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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 0-20570
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
HSN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2712887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2501 118TH AVENUE NORTH, ST. PETERSBURG, FLORIDA
(Address of registrant's principal executive offices)
33716
(Zip Code)
(813) 572-8585
(Registrant's telephone number, including area code):
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF NAME OF EXCHANGE
EACH CLASS WHICH REGISTERED
- ---------------------------------------------- ----------------------------------------------
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 14, 1997, there were outstanding 36,093,293 shares of Common
Stock and 10,225,056 shares of Class B Common Stock. The aggregate market value
of the voting stock held by non-affiliates of the registrant as of March 14,
1997 was $990,511,503.
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HSN, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
NO. PAGE
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 16
Item 3 Legal Proceedings........................................... 18
Item 4 Submission of Matters to a Vote of Security-Holders......... 18
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 20
Item 6 Selected Financial Data..................................... 21
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Item 8 Consolidated Financial Statements and Supplementary Data.... 33
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 61
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 61
Item 11 Executive Compensation...................................... 64
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 70
Item 13 Certain Relationships and Related Transactions.............. 75
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 76
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PART I
ITEM 1. BUSINESS
GENERAL
HSN, Inc. (the "Company" or "HSNi"), formerly known as Silver King
Communications, Inc. ("Silver King"), is a holding company, the subsidiaries of
which conduct the operations of the Company's various business activities. The
Company was incorporated in July 1986 in Delaware as Silver King Broadcasting
Company, Inc. ("SKBC") as part of a strategy to broaden the viewership of Home
Shopping Network, Inc. ("Home Shopping"). SKBC subsequently changed its name to
HSN Communications, Inc. and thereafter, to Silver King. On December 28, 1992
(the "Distribution Date"), Home Shopping, the sole shareholder, distributed the
capital stock (the "Distribution") of the Company to Home Shopping's
stockholders in the form of a pro-rata tax free stock dividend.
On December 19 and 20, 1996, Silver King consummated mergers with Savoy
Pictures Entertainment, Inc. ("Savoy")and Home Shopping, respectively
(collectively, the "Mergers") and changed its name to HSN, Inc. Following the
Mergers, the Company's principal areas of business are electronic retailing and
television broadcasting.
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS
ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, NEW DEVELOPMENTS, NEW
MERCHANDISING STRATEGIES AND SIMILAR MATTERS. A VARIETY OF FACTORS COULD CAUSE
THE COMPANY'S ACTUAL RESULTS AND EXPERIENCE TO DIFFER MATERIALLY FROM THE
ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE COMPANY'S
FORWARD-LOOKING STATEMENTS. THE RISKS AND UNCERTAINTIES THAT MAY AFFECT THE
OPERATIONS, PERFORMANCE, DEVELOPMENT AND RESULTS OF THE COMPANY'S BUSINESS
INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: BUSINESS AND GENERAL ECONOMIC
CONDITIONS, COMPETITIVE FACTORS, CHANNEL SPACE AVAILABILITY AND THE COST AND
AVAILABILITY OF APPROPRIATE MERCHANDISE.
THE MERGERS
SAVOY MERGER
Pursuant to a merger of an indirect wholly owned subsidiary of the Company
with and into Savoy (the "Savoy Merger"), Savoy became an indirect wholly owned
subsidiary of the Company. Upon the effectiveness of the Savoy Merger, each
outstanding share of Savoy common stock, par value $.01 per share ("Savoy Common
Stock"), was converted into the right to receive .14 of a share of the Company's
common stock, par value $.01 per share ("HSNi Common Stock"), and each
outstanding option or warrant to acquire or conversion right to receive Savoy
Common Stock was assumed by the Company and converted into options or warrants
to acquire or conversion right to receive HSNi Common Stock at the .14 of a
share conversion rate. Based on the number of shares of Savoy Common Stock
issued and outstanding as of December 19, 1996, 4,205,870 shares of HSNi Common
Stock were issuable in the Savoy Merger to Savoy shareholders. Prior to the
Savoy Merger, 1,000 shares of Savoy non-voting preferred stock, par value $.01
per share, were issued, which shares were not exchanged for HSNi Common Stock in
the Savoy Merger and remain outstanding.
HOME SHOPPING MERGER
Pursuant to the merger of a subsidiary of the Company ("Merger Sub") with
and into Home Shopping (the "Home Shopping Merger"), each share of Home Shopping
common stock, par value $.01 per share ("Home Shopping Common Stock"), issued
and outstanding immediately prior to the Home Shopping Merger, except for
certain shares which were cancelled, was converted into the right to receive .45
of a share (the "Home Shopping Common Conversion Ratio") of HSNi Common Stock
and each share of Home Shopping Class B common stock ("Home Shopping Class B
Common Stock"), issued and outstanding immediately prior to the Home Shopping
Merger, except for certain shares which were cancelled, was converted into the
right to receive .54 of a share (the "Home Shopping Class B Conversion Ratio")
of the Company's Class B common stock, par value $.01 per share ("HSNi Class B
Common Stock" and, together
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with the HSNi Common Stock, the "HSNi Securities"). A total of 2,591,752 of the
shares of HSNi Class B Common Stock issuable to Liberty HSN, Inc. ("Liberty
HSN") pursuant to the Home Shopping Merger were not issued, but instead are
represented by the Company's contractual obligation to issue to Liberty HSN such
shares upon the occurrence of certain events, including a change in applicable
Federal Communications Commission ("FCC") regulations or other event that would
permit Liberty HSN to hold additional shares of HSNi Class B Common Stock (such
contractual right, the "Contingent Rights" and such underlying shares, the
"Contingent Rights Shares"). Based on the number of shares of Home Shopping
Common Stock and Home Shopping Class B Common Stock issued and outstanding
immediately prior to the Home Shopping Merger, 24,665,651 shares of HSNi Common
Stock and 7,809,111 shares of HSNi Class B Common Stock were issuable in the
Home Shopping Merger to Home Shopping shareholders. Each outstanding option to
acquire or conversion right to receive Home Shopping Common Stock was assumed by
the Company and converted into an option to acquire or a conversion right to
receive HSNi Common Stock at a conversion rate equal to the Home Shopping Common
Conversion Ratio.
Liberty HSN is an indirect, wholly owned subsidiary of Liberty Media
Corporation ("Liberty"), which, in turn, is a wholly owned subsidiary of
Tele-Communications, Inc. ("TCI"). Prior to the Home Shopping Merger, TCI,
through Liberty and Liberty HSN, maintained voting control over Home Shopping.
Because the Home Shopping Class B shares are entitled to ten votes per
share, upon consummation of the Home Shopping Merger, the Company owned 80.1% of
the equity and 90.8% of the voting power of Home Shopping and Liberty HSN owned
19.9% of the equity and 9.2% of the voting power of Home Shopping. After the
Home Shopping Merger, pursuant to an exchange agreement, dated as of December
20, 1996 (the "Exchange Agreement"), between the Company and Liberty HSN, at
such time from time to time as Liberty HSN or its permitted transferee may be
allowed under applicable FCC regulations to hold additional shares of the
Company's stock, Liberty HSN or its permitted transferee will exchange its Home
Shopping Common Stock and its Home Shopping Class B Common Stock for shares of
HSNi Common Stock and HSNi Class B Common Stock, respectively, at the applicable
conversion ratio (such exchange and such HSNi Securities issued pursuant thereto
are referred to herein as the "Exchange" and the "Exchange Shares",
respectively). Liberty HSN, however, is obligated to effect an Exchange only
after all of the Contingent Rights Shares have been issued, subject to certain
conditions. Upon completion of the Exchange, Home Shopping would become a wholly
owned subsidiary of the Company.
OUTSTANDING SHARES AND CONTROLLING SHAREHOLDERS
At December 31, 1996, 35,992,903 shares of HSNi Common Stock and 10,225,056
shares of HSNi Class B Common Stock were outstanding. Of these shares, Liberty
HSN owns 61,630 shares of HSNi Common Stock and 9,809,111 shares of HSNi Class B
Common Stock. Barry Diller, Chairman of the Board and Chief Executive Officer of
the Company, through BDTV INC., BDTV II INC., his own holdings and a
stockholders agreement with Liberty (the "Stockholders Agreement"), has the
right to vote approximately 1.5% of HSNi's Common Stock, or 548,618 shares, and
approximately 96% or 9,809,111 shares of HSNi's outstanding Class B Common
Stock, each share of which is entitled ten votes per share. As a result, Mr.
Diller controls 71% of the outstanding total voting power of the Company. Mr.
Diller, subject to the Stockholders Agreement, is effectively able to control
the outcome of nearly all matters submitted to a vote of the Company's
stockholders. Assuming that the Contingent Rights Shares and the Exchange Shares
are issued to Liberty HSN (and without taking into account any other
transactions that would require the Company to issue additional Company
Securities to Liberty HSN or any options to acquire HSNi Common Stock held by
Mr. Diller), HSNi Securities subject to the Stockholders Agreement would
represent in the aggregate approximately 19% of the then outstanding Common
Stock, 37% of the then outstanding equity of the Company and 78% of the then
outstanding total voting power of the Company.
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SAVOY DEBENTURES
At the effective time of the Savoy Merger, Savoy and the Company entered
into a supplemental indenture with the trustee under the indenture governing
Savoy's outstanding 7% Convertible Subordinated Debentures, due July 1, 2003
(the "Savoy Debentures"), providing for the assumption by the Company as joint
and several obligor of the Savoy Debentures and that each $1,000 principal
amount of the Savoy Debentures is convertible into the amount of HSNi Common
Stock that the holder thereof would have been entitled to receive had such Savoy
Debenture been converted into Savoy Common Stock immediately prior to
consummation of the Savoy Merger or 7.53 shares at $132.86 per share.
HOME SHOPPING DEBENTURES
At the effective time of the Home Shopping Merger, Home Shopping and the
Company entered into a supplemental indenture with the trustee under the
indenture governing Home Shopping's outstanding 5.875% subordinated debentures
convertible into shares of Home Shopping Common Stock (the "Home Shopping
Debentures"). Pursuant to the supplemental indenture, the Company assumed the
Home Shopping Debentures as a joint and several obligor, and each $1,000
principal amount of the Home Shopping Debentures is convertible into the amount
of HSNi Common Stock that the holder would have been entitled to receive had the
Home Shopping Debenture been converted into Home Shopping Common Stock
immediately prior to consummation of the Home Shopping Merger or 37.50 shares at
$26.67 per share.
HOME SHOPPING NETWORK, INC.
Home Shopping, through its Home Shopping Club, Inc. subsidiary ("HSC"),
sells a variety of consumer goods and services by means of live,
customer-interactive electronic retail sales programs which are transmitted via
satellite to cable television systems, affiliated broadcast television stations
and satellite dish receivers. Home Shopping operates two retail sales programs,
The Home Shopping Network ("HSN") and America's Store, each 24 hours a day,
seven days a week (collectively the "Programs"). The Programs are carried by
cable television systems and broadcast television stations throughout the
country. America's Store is available in one-hour segments, which enables
broadcast and cable affiliates to air America's Store in available time slots
that would not otherwise produce revenue for the affiliate.
Home Shopping's retail sales and programming are intended to promote sales
and customer loyalty through a combination of product quality, product
information and entertainment. The Programs are divided into segments which are
televised live with a host who presents the merchandise and conveys information
relating to the product, including price, quality, features and benefits. Hosts
engage callers in on-air discussions regarding the currently featured product or
the caller's previous experience with Home Shopping's products. Viewers purchase
products by calling a toll-free telephone number. Home Shopping attempts to
stimulate customer loyalty by providing, among other things, marketing materials
such as The Home Shopping Network Magazine which offers discounts on Home
Shopping purchases, and features articles on products, programming and schedules
of upcoming shows.
After December 31, 1996, Home Shopping converted its Spree! program to
America's Store, a program primarily devoted to jewelry and related products, as
well as certain other products. This change was designed to distinguish the
Programs and to focus America's Store in popular product areas of electronic
retailing. Home Shopping is continuing to develop this program concept.
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The following table highlights the changes in the estimated unduplicated
television household reach of HSN, Home Shopping's primary program, by category
of access for the year ended December 31, 1996:
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CABLE* BROADCAST SATELLITE TOTAL
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(In thousands of households)
Households -- December 31, 1995............................. 44,220 21,219 3,750 69,189
Net additions/(deletions)................................... 1,291 (1,081) 38 248
Shift in classification..................................... 2,353 (2,353) -- --
Change in Nielsen household counts.......................... -- 1,257 -- 1,257
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Households -- December 31, 1996............................. 47,864 19,042 3,788 70,694
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* 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 2.3 million and 1.3
million direct broadcast satellite ("dbs") households at December 31, 1996 and
1995, respectively, and therefore are excluded from satellite.
According to industry sources, as of December 31, 1996, 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 to the households in the above table, as of December 31, 1997,
approximately 11.1 million cable television households were reached by America's
Store, of which 4.3 million were on a part-time basis. Of the total cable
television households receiving America's Store, 9.7 million also receive HSN.
CUSTOMER SERVICE AND RETURN POLICY
Home Shopping believes that satisfied customers will be loyal and will
purchase merchandise on a regular basis. Accordingly, Home Shopping has customer
service personnel and computerized voice response units (the "VRU") available to
handle calls relating to customer inquiries seven days a week, 24 hours a day.
Generally, any item purchased from Home Shopping may be returned within 30
days for a full refund of the purchase price, including the original shipping
and handling charges.
DISTRIBUTION, DATA PROCESSING AND TELECOMMUNICATIONS
Home Shopping's fulfillment subsidiaries store, service and ship
merchandise from warehouses located in Salem, Virginia and Waterloo, Iowa.
During 1997, Home Shopping will move its St. Petersburg, Florida fulfillment
operations and national returns center to Salem, Virginia. Generally,
merchandise is delivered to customers within 7 to 10 business days of placing an
order.
Home Shopping currently operates several Unisys main frame computers and
has extensive computer systems which track purchase orders, inventory, sales,
payments, credit authorization, and delivery of merchandise to customers. Home
Shopping commenced a review of its current computer systems during 1996 and has
taken initial steps to upgrade many of these systems.
Home Shopping has digital telephone and switching systems and utilizes the
VRU which allows callers to place their orders by means of touch tone input or
to be transferred to an operator.
PRODUCT PURCHASING AND LIQUIDATION
Home Shopping purchases merchandise made to its specifications, merchandise
from manufacturers' lines, merchandise offered under certain exclusive rights
and overstock inventories of wholesalers. During 1996, Home Shopping continued
to change its purchasing strategy to emphasize price point, variety, continuity
sales, product sourcing and events. The mix of products and source of such
merchandise depends upon a variety of factors including price and availability.
Home Shopping generally does not have long-term
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commitments with its vendors, and there are various sources of supply available
for each category of merchandise sold.
Home Shopping's product offerings include: jewelry; hardgoods, which
include consumer electronics, collectibles, housewares, and consumables;
cosmetics; softgoods, which consist primarily of apparel; and fashion
accessories. For 1996, jewelry, hardgoods, cosmetics, softgoods and fashion
accessories accounted for approximately 41%, 35%, 13%, 7% and 4%, respectively,
of Home Shopping's net sales.
Home Shopping liquidates short lot and returned merchandise through its
liquidation center and three outlet stores located in the Tampa Bay, Florida
area. Damaged merchandise is liquidated by Home Shopping through traditional
channels. During January 1997, Home Shopping closed two outlet stores and one
liquidation center in Orlando, Florida.
TRANSMISSION AND PROGRAMMING
Home Shopping produces the Programs in its studios located in St.
Petersburg, Florida. The Programs are distributed to cable television systems,
broadcast television stations, direct broadcast satellite services and satellite
dish receivers by means of Home Shopping's satellite uplink facilities to
satellite transponders leased by Home Shopping. Any cable television system,
broadcast television station or individual satellite dish owner in the United
States and the Caribbean Islands equipped with standard satellite receiving
facilities is capable of receiving the Programs.
Home Shopping has lease agreements securing full-time use of three
transponders on three domestic communications satellites, although one of those
transponders has been subleased as described below. Each of the transponder
lease agreements grants Home Shopping "protected" rights. When the carrier
provides services to a customer on a "protected" basis, replacement transponders
(i.e., spare or unassigned transponders) on the satellite may be used in the
event the "protected" transponder fails. Should there be no replacement
transponders available, the "protected" customer will displace a "preemptible"
transponder customer on the same satellite. The carrier also maintains a
protection satellite and should a satellite fail completely, all "protected"
transponders would be moved to the protection satellite which is available on a
"first fail, first served" basis.
Use of the transponder which Home Shopping subleases may, however, be
preempted in order to satisfy the owner's obligations to provide the transponder
to another lessee on the satellite in the event that the other lessee cannot be
restored to service through the use of spare or reserve transponders (the
"Special Termination Right"). As of June 5, 1995, Home Shopping discontinued use
of this satellite transponder for which it has a non-cancellable operating lease
calling for monthly payments of approximately $150,000 through December 31,
2006. Home Shopping subleased this satellite transponder during 1996 for a term
of 10 years with an option to cancel after four years. The monthly sublease
rental is in excess of the monthly payment.
A transponder failure that would necessitate a move to another transponder
on the same satellite would not result in any significant interruption of
service to the cable systems and/or television stations which receive the
Programs. However, a failure that would necessitate a move to another satellite
may temporarily affect the number of cable systems and/or television stations
which receive the Programs (as well as all other programming carried on the
failed satellite) because of the need to install equipment or to reorient earth
stations.
The terms of two of the satellite transponder leases utilized by Home
Shopping are for the life of the satellites, which are projected through 2004.
The term of the third subleased satellite is through December 31, 2006, subject
to earlier implementation of the Special Termination Right.
Home Shopping's access to two transponders pursuant to long-term agreements
would enable it to continue transmission of HSN should either one of the
satellites fail. Although Home Shopping believes it is taking every reasonable
measure to ensure its continued satellite transmission capability, there can be
no assurance that termination or interruption of satellite transmissions will
not occur. Such a termination or
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interruption of service by one or both of these satellites could have a material
adverse effect on the operations and financial condition of the Company.
The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which Home Shopping has
no control, including competition among prospective users for available
transponders and the availability of satellite launching facilities for
replacement satellites.
The FCC grants licenses to construct and operate satellite uplink
facilities which transmit signals to satellites. These licenses are generally
issued without a hearing if suitable frequencies are available. Home Shopping
has been granted two licenses for operation of C-band satellite transmission
facilities and two licenses for operation of KU-band satellite transmission
facilities on a permanent basis in Clearwater and St. Petersburg, Florida.
AFFILIATION AGREEMENTS WITH CABLE OPERATORS
Home Shopping has entered into affiliation agreements with cable system
operators to carry HSN, America's Store or both. Generally, the affiliation
agreements have a term of five years, are automatically renewable for subsequent
one year terms, and obligate the cable operator to assist the promotional
efforts of Home Shopping by carrying commercials regarding HSN and America's
Store and distributing Home Shopping's marketing materials to the cable
operator's subscribers. All cable operators receive a commission of five percent
of the net merchandise sales within the cable operator's franchise area
regardless of whether the sale originated from a cable or a broadcast household.
However, particularly with larger, multiple system operators, Home Shopping has
agreed to provide additional compensation. In the past, this has included the
purchase of advertising availabilities from cable operators on other programming
networks and the establishment of commission guarantees committing Home Shopping
to a certain level of payments. Although a number of these contracts remain in
effect, Home Shopping is no longer entering into agreements that provide for
advertising availabilities and commission guarantee compensation. These forms of
compensation were replaced with cable distribution fees primarily consisting of
upfront payments, based on a commitment to transmit the Programs to a certain
number of subscribers and/or performance bonus commissions that are intended to
compensate cable operators for promotional efforts which result in higher net
sales for Home Shopping.
HSNI BROADCASTING
Through subsidiaries described below, the Company controlled as of December
31, 1996, 18 full power television broadcast stations, including three satellite
stations. Additionally, the Company controlled 26 low power ("LPTV") television
stations (the "LPTV Stations") and two low power translators.
A. SKTV, INC.
The Company, through its SKTV, Inc. subsidiary ("SKTV") and its
subsidiaries, owns and operates 12 independent full power UHF television
stations, including one television satellite station (the "SKTV Stations"). The
SKTV Stations serve ten of the 16 largest metropolitan television markets in the
United States. As of December 31, 1996, the SKTV Stations reached approximately
28.3 million television households, which is one of the largest audience reaches
of any owned and operated independent television broadcasting group in the
United States.
As of December 31, 1996, SKTV held notes receivable and/or equity interests
in six other entities which hold broadcast licenses and/or authorizations in
nine television markets as described below.
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SKTV STATIONS
As of December 31, 1996, SKTV owned the following stations:
SUMMARY OF STATION MARKET
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HOUSEHOLDS IN
DESIGNATED LICENSE
TELEVISION CHANNEL METROPOLITAN MARKET AREA DMA EXPIRATION
STATION CITY OF LICENSE NO. AREA SERVED ("DMA")(1) RANK(1) DATE
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WHSE-TV(2)........... Newark, NJ 68 New York, NY 6,711,450 1 6/1/99
WHSI-TV(2)........... Smithtown, NY 67 New York, NY 6,711,450 1 6/1/99
KHSC-TV.............. Ontario, CA 46 Los Angeles, CA 4,942,440 2 12/1/98
WEHS-TV.............. Aurora, IL 60 Chicago, Il 3,124,340 3 12/1/97
WHSP-TV.............. Vineland, NJ 65 Philadelphia, PA 2,654,080 4 6/1/99
WHSH-TV.............. Marlborough, MA 66 Boston, MA 2,150,110 6 4/1/99
KHSX-TV.............. Irving, TX 49 Dallas, TX 1,848,550 8 8/1/98
KHSH-TV.............. Alvin, TX 67 Houston, TX 1,595,350 11 8/1/98
WQHS-TV.............. Cleveland, OH 61 Cleveland, OH 1,461,410 13 10/1/97
WBHS-TV.............. Tampa, FL 50 Tampa/St. Petersburg, FL 1,411,440 15 2/1/05
WYHS-TV.............. Hollywood, FL 69 Miami, FL 1,363,260 16 2/1/05
WHSW-TV.............. Baltimore, MD 24 Baltimore, MD 989,470 23 10/1/01
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(1) Estimates by Nielsen Marketing Research ("Nielsen") as of January 1997. For
multiple ownership purposes, the FCC attributes only 50% of a market Area of
Dominant Influence ("ADI") reach to UHF stations. Arbitron ADI's, like
Nielsen DMA's, are measurements of television households in television
markets throughout the country. For the Company's purposes, ADI and DMA
measurements do not materially differ.
(2) WHSI-TV operates as a satellite of WHSE-TV and primarily rebroadcasts the
signal of WHSE-TV. Together, the two Stations serve the metropolitan New
York City television market and are considered one station for FCC multiple
ownership purposes.
Additionally, as of December 31, 1996, SKTV owned a 33.44% membership
interest (in profits and losses not including incentive interests) in Blackstar
L.L.C. ("Blackstar"), the parent company of the licensees of Stations WBSF(TV),
Melbourne, Florida; KBSP-TV, Salem, Oregon; and WBSX(TV), Ann Arbor, Michigan,
which serve all or portions of the metropolitan areas of Orlando, Florida;
Portland, Oregon; and Detroit, Flint and Lansing, Michigan, respectively. All of
these television stations are affiliates of Home Shopping and currently carry
Home Shopping programming on a substantially full-time basis. Blackstar also is
the parent company of the licensee of Station KEVN-TV, Rapid City, South Dakota,
and its satellite station, KIVV-TV, licensed to Lead-Deadwood, South Dakota,
both of which are affiliated with, and carry the programming of, Fox
Broadcasting Company ("Fox"). In addition, Silver King Capital Corporation, a
wholly owned subsidiary of SKTV, owns 1,000 shares of non-voting preferred stock
in Blackstar Communications, Inc., a subsidiary of Blackstar. Subject to FCC
approval, Blackstar has agreed to sell the assets of its Ann Arbor, Michigan
station to a third party. Upon the closing of the sale, the Home Shopping
affiliation agreement will terminate. Following the termination and upon the
occurrence of certain other events, SKTV is expected to have a 45% equity
interest in Blackstar.
SKTV also owns a 45% nonvoting common stock interest in Roberts
Broadcasting Company, which owns Station WHSL(TV), East St. Louis, Illinois,
serving the St. Louis, Missouri metropolitan area, and a 45% nonvoting common
stock interest in Urban Broadcasting Corporation, which owns Station WTMW(TV),
Arlington, Virginia, serving the Washington, D.C. metropolitan area. SKTV also
owns a 45% nonvoting common stock interest in Roberts Broadcasting Company of
Denver, which owns Station KTVJ(TV), Boulder, Colorado. KTVJ(TV) serves the
Denver, Colorado metropolitan area. All of these stations carry Home Shopping
programming.
On April 26, 1996, Channel 66 of Vallejo, California, Inc.("Channel 66"),
an entity in which a subsidiary of SKTV holds a 49% nonvoting common stock
interest, consummated the acquisition of Station KPST-TV,
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Vallejo, California which serves the San Francisco market. SKC Investments,
Inc., a subsidiary of the Company, loaned Whitehead Media of California, Inc.
("Whitehead") $7.9 million to finance the acquisition and has loaned an
additional $.7 million for construction of a new studio. Pursuant to a
Shareholder Agreement among Channel 66, SKTV and Whitehead, Whitehead has the
option to require SKTV to purchase all of Whitehead's shares of common stock in
Channel 66 between April 26, 1999 and April 25, 2001, and at any time within 180
days of the termination of the affiliation agreement between Home Shopping and
Channel 66. SKTV has the option to require Whitehead to sell all of its shares
of Common Stock in Channel 66 to SKTV between April 26, 2001 and April 25, 2002.
The Shareholder Agreement provides specific procedural requirements for
exercising these options and an appraisal method for determining the applicable
price for such purchases.
SKTV has an option to purchase a 45% nonvoting common stock interest in
Jovon Broadcasting Company, the licensee of Station WJYS(TV), Hammond, Indiana,
serving the Chicago, Illinois television market. In a Memorandum Opinion and
Order and Notice of Apparent Liability released June 14, 1996, the FCC ruled
that, consistent with FCC regulations and policies, the Company may exercise
that portion of the option which will provide it with a 33% nonvoting common
stock interest in Station WJYS(TV). SKTV has a loan agreement with the station
licensee and the FCC also required that certain aspects of the loan documents
between the licensee of WJYS(TV) and SKTV be reformed. The licensee of WJYS(TV)
has filed a petition with the FCC requesting clarification as to whether the
agency intended to rewrite the option to permit a partial exercise and argues
that if it did so intend, the FCC lacked the authority to do so. The Company has
opposed that petition.
The Company's 26 LPTV Stations are located in the New York, New York;
Atlanta, Georgia; St. Petersburg, Florida; St. Louis, Missouri; Knoxville,
Tennessee; Minneapolis, Minnesota; New Orleans, Louisiana; Roanoke, Virginia;
Tucson, Arizona; Tulsa, Oklahoma; Wichita, Kansas; Columbus, Ohio; Kansas City,
Missouri; Springfield, Illinois; Huntington, West Virginia; Champaign, Illinois;
Toledo, Ohio; Portsmouth, Virginia; Raleigh, North Carolina; Des Moines, Iowa;
Shreveport, Louisiana; Spokane, Washington; Pensacola, Florida; Birmingham,
Alabama; Mobile, Alabama; and Jacksonville, Florida areas. The LPTV Stations
have an average coverage radius of 10-12 miles and an average transmitter power
of 1,000-2,000 watts. This contrasts with the Company's full-power UHF
television stations which cover an average radius of 45-55 miles and have an
average transmitter power of 120,000 watts.
PROGRAMMING
Each of the SKTV Stations, through the applicable subsidiaries, has entered
into a Television Affiliation Agreement (the "Affiliation Agreement(s)") with
Home Shopping pursuant to which each Station broadcasts HSN for approximately
164 hours per week.
Home Shopping pays each SKTV Station compensation pursuant to the
applicable hourly affiliation rate for such SKTV Station under its Affiliation
Agreement. Hourly rates are based on the number of households in a Station's
service area. The Affiliation Agreements provide for higher compensation to an
SKTV Station if the SKTV Station's compensation amount, which is based upon a
formula involving Home Shopping's net sales credited to the SKTV Station,
exceeds the amount payable pursuant to the hourly affiliation rate. This
determination is made on an annual basis within 30 days of each anniversary of
the Affiliation Agreements. Following the Home Shopping Merger, a decision was
made not to pay the compensation bonus for 1996.
The Company is continuing to evaluate the status of the Affiliation
Agreements following the Home Shopping Merger. The Company plans to determine on
a market by market basis whether the SKTV Stations will continue to air HSN, or
whether the Company will, instead, disaffiliate Home Shopping and the SKTV
Stations and develop and broadcast programming independently of Home Shopping. A
decision to disaffiliate in a market will depend, in part, upon channel
availability, competitive factors and the terms of the Home Shopping cable
affiliation agreements, particularly in light of the recent U.S. Supreme Court
ruling upholding the FCC's must-carry rules. See "Regulation -- Review of 'Must
Carry Rules.' "
Upon disaffiliation, substantial expenditures would be required to develop
SKTV programming and promotions, which, during this developmental and
transitional stage, would not be offset by sufficient
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advertising revenues. Additionally, the Company may also incur additional
expenses and cash outflows (including the making of up-front payments), which
could be substantial, in connection with entering into cable distribution
agreements for the purpose of securing carriage of Home Shopping programming
and/or the SKTV Stations' programming. Furthermore, disaffiliation will disrupt
Home Shopping's ability to reach some of its existing customers which may cause
a reduction in the Company's revenues. The Company believes that the process of
disaffiliation can be successfully managed to minimize these adverse
consequences.
There can be no assurance that, if Home Shopping and the SKTV Stations
disaffiliate, the Company will be successful in its strategy to develop and
broadcast new programming formats, whether on a local or national basis, or that
the Company will be able to find other means of distributing its Home Shopping
programming on favorable terms to the households in the broadcast areas
currently served by SKTV Stations. The consequences of any of the foregoing
decisions will impact the business, financial condition and results of
operations of the Company.
In addition to analyzing disaffiliation, the Company may consider a number
of other options with respect to the SKTV Stations. These options include
selling the SKTV Stations or entering into partnership arrangements with
broadcasters and/or cable operators. The Company has made no final decision as
to how it will utilize the SKTV Stations, although preliminarily, it is planning
to disaffiliate and independently program its Miami station. The Company intends
over time to program all of these stations on a local basis, either by itself or
with partners.
The Company's LPTV Stations, for the most part, carry America's Store. The
SKTV Stations carry HSN approximately 164 hours per week. Available advertising
time on the SKTV Stations is utilized to promote various Home Shopping
subsidiaries and is also sold to outside commercial clients on a per unit fixed
rate. Advertising time also is bartered in exchange for non-Home Shopping
programming. Time is available in units of 30 seconds, 60 seconds, 120 seconds,
half-hours and hours. A four-hour block on Sunday mornings at each SKTV Station
is devoted to public interest programming comprised of children's,
informational, religious, and/or ethnic programming, some of which produces
revenue. In addition, Home Shopping occasionally sponsors promotional events
geared towards the markets served by the SKTV Stations to develop viewer
awareness and loyalty to Home Shopping programming.
B. SF BROADCASTING
As a result of the Savoy Merger, the Company acquired Savoy's broadcasting
operations ("SF Broadcasting"). SF Broadcasting consists of SF Multistations,
Inc.("SF Multistations"), and its wholly owned subsidiaries which own KHON
(together with satellite stations KAII and KHAW, hereafter collectively referred
to as "KHON"), WALA and WVUE, and SF Broadcasting of Wisconsin, Inc. ("SF
Wisconsin") and its wholly owned subsidiaries which own WLUK. Savoy Stations,
Inc. ("Savoy Stations"), an indirect wholly owned subsidiary of the Company,
owns 50% of the common equity and 100% of the voting stock of each of SF
Wisconsin and SF Multistations. A subsidiary of Fox owns 50% of the common
equity of SF Multistations and SF Wisconsin and also owns options, subject to
certain conditions, to convert its non-voting interest into voting interests.
For a further description of these options, see "Ownership Structure" discussed
below.
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The following table sets forth certain information regarding the stations
owned and operated by SF Broadcasting (the "SF Stations") and the markets in
which they operate:
SUMMARY OF STATION MARKETS
- ----------------------------------------------------------------------------------------------------------------
TELEVISION METROPOLITAN AFFILIATION/ LICENSE
STATION AREA SERVED CHANNEL HOUSEHOLDS IN DMA(1) DMA RANK(1) EXPIRATION DATE
- ----------------------------------------------------------------------------------------------------------------
WVUE-TV.............. New Orleans, LA FOX/8 620,760 41 6/1/97
KHON-TV(2)........... Honolulu, HI(3) FOX/2 382,700 69 2/1/99
KAII-TV(2)........... Wailuku, HI
KHAW-TV(2)........... Hilo, HI
WALA-TV.............. Mobile-Pensacola, AL FOX/10 445,780 61 4/1/97(4)
WLUK-TV.............. Green Bay, WI(3) FOX/11 376,380 70 12/1/97
- ---------------
(1) Estimated by Nielsen as of January 1997. Rankings are based on the relative
size of a station's market among the 211 generally recognized Designated
Market Areas.
(2) KAII and KHAW operate as satellite stations of KHON-TV and primarily
re-broadcast the signal of KHON. The stations are considered one station for
FCC multiple ownership purposes.
(3) Low power television translators K55D2 and W40AN retransmit stations KHON
and WLUK, respectively.
(4) An application to renew the license of WALA was timely filed and is pending
at the FCC. Under FCC rules, an existing license automatically continues in
effect once a timely renewal application has been filed until a final FCC
decision is issued.
FOX AFFILIATION
As described above, each of the SF Stations has entered into affiliation
agreements with Fox (the "Fox Affiliation Agreements"). Subject to earlier
termination (as described below), the Fox Affiliation Agreements terminate on
the tenth anniversary of the commencement date of such agreement, provided that,
Fox may extend the initial term of each of the agreements for additional
successive periods of two years each if it gives the requisite written notice to
the relevant SF Station and such SF Station fails to give Fox written notice
within the prescribed time period that it rejects such an extension. Pursuant to
these agreements, Fox provides the SF Stations with programming in return for
the stations' broadcasting Fox-inserted commercials in such programming. The SF
Stations also retain the right to include a limited amount of commercials during
Fox programming and receive additional compensation based on certain performance
and other criteria. Each of the Fox Affiliation Agreements, however, is subject
to termination by Fox in certain instances including the following: (i) if
within any 12-month period a station makes or will make three or more
unauthorized preemptions of Fox programming, Fox may terminate the relevant
agreement upon 30 days prior written notice; (ii) in the event there is a
material change in certain aspects of the stations' operation, making the
affiliation (as of the date of the applicable agreement) less valuable to Fox,
Fox may terminate the relevant agreement upon 30 days prior written notice; and
(iii) upon certain transfers of control of any of the FCC licenses relating to
the SF Stations, Fox may have the right to terminate the applicable Fox
Affiliation Agreement in the manner specified in such agreement.
OWNERSHIP STRUCTURE
After September 20, 1997, in the case of SF Wisconsin, and October 28,
1997, in the case of SF Multistations, Fox will have the option (subject to all
necessary regulatory approvals) to exchange all, but not less than all, of its
non-voting common stock of such companies for common stock with voting rights
(the "Conversion Options"). Fox has agreed not to exercise the Conversion
Options if any regulatory approval would have a material adverse effect on SF
Wisconsin or SF Multistations, as the case may be.
Fox has no representatives on the board of directors of SF Broadcasting,
and does not participate in the operation of SF Broadcasting or of the
television stations. The agreement between Fox and Savoy Stations provides that
Fox's consent is required for certain fundamental corporate decisions,
including, but not limited
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to, certain mergers or asset sales or the payment of dividends. If Fox exercises
the Conversion Options, each of Fox and Savoy Stations will be able to designate
two of the four directors of SF Wisconsin or SF Multistations.
FINANCING OF ACQUISITION
SF Broadcasting financed their purchase of the SF Stations through (i)
$135.0 million of acquisition loans; (ii) $80.6 million of common equity
contributions from Savoy Stations and $29.4 million of common equity
contributions from Fox; and (iii) the Fox purchase of $39.0 million of preferred
stock. Since the acquisition of the SF Stations, Savoy Stations and Fox have
increased, and intend to continue to increase, their initial capital
contributions. Savoy Stations and Fox have each contributed $19.5 million in
1996 and will contribute, at a minimum, an additional $9.0 million each in 1997
according to their Capital Contribution Agreement to pay down outstanding debt.
Both Fox and Savoy Stations also contribute capital on a quarterly basis to fund
the corporate overhead of the SF Broadcasting.
C. REGULATION
CURRENT FCC REGULATION
The communications industry, including the ownership, use and transfer of
television broadcast licenses, and the broadcast of programming over television
stations owned or operated by the Company, is subject to substantial federal
regulation, particularly pursuant to the Communications Act of 1934, as amended
(the "1934 Act") and the rules and regulations promulgated thereunder. The 1934
Act prohibits the operation of television broadcasting stations except under a
license issued by the FCC and empowers the FCC, among other matters, to issue,
renew, revoke and modify broadcast licenses, to determine the location of
stations, to establish areas to be served and to regulate certain aspects of
broadcast programming. The 1934 Act prohibits the assignment of a broadcast
license or the transfer of control of a licensee without FCC prior approval. If
the FCC determines that violations of the 1934 Act or any FCC rule have
occurred, it may impose sanctions ranging from admonishment of a licensee to
license revocation.
The 1934 Act provides that a broadcast license may be granted to any
applicant if the public interest, convenience and necessity will be served
thereby, subject to certain limitations. Under regulations promulgated by the
FCC pursuant to the 1934 Act, television broadcast licenses are issued initially
for terms of five years. Upon application, and in the absence of a conflicting
application (which, prior to passage of the Telecommunications Act of 1996 (the
"1996 Act"), could be filed in limited circumstances) or an adverse finding as
to the licensee's qualifications, broadcast licenses usually have been renewed
without a hearing by the FCC for additional terms of up to five years. Such
license terms have increased. See discussion of the 1996 Act below.
Current FCC regulations also impose significant restrictions on certain
positional and ownership interests in broadcast and other media. The officers,
directors and certain of the equity owners of a broadcasting company are deemed
to have "attributable interests" in the broadcasting company. In the case of a
corporation controlling or operating television stations, ownership is
attributed only to officers, directors and stockholders who own 5% or more of
the company's outstanding voting stock. Institutional investors, including
mutual funds, insurance companies and banks acting in a fiduciary capacity, may
own up to 10% of the outstanding voting stock without being subject to
attribution, provided that such stockholders exercise no control over the
management or policies of the broadcasting company.
Under current FCC rules governing multiple ownership of broadcast stations,
a license to operate a television station will not be granted (unless
established waiver standards are met) to any party (or parties under common
control) that has an attributable interest in another television station with an
overlapping service area (the "Local Restriction"). The rules also currently
prohibit (with certain qualifications) the holder of an attributable interest in
a television station from also having an attributable interest in a radio
station, daily newspaper or cable television system serving a community located
within the relevant coverage area of that television station. Separately, the
FCC's "cross-interest" policy may, in certain circumstances, prohibit the common
ownership of an attributable interest in one media outlet and a non-attributable
equity
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interest in another media outlet in the same market. On December 15, 1994, the
FCC adopted notices of proposed rulemaking to consider (i) the modification of
its attribution rules (including the exemption from attribution for holders of
non-voting stock) and "cross-interest" policy involving nonattributable equity
interests, and (ii) the modification of the Local Restriction.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, President Clinton signed the 1996 Act, which amends
the 1934 Act. The 1996 Act, among other measures, directs the FCC to (i) modify
its rules in order to permit an entity to have an attributable interest in an
unlimited number of United States television stations so long as such stations
do not reach, in the aggregate, more than 35% of the national television
audience (the "National Restriction"); (ii) conduct a rulemaking proceeding to
determine whether to retain, modify or eliminate the Local Restriction; and
(iii) conduct a rulemaking proceeding to determine whether to extend the license
term for television stations to eight years. The 1996 Act also prohibits the
filing of conflicting applications, under any circumstances, in connection with
broadcast station license renewals, and repeals the former statutory ban on
common ownership of a broadcast television station and a cable television system
serving a community located within the relevant coverage area of the television
station. However, FCC rules continue to prohibit local broadcast/cable
cross-ownership. On March 8, 1996, the FCC issued an order that has now become
effective and that implements the National Restriction. This order makes it
possible for the Company to own all of its current stations. The Company's
current national television audience reach is estimated at 31.04 percent, but is
considered at 16.46 percent for FCC purposes due to the treatment of UHF
stations. On January 24, 1997, the FCC extended the license terms for television
stations from five to eight years. The 1996 Act also allows telephone companies
to operate cable television systems in their own service areas. On November 7,
1996, the FCC issued notices soliciting additional public comment in connection
with its pending rulemaking proceedings addressing the 1996 Act's directives and
other issues with respect to the Local Restriction, the attribution rules and
the cross-interest policy. The FCC seeks comment on, among other things, a
proposal that would effectively codify the cross-interest policy to the extent
it was applied to limit TCI's beneficial equity interest in the Company. The FCC
has proposed to prohibit common ownership of a media company and a greater than
33% non-voting equity interest in another media company in the same market, but
has requested comment on whether a higher or a lower non-voting equity benchmark
would be more appropriate. The comment cycle in this proceeding ended on March
7, 1997. It is not possible to predict the extent to which the Local Restriction
may be modified, the timing or effect of other changes in FCC rules or policies
pursuant to the 1996 Act or pending FCC rulemaking proceedings. The outcome of
each of these proceedings could have a material effect on the Company.
REVIEW OF "MUST-CARRY" RULES
FCC regulations implementing the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") require each television
broadcaster to elect, at three-year intervals beginning in 1993, to either (i)
require carriage of its signal by cable systems in the station's market
("must-carry") or (ii) negotiate the terms on which such broadcast station would
permit transmission of its signal by the cable systems within its market
("retransmission consent"). On March 31, 1997, the Supreme Court upheld the
constitutionality of the must-carry provisions.
This ruling means that cable operators must continue to carry local
broadcast signals subject to the provisions of the 1992 Cable Act. The ruling
enhances the value of the SKTV Stations and ensures, absent disaffiliation,
continued carriage of the Home Shopping Programs via the SKTV Stations by cable
operators. However, as discussed above, the Company is evaluating the impact of
the must-carry ruling on its desired disaffiliation of the SKTV Stations from
Home Shopping.
OTHER FCC REGULATIONS AND POLICIES
On August 8, 1996, under the Children's Television Act of 1990 (the "CTA"),
the FCC amended its rules to establish a "processing guideline" for broadcast
television stations of at least three hours per week, averaged over a six-month
period, of "programming that furthers the educational and informational needs of
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children 16 and under in any respect, including the child's
intellectual/cognitive or social/emotional needs." Children's "Core Programming"
has been defined as educational and informational programming that, among other
things, (i) has served the educational and informational needs of children "as a
significant purpose," (ii) has a specified educational and informational
objective and a specified target child audience, (iii) is regularly scheduled,
weekly programming, (iv) is at least 30 minutes in length, and (v) airs between
7:00 a.m. and 10:00 p.m. Any station that satisfies the processing guideline by
broadcasting at least three weekly hours of Core Programming will receive FCC
staff-level approval of the portion of its license renewal application
pertaining to the CTA. Alternatively, a station may qualify for staff-level
approval even if it broadcasts "somewhat less" than three hours per week of Core
Programming by demonstrating that it has aired a weekly package of different
types of educational and informational programming that is "at least equivalent"
to three hours of Core Programming. Non-Core Programming that can qualify under
this alternative includes specials, public service announcements, short-form
programs and regularly scheduled non-weekly programs, with "a significant
purpose of educating and informing children." A licensee that does not meet the
processing guideline under either of these alternatives will be referred by the
FCC's staff to the Commissioners of the FCC, who will evaluate the licensee's
compliance with the CTA on the basis of both its programming and its other
efforts related to children's educational and informational programming, e.g.,
its sponsorship of Core Programming on other stations in the market, or
nonbroadcast activities "which enhance the value" of such programming. A
television station ultimately found not to have complied with the CTA could face
sanctions including monetary fines and the possible non-renewal of its broadcast
license.
The CTA and FCC rules require television station licensees to identify
programs specifically designed to educate and inform children at the beginning
of each program and in published program listings. In addition, the 1996 Act
directed the broadcast and cable television industries to develop and transmit
an encrypted rating in all video programming that, when used in conjunction with
so-called "V-Chip" technology, would permit the blocking of programs with a
common rating. On January 17, 1997, an industry proposal was submitted to the
FCC describing a voluntary ratings system under which all video programming
would be designated in one of six categories. Pursuant to the 1996 Act, the FCC
has initiated a proceeding to determine whether to accept the industry proposal
or to establish and implement an alternative system for rating and blocking
video programming. The FCC has indicated that it will commence a separate
proceeding shortly addressing technical issues related to the "V-Chip." The
Company cannot predict whether the FCC will accept the industry proposal
regarding the rating and blocking of video programming, or how changes in this
proposal could affect the Company's business.
The FCC is conducting a rulemaking proceeding to devise a table of channel
allotments in connection with the introduction of digital television service
("DTV"). On April 3, 1997, the FCC adopted a table of channel allotments which
allots a second broadcast channel to each full-power commercial television
station for DTV operation. While the text of the Commission's decision has not
yet been released, according to news releases, stations will be required to
phase in their DTV operations over a 5-year period. Affiliates of the four major
commercial networks in the top-10 markets are required under the FCC's decision
to begin broadcasting with a digital signal by May 1, 1999, and those in markets
11 to 30 by November 1, 1999. In addition, a number of broadcasters in the
top-10 television markets have committed to begin digital operations within the
next 18 months. The FCC will grant extensions under limited circumstances to
broadcasters who are unable to meet the implementation deadlines. Following the
transition period to DTV, broadcasters will be required to surrender their
non-DTV channels. Subject to periodic review, the FCC has set a target date of
2006 as an end-date for non-DTV service. Under certain circumstances, conversion
to DTV operations may reduce a station's geographical coverage area.
The FCC's April 3 decision also provides for the early recovery of certain
spectrum located between UHF channels 60-69. As a result, certain stations
currently operating on these channels may be required to relocate to other
channels. In addition, the FCC will maintain the secondary status of LPTV
stations, which may result in the displacement of existing LPTV stations by DTV
channel allotments, particularly in major markets. The FCC has adopted certain
technical and administrative measures to minimize the impact of DTV
implementation on LPTV stations. Meanwhile, Congress is considering proposals
that would require incumbent broadcasters to bid at auctions for the additional
spectrum required to effect a transition to DTV, or,
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alternatively, would assign additional DTV spectrum to incumbent broadcasters
and require the early surrender of their non-DTV channel for sale by public
auction. A change to digital transmission will necessitate significant capital
expenditures by the Company.
The FCC is conducting a rulemaking proceeding to examine its rules
prohibiting broadcast television networks from representing their affiliated
stations for the sale of non-network advertising time and from influencing or
controlling the rates set by their affiliates for the sale of such time.
Separately, the FCC is conducting a rulemaking proceeding to consider the
relaxation or elimination of its rules prohibiting broadcast networks from (i)
restricting their affiliates' right to reject network programming, (ii)
reserving an option to use specified amounts of their affiliates' broadcast time
and (iii) forbidding their affiliates from broadcasting the programming of
another network; and to consider the relaxation of its rule prohibiting network
affiliated stations from preventing other stations from broadcasting the
programming of their network.
There are additional FCC and other federal agencies, regulations and
policies, affecting the business and operations of broadcast stations. Proposals
for additional or revised rules are considered by these agencies and Congress
from time to time. It is not possible to predict the resolution of these issues
or other issues discussed above, although their outcome could, over a period of
time, affect, either adversely or favorably, the broadcasting industry generally
or the Company specifically.
The foregoing does not purport to be a complete summary of all the
provisions of the 1934 Act, the 1996 Act or other Congressional acts or of the
regulations and policies of the FCC thereunder. Reference is made to the 1934
Act, as amended, the 1996 Act, other Congressional acts, such regulations and
policies, and the public notices promulgated by the FCC for further information.
MOTION PICTURES
Savoy has ceased its motion picture production activities, but maintains a
film library consisting of approximately 15 films and owns rights in a number of
motion picture development properties.
ADDITIONAL SUBSIDIARY BUSINESSES
In addition to the electronic retailing and television broadcast
businesses, the Company's subsidiaries are involved in other businesses.
Vela Research, Inc. ("Vela") develops and markets high technology audio and
video MPEG compression/decompression products to the cable, broadcast, computer
and telecommunications industries.
Internet Shopping Network, Inc. ("ISN") has grown to become a leading
retailer of computer hardware and software on the Internet and offers over
40,000 products from major manufacturers. ISN is also engaged in exploring other
new digital retailing vehicles.
National Call Center, Inc. ("NCCI") performs direct response telemarketing
services using toll free 800 numbers and provides services on a contractual
basis to third parties using inbound and outbound telemarketing. NCCI can
perform any number of related functions, including fulfillment and credit card
clearing services.
INTERNATIONAL VENTURES
During 1996 and 1997, Home Shopping entered into two international ventures
as a minority participant.
Germany. Home Shopping acquired a 29% interest in Home Order Television
GmbH & Co. KG ("HOT"), a venture based in Munich. HOT broadcasts television
shopping 24 hours per day, 12 of which are devoted to live shopping. HOT is
carried via cable and satellite to approximately 8.3 million households in
Germany and Austria.
Japan. Home Shopping acquired a 30% interest in Jupiter Shop Channel Co;.
Ltd, ("Shop Channel") a venture based in Tokyo. Shop Channel broadcasts
televised shopping 24 hours a day, 18 hours per week of
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which are devoted to live shopping. Shop Channel has reached agreements to be
available in approximately 845,000 households as of April 1997.
Tele-Communications International, Inc., a subsidiary of TCI ("TCI
International") owns a 50% interest in Jupiter Programming Co;. Ltd ("JPC")
which is the 70% shareholder in the venture.
COMPETITION
The Company operates in a highly competitive environment. It is in direct
competition with businesses which are engaged in retail merchandising, other
electronic retailers, direct marketing retailers such as mail order companies,
companies that sell from catalogs, other discount retailers and companies that
market through computer technology. The Company also competes for access to its
customers and for audience share and revenue with broadcasters and conventional
forms of entertainment and information, such as programming for network and
independent broadcast television stations, basic and pay cable television
services, satellite master antenna systems, home satellite dishes and home
entertainment centers, newspapers, radio, magazines, outdoor advertising,
transit advertising and direct mail. In particular, the price and availability
of programming for cable television systems affects the availability of these
channels for the Company's Programs and the compensation which must be paid to
the cable operators for carriage of Home Shopping programming. In addition, the
Company believes that due to a number of factors, including the development of
cable operator owned programming, the competition for channel capacity has
substantially increased. With the advent of new compression technologies on the
horizon, this competition for channel capacity may substantially decrease,
although additional competitors may have the opportunity to enter the
marketplace. No predictions can be made with respect to the viability of these
technologies or the extent to which they will ultimately impact the availability
of channel capacity.
Home Shopping and QVC, Inc. ("QVC") are currently the two leading
electronic retailing companies. There are other companies, some having an
affiliation or common ownership with cable operators, that now market
merchandise by means of live television. A number of other entities are engaged
in direct retail sales businesses which utilize television in some form and
which target the same markets in which the Company operates. Some of the
Company's competitors are larger and more diversified than the Company, or are
also affiliated with cable operators which have a substantial number of
subscribers. The Company cannot predict the degree of success with which it will
meet competition in the future. TCI currently owns 43% of QVC but has entered
into a stockholders agreement with Comcast Corporation (which owns 57% of QVC)
pursuant to which Comcast Corporation controls the day to day operations of QVC.
In addition to the above factors, the Company's ownership of and
affiliation with broadcast television stations creates another set of
competitive conditions. These stations compete for television viewers primarily
within local markets. The Company's broadcast television stations are located in
highly competitive markets and compete against both VHF and UHF stations. Due to
technical factors, a UHF television station generally requires greater power and
a higher antenna to secure substantially the same geographical coverage as a VHF
television station. The Company also competes with new entertainment and
shopping networks for carriage on broadcast television stations. The Company
cannot quantify the competitive effect of the foregoing or any other sources of
video programming on any of the Company's affiliated television stations, nor
can it predict whether such competition will have a material adverse effect on
its operations.
SF Broadcasting competes for audience share primarily on the basis of
program popularity, which has a direct effect on advertising rates. A large
amount of the SF Stations' prime time programming is supplied by Fox and their
results are totally dependent upon the performance of the Fox-supplied programs
in attracting viewers. Non-network time periods are programmed by the stations
primarily with syndicated programs purchased for cash, cash and barter, or
barter-only, and also through self-produced news, public affairs and other
entertainment programming. Other factors that are material to a television
station's competitive position include signal coverage, local program
acceptance, network affiliation, audience characteristics and assigned broadcast
frequency. SF Broadcasting also competes for programming, which involves
negotiating with national program distributors or syndicators that sell
first-run and rerun packages of programming. Those
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stations compete for exclusive access to those programs against in-market
broadcast station competitors for syndicated products.
In summary, the Company operates in a highly competitive environment in
which, among other things, technological change, changes in distribution
patterns, media innovations, data processing improvements and new entrants make
the competitive position of both the Company and its competitors extremely
difficult to predict.
TRADEMARKS, TRADENAMES AND COPYRIGHTS
The Company has registered and continues to register, when appropriate, its
trade and service marks as they are developed and used, and the Company
vigorously protects its trade and service marks. The Company believes that its
marks are a primary marketing tool for promoting its identity.
EMPLOYEES
As of the close of business on December 31, 1996, the Company employed
approximately 4,750 employees with approximately 4,150 employees employed by
Home Shopping, approximately 520 employees employed by Savoy and approximately
80 employees employed by SKTV. The Company believes that it generally has good
employee relationships.
ITEM 2. PROPERTIES
The Company owns an approximately 480,000 square foot facility in St.
Petersburg, Florida, which houses its Home Shopping television studios,
broadcast facilities, and many of the Company's administrative offices and
training facilities.
The Company also maintains executive offices at Carnegie Hall Tower, 152
West 57th Street, New York, New York which consist of approximately 12,000
square feet leased by the Company through 1998 and at The Water Garden, 2425
Olympic Boulevard, Santa Monica, California which consist of approximately
42,000 square feet, under two leases which expire in 1998.
The Company owns four warehouse type facilities totaling approximately
115,000 square feet near the Company's main campus in St. Petersburg, Florida.
These facilities have been used for returns processing, retail distribution and
general storage.
The Company leases a 21,000 square foot facility in Clearwater, Florida for
its video and post production operations.
The Company owns and operates a warehouse consisting of 163,000 square feet
located in Waterloo, Iowa which is used as a fulfillment center.
The Company operates a warehouse located in Salem, Virginia, consisting of
approximately 650,000 square feet which is leased from the City of Salem
Industrial Development Authority. On November 1, 1999, the Company will have the
option to purchase the property for $1.
The Company's retail outlet subsidiary leases four retail stores in the
Tampa Bay area totaling approximately 91,925 square feet.
The Company and its other subsidiaries also lease office space in
California, Colorado and New Jersey.
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The Company owns or leases office, studio and transmitter space for the
SKTV and SF Stations as follows:
- ----------------------------------------------------------------------------------------------
LOCATION FUNCTION OWNED/LEASED
- ----------------------------------------------------------------------------------------------
Mobile, AL............................. Offices/Studio......................... Leased
Baldwin County, AL..................... Transmitter............................ Owned
Mt. Wilson, CA......................... Transmitter............................ Leased
Ontario, CA............................ Offices/Studio......................... Owned
Riverview, FL.......................... Transmitter............................ Leased
Hollywood, FL.......................... Transmitter............................ Leased
Miramar, FL............................ Offices/Studio......................... Leased
Pensacola, FL.......................... Offices/Studio......................... Leased
Honolulu, HI........................... Offices/Studio/Transmitter............. Leased
Aurora, IL............................. Offices/Studio......................... Leased
Chicago, IL............................ Offices/Studio/Transmitter............. Leased
New Orleans, LA........................ Offices/Studio......................... Owned
Baltimore, MD.......................... Offices/Studio/Transmitter............. Leased
Hudson, MA............................. Offices/Studio/Transmitter............. Owned
Newark, NJ............................. Offices/Studio......................... Owned
Newfield, NJ........................... Offices/Studio......................... Owned
Waterford Works, NJ.................... Transmitter............................ Leased
Central Islip, NY...................... Offices/Studio......................... Owned
Middle Island, NY...................... Transmitter............................ Owned
New York, NY........................... Offices/Transmitter.................... Leased
Parma, OH.............................. Offices/Studio/Transmitter............. Leased
Alvin, TX.............................. Offices/Studio......................... Leased
Cedar Hill, TX......................... Transmitter............................ Leased
Irving, TX............................. Offices/Studio......................... Owned
Missouri City, TX...................... Transmitter............................ Leased
Green Bay, WI.......................... Offices/Studio/Transmitter............. Owned
The Company leases the following LPTV transmitter sites:
Atlanta, GA Pensacola, FL
Birmingham, AL Portsmouth, VA
Champaign, IL Raleigh, NC
Columbus, OH Roanoke, VA
Des Moines, IA Shreveport, LA
Huntington, WV Springfield, IL
Jacksonville, FL Spokane, WA
Kansas City, MO St. Louis, MO
Knoxville, TN St. Petersburg, FL
Minneapolis, MN Toledo, OH
Mobile, AL Tulsa, OK
New Orleans, LA Tucson, AZ
New York, NY Wichita, KS
All of the Company's leases are at prevailing market rates and with
unaffiliated parties, and the Company believes that the duration of each lease
is adequate. The Company believes that its principal properties, whether owned
or leased, are adequate for the purposes for which they are used and are
suitably maintained for such purposes. Most of the office/studio space is
substantially utilized, and where significant excess space exists, the Company
leases or subleases such space to the extent possible. The Company anticipates
no future problems in renewing or obtaining suitable leases for its principal
properties.
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ITEM 3. LEGAL PROCEEDINGS
On August 26, 1996, after announcement that Silver King, House Acquisition
Corp., a newly formed subsidiary of Silver King, Liberty HSN, and Home Shopping
had entered into the Agreement and Plan of Exchange and Merger dated as of
August 25, 1996 (the "Home Shopping Merger Agreement"), a class action complaint
titled Andre Engle v. Leo J. Hindery, et. al. was filed in the Court of Chancery
of the State of Delaware, in and for the County of New Castle (the "Delaware
Court"), against Home Shopping, Leo J. Hindery, Jr., Gen. H. Norman Schwarzkopf,
Eli J. Segal, Peter R. Barton, Robert R. Bennett, Barry Diller, James G. Held,
Silver King, Liberty and TCI by a shareholder of Home Shopping on behalf of a
purported class consisting of all public shareholders of Home Shopping (other
than Liberty and its controlled affiliates). Shortly thereafter, four other
class action complaints were filed against the foregoing defendants with the
Delaware Court by shareholders of Home Shopping on behalf of a purported class
consisting of all public shareholders of Home Shopping (other than Liberty and
its controlled affiliates); one of these actions also named as defendants, J.
Anthony Forstmann and Victor A. Kaufman. Plaintiffs allege, among other things,
that, by approving the Home Shopping Merger Agreement, the Home Shopping's
director defendants and, by supporting the merger, Liberty breached their
fiduciary duties to the stockholders and that the consideration to be paid to
stockholders in the Home Shopping Merger is unfair and inadequate. Plaintiffs
sought, among other things, an injunction preventing the defendants from taking
actions toward consummation of the Home Shopping Merger and related
transactions, and now seek recission or rescissory damages and an award of
unspecified compensatory damages to the members of the plaintiffs class. On
October 7, 1996, the five class action lawsuits were consolidated for all
purposes in an action titled In Re: Home Shopping Network, Inc. Shareholders
Litigation, Consolidated Civil Action No. 15179.
The Company believes that the claims in the consolidated action are without
merit, and does not believe it is reasonably possible that the actions will be
successful or otherwise materially adversely affect the Company or its
businesses. There can be no assurance, however, that the plaintiffs will not be
successful, and the Company cannot estimate, based on facts available as of the
date of this Report, the possible adverse effects of such a result.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On December 19, 1996, the annual meeting of stockholders was held. At the
annual meeting, stockholders representing 2,415,945 shares of Class B Common
Stock and 7,083,132 shares of Common Stock were entitled to vote. Stockholders
present or in person by proxy, representing 2,415,945 shares of Class B Common
Stock and 6,118,028 shares of Common Stock, voted on the following matters:
The stockholders of both the Common Stock and the Class B Common Stock
voting as a single class approved the Savoy Merger:
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
29,452,630 59,422 15,226
The stockholders of both the Common Stock and the Class B Common Stock
voting as a single class approved the Home Shopping Merger:
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
29,402,671 110,537 14,070
The stockholders of the Common Stock and the Class B Common Stock voting as
separate classes approved increases in the authorized capital stock of the
Company:
COMMON STOCK
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
5,239,876 116,069 11,883
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21
CLASS B COMMON STOCK
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
2,415,945 -0- -0-
The stockholders of the Common Stock and the Class B Common Stock voting as
separate classes approved the change in the name of the Company:
COMMON STOCK
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
5,315,458 38,338 14,032
CLASS B COMMON STOCK
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
2,415,945 -0- -0-
The stockholders of the Common Stock and the Class B Common Stock voting as
separate classes approved the change in voting of the Company by classes:
COMMON STOCK
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
4,316,743 1,029,429 21,656
CLASS B COMMON STOCK
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
2,415,945 -0- -0-
The stockholders elected the following six 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 VOTES NUMBER OF VOTES
CAST IN FAVOR WITHHELD
--------------- ---------------
Bruce M. Ramer............................... 5,987,001 131,027
Sidney V. Sheinberg.......................... 5,986,913 131,115
Elected by holders of Common Stock and Class B Common Stock voting as a
single class:
NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR WITHHELD
--------------- ---------------
Barry Diller................................. 30,214,603 62,875
Victor A. Kaufman............................ 30,213,701 63,777
John E. Oxendine............................. 30,313,371 64,107
Richard E. Snyder............................ 30,212,656 64,122
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The stockholders of both the Common Stock and Class B Common Stock voting
as a single class approved the adoption of the Company's 1995 Stock Incentive
Plan and the Company's Directors' Stock Option Plan as follows:
1995 STOCK OPTION PLAN
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
24,623,019 538,326 48,149
DIRECTORS' STOCK OPTION PLAN
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
30,002,872 193,578 13,044
The stockholders of both the Common Stock and the Class B Common Stock
voting as a single class ratified the appointment of Ernst & Young LLP as the
Company's Independent Auditors:
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAINING
- --------------- --------------- ---------------
30,251,409 11,561 14,508
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on The Nasdaq Stock Market's National
Market ("NASDAQ") (Symbol: HSNI after December 20, 1996, SKTV during the other
periods reported below)
- --------------------------------------------------------------------------------
HIGH LOW
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
First Quarter............................................. $34.75 $27.50
Second Quarter............................................ 34.50 28.00
Third Quarter............................................. 30.50 21.25
Fourth Quarter............................................ 26.50 21.00
YEAR ENDED DECEMBER 31, 1995
First Quarter............................................. $10.75 $ 8.75
Second Quarter............................................ 19.50 9.25
Third Quarter............................................. 39.75 15.50
Fourth Quarter............................................ 40.25 28.00
The bid prices reported for these periods reflect inter-dealer prices,
without retail markup, markdown or commissions, and may not represent actual
transactions.
There were approximately 11,907 stockholders of record as of March 14, 1997
and the closing price of HSNi Company Common Stock that day was $27.63.
HSNi Common Stock began trading on December 28, 1992 on the OTC Electronic
Bulletin Board. On January 19, 1993, HSNi Common Stock was listed on the NASDAQ
Small-Cap Market. On August 26, 1993, HSNi Common Stock was listed on the NASDAQ
National Market System; which is now the Nasdaq National Market.
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23
The Company has paid no cash dividends on its common stock to date and does
not anticipate paying cash dividends in the immediate future. Additionally, the
Company's current and pending loan facilities preclude the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------
FOUR MONTHS
YEAR ENDED ENDED YEARS ENDED AUGUST 31,
SUMMARY CONSOLIDATED STATEMENTS DECEMBER 31, DECEMBER 31, --------------------------------------
OF OPERATIONS DATA 1996(1) 1995 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net revenue............................... $75,172 $15,980 $47,918 $46,563 $46,136 $ 46,729
Earnings (loss) before cumulative effect
of change in accounting principle(2).... (6,539) (2,882) 115 (899) (6,386) (15,222)
Net earnings (loss)(3).................... (6,539) (2,882) 115 (3,878) (6,386) (15,222)
Earnings (loss) per common share:
Earnings (loss) before cumulative effect
of change in accounting principle(4).... (.61) (.31) .01 (.10) (.72) --
Net earnings (loss)(4).................... (.61) (.31) .01 (.44) (.72) --
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, AUGUST 31,
SUMMARY CONSOLIDATED --------------------- -----------------------------------------
BALANCE SHEET DATA 1996(1) 1995 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
(In thousands)
Working capital (deficit).................. $ (24,444) $ 7,553 $ 6,042 $ 1,553 $ 4,423 $ (594)
Total assets............................... 2,116,232 136,670 142,917 145,488 153,718 153,491
Long-term obligations...................... 271,430 95,980 97,937 114,525 128,210 185
Stockholders' equity (deficit)............. 1,158,749 7,471 9,278 2,614 6,396 (87,064)
- ---------------
(1) As a result of the Mergers, the results of operations for the year ended
December 31, 1996 includes SKTV for the full year and 11 and 12 days of Home
Shopping and Savoy, respectively. The balance sheet reflects purchase
accounting adjustments for the consolidated entity. Commissions of $3.4
million were not paid for 1996 as a result of the Mergers.
(2) In fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("Statement 109"). The
cumulative effect of the accounting change resulted in a charge of
approximately $3.0 million. Prior years' financial statements were not
restated.
(3) Beginning in fiscal 1992, the SKTV Stations were charged interest based on
the historical cost of the SKTV Stations to SKTV and Home Shopping's then
cost of long-term borrowings. In fiscal 1993, the SKTV Stations were charged
interest expense on the note payable to HSN Capital Corporation ("HSNCC"), a
wholly-owned subsidiary of Home Shopping, at a rate of 9.5% per annum. In
fiscal 1994, the Company paid interest to HSNCC until August 1, 1994 when
the Company repaid the long-term obligation to HSNCC.
(4) Net earnings (loss) per share for the year ended December 31, 1996, the four
months ended December 31, 1995 and for the years ended August 31, 1995, 1994
and 1993 have been computed based upon the weighted average shares
outstanding of 10,785,743; 9,394,696; 9,144,772; 8,881,380; and 8,851,339,
respectively. Loss per share for fiscal year 1992 has been omitted due to
lack of comparability.
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
HSNi is a holding company, the subsidiaries of which conduct the operations
of the Company's various business activities. The Company was incorporated in
July 1986 in Delaware as part of a strategy to broaden the viewership of Home
Shopping. On December 28, 1992, Home Shopping, the sole shareholder, distributed
the capital stock of the Company to Home Shopping's stockholders in the form of
a pro-rata stock dividend.
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As discussed in Note A to the Consolidated Financial Statements, included
herein, on October 25, 1995, the Company elected to change its year end from
August 31 to December 31. This change was made effective January 1, 1996.
On December 19 and 20, 1996, the Company acquired 100% of the outstanding
stock of Savoy and 80.1% of the outstanding stock of Home Shopping,
respectively, and changed its name to HSN, Inc. The Mergers were accounted for
using the purchase method of accounting. Following the Mergers, the Company's
principal areas of business are electronic retailing and television
broadcasting.
Home Shopping, through HSC, sells a variety of consumer goods and services
by means of live, customer-interactive electronic retail sales programs which
are transmitted via satellite to cable television systems, affiliated broadcast
television stations and satellite dish receivers. Home Shopping operates the
Programs, each 24 hours a day, seven days a week.
Currently the Company, through SKTV, owns and operates 12 independent full
power UHF television stations, including one television satellite station, which
primarily carry HSN.
As a result of the Savoy Merger, the Company acquired SF Broadcasting which
operates four broadcast television stations affiliated with Fox. Savoy Stations
owns 50% of the common equity and 100% of the voting stock of SF Broadcasting. A
subsidiary of Fox owns 50% of the common equity of SF Broadcasting and also owns
options, subject to certain conditions, to convert its non-voting interest into
voting interests.
As a result of the Mergers, the future results of operations of the Company
will change substantially from its historical results of operations as Home
Shopping had revenues in excess of $1.0 billion and an operating profit of $41.2
million for the year ended December 31, 1996, primarily derived from the retail
sales of the Programs. SF Broadcasting had revenues of $50.7 million for the
year ended December 31, 1996, principally derived from advertising revenues. See
"Unaudited Pro Forma Combined Condensed Statements of Operations."
Each of the SKTV Stations, through the applicable subsidiaries, has entered
into an Affiliation Agreement (the "Affiliation Agreement(s)") with Home
Shopping pursuant to which each Station broadcasts HSN for approximately 164
hours per week. Home Shopping pays each SKTV Station compensation pursuant to
the applicable hourly affiliation rate for such SKTV Station under its
Affiliation Agreement. The Company is continuing to evaluate the status of the
Affiliation Agreements following the Home Shopping Merger. The Company plans to
determine on a market by market basis whether the SKTV Stations will continue to
air HSN, or whether the Company will, instead, disaffiliate HSN and the SKTV
Stations and develop and broadcast programming independently of Home Shopping.
See "HSNi Broadcasting -- SKTV, Inc. -- Programming" above.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion presents the material changes in the consolidated
results of operations of the Company which have occurred between the year ended
December 31, 1996 and the fiscal year ended August 31, 1995, the pro forma year
ended December 31, 1996 versus December 31, 1995, along with material changes
between the four months ended December 31, 1995 and 1994 and the fiscal years
ended August 31, 1995 and 1994. Reference should also be made to the
Consolidated Financial Statements and Summary Financial Data included herein.
YEAR ENDED DECEMBER 31, 1996 VS. FISCAL YEAR ENDED AUGUST 31, 1995
As a result of the acquisitions of Home Shopping and Savoy, the
consolidated results of operations for the year ended December 31, 1996 include
the results of these two entities for 11 days and 12 days, respectively, in
addition to the results of SKTV for the full year.
All discussion included herein calculates the percentage changes using
actual dollar amounts, versus rounded dollar amounts.
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NET REVENUES
BROADCASTING
For the year ended December 31, 1996, broadcasting revenue decreased $1.2
million, or 2.7% to $43.4 million from $44.6 million for the year ended August
31, 1995. This decrease is primarily the result of the elimination of $1.1
million of SKTV revenue for the 11 days ended December 31, 1996 due to the
merger with Home Shopping. Future revenues from Home Shopping will be eliminated
in consolidation as will the same amount of Home Shopping engineering and
programming expenses. The year ended December 31, 1996 also includes $1.5
million of revenue of SF Broadcasting for the 12 days ended December 31, 1996.
HOME SHOPPING
Home Shopping was acquired on December 20, 1996 and, accordingly, $30.6
million of revenue for the 11 day period ended December 31, 1996 is reflected in
total revenues. Home Shopping revenues are generated primarily from retail sales
of the Programs.
OTHER
For the year ended December 31, 1996, other revenue decreased $2.1 million,
or 63.5%, to $1.2 million from $3.4 million for the fiscal year ended August 31,
1995. This decrease primarily is the result of a decrease in production revenue
due to the closing of the Denver Telemation facility in December 1995.
OPERATING EXPENSES:
COST OF SALES, SELLING AND MARKETING AND ENGINEERING AND PROGRAMMING
Cost of sales increased $20.4 million for the year ended December 31, 1996
compared to the fiscal year ended August 31, 1995 as a result of the inclusion
of 11 days of Home Shopping. In addition, increases in selling and marketing and
engineering and programming of $5.0 million and $1.8 million, respectively, also
related to 11 days of activity for Home Shopping.
GENERAL AND ADMINISTRATIVE
For the year ended December 31, 1996, general and administrative expenses
increased $3.9 million primarily due to the inclusion of $2.8 million of expense
as a result of the Home Shopping and Savoy mergers. The remaining increase of
$1.1 million is attributable to an equity and bonus compensation arrangement
with the Company's Chairman and Chief Executive Officer, offset by decreases in
payroll due to the restructuring of the Company in 1995.
DEPRECIATION AND AMORTIZATION
The increase in depreciation and amortization of $.8 million for the year
ended December 31, 1996 was primarily due to the inclusion of $1.4 million of
expense as a result of the Mergers. In addition, an increase of $.9 million was
due to goodwill amortization related to the Mergers. These increases were offset
by decreases of $1.5 million, primarily related to the closure and subsequent
sale of fixed assets related to the Denver Telemation facility.
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26
OTHER INCOME (EXPENSE)
For the year ended December 31, 1996, net other expense increased $1.6
million compared to the year ended August 31, 1995. This increase is primarily
due to non-cash interest expense related to the acceleration of upfront bank
fees in anticipation of the refinancing of the Company's debt in early 1997,
offset by decreased interest expense attributable to a reduction in the
Company's long-term debt in 1996. In addition, $.5 million of net interest
expense was due to the inclusion of partial periods for Home Shopping and Savoy.
INCOME TAXES
The Company's effective tax rate is higher than the statutory rate due
primarily to the amortization of goodwill and other acquired intangibles,
certain non-deductible executive compensation and a deduction for certain
dividends received. In addition, some states require separate company tax
filings which cause state income taxes to be disproportionate with consolidated
earnings.
MINORITY INTEREST
Minority interest represents Liberty HSN's 19.9% interest in Home
Shopping's earnings and Fox's 50% interest in the SF Broadcasting loss for the
11 and 12 day periods, respectively.
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PRO FORMA YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
The following unaudited pro forma combined condensed statements of
operations of HSNi ("Combined Statements") have been prepared to give effect to
the Mergers as if they had occurred January 1, 1995. In addition, the Combined
Statements assume that SF Broadcasting was acquired by Savoy as of January 1,
1995 giving effect to the Mergers and the acquisition of SF Broadcasting using
the purchase method of accounting. During 1996, Savoy ceased its activities in
the motion picture business. Accordingly, the Combined Statements, were prepared
excluding the operating results of the Savoy motion picture business, for the
years ended December 31, 1996 and 1995.
The Combined Statements are presented for illustrative purposes only and
are not necessarily indicative of the results of operations which would have
actually been reported had any of the transactions occurred as of January 1,
1995, nor is it necessarily indicative of future results of operations.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
EXCLUDING SAVOY MOTION PICTURE BUSINESS
- --------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
- --------------------------------------------------------------------------------------
(In thousands,
except per share data)
NET REVENUES
Home Shopping............................................. $1,014,705 $ 919,796
Broadcasting and production............................... 53,215 65,257
---------- ----------
Total net revenues................................ 1,067,920 985,053
OPERATING EXPENSES
Cost of sales............................................. 626,090 603,440
Other costs............................................... 311,640 356,544
Depreciation and amortization............................. 90,862 95,667
---------- ----------
Total operating expenses.......................... 1,028,592 1,055,651
---------- ----------
Operating profit (loss)........................... 39,328 (70,598)
Other income (expense), net................................. (34,345) (36,075)
---------- ----------
Income (loss) before income taxes, and minority interest.... 4,983 (106,673)
Income tax (expense) benefit................................ (22,582) 29,159
Minority interest........................................... 3,288 14,772
---------- ----------
Net loss.......................................... $ (14,311) $ (62,742)
========== ==========
Loss per common share....................................... $ (.29) $ (1.30)
Common shares outstanding................................... 48,761 48,359
PRO FORMA REVENUES
For the year ended December 31, 1996, total revenues increased $82.9
million or 8.4% compared to the year ended December 31, 1995. The increase in
revenues for the year ended December 31, 1996, primarily resulted from an
increase in net sales for Home Shopping of $94.9 million, or 10.3%, to $1.015
billion from $919.8 million for the year ended December 31, 1995. Net sales of
HSC increased $108.3 million, or 13.8%, for the year ended December 31, 1996,
reflecting a 12.0% increase in the number of packages shipped and a 1.5%
decrease in the average price per unit sold compared to the year ended December
31, 1995. Sales by wholly-owned subsidiaries, Vela, HSN Mail Order, Inc. ("Mail
Order") and ISN increased $9.0 million, $7.8 million and $4.4 million,
respectively, for the year ended December 31, 1996. These increases were
partially offset by decreases related to HSN Direct Joint Venture ("HSND") and
Ortho-Vent, Inc. ("Ortho-Vent") of $17.7 million and $15.6 million,
respectively.
For the year ended December 31, 1996, HSC's merchandise return percentage
decreased to 23.5% from 25.7%, in 1995. Management believes that the lower
return rate is primarily attributable to the decrease in the
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28
average price per unit sold. Promotional price discounts remained constant at
2.8% of HSC sales for the year ended December 31, 1996, compared to 1995.
The Company believes that the improvement in sales in the year ended
December 31, 1996 compared to 1995 was primarily the result of changes made by
new management to Home Shopping's merchandising and programming strategies. In
addition, Home Shopping offered a "no interest-no payment" credit promotion
through September 1996 for certain purchases made during June 1996 using Home
Shopping's private label credit card and offered a similar promotion during the
fourth quarter of 1996 with the payment deferral period extending to March 1997.
Management is taking additional steps designed to attract both first-time and
active customers which include changing the merchandising approach to broaden
product assortment, changing the sales mix, optimizing product variety and
value, maintaining the average price per unit at the desired level, improving
inventory management and better planning of programmed shows. There can be no
assurance that additional changes to Home Shopping's merchandising and
programming strategies will achieve management's intended results.
PRO FORMA OPERATING EXPENSES
COST OF SALES
For the year ended December 31, 1996, cost of sales increased $22.7
million, or 3.8%, compared to the year ended December 31, 1995. The increase in
cost of sales primarily relates to Home Shopping's cost of sales which increased
$22.8 million, or 3.8%, to $625.7 million from $602.8 million for the year ended
December 31, 1995. As a percentage of net sales, Home Shopping's cost of sales
decreased to 61.7% from 65.5% compared to the year ended December 31, 1995.
Cost of sales of Home Shopping and Vela increased $17.2 million and $5.0
million, respectively, for the year ended December 31, 1996, compared to 1995.
These increases were partially offset by decreases related to HSND and
Ortho-Vent of $6.6 million and $9.4 million, respectively, for the year ended
December 31, 1996, compared to 1995. As a percentage of Home Shopping net sales,
cost of sales decreased to 62.3% for the year ended December 31, 1996, from
68.7% in 1995.
The dollar increases in Home Shopping's cost of sales relate in part to the
higher sales volume. The comparative decreases in Home Shopping's cost of sales
percentage in the year ended December 31, 1996, relate in part to warehouse
sales and other promotional events held during 1995. In addition, the 1996
product sales mix was composed of higher gross profit merchandise. Also, Home
Shopping's cost of sales for the year ended December 31, 1996 reflects a $5.4
million decrease in Home Shopping's inventory carrying adjustment. In 1997,
management expects a slight decrease in Home Shopping's cost of sales percentage
from 1996.
OTHER COSTS
For the year ended December 31, 1996, other costs decreased $44.9 million,
or 12.6%, compared to the year ended December 31, 1995. This primarily relates
to a 44.1 million decrease in operating costs at Home Shopping resulting from
the sale of HSND and Ortho-Vent which decreased a total of $13.9 million,
additional costs incurred in 1995 totaling $3.1 million in connection with a
change in programming strategies and a $6.9 million decrease in expenses
resulting from management's actions to streamline operations primarily through
workforce reductions. In addition, other charges decreased $13.4 million.
Additional amounts were also incurred in 1995 relating to the Denver Telemation
facility closure, severance and payments to executives as provided for under
their employment agreements. These decreases were offset in part by an increase
in other costs of SF Broadcasting.
DEPRECIATION AND AMORTIZATION
For the year ended December 31, 1996, depreciation and amortization expense
decreased $4.8 million, or 5.0%. This decrease primarily relates to a $5.8
million decrease in depreciation and amortization of Home Shopping 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 year ended
December 31, 1996, compared to 1995. Depreciation expense will increase in 1997
compared to 1996 related to increased capital expenditures in 1997.
26
29
In addition, amortization expense for name lists decreased $3.9 million for the
year ended December 31, 1996, compared to 1995, relating to the sale of
Ortho-Vent assets in the fourth quarter of 1995. These decreases were offset by
increased amortization of cable distribution fees of $4.4 million for the year
ended December 31, 1996, compared to 1995. Amortization of these fees is
expected to total $19.0 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 consummated during
1997.
OTHER INCOME (EXPENSE), NET
For the year ended December 31, 1996, other expense decreased $1.7 million,
or 4.8%, compared to the year ended December 31, 1995. Home Shopping's other
expense decreased $7.0 million for the year ended December 31, 1996, compared to
the year ended December 31, 1995, resulting from litigation settlement income of
$2.1 million in 1996 which represents the reversal of amounts accrued in prior
years which were in excess of the actual settlement on certain litigation. This
income was offset by equity losses totaling $5.7 million relating to the
Company's investments in HOT and Shop Channel which were partially offset by a
gain on the sale of a controlling interest in HSND of $1.9 million 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. Litigation expense for the year ended December 31, 1995, of $6.4
million, represents litigation settlements and anticipated costs in connection
with the resolution of certain pending litigation. In addition in 1995, $6.0
million in losses recorded in connection with the retirement of equipment was
offset by receipts from lawsuit settlements, royalty income and other
miscellaneous income totaling $5.6 million.
The net decrease was offset in part by increased net interest expense
related to SF Broadcasting which reflects increased borrowing levels and lower
investment balances.
MINORITY INTEREST
For the year ended December 31, 1996, minority interest decreased $11.5
million, or 77.7%, compared to the year ended December 31, 1995, related to
Liberty HSN's minority interest in the pretax profit of Home Shopping in 1996
compared to its pretax loss in 1995 offset by the Fox minority interest in SF
Broadcasting pretax loss in the 1996 compared to their profit in 1995.
FOUR MONTHS ENDED DECEMBER 31, 1995 VS. FOUR MONTHS ENDED DECEMBER 31, 1994
REVENUES
For the four months ended December 31, 1995, net revenue decreased $1.3
million to $16.0 million from $17.3 million when compared to the same period in
1994. The decrease primarily related to the receipt of $1.8 million of
additional fees in fiscal 1995, compared to $.8 million in fiscal 1994 under the
Affiliation Agreements and a decrease of $.4 million due to a reduction in
production revenue. The Company closed the Denver Telemation facility effective
November 1995.
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE
For the four months ended December 31, 1995, general and administrative
expenses increased $1.7 million to $9.2 million from $7.5 million when compared
to the same period in 1994. An additional $1.1 million is attributable to an
equity and bonus compensation arrangement with the Company's Chairman and Chief
Executive Officer. The remaining increase was due to additional consulting and
legal expenses associated with new executive management.
OTHER
In December 1995, the Company implemented a formal plan to increase
operating efficiency, reduce personnel at the SKTV Stations and the Company's
corporate offices and close the Denver Telemation facility. As a result, the
Company recorded a $2.6 million charge to operations for the four months ended
27
30
December 31, 1995, which included severance costs, facility closure and
non-cancellable lease costs and the write-down of property, plant and equipment.
OTHER INCOME (EXPENSE)
For the four months ended December 31, 1995, interest income increased $.5
million to $.9 million from $.4 million when compared to the same period in
1994. The increase is primarily due to the settlement of the Company's lawsuit
against Urban Broadcasting Corporation ("Urban"). The Company did not recognize
any interest income from a note receivable from Urban in the four month period
ended December 31, 1994 until the settlement was reached and the funds were
received in May 1995.
INCOME TAXES
The Company's effective tax rate for these periods differed from the
statutory rate due primarily to the amortization of goodwill and other acquired
intangible assets relating to acquisitions from prior years, other
non-deductible items, and state income taxes.
FISCAL YEAR ENDED AUGUST 31, 1995 VS. FISCAL YEAR ENDED AUGUST 31, 1994
REVENUES
For the year ended August 31, 1995, net revenue increased $1.3 million to
$47.9 million from $46.6 million for the year ended August 31, 1994. The
increase primarily relates to the receipt of $1.3 million of additional fees in
fiscal 1995, compared to fiscal 1994, under the Affiliation Agreements.
Additionally, during fiscal 1995, the Company received $.4 million from
direct response television spots which was offset by a decrease of $.4 million
due to the declining production revenue of Telemation and from the closing of
the Chicago Telemation facility in fiscal 1994 described below.
OPERATING EXPENSES
COST OF SALES
For the year ended August 31, 1995, cost of sales decreased $.3 million to
$.6 million from $.9 million for the year ended August 31, 1994 due to the
declining production revenue of Telemation and the closing of the Chicago
Telemation facility in fiscal 1994 described below.
GENERAL AND ADMINISTRATIVE
For the year ended August 31, 1995, general and administrative expenses
increased $3.1 million to $24.4 million from $21.3 million for the year ended
August 31, 1994. The Company recognized approximately $2.0 million in additional
compensation expense in fiscal 1995 related to the issuance of 441,988 shares
attributable to an equity and bonus compensation arrangement with the Company's
Chairman and Chief Executive Officer, and an increase of $.8 million in legal
and consulting fees.
OTHER
The Company closed the Chicago unit of Telemation in fiscal 1994 after
management determined that this unit could not meet the Company's financial
objectives in Chicago's highly competitive video production marketplace due to
the turnover of key employees and the need for additional capital assets.
During fiscal 1994, the Company recorded a $1.2 million charge to
operations to close the Chicago unit. Approximately $.5 million was attributable
to the write-off of leasehold improvements, production equipment and other
assets and liabilities. Additionally, the Company made cash payments of $.7
million to buy out the lease obligations of the building and equipment and to
fund other miscellaneous expenses including severance payments to terminated
employees.
28
31
OTHER INCOME (EXPENSE)
For the year ended August 31, 1995 net other income (expense) decreased $.5
million to $7.0 million from $7.5 million for the year ended August 31, 1994.
Interest expense decreased $1.2 million to $11.0 million in fiscal 1995
from $12.2 million in fiscal 1994. The decrease is due to both a reduction in
long-term obligations and interest rates in fiscal 1995. The Company refinanced
its long-term obligation effective August 1, 1994.
Interest income increased $2.1 million to $3.4 million in fiscal 1995 from
$1.3 million in fiscal 1994 primarily due to the receipt of interest from Urban
and interest earned on the Company's invested cash equivalents.
Miscellaneous income from dividends decreased $2.8 million to $.6 million
in fiscal 1995 from $3.4 million in fiscal 1994. The decrease is due to the
restructuring and receipt of the preferred dividends owed to the Company by
Blackstar during fiscal 1994. On November 5, 1993, the Company amended the
shareholders' agreement with Blackstar's other shareholders. Under the terms of
the amended shareholders' agreement, Blackstar and the Company reduced the
cumulative preferred dividend rate from 14% to 9.25% retroactive to April 20,
1988. The Company received $1.0 million in cash of the total dividends in
arrears amount of approximately $2.8 million as of November 5, 1993. Additional
scheduled dividend payments of $.5 million and $.4 million were made on April 4,
1994 and July 1, 1994, respectively. In addition, on August 10, 1994, Blackstar
made a final dividend in arrears payment of $1.5 million to the Company which
brought Blackstar current on all dividends as of that date. On March 31, 1995,
the Company received the annual preferred dividend of $.5 million.
INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE FOR INCOME
TAXES
During fiscal 1994, the Company adopted Statement 109 and reported the
cumulative effect of the change in the method of accounting for income taxes in
the Consolidated Statement of Operations. The cumulative effect of the
accounting change resulted in a charge of approximately $3.0 million. Prior
years' financial statements were not restated.
The Company's effective tax rate is higher than the statutory rate of 34%
due primarily to the amortization of goodwill and other acquired intangibles,
certain non-deductible executive compensation and a deduction for certain
dividends received. In addition, states require separate company tax filings
which causes state income taxes to be disproportionate with consolidated
earnings.
SEASONALITY
The Company believes that seasonality does impact its retailing segment but
not to the same extent it impacts the retail industry in general.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $12.0 million for the year
ended December 31, 1996. In addition, in connection with the Mergers, the
Company acquired cash of $52.7 million. These cash proceeds were used
principally to repay outstanding borrowings of $39.7 million under the Company's
senior term loans (the "Facility"). Net earnings adjusted for non-cash items
totaled $13.2 million for the year ended December 31, 1996. The decrease in
working capital of $32.0 million for the year ended December 31, 1996 is
primarily the result of the Mergers and the purchase accounting adjustments
recorded in connection therewith.
Accounts and notes receivable at December 31, 1996 included "FlexPay"
accounts receivable totaling $20.3 million. It is expected that the Company's
financing of "FlexPay" accounts receivable will not have a significant impact on
its liquidity position.
29
32
The inventory balance is net of a carrying adjustment of $27.9 million at
December 31, 1996, which is primarily related to product which is inconsistent
with Home Shopping's new sales and merchandising philosophy.
Capital expenditures were $1.1 million for the year ended December 31,
1996. Home Shopping has initiated a plan to improve and expand the capabilities
of its computer systems and accordingly, capital expenditures in 1997 are
expected to range from $25.0 to $30.0 million. When completed, Home Shopping
expects to achieve savings in its call center and fulfillment operations.
The Company is considering the orderly disaffiliation of the SKTV Stations
and the development and broadcasting of independent programming. In the event of
disaffiliation, substantial capital expenditures would be required to develop
SKTV programming. SKTV expects these capital expenditures, combined with capital
expenditures for SF Broadcasting, to range from $15.0 to $20.0 million for 1997.
Home Shopping has a $150.0 million revolving credit facility (the "Home
Shopping Facility") with a $25.0 million sub-limit for import letters of credit.
The Home Shopping Facility expires on August 2, 1999, and is secured by the
stock of HSC and HSN Realty, Inc. There were no outstanding borrowings under the
Home Shopping Facility as of December 31, 1996, and $138.0 million was available
for borrowing after taking into account outstanding letters of credit. As of
March 28, 1997, there were no outstanding borrowings under the Home Shopping
Facility. The Company anticipates that it will use its borrowing capacity under
the Home Shopping Facility or its replacement for working capital requirements,
capital expenditures and general corporate purposes.
As a result of the Mergers, the Company is renegotiating the Facility and
the Home Shopping Facility and believes that it will obtain financing at a
higher borrowing level with terms similar to those which currently exist.
On April 26, 1996, an entity in which the Company holds a 49% nonvoting
common stock interest acquired KPST-TV, Vallejo, California which serves the San
Francisco market. SKC Investments, Inc., a subsidiary of the Company, loaned the
purchasing entity $7.9 million to finance the acquisition.
On May 8, 1996, the Company received a prepayment of approximately $1.6
million in full satisfaction of the note receivable from Roberts. The Company
still retains a 45% nonvoting convertible common stock interest in Roberts. In
addition, during the year ended December 31, 1996, collections from other notes
receivable were $2.5 million.
As discussed in Note F to the Consolidated Financial Statements included
herein, on October 10, 1996, Home Shopping entered into a binding Memorandum of
Understanding to purchase a 29% equity interest in HOT and its general partner
for $15.0 million (the "HOT Interest"). The Company has paid $5.0 million for
the HOT Interest and has recorded a $10.0 million subscription payable; $5.0
million is expected to be paid in each of April 1997 and September 1997.
In addition, on November 14, 1996, Home Shopping and JPC formed Shop
Channel for the primary purpose of broadcasting televised shopping in Japan.
Home Shopping paid $1.8 million for its 30% interest in Shop Channel. The
remaining 70% interest is held by JPC.
The Company has certain ongoing funding obligations as discussed in Note K
in the Consolidated Financial Statements included herein.
During 1997, management expects to pay cable distribution fees of $35.0 to
$40.0 million, relating to new and current contracts with cable system operators
to carry Home Shopping's programming.
During 1996, the Company received cash proceeds of $1.2 million from the
exercise of .1 million options to purchase HSNi Common Stock.
In management's opinion, available cash, internally generated funds and the
Home Shopping Facility or its replacement will provide sufficient capital
resources to meet the Company's foreseeable needs.
During 1996, the Company did not pay any cash dividends, and none are
permitted under the Company's existing and pending credit facilities.
30
33
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
HSN, Inc.
We have audited the accompanying consolidated balance sheet of HSN, Inc.
and subsidiaries (formerly Silver King Communications, Inc.) as of December 31,
1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. Our audit also included the
financial statement schedule listed in the index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HSN, Inc.
and subsidiaries as of December 31, 1996 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
New York, New York
February 26, 1997
31
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
HSN, Inc.
We have audited the accompanying consolidated balance sheet of HSN, Inc.
(formerly Silver King Communications, Inc.) and subsidiaries as of December 31,
1995 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period September 1, 1995 through December 31,
1995 and for each of the two years in the period ended August 31, 1995. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of HSN, Inc. and subsidiaries at
December 31, 1995 and the results of their operations and their cash flows for
the period September 1, 1995 through December 31, 1995 and for each of the two
years in the period ended August 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
As discussed in Note B-8 to the consolidated financial statements, HSN, Inc. and
subsidiaries changed their method of accounting for income taxes effective
September 1, 1993 to conform with Statement of Financial Accounting Standards
No. 109.
DELOITTE & TOUCHE LLP
Tampa, Florida
July 2, 1996
32
35
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HSN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------
FOUR MONTHS
YEAR ENDED ENDED YEARS ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ----------------------
1996 1995 1995 1994
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share data)
NET REVENUES
Broadcasting ($41,128 from a related party
in 1994)............................... $ 43,359 $15,061 $ 44,563 $ 42,682
Home Shopping............................. 30,588 -- -- --
Other..................................... 1,225 919 3,355 3,881
-------- ------- -------- --------
Total net revenues................ 75,172 15,980 47,918 46,563
-------- ------- -------- --------
Operating costs and expenses:
Cost of sales............................. 20,974 193 614 938
General and administrative................ 28,254 9,163 24,394 21,309
Depreciation and amortization............. 15,486 4,701 14,674 15,000
Selling and marketing..................... 4,951 -- -- --
Engineering and programming............... 1,812 -- -- --
Other..................................... 83 2,603 -- 1,205
-------- ------- -------- --------
Total operating expenses.......... 71,560 16,660 39,682 38,452
-------- ------- -------- --------
Operating profit (loss)........... 3,612 (680) 8,236 8,111
Other income (expense):
Interest expense ($11,456 to a related
party in 1994)......................... (11,841) (3,463) (10,963) (12,178)
Interest income........................... 3,238 888 3,410 1,321
Miscellaneous............................. 44 -- 570 3,352
-------- ------- -------- --------
(8,559) (2,575) (6,983) (7,505)
-------- ------- -------- --------
Earnings (loss) before income taxes,
minority interest and cumulative effect of
change in accounting principle............ (4,947) (3,255) 1,253 606
Income tax (expense) benefit................ (1,872) 373 (1,138) (1,505)
Minority interest........................... 280 -- -- --
-------- ------- -------- --------
Earnings (loss) before cumulative effect of
change in accounting principle............ (6,539) (2,882) 115 (899)
Cumulative effect of change in accounting
principle for income taxes................ -- -- -- (2,979)
-------- ------- -------- --------
NET EARNINGS (LOSS)......................... $ (6,539) $(2,882) $ 115 $ (3,878)
======== ======= ======== ========
Earnings (loss) per common share:
Earnings (loss) before cumulative effect
of change in accounting principle...... $ (.61) $ (.31) $ .01 $ (.10)
Cumulative effect of change in accounting
principle.............................. -- -- -- (.34)
-------- ------- -------- --------
Net earnings (loss) per common share...... $ (.61) $ (.31) $ .01 $ (.44)
======== ======= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
33
36
HSN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------
DECEMBER 31,
------------------------
1996 1995
- --------------------------------------------------------------------------------------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 42,606 $ 19,140
Accounts and notes receivable (net of an allowance for
doubtful accounts of $2,679 and $68, respectively)........ 56,832 4,237
Inventories, net............................................ 100,527 --
Deferred income taxes....................................... 40,842 1,797
Other current assets, net................................... 7,791 1,199
---------- --------
Total current assets.............................. 248,598 26,373
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 95,472 76,033
Buildings and leasehold improvements........................ 63,739 19,520
Furniture and other equipment............................... 20,414 2,991
---------- --------
179,625 98,544
Less accumulated depreciation and amortization.... 73,959 72,851
---------- --------
105,666 25,693
Land........................................................ 14,944 3,334
Construction in progress.................................... 1,365 244
---------- --------
121,975 29,271
OTHER ASSETS
Intangible assets, net...................................... 1,545,947 59,984
Cable distribution fees, net ($40,892 to related parties)... 113,594 --
Long-term investments ($5,581 in related parties at December
31, 1996)................................................. 30,121 5,135
Notes receivable, net of current portion ($1,639 from
related parties at December 31, 1996)..................... 17,741 12,188
Deferred income taxes....................................... 1,926 --
Deferred charges and other, net............................. 36,330 3,719
---------- --------
1,745,659 81,026
---------- --------
$2,116,232 $136,670
========== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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37
HSN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
- --------------------------------------------------------------------------------------
DECEMBER 31,
------------------------
1996 1995
- --------------------------------------------------------------------------------------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations................. $ 42,906 $ 12,456
Accounts payable............................................ 95,421 --
Programming fees ($9,051 to related parties)................ 40,717 --
Other accrued liabilities................................... 93,998 6,364
---------- --------
Total current liabilities......................... 273,042 18,820
LONG-TERM OBLIGATIONS (net of current maturities)........... 271,430 95,980
DEFERRED INCOME TAXES....................................... -- 14,399
OTHER LONG-TERM LIABILITIES, net............................ 56,875 --
MINORITY INTEREST........................................... 356,136 --
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value; authorized 15,000,000
shares; no shares issued and outstanding at December 31,
1996 and 1995............................................. -- --
Common stock -- $.01 par value; authorized 150,000,000
shares; issued and outstanding 35,992,903 and 6,996,332
shares at December 31, 1996 and 1995, respectively........ 360 70
Class B -- convertible common stock -- $.01 par value;
authorized, 30,000,000 shares; issued and outstanding,
10,225,056 shares at December 31, 1996; and 2,415,945
shares authorized, issued and outstanding at December 31,
1995...................................................... 102 24
Additional paid-in capital.................................. 1,285,277 126,119
Accumulated deficit......................................... (116,662) (110,123)
Unearned compensation....................................... (5,330) (3,621)
Note receivable from key executive for common stock
issuance.................................................. (4,998) (4,998)
---------- --------
1,158,749 7,471
---------- --------
$2,116,232 $136,670
========== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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38
HSN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
NOTE
RECEIVABLE
FROM KEY
EXECUTIVE
CLASS B FOR
CONVERTIBLE ADDITIONAL COMMON
COMMON COMMON PAID-IN ACCUMULATED UNEARNED STOCK
STOCK STOCK CAPITAL DEFICIT COMPENSATION ISSUANCE TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
BALANCE AT AUGUST 31, 1993...... $ 64 $ 24 $ 109,786 $(103,478) $ -- $ -- $ 6,396
Issuance of common stock upon
exercise of stock options..... 1 -- 95 -- -- -- 96
Net loss for the year ended
August 31, 1994............... -- -- -- (3,878) -- -- (3,878)
---- ---- ---------- --------- ------- ------- ----------
BALANCE AT AUGUST 31, 1994...... 65 24 109,881 (107,356) -- -- 2,614
Issuance of common stock upon
exercise of stock options..... -- -- 180 -- -- -- 180
Unearned compensation related to
grant of stock options to key
executive..................... -- -- 3,973 -- (3,973) -- --
Amortization of unearned
compensation related to grant
of stock options to key
executive..................... -- -- -- -- 20 -- 20
Income tax benefit related to
stock options exercised....... -- -- 421 -- -- -- 421
Issuance of common stock to key
executive..................... 4 -- 9,996 -- -- (4,998) 5,002
Value of common stock in excess
of key executive's purchase
price......................... -- -- 926 -- -- -- 926
Net earnings for year ended
August 31, 1995............... -- -- -- 115 -- -- 115
---- ---- ---------- --------- ------- ------- ----------
BALANCE AT AUGUST 31, 1995...... 69 24 125,377 (107,241) (3,953) (4,998) 9,278
Issuance of common stock upon
exercise of stock options..... 1 -- 187 -- -- -- 188
Amortization of unearned
compensation related to grant
of stock options to key
executive..................... -- -- -- -- 332 -- 332
Income tax benefit related to
stock options exercised....... -- -- 555 -- -- -- 555
Net loss for the four month
period ended December 31,
1995.......................... -- -- -- (2,882) -- -- (2,882)
---- ---- ---------- --------- ------- ------- ----------
BALANCE AT DECEMBER 31, 1995.... 70 24 126,119 (110,123) (3,621) (4,998) 7,471
Issuance of common stock upon
exercise of stock options..... 1 -- 1,155 -- -- -- 1,156
Amortization of unearned
compensation related to grant
of stock options to key
executive..................... -- -- -- -- 1,028 -- 1,028
Income tax benefit related to
stock options exercised....... -- -- 841 -- -- -- 841
Issuance of common stock related
to the Home Shopping merger... 247 78 1,044,487 -- -- -- 1,044,812
Issuance of common stock related
to the Savoy merger........... 42 -- 112,675 -- -- -- 112,717
Unearned compensation related to
employee equity participation
plan.......................... -- -- -- -- (2,737) -- (2,737)
Net loss for year ended December
31, 1996...................... -- -- -- (6,539) -- -- (6,539)
---- ---- ---------- --------- ------- ------- ----------
BALANCE AT DECEMBER 31, 1996.... $360 $102 $1,285,277 $(116,662) $(5,330) $(4,998) $1,158,749
==== ==== ========== ========= ======= ======= ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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39
HSN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
FOUR MONTHS YEARS ENDED
YEAR ENDED ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, -------------------
1996 1995 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net earnings (loss)....................................... $ (6,539) $(2,882) $ 115 $ (3,878)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 18,672 4,701 14,674 15,000
Non-cash interest expense............................... -- 288 820 --
Deferred income taxes................................... 418 (710) 219 3,845
Amortization of unearned compensation................... 1,028 332 20 --
Inventory carrying adjustment........................... (420) -- -- --
Equity in losses of unconsolidated affiliates........... 367 -- -- --
Minority interest....................................... (280) -- -- --
(Gain) loss on retirement or sale of fixed assets....... (34) 603 (111) 99
Provision for (recovery of) losses on accounts and notes
receivable............................................ 23 51 179 (163)
Non-cash compensation to key executive.................. -- -- 926 --
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable............ 511 (841) (2) 350
Decrease in inventories............................... 9,949 -- -- --
(Increase) decrease in other current assets........... 1,332 (229) (397) 15
Decrease in accounts payable.......................... (11,910) -- -- --
Increase (decrease) in accrued liabilities............ (1,149) 1,269 999 (106)
-------- ------- ------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 11,968 2,582 17,442 15,162
-------- ------- ------- ---------
Cash flows from investing activities:
Investments in long-term notes receivable................. (8,369) (653) (2,855) (2,300)
Proceeds from long-term notes receivable.................. 4,086 999 2,868 3,280
Proceeds from sale of fixed assets........................ 2,345 66 254 34
Capital expenditures...................................... (1,143) (163) (1,703) (1,922)
(Increase) decrease in other non-current assets........... 2,089 -- (260) (74)
Payment of merger costs................................... (1,630) -- -- --
-------- ------- ------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES........................................ (2,622) 249 (1,696) (982)
-------- ------- ------- ---------
Cash flows from financing activities:
Principal payments of long-term obligations............... (39,763) (6,089) (10,475) (132,909)
Proceeds from issuance of common stock.................... 1,156 188 5,182 96
Payment of capitalized bank fees.......................... -- -- (283) (4,184)
Proceeds from debt refinancing............................ -- -- -- 125,000
Cash acquired in merger................................... 52,727 -- -- --
-------- ------- ------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES........................................ 14,120 (5,901) (5,576) (11,997)
-------- ------- ------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 23,466 (3,070) 10,170 2,183
Cash and cash equivalents at beginning of period............ 19,140 22,210 12,040 9,857
-------- ------- ------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 42,606 $19,140 $22,210 $ 12,040
======== ======= ======= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
37
40
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION
HSN, Inc., formerly Silver King Communications, Inc., (the "Company" or
"HSNi") is a holding company, the subsidiaries of which conduct the day-to-day
operations of the Company's various business activities. The Company's principal
business operations include electronic retailing and television broadcasting.
The consolidated financial statements include the operations of Savoy Pictures
Entertainment, Inc. and subsidiaries ("Savoy") and the operations of Home
Shopping Network, Inc. and subsidiaries ("Home Shopping") from the date of their
acquisitions (collectively, the "Mergers") on December 19, 1996 and December 20,
1996, respectively, as discussed in Note C.
On October 25, 1995, the Company elected to change its annual reporting
period from a year ending August 31 to a year ending December 31, effective
January 1, 1996. All subsidiaries of the Company are on a calendar year basis,
except for SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc. and
Subsidiaries (collectively known as "SF Broadcasting") which are on a 52/53 week
fiscal year ending the last Sunday in December.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and majority owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
Investments in which the Company owns a 20%, but not in excess of 50%,
interest and where it can exercise significant influence over the operations of
the investee, are accounted for using the equity method. All other investments
are accounted for using the cost method. The Company periodically evaluates the
recoverability of investments recorded under the cost method and recognizes
losses if a decline in value is determined to be other than temporary.
2. REVENUES
Revenues from Home Shopping primarily consist of merchandise sales and are
reduced by incentive discounts and sales returns to arrive at net sales.
Revenues are recorded for credit card sales upon transaction authorization, and
for check sales upon receipt of customer payment, which does not vary
significantly from the time goods are shipped. Home Shopping's sales policy
allows merchandise to be returned at the customer's discretion, generally up to
30 days. Allowances for returned merchandise and other adjustments are provided
based upon past experience.
Prior to December 20, 1996, television broadcasting revenue was principally
derived from the broadcasting of Home Shopping programming. The Company was
compensated by Home Shopping based on an applicable hourly affiliation rate per
station and, upon reaching certain sales levels, commissions on net sales.
Revenue was recognized as services were provided or when additional commissions
were earned. Subsequent to the Mergers, as discussed in Note C, intercompany
revenues and expenses are eliminated in consolidation.
Broadcast advertising revenues are recognized in the period the services
are provided.
3. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and short-term investments. Short-term investments consist primarily of
U.S. Treasury Securities, auction preferred shares, U.S. Government agencies and
certificates of deposit with original maturities of less than 91 days.
38
41
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain costs associated with the internal
development of software for use in its primary business.
5. INVENTORIES, NET
Merchandise inventories are valued at the lower of cost or market, cost
being determined using the first-in, first-out method. Cost includes freight,
certain warehouse costs and other allocable overhead. Market is determined on
the basis of net realizable value, giving consideration to obsolescence and
other factors. Inventories are presented net of an inventory carrying adjustment
of $27.9 million at December 31, 1996.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements, are
recorded at cost. Repairs and maintenance and any gains or losses on
dispositions are included in operations.
Depreciation and amortization is provided for on a straight-line basis to
allocate the cost of depreciable assets to operations over their estimated
service lives.
- ---------------------------------------------------------------------------------
DEPRECIATION/
ASSET CATEGORY AMORTIZATION PERIOD
- ---------------------------------------------------------------------------------
Computer and broadcast equipment............................ 3 to 13 Years
Buildings and building improvements......................... 30 to 40 Years
Leasehold improvements...................................... 4 to 20 Years
Furniture and other equipment............................... 3 to 10 Years
Depreciation and amortization expense on property, plant and equipment was
$4.3 million, $1.6 million, $5.3 million and $5.3 million for the year ended
December 31, 1996, the four months ended December 31, 1995 and the years ended
August 31, 1995 and 1994, respectively.
For income tax purposes, certain assets are depreciated using allowable
accelerated methods, which result in different depreciation amounts than would
be calculated for financial statement purposes. At least annually, and more
often if circumstances dictate, the Company evaluates the recoverability of net
carrying value of its property, plant and equipment on a consolidated basis. As
part of this evaluation, the fair value of the property, plant and equipment is
estimated (in some cases with the assistance of outside real estate consultants)
based on discounted cash flows. The fair value is compared to the carrying
amount in the financial statements. A deficiency in fair value relative to
carrying amount is an indication of the need for a write-down due to impairment.
If the total of these future undiscounted cash flows were less than the carrying
amount of the property, plant and equipment, the asset would be written-down to
its fair value, and a loss on impairment recognized by a charge to earnings. The
Company's accounting policy complies with Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
the Long-Lived Assets to be Disposed of."
7. INTANGIBLE ASSETS
The Company periodically analyzes the value of its intangible assets,
including cable distribution fees and deferred and other charges, to determine
if an impairment has occurred. The Company measures the potential impairment
based on the undiscounted value of expected future operating cash flows of the
assets. Based on its analysis, the Company does not believe that an impairment
of these assets has occurred.
39
42
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Under Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" ("Statement 109"), deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
During fiscal 1994, the Company adopted Statement 109 and reported the
cumulative effect of a change in method of accounting for income taxes. The
cumulative effect of an accounting change resulted in a charge of $3.0 million.
Prior years' financial statements were not restated. Prior to the implementation
of Statement 109, the Company accounted for income taxes using Accounting
Principles Board Opinion ("APB") 11.
9. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is based on net earnings (loss) divided
by the weighted average number of common shares outstanding giving effect to
stock options, warrants and convertible debt, when dilutive. Fully diluted
earnings per share is not materially different from primary earnings per share
in any period presented.
The weighted average number of common shares outstanding was 10,785,743 for
the year ended December 31, 1996, 9,394,696 for the four months ended December
31, 1995, and 9,144,772 and 8,881,380 for the years ended August 31, 1995 and
1994, respectively.
10. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with APB
25, "Accounting for Stock Issued to Employees", and in cases where exercise
prices equal or exceed fair market value, recognizes no compensation expense for
the stock option grants. In cases where exercise prices are less than fair
value, compensation is recognized over the period of performance or the vesting
period.
The Company is subject to the disclosure requirements of Statement of
Financial Accounting Standards No. 123 "Accounting and Disclosure of Stock-Based
Compensation" ("Statement 123"), which encourages, but does not require,
companies to recognize stock awards based on their fair value at the date of
grant. Unaudited pro forma financial information, assuming that the Company had
adopted the measurement standards of Statement 123, is included in Note O.
11. MINORITY INTEREST
Minority interest in the Company's consolidated balance sheet represents
Liberty HSN, Inc.'s ("Liberty HSN") 19.9% ownership in Home Shopping and Fox
Television Stations, Inc.'s ("Fox") 50% non-voting ownership interest in SF
Broadcasting which is consolidated as a result of voting and management control.
12. ACCOUNTING ESTIMATES
Management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with generally accepted accounting principles. These estimates and
assumptions impact the reported amount of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the consolidated
financial statements. They also impact the reported amount of net income during
any period. Actual results could differ from those estimates.
40
43
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant estimates underlying the accompanying consolidated financial
statements and notes include the inventory carrying adjustment, sales return
accrual, allowance for doubtful accounts, recoverability of intangibles and
other long lived assets, and various other operating allowances and accruals.
13. RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the 1996 presentation.
NOTE C -- MERGERS AND PRO FORMA RESULTS
SAVOY MERGER
On August 13, 1996, HSNi entered into an amendment to the Agreement and
Plan of Merger, dated as of November 27, 1995, between HSNi and Savoy, pursuant
to which Savoy would become a wholly-owned subsidiary of HSNi (the "Savoy
Merger"). Each outstanding share of Savoy common stock was converted into the
right to receive .14 of a share of common stock of the Company ("HSNi Common
Stock") and each outstanding option or warrant to acquire a conversion right to
receive Savoy common stock was assumed by the Company at the .14 conversion
ratio. On December 19, 1996, HSNi consummated the Savoy Merger by issuing
4,205,870 shares of HSNi Common Stock in exchange for all the then outstanding
Savoy common stock. One thousand shares of Savoy non-voting preferred stock were
not exchanged in the Savoy Merger and remain outstanding.
HOME SHOPPING MERGER
On August 25, 1996, the Company entered into an Agreement and Plan of
Exchange and Merger (the "Home Shopping Merger Agreement") with Home Shopping, a
newly-formed subsidiary of the Company ("Merger Sub") and Liberty HSN. On
December 20, 1996, pursuant to the Home Shopping Merger Agreement, Merger Sub
was merged with and into Home Shopping (the "Home Shopping Merger") and Home
Shopping became a subsidiary of the Company. Pursuant to the Home Shopping
Merger, each share of Home Shopping common stock ("Home Shopping Common Stock")
issued and outstanding immediately prior to the Home Shopping Merger (except for
certain shares which were cancelled) was converted into the right to receive .45
of a share (the "Common Conversion Ratio") of HSNi Common Stock, and each share
of Home Shopping Class B common stock ("Home Shopping Class B Common Stock")
issued and outstanding immediately prior to the Home Shopping Merger (all of
which shares, except for certain shares which were cancelled in the Home
Shopping Merger, were beneficially owned by Liberty HSN) was converted into the
right to receive .54 of a share (the "Class B Conversion Ratio") of the
Company's Class B common stock ("HSNi Class B Common Stock" and, together with
HSNi Common Stock, the "HSNi Securities"). A portion of the shares of HSNi Class
B Common Stock (2,591,752 shares) issuable to Liberty HSN were not issued at the
time of the Home Shopping Merger but are instead represented by the Company's
contractual obligation to issue to Liberty HSN such shares upon the occurrence
of certain events (such contractual rights, the "Contingent Rights" and such
underlying shares, the "Contingent Rights Shares"). These events relate
primarily to regulatory limitations under rules and regulations of the Federal
Communications Commission ("FCC") regarding the permitted ownership interest of
Liberty Media Corporation ("Liberty") in the Company. Additionally, in the Home
Shopping Merger each outstanding option to acquire or conversion right to
receive Home Shopping Common Stock was assumed by the Company and converted into
an option to acquire or a conversion right to receive HSNi Common Stock at a
conversion rate equal to the Common Conversion Ratio.
Liberty HSN is an indirect, wholly-owned subsidiary of Liberty, which, in
turn, is a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"). Prior
to the Home Shopping Merger, TCI, through Liberty and Liberty HSN, maintained
voting control over Home Shopping. Immediately prior to the Home
41
44
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shopping Merger, Liberty HSN exchanged all of its 17,566,712 shares of Home
Shopping Common Stock and 739,141 shares of Home Shopping Class B Common Stock,
for an equal number of shares of common stock and Class B common stock,
respectively, of Merger Sub. As a result of the Home Shopping Merger, Liberty
HSN's shares of common stock and Class B common stock of Merger Sub were
converted into shares of Home Shopping Common Stock and Home Shopping Class B
Common Stock, respectively. Home Shopping was the surviving corporation in the
Home Shopping Merger.
Upon consummation of the Home Shopping Merger, and because the Home
Shopping Class B Common Stock is entitled to ten votes per share on matters on
which both classes of common stock vote together as a single class, the Company
owned 80.1% of the equity and 90.8% of the voting power of Home Shopping, and
Liberty HSN owned 19.9% of the equity and 9.2% of the voting power of Home
Shopping.
After the Home Shopping Merger, pursuant to an exchange agreement, dated as
of December 20, 1996, between the Company and Liberty HSN (the "Exchange
Agreement"), at such time from time to time as Liberty HSN or its permitted
transferee may be allowed under applicable FCC regulations to hold additional
shares of the Company's stock, Liberty HSN or its permitted transferees will
exchange its Home Shopping Common Stock and its Home Shopping Class B Common
Stock for shares of HSNi Common Stock and HSNi Class B Common Stock,
respectively, at the applicable conversion ratio. Liberty HSN, however, is
obligated to effect such exchange only after all of the Contingent Rights Shares
have been issued, subject to certain conditions. Upon completion of such
exchange, Home Shopping will become a wholly-owned subsidiary of the Company.
Based on the number of shares of Home Shopping Common Stock and Home
Shopping Class B Common Stock issued and outstanding immediately prior to the
Home Shopping Merger, 24,665,651 shares of HSNi Common Stock and 7,809,111
shares of HSNi Class B Common Stock were issuable in the Home Shopping Merger to
Home Shopping shareholders.
Both the Savoy Merger and the Home Shopping Merger have been accounted for
using the purchase method of accounting. The purchase price, including expenses,
for the Savoy Merger and the Home Shopping Merger, which were $113.4 million and
$1.2 billion, respectively, have been preliminarily allocated to the assets and
liabilities of Savoy and Home Shopping based on their respective fair values at
the dates of purchase. The fair value of the assets and liabilities acquired are
summarized below, along with the excess of the purchase price, including
expenses, over the fair value of net assets, which has been assigned to
goodwill:
- -----------------------------------------------------------------------------------------
SAVOY HOME SHOPPING
- -----------------------------------------------------------------------------------------
(In thousands)
Current assets.............................................. $ 36,000 $ 192,000
Non-current assets.......................................... 65,800 258,000
Goodwill and broadcast licenses............................. 306,000 1,186,000
Current liabilities......................................... 64,000 192,000
Non-current liabilities..................................... 230,400 223,000
The operations of Savoy and Home Shopping have been included in the
operations of the Company since the respective dates of their acquisition. The
following unaudited pro forma condensed consolidated financial information gives
effect to the Savoy Merger and the Home Shopping Merger as if each had occurred
as of January 1, 1995. The pro forma results include certain adjustments,
including increased amortization related to goodwill, the reduction of cable and
broadcast fees for fair value adjustments related to purchase accounting and the
elimination of intercompany revenues and expenses, and are not necessarily
indicative of what the results would have been had the Mergers actually occurred
as of January 1, 1995. The pro forma information includes the operations of
Savoy's motion picture production and distribution business which generated
losses of $145.0 million and $78.2 million in 1996 and 1995, respectively. Savoy
ceased its motion picture production activities, and these losses are not
expected to continue.
42
45
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ------------------------------------------------------------------------------------------
YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995
- ------------------------------------------------------------------------------------------
(In thousands, except per
share data)
Net revenues................................................ $1,135,191 $1,052,353
Net loss.................................................... (157,983) (139,620)
Net loss per common share................................... (3.24) (2.89)
NOTE D -- INTANGIBLE ASSETS
Intangible assets include the costs associated with the acquisition of the
following assets which are amortized using the straight-line method over their
estimated lives, generally 40 years.
- -------------------------------------------------------------------------------------------------
DECEMBER 31,
-------------------- PERIOD OF
1996 1995 AMORTIZATION
- -------------------------------------------------------------------------------------------------
(In thousands)
Intangible Assets:
Goodwill............................................... $1,193,322 $ 6,864 30 to 40 Years
Broadcast licenses..................................... 350,118 46,287 30 to 40 Years
Other.................................................. 2,507 6,833 3 to 10 Years
---------- -------
$1,545,947 $59,984
========== =======
Goodwill at December 31, 1996 primarily relates to the Mergers, as
discussed in Note C and is net of accumulated amortization of $4.1 million at
December 31, 1996.
Broadcast licenses represent the costs of acquiring FCC licenses related to
broadcast operations and is net of accumulated amortization of $21.5 million as
of December 31, 1996.
Other intangibles are net of accumulated amortization of $72.3 million as
of December 31, 1996.
Intangible assets at December 31, 1995 include costs associated with the
acquisition of certain assets included in the acquisitions of the 12 UHF
television stations operated by the Company, certain broadcast licenses and
other identifiable intangibles. Intangible assets are net of total accumulated
amortization of $83.8 million as of December 31, 1995.
NOTE E -- CABLE DISTRIBUTION FEES
In connection with the Home Shopping Merger on December 20, 1996, as
discussed in Note C, assets related to upfront fees for long term cable
contracts for carriage of Home Shopping's programming were recorded. These fees
are amortized to expense on a straight line basis over the terms of the
respective contracts, with original terms from 5 to 15 years. Amortization
expense for cable distribution fees was not significant for the 11 days ending
December 31, 1996.
NOTE F -- LONG-TERM INVESTMENTS
Investments accounted for under the equity method include the following:
On October 10, 1996, Home Shopping, Quelle Schickedanz AG & Co., Thomas
Kirch and Dr. Georg Kofler entered into a binding Memorandum of Understanding in
connection with their joint participation in Home Order Television GmbH & Co. KG
("HOT"), Germany's first television shopping network. Definitive documents were
executed during January 1997. Home Shopping purchased a 29% equity interest in
HOT and its general partner for $15.0 million (the "HOT Interest"). Home
Shopping has paid $5.0 million for the HOT Interest and has recorded a $10.0
million subscription payable; $5.0 million is expected to be paid in
43
46
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
each of April 1997 and September 1997. The agreement contains restrictions and
other provisions regarding transfers of equity interests in HOT.
The Company's investment in HOT includes the unamortized excess goodwill of
Home Shopping's investment over its equity in net assets. This goodwill amount
was $10.3 million at December 31, 1996 and is being amortized on a straight-line
basis over ten years.
On November 14, 1996, Home Shopping and Jupiter Programming Co;. Ltd.
("JPC") formed Jupiter Shop Channel Co;. Ltd. ("Shop Channel") for the primary
purpose of broadcasting televised shopping in Japan. Home Shopping paid $1.8
million for its 30% interest in Shop Channel. The remaining 70% interest is held
by JPC.
Through December 31, 1996, the Company's equity in losses of affiliates was
$.4 million. The Company has certain ongoing funding obligations as discussed in
Note K.
Investments accounted for under the cost method include the following:
- ------------------------------------------------------------------------------
DECEMBER 31,
----------------
1996 1995
- ------------------------------------------------------------------------------
(In thousands)
BODY BY JAKE ENTERPRISES LLC ("BBJ")
20% interest purchased for $4,000,000..................... $ 3,875 $ --
THE NATIONAL REGISTRY, INC. ("NRI")
100,000 shares of Series A non-voting Preferred Stock,
$.01 par value, with a liquidation preference of $100
per share.............................................. 10,000 --
BLACKSTAR COMMUNICATIONS, INC. ("BLACKSTAR")
1,000 shares of Preferred Stock $5,000 per share,
non-voting, 9.25% per annum cumulative dividend........ 5,000 5,000
4,500 shares of Series 1 Class B non-voting Convertible
Common Stock, $10 per share, convertible on a
one-to-one basis to Series 2 voting Common Stock....... 45 45
ROBERTS BROADCASTING COMPANY ("ROBERTS")
4,500 shares of Series 1 Class B non-voting Convertible
Common Stock, $10 per share convertible on a one-to-one
basis to Series 2 voting Common Stock.................. 45 45
ROBERTS BROADCASTING COMPANY OF DENVER
45 shares Series 1 Class B non-voting Convertible Common
Stock, $10 per share; convertible on a one-to-one basis
to Series 2 voting Common Stock........................ -- --
URBAN BROADCASTING CORPORATION ("URBAN")
4,500 shares of Series 1 Class B non-voting Convertible
Common Stock, $10 per share, convertible on a
one-to-one basis to Series 2 voting Common Stock....... 45 45
OTHER....................................................... 5 --
------- ------
$19,015 $5,135
======= ======
In addition to the investment in BBJ, Home Shopping entered into a
long-term marketing agreement with BBJ to provide for the sale and promotion of
merchandise. The Company has the option to convert the NRI investment into
6,336,154 shares of NRI common stock; however, conversion is automatic in the
event cumulative gross revenues for NRI reach $15.0 million.
The Company has the option to convert the Blackstar, Roberts and Urban
non-voting common stock interests into voting common stock investments. The
Company does not currently intend to convert these interests because conversion
would be in violation of FCC rules and regulations. The Company has certain
limited approval rights related to investee corporate actions.
44
47
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has an option to purchase a 45% nonvoting common stock interest
in Jovon Broadcasting Company, the licensee of Station WJYS(TV), Hammond,
Indiana, serving the Chicago, Illinois television market. In a Memorandum
Opinion and Order and Notice of Apparent Liability released June 14, 1996, the
FCC ruled that, consistent with FCC regulations and policies, the Company may
exercise that portion of the option which will provide it with a 33% non-voting
common stock interest in Station WJYS(TV). SKTV has a loan agreement with the
station licensee and the FCC also required that certain aspects of the loan
documents between the licensee of WJYS(TV) and SKTV be reformed. The licensee of
WJYS(TV) has filed a petition with the FCC requesting clarification as to
whether the agency intended to rewrite the option to permit a partial exercise
and arguing that if it did so intend, the FCC lacked the authority to do so. The
Company has opposed that petition.
NOTE G -- NOTES RECEIVABLE
The Company has notes receivable as follows:
- -------------------------------------------------------------------------------
DECEMBER 31,
-----------------
1996 1995
- -------------------------------------------------------------------------------
(In thousands)
ROBERTS BROADCASTING COMPANY
Note receivable, interest at 12.8%, principal and interest
payments of $69,055 due monthly and maturing March
1998................................................... $ -- $ 1,613
ROBERTS BROADCASTING COMPANY OF DENVER
Note receivable, interest at 11.5%, principal and interest
payments of $64,330 due monthly, commencing during
fiscal year 1996....................................... 3,492 3,700
URBAN BROADCASTING CORPORATION
Note receivable, interest at 11.5%, principal and interest
payments of $182,558 due monthly and maturing October
2000................................................... 6,765 8,094
JOVON BROADCASTING CORPORATION
Note receivable, interest at 12.8%, principal and interest
payments of $65,100 due monthly and maturing May
1998................................................... 1,007 1,616
VALLEJO CALIFORNIA, INC.
Note receivable, interest at 11.5%, principal and interest
payments of $150,000 due monthly and maturing July
2003................................................... 8,306 --
RELATED PARTY NOTE
Note receivable, interest at 5.0%, interest payable
monthly, principal due one year following termination
of the Vice Chairman's employment...................... 1,000 --
OTHER (from related party).................................. 832 --
------- -------
21,402 15,023
Less current portion of notes receivable.................. 3,661 2,835
------- -------
$17,741 $12,188
======= =======
Certain notes receivable are collateralized by stock pledges and security
interests in all of the tangible and intangible assets in the investee companies
to the full extent permitted by law. The loan made to the Vice Chairman is for
the purchase or renovation of a residence and is secured by a mortgage on that
property.
45
48
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets primarily consist of the film library and
broadcast rights acquired in connection with the acquisition of Savoy; satellite
and other deposits acquired in connection with the acquisition of Home Shopping;
and deferred financing costs. Deferred charges and other assets are net of
accumulated amortization of $4.3 million and $1.2 million as of December 31,
1996 and December 31, 1995, respectively.
NOTE I -- LONG-TERM OBLIGATIONS
- ----------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1996 1995
- ----------------------------------------------------------------------------------
(In thousands)
Secured Senior Term Loan -- Tranche A (the "Tranche A
Loan"); payable in quarterly installments and maturing
July 31, 2000. The interest rate was 7.69% at December 31,
1996. At the Company's option, the interest rate (the
"Rate") is tied to the London Interbank Offered Rate
("LIBOR"), or the Alternate Base Rate ("ABR") (as
defined), plus an applicable margin....................... $ 34,704 $ 60,399
Secured Senior Term Loan -- Tranche B (the "Tranche B
Loan"); payable in quarterly installments and maturing
July 31, 2002. The Rate was 8.69% at December 31, 1996. At
the Company's option, the Rate is tied to LIBOR, or the
ABR, plus an applicable margin............................ 33,968 48,037
Unsecured $100,000,000 5 7/8% Convertible Subordinated
Debentures (the "Home Shopping Debentures") due March 1,
2006 convertible into HSNi Common Stock at anytime after
May 1, 1996, at a conversion price of $26.67 per share.
The Debentures were sold March 1, 1996 with net proceeds
received of $97,200,000................................... 107,007 --
Secured Broadcast Facility (the "Broadcast Facility");
payable in 20 consecutive quarterly installments
commencing on September 30, 1997, subject to mandatory
prepayment out of excess SF Broadcasting cash flow (as
defined). The interest rate was 8.3% at December 31, 1996.
At the Company's option, Rate is tied to the ABR, or
LIBOR, plus an applicable margin.......................... 92,500 --
Secured $150,000,000 Revolving Credit Facility with a
$25,000,000 sub-limit for import letters of credit,
entered into on August 2, 1996, ("the Home Shopping
Facility") which expires August 2, 1999. Borrowings can be
used for general corporate purposes. At the Company's
option, the Rate on borrowings is tied to the ABR or LIBOR
plus an applicable margin. The interest rate on borrowings
ranged from 6.31% to 8.25%................................ -- --
12% Convertible Senior Subordinated Note due February 28,
1997, convertible into HSNi Common Stock at a conversion
price of $92.86........................................... 12,500 --
Unsecured $37,782,000 7% Convertible Subordinated Debentures
sold at a premium due July 1, 2003 ("Savoy Debentures")
convertible into HSNi Common Stock at a conversion price
of $132.86 per share...................................... 32,331
Other long-term obligations................................. 1,326 --
-------- --------
Total long-term obligations................................. 314,336 108,436
Less current maturities..................................... 42,906 12,456
-------- --------
Long-term obligations, net of current maturities............ $271,430 $ 95,980
======== ========
46
49
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Mergers discussed in Note C, the Company made
adjustments to reflect the fair value of the Home Shopping Debentures and the
Savoy Debentures from their historical carrying values of $97.4 million and
$38.9 million, respectively.
On August 1, 1994, the Company consummated a senior secured credit facility
in an aggregate principal amount of $140.0 million (the "Facility"). The
Facility consists of the Tranche A and Tranche B loans, as described above and a
Secured Senior $15.0 million Revolving Credit Facility (the "RCF"). The RCF is
available for general corporate purposes. Borrowings under the RCF are on terms
identical to those listed above for the Tranche A Loan. The RCF requires a
commitment fee of 50 basis points per annum on the unused portion. Under the
terms of the Facility, the Company is restricted from entering into certain
corporate transactions such as the sale or issuance of debt and/or equity
securities and the payment of dividends. Under certain conditions, the Company
is required to fund prepayments in advance of scheduled principal payments.
The Home Shopping 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 Home Shopping Debentures may
not be redeemed unless the closing price of HSNi Common Stock equals or exceeds
140% of the conversion price per share, or $37.33 for a specified period of
time. The Home Shopping Debentures are subordinated to all existing and future
senior debt of the Company. In connection with the Home Shopping Merger, HSNi
became a joint and several obligor with respect to the Home Shopping Debentures.
The Broadcast Facility, which expires on June 30, 2002, is secured by
substantially all assets of SF Broadcasting. Restrictions contained in the
Broadcast Facility include, but are not limited to, limitations on additional
indebtedness, payment of dividends and the maintenance of various financial
covenants and ratios. Under certain limited circumstances, Savoy and Fox may be
required to contribute additional capital to SF Broadcasting if certain
covenants are not met. Savoy and Fox each made a capital contribution of $19.5
million in 1996 which was used to repay borrowings under the Broadcast Facility.
The Home Shopping Facility, which expires on August 2, 1999, is secured by
the stock of HSC and HSN Realty, Inc. At December 31, 1996, there were no
outstanding borrowings under the Home Shopping Facility and $138.0 million was
available for borrowing after taking into account outstanding letters of credit.
The Company was in compliance with all covenants contained in the Home Shopping
Facility as of December 31, 1996. Restrictions contained in the Home Shopping
Facility include, but are not limited to, limitations on the encumbrance and
disposition of assets and the maintenance of various financial covenants and
ratios.
Interest on the Savoy Debentures is payable semi-annually on January 1 and
July 1. The Savoy Debentures are redeemable at the option of the Company at
varying percentages of the principal amount each year, ranging from 105.25% to
100.75%, plus applicable interest. In connection with the Savoy Merger, HSNi
became a joint and several obligor with respect to the Savoy Debentures.
Aggregate contractual maturities of long-term obligations are as follows:
- ------------------------------------------------------------------------------
Years Ending
December 31,
- ------------------------------------------------------------------------------
(In thousands)
1997........................................................ $ 42,906
1998........................................................ 24,270
1999........................................................ 28,749
2000........................................................ 24,338
2001........................................................ 35,700
Thereafter.................................................. 157,977
--------
$313,940
========
47
50
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- INCOME TAXES
A reconciliation of total income tax expense (benefit) to the amounts
computed by applying the statutory federal income tax rate to earnings (loss)
before income taxes is shown as follows:
- -----------------------------------------------------------------------------------------------------
FOUR MONTHS YEARS ENDED
YEAR ENDED ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ---------------
1996 1995 1995 1994
- -----------------------------------------------------------------------------------------------------
(In thousands)
Income tax expense (benefit) at the federal statutory
rate of 34%......................................... $(1,682) $(1,107) $ 426 $ 206
Amortization of goodwill and other intangibles........ 548 61 192 188
Dividends received deduction.......................... -- -- (110) (260)
State income taxes, net of effect of federal tax
benefit............................................. 581 22 558 837
Non-deductible portion of executive compensation...... 1,385 426 321 --
Increase (decrease) in valuation allowance for
deferred tax assets................................. 966 264 (212) 491
Other, net............................................ 74 (39) (37) 43
------- ------- ------ ------
Income tax expense (benefit).......................... $ 1,872 $ (373) $1,138 $1,505
======= ======= ====== ======
The components of income tax expense (benefit) are as follows:
- -----------------------------------------------------------------------------------------------------
FOUR MONTHS YEARS ENDED
YEAR ENDED ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ---------------
1996 1995 1995 1994
- -----------------------------------------------------------------------------------------------------
(In thousands)
Current income tax expense:
Federal............................................. $ 602 $ 104 $ 110 $ --
State............................................... 852 233 809 639
------- ------- ------ ------
Current income tax expense.................. 1,454 337 919 639
------- ------- ------ ------
Deferred income tax expense (benefit):
Inventory costing................................... (479) -- -- --
Provision for accrued liabilities................... 609 (691) -- --
Depreciation for financial statements in excess of
tax.............................................. (276) (201) (608) (344)
Amortization of goodwill and other broadcast related
intangibles...................................... (52) (1) 3 (365)
Net operating loss carryover........................ (1,561) (412) 845 --
Increase (decrease) in valuation allowance for
deferred tax assets.............................. 1,305 264 (212) 491
Other, net.......................................... 872 331 191 1,084
------- ------- ------ ------
Change in net deferred tax liability........ 418 (710) 219 866
------- ------- ------ ------
Total income tax expense (benefit).......... $ 1,872 $ (373) $1,138 $1,505
======= ======= ====== ======
48
51
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of cumulative temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are presented below. The valuation allowance
represents that portion of deferred tax assets recorded for net losses and basis
differences on intangible assets for which it is more likely than not that the
tax benefit will not be realized.
- ----------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1996 1995
- ----------------------------------------------------------------------------------
(In thousands)
Current deferred tax assets:
Net federal operating loss carryforward................... $ 85,929 $ 719
Inventory costing......................................... 30,102 --
Provision for accrued expenses............................ 11,310 1,171
Amortization of broadcast related intangibles............. 8,767 7,900
Other..................................................... 17,694 --
--------- --------
Total gross deferred tax assets................... 153,802 9,790
Less valuation allowance.......................... (112,960) (7,993)
--------- --------
Current deferred tax assets after valuation allowance....... $ 40,842 $ 1,797
========= ========
Non-current deferred tax assets (liabilities):
Broadcast and cable fee contracts......................... $ 17,010 $ --
Depreciation for tax in excess of financial statements.... (8,704) (3,596)
Amortization of FCC licenses and broadcast related
intangibles............................................ (17,734) (10,038)
Other..................................................... 13,095 (765)
--------- --------
Net deferred tax assets........................... 3,667 (14,399)
Less valuation allowance.......................... (1,741) --
--------- --------
Non-current deferred tax assets (liabilities) after
valuation allowance....................................... $ 1,926 $(14,399)
========= ========
The Company recognized income tax deductions related to the issuance of
common stock pursuant to the exercise of stock options for which no compensation
expense was recorded for accounting purposes. The related income tax benefit of
$.9 million and $.6 million as of December 31, 1996 and 1995, respectively, was
recorded as an increase to additional paid-in capital.
At December 31, 1996 and 1995 the Company has net operating loss
carryforwards ("NOL") for federal income tax purposes of $225.0 million and $1.8
million, respectively, which are available to offset future federal taxable
income, if any, through 2011. Approximately $217.6 million of the NOL as of
December 31, 1996, are pre-acquisition losses which are subject to certain tax
loss limitations. Accordingly, the Company has established a valuation allowance
for those pre-acquisition losses. Recognition of these tax benefits in the
future periods would be applied as a reduction of goodwill related to the
acquisition.
Management believes the ultimate resolution of any tax audits for the open
years, those years ending after August 31, 1989, will not have a significant
impact on the Company's consolidated financial position or results of
operations.
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company leases satellite transponders, computers, warehouse and office
space, as well as broadcast and production facilities and equipment used in
connection with its operations under various operating leases, many of which
contain escalation clauses.
49
52
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments under non-cancellable leases are as follows:
- ----------------------------------------------------------------------------
YEARS ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------
(In thousands)
1997........................................................ $ 16,016
1998........................................................ 9,539
1999........................................................ 7,630
2000........................................................ 7,165
2001........................................................ 8,788
Thereafter.................................................. 26,276
--------
$ 75,414
========
Rent and lease expense charged to operations were $2.9 million, $.8
million, $2.7 million and $3.2 million for the year ended December 31, 1996, the
four months ended December 31, 1995, and the years ended August 31, 1995 and
1994, respectively.
In connection with the Home Shopping Merger, the Company assumed an
obligation for a satellite transponder which is no longer in use by Home
Shopping, but for which there is an obligation under a non-cancellable operating
lease calling for monthly payments ranging from $140,000 to $150,000 through
December 2006. The satellite transponder has been subleased, beginning December
1, 1996, for a term of ten years with an option to cancel after four years, for
$165,000 monthly.
In connection with the Home Shopping Merger, the Company has assumed an
agreement for inbound 800 service usage with MCI Telecommunications Corporation
("MCI") ending in August 2000 which requires minimum annual payments of $9.6
million based on usage. If the Company terminates the agreement for reasons
other than cause, payment of 50% of the aggregate of the minimum amounts for the
remainder of the unexpired term will be due 30 days after the termination. Home
Shopping's payments to MCI for such services during the years ended December 31,
1996 and 1995 exceeded the above mentioned minimum.
In addition, in connection with the Home Shopping Merger, the Company has
assumed an agreement with MCI covering equipment maintenance for a term from
April 1996 through April 2001, requiring minimum annual payments of $2.7
million. Upon payment of $13.4 million under the terms of the contract, the
Company is no longer required to pay any fees for these services. The Company
receives a credit for any annual fees over $3.2 million. Management expects
annual payments under this contract to exceed the minimum agreement.
The Company is required to provide funding, from time to time, for
operations of Shop Channel and HOT. Future contributions to Shop Channel,
amounting to $8.7 million in the next two years, are based upon estimated
shareholder contributions set forth in the initial business plan of the venture.
Future contributions to HOT are limited as set forth in the agreement to $11.4
million over the term of the partnership. No payments were made under these
funding requirements for the year ended December 31, 1996. The amounts shown
above were translated from the respective foreign currency using conversion
rates in effect at December 31, 1996.
Mr. Barry Diller, the Chairman and Chief Executive Officer of the Company,
was granted an equity and bonus arrangement pursuant to which he will receive a
bonus payment of approximately $2.5 million on August 24, 1997, except that the
bonus will be paid immediately upon a change in control of the Company or upon
termination of Mr. Diller's employment either by the Company other than for
cause or by Mr. Diller prior to the change of control with good reason.
50
53
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- STOCKHOLDERS' EQUITY
DESCRIPTION OF COMMON STOCK AND CLASS B -- CONVERTIBLE COMMON STOCK
Holders of HSNi Common Stock have the right to elect, and the holders of
HSNi Class B Common Stock have no vote on, 25% of the entire Board of Directors,
rounded upward to the nearest whole number of directors. As to the election of
the remaining directors, the holders of HSNi Class B Common Stock are entitled
to 10 votes for each HSNi Class B Common Stock share, and the holders of the
HSNi Common Stock are entitled to one vote per share. There are no cumulative
voting rights.
The holders of both classes of the Company's common stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment of dividends. In the
event of the liquidation, dissolution or winding up of the Company, the holders
of both classes of common stock are entitled to share ratably in all assets of
the Company remaining after provision for payment of liabilities. HSNi Class B
Common Stock is convertible at the option of the holder into HSNi Common Stock
on a share-for-share basis. Upon conversion, the HSNi Class B Common Stock will
be retired and not subject to reissue.
In February 1993, RMS Limited Partnership ("RMSLP"), the then controlling
shareholder of the Company, and Liberty entered into an Option Agreement
pursuant to which RMSLP granted an irrevocable assignable option (the "Option")
to Liberty to purchase from RMSLP 2,000,000 shares of HSNi Class B Common Stock.
In August 1996, Liberty contributed its Option to BDTV, which subsequently
exercised the Option. See further description under Diller-Liberty Stockholders'
Agreement.
At the 1996 Annual Meeting of Stockholders, stockholders of record of HSNi
approved the increase in the number of authorized shares of HSNi Common Stock
from 30,000,000 shares to 150,000,000 shares, the number of authorized shares of
HSNi Class B Common Stock from 2,415,945 shares to 30,000,000 shares and the
number of authorized shares of HSNi preferred stock from 50,000 shares to
15,000,000 shares. In addition, the stockholders approved the elimination of the
separate class votes of the holders of HSNi Common Stock and HSNi Class B Common
Stock in certain specified circumstances at any time that there are at least
2,280,000 shares of HSNi Class B Common Stock outstanding.
NOTE RECEIVABLE FROM KEY EXECUTIVE FOR COMMON STOCK ISSUANCE
In August 1995, Mr. Barry Diller became Chairman of the Board and Chief
Executive Officer of the Company. In connection with Mr. Diller's employment,
the Company agreed to sell Mr. Diller 441,988 shares of HSNi Common Stock
("Diller Shares") at $22.625 per share for cash and a non-recourse promissory
note in the amount of $5.0 million, secured by approximately 265,000 shares of
HSNi Common Stock. The promissory note is due on the earlier of (i) the
termination of Mr. Diller's employment, or (ii) the second anniversary of the
issuance of the note. The Company recognized $926,138 of compensation expense,
with a corresponding increase in additional paid-in capital, related to the
issuance of the Diller Shares. The compensation expense resulted from the
difference in the per share fair market value of HSNi Common Stock and the per
share purchase price.
DILLER-LIBERTY STOCKHOLDERS' AGREEMENT
Mr. Diller and Liberty are parties to a stockholders agreement, dated as of
August 24, 1995 (the "August Stockholders Agreement"), as amended by the first
amendment (the "First Amendment") thereto, dated as of August 25, 1996 (the
First Amendment, together with the August Stockholders Agreement, the
"Stockholders Agreement"), pursuant to which the parties thereto and certain of
their affiliates have formed the BDTV Entities, which are, collectively, the
holder of record of 9,809,111 shares of HSNi Class B Common Stock (representing
approximately 95.9% of the outstanding HSNi Class B Common Stock as of December
31, 1996). Mr. Diller is the President of each of the BDTV entities and
beneficially owns all of the
51
54
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
voting stock of each of them. Liberty currently holds all of the non-voting
common stock of each of the BDTV entities, representing in excess of 99% of the
equity of each of them, which shares are convertible under certain circumstances
into shares of voting common stock.
In addition to the 9,809,111 shares of HSNi Class B Common Stock held by
the BDTV Entities, Mr. Diller, Liberty and Arrow Holdings, LLC ("Arrow"), an
entity controlled by Mr. Diller, collectively hold 548,618 shares of HSNi Common
Stock. These securities are subject to the terms of the Stockholders Agreement
and represent, in the aggregate, approximately 1.5% of the outstanding HSNi
Common Stock, 22% of the outstanding combined common equity of the Company and
71% of the outstanding total voting power of the Company. Assuming that all
securities to be issued to Liberty pursuant to the Contingent Rights and the
Exchange Agreement were issued (and that no other HSNi Securities were otherwise
issued), the HSNi Securities subject to the Stockholders Agreement would
represent in the aggregate approximately 19% of the then-outstanding HSNi Common
Stock, 37% of the then-outstanding equity of the Company and 78% of the
then-outstanding total voting power of the Company.
Pursuant to the Stockholders' Agreement, Mr. Diller exercises voting
control over HSNi Securities held by the BDTV Entities, Mr. Diller, Liberty,
Arrow and certain of their affiliates, subject to certain restrictions on Mr.
Diller's authority to vote such shares with respect to certain matters relating
to the Company and otherwise as provided in the Stockholders Agreement. Pursuant
to the Stockholders' Agreement, Mr. Diller and Liberty have agreed that HSNi
Securities owned by any of Mr. Diller, Liberty and certain of their affiliates
will not be voted in favor of the taking of any action in connection with
certain extraordinary matters except with the consent of each of Mr. Diller and
Liberty.
In the Stockholders Agreement, Mr. Diller has agreed that, at any time
following the consummation of the Home Shopping Merger that Liberty or Liberty
HSN is no longer a subsidiary of TCI (and provided that a change in law, rule or
regulation or circumstance that would permit Liberty to exercise full ownership
and control over HSNi Securities (including its pro rata portion of HSNi
Securities held by the BDTV Entities represented by Liberty's equity interest in
the BDTV Entities), notwithstanding the Company's ownership of broadcast
licenses (the "Licenses") granted by the FCC (a "Change in Law") has not
theretofore otherwise occurred), Liberty may request that Mr. Diller and the
Company use all reasonable efforts to take such actions as may be reasonably
necessary in order that Liberty would be permitted to exercise full ownership
rights with respect to HSNi Securities owned by it (including its pro rata
interest in any HSNi Securities held by any BDTV Entity) (a "Restructuring
Transaction"). In the event that a Restructuring Transaction has not occurred
within 365 days following Liberty's notice of its request (or earlier, in
certain circumstances) and a Change in Law has not otherwise occurred, Liberty
would be permitted, subject to certain limitations and rights of first refusal
in favor of Mr. Diller, to sell its HSNi Securities without regard to the
restrictions on transfer contained in the Stockholders Agreement, and such
transferee would purchase HSNi Securities free and clear of any rights (other
than certain registration rights) or obligations under the Stockholders
Agreement.
In view of the number of shares of HSNi Securities as to which the BDTV
Entities or Mr. Diller will have voting power in connection with the matters
described herein, it is anticipated that such persons will be able to control
the outcome of any vote of stockholders as to any proposal or matter on which
the holders of HSNi Common Stock and HSNi Class B Common Stock vote together as
a single class and the outcome of any matter as to which only the holders of
HSNi Class B Common Stock vote as a separate class. In addition, Mr. Diller,
subject to the terms of the Stockholders Agreement, will effectively be able to
control the outcome of all matters submitted to a vote or for the consent of
stockholders (other than with respect to the election by the holders of HSNi
Common Stock of 25% of the members of the Board of Directors (rounded up to the
nearest whole number) and certain matters as to which a separate class vote of
the holder of HSNi Common Stock is required under Delaware law).
52
55
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- LITIGATION
The Company is engaged in various lawsuits either as plaintiff or
defendant, including certain class action lawsuits initiated in connection with
the Home Shopping Merger. In the opinion of management, the ultimate outcome of
these various lawsuits should not have a material impact on the liquidity,
results of operations or financial condition of the Company.
NOTE N -- BENEFIT PLANS
The Company offers plans pursuant to Section 401(k) of the Internal Revenue
Code (the "Plans") covering substantially all full-time employees. The Plans do
not cover those employees who are party to collective bargaining agreements. The
Company's share of the matching employer contributions is set at the discretion
of the Board of Directors or the applicable committee thereof. Contributions
were $.1 million, $14,000, $.1 million, and $.1 million for the year ended
December 31, 1996, the four months ended December 31, 1995 and the years ended
August 31, 1995 and 1994, respectively.
In connection with the Home Shopping Merger, the Company has adopted the
Home Shopping Network, Inc. Employee Equity Participation Plan (the "Equity
Plan"). The Equity Plan covers all Home Shopping employees who have completed
one year of service, at least 1,000 hours of service, are at least 21 years of
age, are not highly compensated, and did not hold options to purchase shares of
Home Shopping Common Stock.
Employees who met the eligibility requirements on December 31, 1994 and
June 30, 1995, will receive grants under the Equity Plan. The stock vests
ratably at 20% a year with the first vesting being effective as of the calendar
year in which the eligible employee has worked at least 1,000 hours. The Board
of Directors has not made any additional grants for any period subsequent to
June 30, 1995.
NOTE O -- STOCK OPTION PLANS
The Company has granted options to purchase common stock under various
stock option plans. In connection with the Mergers, the Company assumed and
converted Home Shopping and Savoy options into options to acquire HSNi Common
Stock based on the respective merger exchange ratios (see Note C), including
corresponding adjustments to the option exercise price based on the exchange
ratios. The following describes the various stock option plans, including the
options under the plans assumed and converted in connection with the Mergers:
The Silver King Communications, Inc. 1995 Stock Incentive Plan provides for
the grant of options to employees or consultants of the Company, its
subsidiaries and affiliates, to purchase HSNi Common Stock for not less than
fair market value on the date of grant. These options generally vest annually
and equally over four years beginning one year from the date of grant, and
expire ten years from the date of grant. The number of shares of HSNi Common
Stock authorized under the Plan is 1,500,000 shares.
The Silver King Communications, Inc. Directors' Stock Option Plan provides
for the grant of options to outside directors. Options to purchase 5,000 shares
of HSNi Common Stock are automatically granted upon appointment to the Board of
Directors and options to purchase an additional 5,000 shares are granted
annually thereafter on the date of the Company's annual meeting. These options
provide for the purchase of HSNi Common Stock at fair market value on the
trading day immediately preceding the grant date, vest over three years and
expire ten years from the date of grant. The number of shares of HSNi Common
Stock authorized under the plan is 100,000 shares.
The Silver King Communications, Inc. Stock Option and Restricted Stock Plan
(the "Employee Plan") provides for the grant of options to employees to purchase
common stock at the fair market value on the date of grant. The options become
exercisable in five equal, annual installments beginning on the date of grant.
The
53
56
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options expire five years from the date they vest and become exercisable. In
connection with the downsizing of the Company's staff and the pending change in
ownership of the Company, on October 25, 1995, the Compensation/Benefits
Committee of the Board of Directors of the Company resolved to accelerate the
vesting date of all existing unvested employee stock options granted under the
Employee Plan, effective December 1, 1995. The expiration dates for the
accelerated options shall remain five years from the date of their original
scheduled vesting. At December 31, 1996, no options under this plan were
available for grant.
The Silver King Communications, Inc. Stock Option Plan for Outside
Directors provides for the grant of options to purchase common stock at the fair
market value on the date of grant. The options become exercisable in five equal,
annual installments beginning on the date of the grant. All options expire five
years from the date they vest and become exercisable. At December 31, 1996, no
options under this plan were available for grant.
The 1996 Home Shopping Employee Plan provides for the grant of options to
purchase Home Shopping Common Stock at fair market value, subject to the
discretion of the Compensation/Benefits Committee of the Board of Directors, as
of the date of grant. The options vest annually and equally over five years,
unless otherwise specified by the Compensation/Benefits Committee of the Board
of Directors, beginning one year from the date of grant, and expire ten years
from the date of grant.
The 1996 Home Shopping Director Plan provided for issuance of options to
outside directors. Options for 5,000 shares of Home Shopping Common Stock were
automatically granted upon appointment to the Board of Directors, and options
for an additional 5,000 shares were to be granted annually thereafter. Such
options provided for purchase at fair market value on the date of grant, vest
over three years, and expire five years from the date of vesting.
The 1986 Home Shopping Stock Option Plan for Employees, as amended,
provided for the grant of options to purchase Home Shopping Common Stock at the
fair market value at date of grant. The options generally vest annually and
equally over five years beginning one year from the date of grant, and expire
ten years from the date of grant. At December 31, 1996, no options under this
plan were available for grant.
The 1986 Home Shopping Stock Option Plan for Outside Directors, as amended,
provided for the grant of options to purchase Home Shopping Common Stock at fair
market value as of the date of grant. The options vest equally over two years
beginning on the date of grant and expire five years from the date they vest.
During 1992, the Board of Directors and shareholders approved certain amendments
to the plan. The amendments provided for additional option grants after five
years of service. At December 31, 1996, no options under this plan were
available for grant.
The Savoy Stock Option Plan provided for the grant of options to employees
to purchase Savoy common stock at the fair market value on the date of grant.
Options generally become exercisable over a three-year period and expire ten
years from the date they vest and become exercisable. At December 31, 1996, no
options under this plan were available for grant.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994, under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995: risk-free interest rates of 6.4%; a dividend
yield of zero; volatility factors of the expected market price of HSNi Common
Stock based on historical trends; and a weighted-average expected life of the
options of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the
54
57
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
- -----------------------------------------------------------------------------------------------------
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
1996 1995 1995
- -----------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Pro forma net loss......................................... $(21,225) $(6,007) $ (159)
Pro forma loss per share................................... $ (1.97) $ (1.42) $ (.02)
A summary of changes in outstanding options under the stock option plans,
is as follows:
- -----------------------------------------------------------------------------------------------------------------------------
HSNi Home
(formerly Shopping
Silver Home 1986 Plans
King) Shopping and Savoy
Plans Price Range 1996 Plans Price Range 1995 Plan Price Range Total
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands, except price range)
Total Authorized...... 5,996 8,415 987 15,398
===== ===== ====== ======
Outstanding -- August
31, 1993............ 362 $ 2.00 - 2.88 -- -- -- -- 362
Granted............. 81 $11.75 - 18.25 -- -- -- -- 81
Exercised........... (48) $ 9.50 - 17.50 -- -- -- -- (48)
Cancelled........... (50) $ 2.00 - 18.00 -- -- -- -- (50)
----- ----- ------ ------
Outstanding -- August
31, 1994............ 345 $ 2.00 - 18.25 -- -- -- -- 345
Granted............. 2,031 $ 9.75 - 25.75 -- -- -- -- 2,031
Exercised........... (33) $ 2.00 - 18.00 -- -- -- -- (33)
Cancelled........... (46) $ 2.00 -- -- -- -- (46)
----- ----- ------ ------
Outstanding -- August
31, 1995............ 2,297 $ 2.00 - 25.75 -- -- -- -- 2,297
Granted............. 10 $ 32.75 -- -- -- -- 10
Exercised........... (38) $ 2.00 - 18.00 -- -- -- -- (38)
Cancelled........... -- -- -- -- -- -- 0
----- ----- ------ ------
Outstanding --
December 31, 1995... 2,269 $ 2.00 - 32.75 -- -- -- -- 2,269
Granted or issued in
connection with
mergers........... 975 $21.38 - 32.88 7,328 $18.88 - 31.94 987 $7.21 - 148.21 9,290
Exercised........... (117) $ 2.00 - 17.75 -- -- (2) $12.11 - 19.44 (119)
Cancelled........... -- -- (4) $21.39 - 25.56 -- -- (4)
----- ----- ------ ------
OUTSTANDING --
DECEMBER 31, 1996... 3,127 $ 2.00 - 32.75 7,324 $18.88 - 31.94 985 $7.21 - 148.21 11,436
===== ===== ====== ======
Options exercisable... 887 $ 2.00 - 32.75 1,784 $18.88 - 25.56 654 $7.21 - 148.21 3,325
===== ===== ====== ======
Available for grant... 625 1,091 0 1,716
===== ===== ====== ======
55
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HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average exercise prices during the year ended December 31,
1996, were $21.51, $9.11 and $24.17 for options granted or issued in connection
with the Mergers, options exercised and options cancelled, respectively. The
weighted average fair value of options granted during the year was $15.84.
- --------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ----------------------------------
WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE PRICE DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------
(In thousands) (In thousands)
$2.00 to $10.00........ 269 3.9 $ 5.02 269 $ 5.02
$10.01 to $20.00....... 7,336 8.8 $18.77 1,965 $18.47
$20.01 to $30.00....... 2,677 8.6 $23.13 723 $23.28
$30.01 to $148.21...... 1.154 8.6 $37.39 368 $49.97
------- --- ------ ------ ------
11,436 8.6 $21.35 3,325 $21.91
======= === ====== ====== ======
In October 1990, Home Shopping adopted the 1990 Executive Stock Award
Program (the "Program") pursuant to which 2,990,000 shares of common stock were
granted to certain key employees and consultants. The Program was funded
exclusively by the contribution of shares of common stock owned by a former
chairman of the board and a former president of Home Shopping. Home Shopping did
not issue any additional shares of stock in connection with the Program. The
shares granted under the Program were distributed in five equal annual
installments commencing one year from the grant date. Participants in the
Program are entitled to receive dividends, if declared, on their unvested shares
and certain officers are entitled to voting rights with respect to their
unvested shares. Forfeitures are reissued at the discretion of the
Compensation/Benefits Committee of the Board of Directors.
In August 1995, in connection with Mr. Diller's employment, the Company
granted Mr. Diller an option (the "Diller Option") to acquire 1,895,847 shares
of common stock at an exercise price of $22.625 per share. In connection with
granting the Diller Option, the Company recorded unearned compensation of $4.0
million offset by a $4.0 million increase to additional paid-in capital. The
unearned compensation resulted from the difference in the exercise price and
fair market value of the common stock at the date of grant and is being
amortized over the four year vesting period of the options.
Over the next three years, the Company will recognize approximately $1.8
million annually of non-cash compensation expense related to unearned
compensation related to the Diller Option and other stock award programs.
NOTE P -- STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information:
- ---------------------------------------------------------------------------------------------------
FOUR MONTHS YEARS ENDED
YEAR ENDED ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ------------------
1996 1995 1995 1994
- ---------------------------------------------------------------------------------------------------
(In thousands)
CASH PAID DURING THE PERIOD FOR:
Interest...................................... $8,939 $3,200 $10,000 $12,400
Income taxes.................................. 458 100 1,500 300
Supplemental information of non-cash investing and financing activities:
- - During December 1996, the Company acquired Savoy and Home Shopping by issuing
stock as discussed in Note C.
56
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HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- - During August 1995, in connection with the retention of the Chairman and Chief
Executive Officer, the Company issued 220,994 shares of HSNi Common Stock to
its Chairman and Chief Executive Officer in exchange for $2,000 in cash and a
note receivable of $5.0 million.
NOTE Q -- RELATED PARTY TRANSACTIONS
The Company is involved in several agreements with related parties as
follows:
The Company, through its Home Shopping subsidiary, is a partner in Shop
Channel, an entity in which TCI, through a subsidiary, has an indirect ownership
interest. In the ordinary course of business, Home Shopping has sold inventory
to Shop Channel and recorded a receivable of $.7 million for those sales and
other services provided at December 31, 1996. The Company's net investment in
Shop Channel at December 31, 1996 was $.5 million.
The Company has a secured, non-recourse note receivable of $5.0 million
from its Chairman and Chief Executive Officer, see Note L.
The Company has a note receivable of $1.0 million from its Vice Chairman.
See Note G.
Prior to the Home Shopping Merger, as discussed in Note C, the Company had
affiliation agreements with Home Shopping for which the Company received $42.4
million and $42.7 million in calendar years 1996 and 1995, respectively. As a
result of the Home Shopping Merger, these affiliation agreements are no longer
considered related party transactions and $3.4 million which had been accrued in
1996 on the books of Home Shopping was reversed.
In the normal course of business, Home Shopping enters into agreements with
the operators of cable television systems and operators of broadcast television
stations for the carriage of Home Shopping programming. Home Shopping has
entered into agreements with a number of cable operators that are affiliates of
TCI. These long-term contracts provide for a minimum subscriber guarantee and
incentive payments based on the number of subscribers. Cash paid by Home
Shopping to TCI and certain of its affiliates under these contracts for cable
commissions and advertising was $11.9 million and $.8 million for calendar year
1996 and the 11 days subsequent to the Home Shopping Merger, respectively.
As of December 31, 1996, SKTV Inc., a wholly-owned subsidiary of the
Company, owned a 33.4% membership interest in Blackstar. The Chairman and CEO of
Blackstar is a director of the Company. Home Shopping currently maintains
broadcast affiliation agreements with stations for which Blackstar is the parent
company. Home Shopping recorded affiliation payments of $4.7 million and $.1
million relating to those stations, for calendar year 1996 and the 11 days
subsequent to the Home Shopping Merger, respectively.
The President of Roberts Broadcasting Company served on the Board of
Directors of the Company until January 1, 1995. Amounts receivable from or
payable to Roberts Broadcasting Company through that date are classified as
related party transactions.
57
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HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE R -- QUARTERLY RESULTS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- --------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
YEAR ENDED DECEMBER 31, 1996
Net revenues..................................... $41,923(a) $11,213 $10,924 $11,112
Operating profit (loss).......................... (1,369)(a) 1,774 1,580 1,627
Net loss......................................... (5,110)(a) (371) (452) (606)
Net loss per common share (b).................... (.35)(a) (.04) (.05) (.06)
YEAR ENDED DECEMBER 31, 1995
Net revenues..................................... $12,145 $11,658 $11,510 $11,315
Operating profit (loss).......................... (1,135) (121) 2,141 1,973
Net earnings (loss).............................. (2,721) (1,659) 820 153
Net earnings (loss) per common share............. (.30) (.18) .09 .02
- ---------------
(a) The operating results for the fourth quarter 1996 reflect the impact of the
Mergers discussed in Note C.
(b) Per common shares amounts for the quarters do not add to the annual amount
because of differences in the average common shares outstanding during each
period.
NOTE S -- SIGNIFICANT CUSTOMERS
For the year ended December 31, 1996, four months ended December 31, 1995
and the years ended August 31, 1995 and 1994, respectively, net revenue from a
significant customer, Home Shopping, accounted for more than 10% of the
Company's net revenue.
- --------------------------------------------------------------------------------------------------
YEARS ENDED
YEAR ENDED FOUR MONTHS AUGUST 31,
DECEMBER 31, ENDED ------------------
1996 DECEMBER 31,
------------ 1995 1995 1994
- --------------------------------------------------------------------------------------------------
(In thousands)
Broadcasting revenue from significant
customer.................................... $43,071 $14,300 $42,488 $41,128
Total net revenues............................ $75,172 $15,980 $47,918 $46,563
Percentage of significant customer revenue to
total net revenue........................... 57.3% 89.5% 88.7% 88.3%
58
61
HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE T -- INDUSTRY SEGMENTS
As a result of the Mergers, discussed in Note C, the Company operates
principally in two industry segments; retailing and broadcasting. The retailing
segment consists of Home Shopping, which primarily includes the sales of
merchandise through electronic retailing. The broadcasting segment includes the
operations of 12 broadcast television stations (including one television
satellite station), which currently transmit Home Shopping programming and six
broadcast television stations (including two television satellite stations)
which are Fox affiliates. Other results of operations and financial position
include the results of film operations in the year ended December 31, 1996 and
production and post-production services to corporations, advertising agencies,
television networks and cable operations throughout the country for the periods
prior to the Mergers and are not considered a significant segment of the
Company.
- ----------------------------------------------------------------------------------------------------
YEARS ENDED
FOUR MONTHS AUGUST 31,
YEAR ENDED ENDED --------------------
DECEMBER 31, 1996 DECEMBER 31, 1995 1995 1994
- ----------------------------------------------------------------------------------------------------
(In thousands)
Revenue
Retailing......................... $ 30,588 $ -- $ -- $ --
Broadcasting...................... 43,359 15,061 44,563 42,682
Other............................. 1,225 919 3,355 3,881
---------- -------- -------- --------
$ 75,172 $ 15,980 $ 47,918 $ 46,563
========== ======== ======== ========
Operating profit (loss)
Retailing......................... $ (522) $ -- $ -- $ --
Broadcasting...................... 4,175 30 9,368 10,384
Other(1).......................... (41) (710) (1,132) (2,273)
---------- -------- -------- --------
$ 3,612 $ (680) $ 8,236 $ 8,111
========== ======== ======== ========
Assets
Retailing......................... $1,628,818 $ -- $ -- $ --
Broadcasting...................... 355,926 135,082 140,563 142,808
Other............................. 131,488 1,588 2,354 2,680
---------- -------- -------- --------
$2,116,232 $136,670 $142,917 $145,488
========== ======== ======== ========
Depreciation and amortization
Retailing......................... $ 1,871 $ -- $ -- $ --
Broadcasting...................... 13,187 4,531 13,833 14,523
Other............................. 428 170 841 477
---------- -------- -------- --------
$ 15,486 $ 4,701 $ 14,674 $ 15,000
========== ======== ======== ========
Capital Expenditures
Retailing......................... $ 447 $ -- $ -- $ --
Broadcasting...................... 696 163 998 1,304
Other............................. -- -- 705 618
---------- -------- -------- --------
$ 1,143 $ 163 $ 1,703 $ 1,922
========== ======== ======== ========
- ---------------
(1) Includes a $1.2 million charge to operations to close the Chicago unit of
Telemation, Inc. in fiscal 1994.
The Company operates almost exclusively within the United States.
Broadcasting revenue is principally derived from the broadcasting of Home
Shopping programming. Other assets primarily relate to the Savoy motion picture
business.
59
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HSN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE U -- FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial
instruments was made in accordance with the requirements of Statements of
Financial Accounting Standards No. 107. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies when available. The carrying value of all
current assets and current liabilities approximates fair value due to their
short-term nature.
- ----------------------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------
(In thousands)
Cash and cash equivalents................... $ 42,606 $ 42,606 $ 19,140 $ 19,140
Long-term investments....................... 30,121 30,121 5,135 5,135
Other non-current assets.................... 36,330 36,330 3,719 3,719
Long-term obligations....................... (314,336) (314,336) (108,436) (108,436)
NOTE V -- SAVOY SUMMARIZED FINANCIAL INFORMATION (UNAUDITED)
The Company has not presented separate financial statements and other
disclosures concerning Savoy because management has determined that such
information is not material to holders of the Savoy Debentures, all of which
have been assumed by the Company as a joint and several obligor. The information
presented is reflected at Savoy's historical cost basis.
- ---------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
SUMMARY CONSOLIDATED STATEMENTS ----------------------------------
OF OPERATIONS 1996 1995 1994
- ---------------------------------------------------------------------------------------------
(In thousands)
Net sales................................................ $ 117,951 $ 92,599 $ 85,763
Cost of sales............................................ 254,009 164,464 125,056
Operating loss........................................... (136,058) (71,865) (39,293)
Net loss................................................. (156,074) (73,744) (59,453)
- -----------------------------------------------------------------------------------
DECEMBER 31,
SUMMARY CONSOLIDATED ---------------------
BALANCE SHEETS 1996 1995
- -----------------------------------------------------------------------------------
(In thousands)
Current assets.............................................. $ 61,901 $238,730
Non-current assets.......................................... 302,195 391,524
Current liabilities......................................... 60,716 151,879
Non-current liabilities..................................... 124,198 194,443
Minority interest........................................... 112,717 68,963
NOTE W -- SUBSEQUENT EVENT (UNAUDITED)
Savoy and Fox each made a capital contribution to SF Broadcasting of $9.0
million on March 27, 1997 which was used to repay borrowings under the Broadcast
Facility. On that date, SF Broadcasting entered into an Amendment and Waiver to
the Broadcast Facility which provided a waiver of certain covenants for the
quarters ended September 30, 1996 and December 31, 1996 and amended the cash
flow to interest expense ratio for the first two quarters of 1997.
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63
NOTE X -- PRO FORMA QUARTERLY RESULTS (UNAUDITED)
The following unaudited pro forma quarterly results of the Company have
been prepared using the purchase method of accounting to give effect to the
Mergers as if they had occurred January 1, 1996. During 1996, Savoy ceased its
activities in the motion picture business and accordingly, the results below
were prepared excluding the operating results of the Savoy motion picture
business.
- ---------------------------------------------------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1996 JUNE 30, 1996 MARCH 31, 1996
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
Net Revenues:
Home Shopping.................. $280,783 $234,321 $243,988 $255,613
Broadcasting and production.... 15,810 13,157 12,818 11,430
-------- -------- -------- --------
Total net revenues..... 296,593 247,478 256,806 267,043
Operating Expenses:
Cost of sales.................. 172,336 137,070 151,744 164,940
Other costs.................... 85,289 75,964 74,441 75,946
Depreciation and
amortization................ 22,895 22,776 22,625 22,566
-------- -------- -------- --------
Total operating
expenses............. 280,520 235,810 248,810 263,452
-------- -------- -------- --------
Operating profit
(loss)............... 16,073 11,668 7,996 3,591
Other income (expense), net...... (13,900) (6,552) (5,456) (8,437)
-------- -------- -------- --------
Income (loss) before income
taxes, and minority interest... 2,173 5,116 2,540 (4,846)
Income tax (expense) benefit..... (7,244) (6,830) (5,235) (3,273)
Minority interest................ 1,338 362 336 1,252
-------- -------- -------- --------
Net loss............... $ (3,733) $ (1,352) $ (2,359) $ (6,867)
======== ======== ======== ========
Earnings (loss) per common
share.......................... $ (.08) $ (.03) $ (.05) $ (.14)
======== ======== ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION REGARDING DIRECTORS
Barry Diller, age 55, has been a director and the Chairman of the Board and
the Chief Executive Officer of the Company since August 24, 1995. He became a
director of Home Shopping on August 24, 1995 and has served as Chairman of the
Board since November 24, 1995. He was Chairman of the Board and Chief Executive
Officer of QVC from January 1993 until February 28, 1995. From 1984 to 1992, Mr.
Diller served as the Chairman of the Board and Chief Executive Officer of Fox,
Inc. Prior to joining Fox, Inc., Mr. Diller served for ten years as Chairman of
the Board and Chief Executive Officer of Paramount Pictures Corporation. Mr.
Diller is a director of Golden Books Family Entertainment, Inc. He also serves
on the Board of the Museum of Television and Radio and is a member of the Board
of Chairman of Councilors for the University of Southern California's School of
Cinema-Television. Mr. Diller also serves on the Board of Directors for the AIDS
Project Los Angeles and the New York Public Library and the Executive Board for
the Medical Sciences of University of California, Los Angeles.
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64
James G. Held, age 47, has been a director of the Company since December
1996. He was appointed as a director pursuant to the terms of the Home Shopping
Merger Agreement. He previously had served as a director of Home Shopping since
February 1996. Since November 1995, Mr. Held has been President and Chief
Executive Officer of Home Shopping. From January 1995 to November 1995, Mr. Held
served as President and Chief Executive Officer of Adrienne Vittadini, Inc. an
apparel manufacturer and retailer. Between September 1993 and January 1995, Mr.
Held was a senior executive of QVC, first as Senior Vice President in charge of
new business development and later as Executive Vice President of merchandising,
sales, product planning and new business development. For eleven years prior to
that, until September 1993, Mr. Held was employed in different executive
positions at Bloomingdale's, Inc.
Victor A. Kaufman, age 53, has been a director since December 1996. Mr.
Kaufman has served in the Office of the Chairman for the Company since January
27, 1997. Prior to that time, he served as Chairman and Chief Executive Officer
of Savoy since March 1992 and a director of Savoy since February 1992. Mr.
Kaufman was the founding Chairman and Chief Executive Officer of Tri-Star
Pictures, Inc. ("Tri-Star") from 1983 until December 1987, at which time he
became President and Chief Executive Officer of its successor company, Columbia
Pictures Entertainment, Inc. ("Columbia"). He resigned from these positions at
the end of 1989 following the acquisition of Columbia by Sony USA, Inc. Mr.
Kaufman joined Columbia in 1974 and served in a variety of senior positions at
Columbia and its affiliates prior to the founding of Tri-Star.
John E. Oxendine, age 53, has been a director of the Company since December
1996. He is the founder and since 1987, has been Chairman of Blackstar
Communications, Inc. ("BCI"), a company that currently owns and operates three
television stations affiliated with the Company. Since the fall of 1994, he has
also served as Chairman and Chief Executive Officer of Blackstar LLC, the owner
of BCI and, through a subsidiary of station KEVN-TV, Rapid City, South Dakota
and its satellite station, KIVV-TV, licensed to Lead-Deadwood, South Dakota.
From 1981 to 1995, Mr. Oxendine served as President and Chief Executive Officer
of Broadcast Capital Fund, Inc. Mr. Oxendine is also a member of the Board of
the nonprofit Monterey Institute.
Bruce M. Ramer, age 63, has been a director of the Company since February
1996 and has been a principal of the law firm Gang, Tyre, Ramer & Brown, Inc.
for more than five years. He is Chairman of the Board of Directors of Geffen
Playhouse, Los Angeles and was formerly a member of the Board of Directors of
Rebuild L.A. Mr. Ramer is also Executive Director of the Entertainment Law
Institute of the University of Southern California Law School, a member of the
Board of Councilors and a member of the Board of Trustees of Loyola Marymount
University.
Gen. H. Norman Schwarzkopf, age 62, has been a director of the Company
since December 1996. He was appointed as a director pursuant to the terms of the
Home Shopping Merger Agreement. He previously had served as a director of Home
Shopping since May 1996. Since his retirement from the military in August 1991,
General Schwarzkopf has been an author, a participant in several television
specials and is currently working with NBC on additional television programs.
From August 1990 to August 1991, he served as Commander-in-Chief, United States
Central Command and Commander of Operations, Desert Shield and Desert Storm.
General Schwarzkopf has 35 years of service with the military. He is also on the
Board of Governors of the Nature Conservancy, Chairman of the Starbright Capital
Campaign, co-founder of the Boggy Creek Gang, a member of the University of
Richmond Board of Trustees, and serves on the Boards of Directors of Borg-Warner
Security Corporation, Remington Arms Company, Washington Water Power, Pentzer
Corporation, Kuhlman Corporation and Cap CURE, Association for the Cure of
Cancer of the Prostate.
Eli J. Segal, age 54, has been a director of the Company since December
1996. He was appointed as director pursuant to the terms of the Home Shopping
Merger Agreement. He previously had served as a director of Home Shopping since
February 1996. Mr. Segal has served as a consultant to Bits & Pieces, Inc., a
direct mail consumer product company, since February 1996; as a consultant to
Sirius Thinking Ltd., an independent television producer, since January 1997;
and as Chairman of the Board of School Sports, Inc., a magazine celebrating the
world of high school sports, since December 1996. Mr. Segal previously served as
Assistant to the President of the United States from January 1993 to February
1996. In that connection, Mr. Segal was also confirmed by the United States
Senate as the first Chief Executive Officer of the
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65
Corporation for National Service. Prior to that, Mr. Segal served as President
of Bits & Pieces, Inc. from 1984 to January 1993, and publisher of GAMES
magazine, a monthly publication from 1990 to January 1993.
Sidney J. Sheinberg, age 62, has been a director of the Company since
February 1996. He served as President and Chief Operating Officer and as a
director of MCA INC. from June 1973 until October 1995. Since October 1995, Mr.
Sheinberg has been a partner of The Bubble Factory, an entertainment company.
Mr. Sheinberg served as a director of Cineplex Odeon Corporation from May 1986
until October 1995.
Richard E. Snyder, age 63, has been a director of the Company since
December 1996. He has been Chairman and Chief Executive Officer since May 1996
and President since February 1996 of Golden Books Family Entertainment, Inc.
(formerly Western Publishing Group). Prior to that time, Mr. Snyder had, since
1994, been an independent business consultant and investor. He was the Chairman
and Chief Executive Officer of Simon & Schuster from 1975 to 1994. Mr. Snyder is
also a director of Reliance Group Holdings, Inc. and Children's Blood
Foundation. Mr. Snyder is a member of the Society of Fellows of the American
Museum of Natural History, the Council on Foreign Relations and the Board of
Overseers for the University Libraries of Tufts University.
EXECUTIVE OFFICERS
The following sets forth certain information concerning the persons who
currently serve as executive officers of the Company and who do not serve on the
Company's Board of Directors.
Brian J. Feldman, age 37, has served as Controller of the Company since
January 27, 1997 and Vice President and Controller of Home Shopping since March
1996. He served as Controller, Deputy Controller and Assistant Controller for
Home Shopping from May 1989 to March 1996.
James G. Gallagher, age 38, has served as Vice President, General Counsel
and Secretary of the Company since January 27, 1997 and as Executive Vice
President and General Counsel of Home Shopping since October 14, 1996. Prior to
joining Home Shopping, Mr. Gallagher served in a variety of capacities,
including most recently as Group Counsel at American Express Travel Related
Services Company, Inc. from July 1988 to September 1996.
Mary Ellen Pollin, age 51, has served as Vice President -- Human Resources
for the Company since January 27, 1997. She joined Home Shopping in December
1995 as Executive Vice President of Administration. From July 1995 to December
1995, she served as Executive Director of Russell Reynolds Associates, an
executive recruiting firm. From July 1993 to June 1995, she served as Vice
President of J.D. Ross International. From May 1990 to June 1993, she was
Director of Recruitment and Executive Placement at Barneys New York. From 1988
to 1990, she served as Vice President, Human Resources of Conran's Habitat.
During the nine years prior to this, Ms. Pollin worked for Bloomingdale's, Inc.
in various human resource capacities.
Jed B. Trosper, age 42, joined Home Shopping in January 1997 as Executive
Vice President, Chief Financial Officer and Treasurer and assumed the roles of
Vice President, Chief Financial Officer and Treasurer of HSNi on January 27,
1997. He previously served as President of Blessing White from September 1995 to
December 1996 and Chief Financial Officer for several of the portfolio companies
of General Atlantic Partners including Blessing/White, Inc., Record World, Inc.,
and Comprehensive Learning Concepts, Inc. from 1990 to 1995. Mr. Trosper was
Chief Financial Officer of Modell's Sporting Goods, Inc. and held various
financial positions at JC Penney Company, Inc., Bloomingdale's, Inc., and S.E.
Nichols Company, Inc. from 1977 to 1990.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
For the 1996 fiscal year, James J. Miller and John E. Oxendine each failed
to file on a timely basis a Form 3 stock ownership report reflecting their
initial beneficial ownership of Company securities acquired in connection with
the Home Shopping Merger. Douglas Binzak and Adam Ware each failed to file on a
timely basis a Form 5 stock ownership report reflecting a change in the term of
certain stock options held by each of them.
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF OUTSIDE DIRECTORS
Effective January 1, 1996, upon the recommendation of the
Compensation/Benefits Committee, the Board approved an increase of the annual
retainer for each director who is not an employee of the Company from $10,000 to
$30,000 per year. The Company also pays each such director $1,000 for each of
the Board of Directors meetings and each of the Board committee meetings
attended, plus reimbursement for all reasonable expenses incurred by such
director in connection with such attendance at any meeting of the Board of
Directors or one of its committees.
At a meeting of the Compensation/Benefits Committee on February 13, 1996,
the Compensation/Benefits Committee recommended, and the Board approved, the
termination of the previous director option plan and the adoption of the
Company's Directors' Stock Option Plan (the "Directors' Stock Option Plan.") The
stockholders approved the Directors' Stock Option Plan on December 19, 1996.
Under the Directors' Stock Option Plan, directors who are not employees of
the Company and who became directors of the Company on or after February 13,
1996 receive an annual grant of options to purchase 5,000 shares of HSNi Common
Stock. The exercise price per share of HSNi Common Stock subject to such options
is the fair market value of HSNi Common Stock on the date of grant, which is
provided to be the mean of the high and low sale price on such date on any stock
exchange on which HSNi Common Stock is listed or as reported by the Nasdaq
National Market, or, in the event that HSNi Common Stock is not so listed or
reported, as determined by an investment banking firm selected by the
Compensation/Benefits Committee. Such options vest in increments of 1,667 shares
on each of the first two anniversaries of the date of grant, and 1,666 shares on
the third. The options expire ten years from the date of grant. For directors
who became directors on February 13, 1996, December 19, 1996 and December 20,
1996, the exercise price per share of the annual grant was $32.88, $21.38 and
$23.25, respectively.
Home Shopping entered into a three year consulting arrangement with General
Schwarzkopf during April 1996 which remains in effect following the Home
Shopping Merger. Under the terms of the arrangement, General Schwarzkopf
received options to purchase 22,500 shares of HSNi Common Stock at an exercise
price of $22.22 per share. The options vest over a three year period commencing
April 3, 1997 and are exercisable for a ten year period. In addition, option
grants in the amount of 2,250 shares each were made in January 1997 to Messrs.
Schwarzkopf and Segal at an exercise price of $25.56 and $21.39 per share,
respectively. These options vest over a two year period and are exercisable for
a period of five years from the date that they vest. The option grants replace
options that were terminated as a result of the Home Shopping Merger.
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SUMMARY OF EXECUTIVE OFFICER COMPENSATION
The following sets forth the annual and long-term compensation for services
to the Company for the year ended December 31, 1996 and four months ended
December 31, 1995 and the fiscal years ended August 31, 1995 and 1994 of those
persons who were, at December 31, 1996, (i) the Chief Executive Officer of the
Company, (ii) the other four most highly compensated officers of the Company
whose compensation exceeded $100,000 for fiscal year 1996.
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------- --------------------------------------
RESTRICTED
FISCAL OTHER ANNUAL STOCK STOCK ALL OTHER
YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
NAME & PRINCIPAL POSITION (1) ($) ($) ($)(2) ($) (#) ($)
------------------------- ------ ------- --------- ------------ ---------- --------- ------------
Barry Diller................. 1996 0 1,618,722(4) 0 0 0 1,280,508(3)(8)
Chairman and 1995* 0 833,333(4) 0 0 6,610,000(5) 424,892(8)
Chief Executive 1995(6) 0 47,945(4) 1,892,401(7) 0 1,895,847(8) 25,200(8)
Officer
Douglas Binzak............... 1996(9) 207,500 0 0 0 110,000 115,328(9)
Executive Vice President --
Broadcasting
Michael Drayer............... 1996 120,750 0 0 0 0 1,000(3)
Executive Vice 1995* 41,135 0 0 0 0 183,911(10)
President, 1995 116,484 4,000 0 0 2,500 1,000(3)
General Counsel 1994 102,653 0 0 0 0 1,000(3)
and Secretary
Lia Afriat-Hernandez......... 1996 107,701 0 0 0 0 174,385(3)(10)
Executive Vice 1995* 34,923 0 0 0 0 0
President -- 1995 97,858 3,500 0 0 2,500 1,000(3)
Compliance/ 1994 76,731 0 0 0 0 1,000(3)
Programming
Adam Ware.................... 1996(9) 142,789 0 0 0 100,000 106,563(9)
Executive Vice President --
Broadcasting
- ---------------
(1) Effective January 1, 1996, the Company's year end was changed from August
31 to the calendar year end. For purposes of the Summary Compensation
Table, "1996" refers to the calendar year 1996, "1995*" refers to the four
months ended December 31, 1995, and "1995" and "1994" refer to the fiscal
years ended August 31, 1995 and 1994, respectively.
(2) Disclosure of perquisites and other personal benefits, securities or
property received by a Named Executive Officer is only required where the
aggregate amount of such compensation exceeded the lesser of $50,000 or 10%
of the total of the Named Executive Officer's salary and bonus for the
year.
(3) Includes the Company's contributions under its 401(k) Retirement Savings
Plan (the "401(k) Plan"). Pursuant to the 401(k) Plan, the Board of
Directors may elect to match a portion of employee contributions up to a
maximum amount of $1,000 per year, which contributions vest in equal
installments over a five-year period. Mr. Drayer and Ms. Hernandez are each
fully vested in the 401(k) Plan.
(4) Pursuant to the Equity Compensation Agreement between Mr. Diller and the
Company, Mr. Diller received a bonus payment of approximately $2.5 million
on August 24, 1996. The Company accrued seven days of this bonus in fiscal
1995 and four months for 1995*.
(5) Reflects 625,000 options granted to Mr. Diller as a result of completion of
the Home Shopping and Savoy Mergers and also includes 5,985,000 options to
purchase HSNi Common Stock resulting from the conversion of options to
purchase Home Shopping Common Stock granted to Mr. Diller in November 1995
as Chairman of Home Shopping.
(6) Mr. Diller was appointed Chairman of the Board and Chief Executive Officer
of the Company on August 24, 1995.
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(7) This figure includes $966,263 in compensation paid to Mr. Diller to fund
his tax liability in connection with his acquisition of HSNi Common Stock
pursuant to the Equity Compensation Agreement, and $926,138 in non-cash
income to Mr. Diller based upon the difference between the fair market
value of HSNi Common Stock on the date of purchase and the price per share
paid for the stock by Mr. Diller.
(8) Pursuant to the Equity and Bonus Compensation Agreement, Mr. Diller was
granted options in 1995 to purchase 1,895,847 shares of HSNi Common Stock,
vesting over a four-year period, at an exercise price below the fair market
value of the Company's Common Stock on the date of grant. The Company has
amortized unearned compensation of $19,046 in 1995, $331,038 in 1995*, and
$993,135 in 1996. In addition, Mr. Diller has an interest-free, secured,
non-recourse promissory note in the amount of $4,997,779 payable to the
Company which was used to purchase 220,994 shares of HSNi Common Stock. As
a result, Mr. Diller has compensation for imputed interest of $6,154 in
1995, $93,854 in 1995* and $286,373 in 1996.
(9) Messrs. Binzak and Ware were employed by the Company during June 1996. On
November 12, 1996, Messrs. Binzak's and Ware's options were amended to
reduce the option price from $32.88 and $33.00, respectively, to $25.25,
the closing price of HSNi Common Stock on the date of amendment. As a
result, included in all other compensation is $115,328 and $106,563 for
Messrs. Binzak and Ware, respectively, relating to the repricing of these
options.
(10) Includes amounts accrued for termination benefits of $183,911 and $173,385
for Mr. Drayer and Ms. Hernandez, respectively.
OPTION GRANTS
Set forth in the table below is information with respect to options to
purchase the Company's Common Stock granted to the Company's named executive
officers ("Named Executive Officers") during the year ended December 31, 1996.
The grants were made under the new 1995 Stock Incentive Plan ("Stock Incentive
Plan").
The Stock Incentive Plan is administered by the Compensation/Benefits
Committee, which has the sole discretion to determine the selected officers,
employees and consultants to whom incentive or non-qualified options, SARs,
restricted stock and performance units may be granted. As to such awards, the
Compensation/Benefits Committee also has the sole discretion to determine the
number of shares subject thereto and the type, terms, conditions and
restrictions thereof. The exercise price of an incentive stock option granted
under the Stock Incentive Plan must be at least 100% of the fair market value of
the Company's Common Stock on the date of grant. In addition, an option granted
under the Stock Incentive Plan terminates within ten years of the date of grant.
To date, only non-qualified stock options have been granted under the Stock
Incentive Plan.
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OPTION GRANTS IN LAST FISCAL YEAR(1)
PERCENT POTENTIAL REALIZABLE VALUE
NUMBER OF OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE PRICE OPTION TERMS(3)
OPTIONS GRANTED IN THE PER SHARE EXPIRATION ----------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE(2) 5%($) 10%($)
---- ---------- -------------- -------------- ---------- ------------ ------------
Barry Diller............ 0 -- -- -- -- --
Chairman and Chief
Executive Officer
Douglas Binzak.......... 110,000 34.4% 25.25(4) 6/10/2006 1,746,755 4,426,200
Executive Vice
President --
Broadcasting
Adam Ware............... 100,000 31.3% 25.25(4) 6/17/2006 1,587,959 4,024,200
Executive Vice
President --
Broadcasting
Michael Drayer.......... 0 -- -- -- -- --
Executive Vice
President, General
Counsel and Secretary
Lia Afriat-Hernandez.... 0 -- -- -- -- --
Executive Vice
President --
Compliance/
Programming
- ---------------
(1) Under the terms of the Stock Incentive Plan, the Compensation/Benefits
Committee retains discretion, subject to plan limits, to modify the terms of
outstanding options and to reprice such options.
(2) Under the Stock Incentive Plan, the Compensation/Benefits Committee
determines the exercise price, vesting schedule and exercise periods for
option grants made pursuant to that Plan. Options granted during the year
ended December 31, 1996, generally become exercisable in four equal, annual
installments commencing on the first anniversary of the grant date. Each
such option expires ten years from the date of grant.
(3) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of HSNi Common Stock, overall stock
market conditions, as well as on the option holders' continued employment
through the vesting period. The amounts reflected in this table may not
necessarily be achieved.
(4) On November 12, 1996, Messrs. Binzak's and Ware's options were amended to
reduce the option price from $32.88 and $33.00, respectively, to $25.25, the
closing price of HSNi Common Stock on that date.
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OPTION EXERCISES
The following table provides information concerning the exercise of stock
options by the Company's Named Executive Officers during the year ended December
31, 1996 and the year-end value of all unexercised options held by such persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
YEAR END(#) YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Barry Diller(2)............. 0 0 2,126,461 6,379,386 7,806,645 23,419,933
Chairman and Chief
Executive Officer
Douglas Binzak(3)........... 0 0 0 110,000 0 0
Executive Vice
President --
Broadcasting
Adam Ware(3)................ 0 0 0 100,000 0 0
Executive Vice
President --
Broadcasting
Michael Drayer(4)........... 0 0 14,500 0 250,500 0
Executive Vice President,
General Counsel and
Secretary
Lia Afriat-Hernandez(4)..... 0 0 12,040 0 202,037 0
Executive Vice
President --
Compliance/Programming
- ---------------
(1) Represents the difference between the $23.75 closing price of HSNi Common
Stock on December 31, 1996 and the exercise price of the options, and does
not include the federal and state taxes due upon exercise.
(2) Mr. Diller's options consist of options to purchase (i) 625,000 shares of
HSNi Common Stock granted in 1995 pursuant to the Stock Incentive Plan, (ii)
1,895,847 shares of HSNi Common Stock granted during 1995 pursuant to the
Equity Compensation Agreement and (iii) 5,985,000 shares of HSNi Common
Stock resulting from the conversion of options to purchase Home Shopping
Common Stock . One quarter of each of these options were exercisable as of
December 31, 1996. The value of in-the-money options at year end reflect
only those options where the closing price of HSNi Common Stock at December
31, 1996 was greater than the exercise price of the option.
(3) The exercise price of the option was greater than the market closing price
of HSNi Common Stock on December 31, 1996.
(4) Mr. Drayer and Ms. Afriat-Hernandez are no longer employed by the Company.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation/Benefits Committee currently are Eli J.
Segal and Sidney J. Sheinberg. Kenneth T. MacDonald, Vincent F. Barresi, Michael
A. Green and Russell I. Pillar served on the Committee during 1996. Except as
set forth below, none of these directors was ever an officer or employee of the
Company or its subsidiaries.
In fiscal year 1994, the Audit Committee approved a consulting agreement
whereby Mr. Barresi, a member of the Board of Directors and the Audit and
Compensation/Benefits Committees, would seek to enhance the Company's revenue
through the increased sale of station airtime and satellite earth station uplink
time, and the leasing of station tower and building space. Mr. Barresi was
compensated at the rate of $6,000 per month plus a 10% commission on net
receipts directly attributable to his efforts and reasonable and prudent
expenses. The consulting agreement was effective March 4, 1994 and terminated
December 31, 1994. Mr. Barresi remains entitled to a 10% commission on net
receipts directly attributable to his efforts. For the year ended, December 31,
1996, Mr. Barresi was compensated in the total amount of $46,000. Mr. Barresi
abstained from voting on all Audit Committee matters pertaining to the
consulting agreement.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1996, information
relating to the beneficial ownership of HSNi Common Stock by (i) each person
known by the Company to own beneficially more than 5% of the outstanding shares
of HSNi Common Stock, (ii) each director, (iii) the Chief Executive Officer of
the Company and the other four most highly compensated officers of the Company
whose compensation exceeded $100,000 for the year 1996, and (iv) all executive
officers and directors of the Company as a group:
NAME AND ADDRESS NUMBER OF PERCENT PERCENT OF VOTES
OF BENEFICIAL OWNER SHARES OF CLASS (ALL CLASSES)(1)
------------------- ---------- -------- ----------------
Capital Research & Management Co &
The Capital Group Companies, Inc(2).............. 3,846,250 10.8% 2.8%
333 South Hope Street
Los Angeles, CA 90071
Denver Investment Advisers, LLC.................... 3,126,243 8.7% 2.3%
1225 17th St., 26th Floor
Denver, CO 80202
Fidelity Investments(3)............................ 2,920,040 8.1% 2.1%
82 Devonshire Street
Boston, MA 02109-3614
Snyder Capital Management, Inc..................... 1,962,325 5.5% 1.4%
350 California Street
Suite 1460
San Francisco, CA 94104
Tele-Communications, Inc.(4)....................... 9,870,741 21.4% 21.4%
5619 DTC Parkway
Englewood, CO
Barry Diller(5).................................... 12,484,190 27.0% 27.0%
Douglas Binzak(6).................................. 0 * *
James G. Held(7)................................... 281,272 * *
Victor A. Kaufman(8)............................... 142,000 * *
John E. Oxendine(9)................................ 0 * *
Bruce M. Ramer(9).................................. 0 * *
Gen. H. Norman Schwarzkopf(10)..................... 750 * *
Eli J. Segal(11)................................... 750 * *
Sidney J. Sheinberg(9)............................. 0 * *
Richard E. Snyder(9)............................... 0 * *
Adam Ware(12)...................................... 0 * *
Michael Drayer(13)................................. 14,500 * *
Lia Afriat-Hernandez(14)........................... 12,343 * *
All executive officers and directors as a
group (16 persons)............................... 12,996,071 28.4% 28.1%
- ---------------
* The percentage of shares beneficially owned does not exceed 1% of the
class.
Unless otherwise indicated, beneficial owners listed herein may be
contacted at the Company's corporate headquarters address, 2501 118th
Avenue North, St. Petersburg, FL 33716. The percentage of votes listed
assumes the conversion of any shares of HSNi Class B Common Stock owned by
such listed person, but does not assume the conversion of HSNi Class B
Common Stock owned by any other person. Under the rules of the Commission,
a person is deemed to be a "beneficial owner" of a security
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if that person has or shares "voting power," which includes the power to
vote or to direct the voting of such security, or "investment power," which
includes the power to dispose of or to direct the disposition of such
security. A person is also deemed to be the beneficial owner of any
securities of which that person has the right to acquire beneficial
ownership within 60 days. Under these rules, more than one person may be
deemed to be a beneficial owner of the same securities and a person may be
deemed to be a beneficial owner of securities as to which that person has
no beneficial interest.
(1) The percent of votes for all classes is based on one vote for each share of
HSNi Common Stock and ten votes for each share of HSNi Class B Common
Stock. However, the percent of votes for TCI and Mr. Diller assume that all
of their HSNi Class B Common Stock has been converted into HSNi Common
Stock, and therefore, there is no HSNi Class B Common Stock outstanding.
(2) Includes 3,141,250 shares of HSNi Common Stock and 705,000 shares as a
result of the assumed conversion of $18,800,000 principal amount of the
Home Shopping Debentures into HSNi Common Stock.
(3) Includes 2,238,479 shares of HSNi Common Stock and 681,651 shares as a
result of the assumed conversion of $15,763,000 principal amount of the
Home Shopping Debentures into HSNi Common Stock.
(4) Includes beneficial ownership of 9,809,111 shares of HSNi Class B Common
Stock, which may be converted at any time into an equal number of shares of
HSNi Common Stock, and 61,630 shares of HSNi Common Stock. The number of
shares does not include any shares or options to purchase shares held and
voted by Mr. Diller outside the BDTV entities as to which shares TCI
disclaims beneficial ownership.
(5) The number of shares includes 486,988 shares owned by Mr. Diller and vested
options to purchase 2,126,461 shares but does not include unvested options
to purchase 6,379,386 shares granted to Mr. Diller. Such number also
includes 9,809,111 shares of HSNi Class B Common Stock beneficially owned
by Mr. Diller as the sole voting shareholder of the BDTV Entities which
hold such shares, which shares are convertible into HSNi Common Stock, and
61,630 shares of HSNi Common Stock held by Liberty HSN with respect to
which Mr. Diller may be deemed to be a beneficial owner because he has
voting control of such shares. Such number does not include the Exchange
Shares or the Contingent Rights Shares. See "Item 1 -- The Mergers -- Home
Shopping Merger" for further discussion.
(6) Does not include unvested options to purchase 110,000 shares of HSNi Common
Stock pursuant to the Stock Incentive Plan.
(7) Includes vested options, granted pursuant to the 1996 Home Shopping
Employee Stock Option Plan (the "Home Shopping Employee Plan"). Does not
include unvested options to purchase 843,750 shares pursuant to that plan.
Includes 22 shares under the Home Shopping Retirement Savings Plan.
(8) Includes the conversion of 500,000 shares of Savoy Common Stock and 250,000
shares of Savoy Restricted Stock pursuant to the Savoy Merger. Includes
28,000 vested options to purchase HSNi Common Stock assumed by the Company
pursuant to the Savoy Merger. Includes 9,000 shares of vested options to
purchase HSNi Common Stock resulting from the conversion of options granted
pursuant to the Home Shopping Employee Plan. Does not reflect unvested
options to purchase 100,000 shares of HSNi Common Stock granted pursuant to
the Stock Incentive Plan and unvested options to purchase 36,000 shares of
HSNi Common Stock resulting from conversion of options granted pursuant to
the Home Shopping Employee Plan.
(9) Does not reflect unvested options to purchase 5,000 shares of HSNi Common
Stock pursuant to the Directors' Stock Option Plan.
(10) Does not include unvested options to purchase 5,000 shares of HSNi Common
Stock pursuant to the Directors' Stock Option Plan. Does not include
unvested options to purchase 1,500 shares of HSNi Common Stock under the
Home Shopping Directors' Stock Option Plan which were converted pursuant to
the terms of the Home Shopping Merger. Does not include unvested options to
purchase 22,500 shares of HSNi Common Stock granted under the Home Shopping
Employee Plan pursuant to a consulting agreement with Home Shopping.
(11) Does not include unvested options to purchase 5,000 shares of HSNi Common
Stock pursuant to the Directors' Stock Option Plan. Does not include
unvested options to purchase 1,500 shares of HSNi
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Common Stock under the Home Shopping Directors' Stock Option Plan which
were converted pursuant to the terms of the Home Shopping Merger.
(12) Does not include unvested options to purchase 100,000 shares of HSNi Common
Stock pursuant to the Stock Incentive Plan.
(13) Includes 14,500 vested options granted under the Company's Stock Option and
Restricted Stock Plan.
(14) Includes vested options to purchase 12,040 vested options granted under the
Company's Stock Option and Restricted Stock Plan.
The following table sets forth, as of December 31, 1996, information
relating to the beneficial ownership of HSNi Class B Common Stock:
PERCENT OF
NAME AND ADDRESS NUMBER OF PERCENT VOTES
OF BENEFICIAL OWNER SHARES(1) OF CLASS (ALL CLASSES)*
------------------- --------- -------- ---------------
Barry Diller(2)...................................... 9,809,111 95.9 71.0%
Tele-Communications, Inc.(2)......................... 9,809,111 95.9 71.0%
5619 DTC Parkway
Englewood, CO
BDTV INC.(2)......................................... 9,809,111 95.9 71.0%
and BDTV II INC.
2425 Olympic Boulevard
Santa Monica, CA 90404
- ---------------
* Excludes shares of HSNi Common Stock owned by any of the listed persons.
(1) All or any portion of shares of HSNi Class B Common Stock may be converted
at any time into an equal number of shares of HSNi Common Stock.
(2) Liberty, a wholly owned subsidiary of TCI, and Mr. Diller have entered into
the Stockholders Agreement pursuant to which Liberty and Mr. Diller have
formed BDTV, to which Liberty assigned the Liberty Option, and BDTV II INC.
(together with BDTV, the "BDTV Entities") On August 13, 1996, BDTV exercised
the Liberty Option, thereby acquiring 2,000,000 shares of HSNi Class B
Common Stock. On December 20, 1996, Liberty contributed 7,809,111 shares of
HSNi Class B Common Stock to BDTV II. Mr. Diller also owns 441,988 shares of
HSNi Common Stock and options to purchase 8,505,847 shares of HSNi Common
Stock, 2,126,461 of which are currently vested representing 5.9% of the
issued and outstanding shares of HSNi Common Stock as of December 31, 1996.
Moreover, if the BDTV Entities converted their beneficially owned HSNi Class
B Common Stock into HSNi Common Stock, such shares would represent
approximately 21.2% of the issued and outstanding shares of HSNi Common
Stock. The BDTV Entities may be issued additional Class B Common Stock upon
issuance of the Contingent Shares and conversion of the Exchange Shares in
accordance with the terms of the Home Shopping Merger. TCI disclaims
beneficial ownership of all HSNi Securities held by Mr. Diller or his
affiliates but not any of HSNi Securities held by the BDTV Entities. Mr.
Diller owns all of the voting stock of BDTV Entities and Liberty owns all of
the non-voting stock, which non-voting stock represents in excess of 99% of
the equity of the BDTV Entities. HSNi Securities held by the BDTV Entities
are subject to the terms of the Stockholders Agreement.
THE DILLER-LIBERTY STOCKHOLDERS AGREEMENT
Mr. Diller and Liberty are parties to a stockholders agreement, dated as of
August 24, 1995 (the "August Stockholders Agreement"), as amended by the first
amendment (the "First Amendment") thereto, dated as of August 25, 1996 (the
First Amendment, together with the August Stockholders Agreement, the
"Stockholders Agreement"), pursuant to which the parties thereto and certain of
their affiliates have formed the BDTV Entities, which are the holders of record
of 9,809,111 shares of HSNi Class B Common Stock (representing approximately
95.9% of the outstanding HSNi Class B Common Stock as of December 31, 1996). Mr.
Diller is the President of each of the BDTV Entities and beneficially owns all
of the voting stock of each of them. Liberty currently holds all of the
non-voting common stock of each of the BDTV Entities,
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representing in excess of 99% of the equity of each of them, which shares are
convertible under certain circumstances into shares of voting common stock.
In addition to the 9,809,111 shares of HSNi Class B Common Stock held by
the BDTV Entities, Mr. Diller, Liberty and Arrow Holdings, LLC ("Arrow"), an
entity controlled by Mr. Diller, collectively hold 548,618 shares of HSNi Common
Stock. These securities are subject to the terms of the Stockholders Agreement
and represent, in the aggregate, approximately 1.5% of the outstanding HSNi
Common Stock, 22% of the outstanding combined common equity of the Company and
71% of the outstanding total voting power of the Company. Assuming that all
securities to be issued to Liberty pursuant to the Contingent Rights and the
Exchange Agreement were issued (and that no other HSNi Securities were otherwise
issued), the HSNi Securities subject to the Stockholders Agreement would
represent in the aggregate approximately 19% of the then-outstanding HSNi Common
Stock, 37% of the then-outstanding equity of the Company and 78% of the
then-outstanding total voting power of the Company.
Pursuant to the Stockholders Agreement, Mr. Diller exercises voting control
over HSNi Securities held by the BDTV Entities , Mr. Diller, Liberty, Arrow and
certain of their affiliates, subject to certain restrictions on Mr. Diller's
authority to vote such shares with respect to certain matters relating to the
Company and otherwise as provided in the Stockholders Agreement. Pursuant to the
Stockholders Agreement, Mr. Diller and Liberty have agreed that HSNi Securities
owned by any of Mr. Diller, Liberty and certain of their affiliates will not be
voted in favor of the taking of any action in connection with certain
extraordinary matters except with the consent of each of Mr. Diller and Liberty.
In the Stockholders Agreement, Mr. Diller has agreed that, at any time
following the consummation of the Home Shopping Merger that Liberty or Liberty
HSN is no longer a subsidiary of TCI (and provided that a change in law, rule or
regulation or circumstance that would permit Liberty to exercise full ownership
and control over HSNi Securities (including its pro rata portion of HSNi
Securities held by the BDTV Entities represented by Liberty's equity interest in
the BDTV Entities ), notwithstanding the Company's ownership of broadcast
licenses granted by the FCC (a "Change in Law") has not theretofore otherwise
occurred), Liberty may request that Mr. Diller and the Company use all
reasonable efforts to take such actions as may be reasonably necessary in order
that Liberty would be permitted to exercise full ownership rights with respect
to HSNi Securities owned by it (including its pro rata interest in any HSNi
Securities held by any BDTV Entity) (a "Restructuring Transaction"). In the
event that a Restructuring Transaction has not occurred within 365 days
following Liberty's notice of its request (or earlier, in certain circumstances)
and a Change in Law has not otherwise occurred, Liberty would be permitted,
subject to certain limitations and rights of first refusal in favor of Mr.
Diller, to sell its HSNi Securities without regard to the restrictions on
transfer contained in the Stockholders Agreement, and such transferee would
purchase HSNi Securities free and clear of any rights (other than certain
registration rights) or obligations under the Stockholders Agreement.
In view of the number of shares of HSNi Securities as to which the BDTV
Entities or Mr. Diller will have voting power in connection with the matters
described herein, it is anticipated that such persons will be able to control
the outcome of any vote of stockholders as to any proposal or matter on which
the holders of HSNi Common Stock and HSNi Class B Common Stock vote together as
a single class and the outcome of any matter as to which only the holders of
HSNi Class B Common Stock vote as a separate class. In addition, Mr. Diller,
subject to the terms of the Stockholders Agreement, will effectively be able to
control the outcome of all matters submitted to a vote or for the consent of
stockholders (other than with respect to the election by the holders of HSNi
Common Stock of 25% of the members of the Board of Directors (rounded up to the
nearest whole number) and certain matters as to which a separate class vote of
the holders of HSNi Common Stock is required under Delaware law).
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Employment Contracts
The Company has entered into an employment agreement with Douglas Binzak,
dated as of February 13, 1996, and an employment agreement with Adam Ware, dated
May 28, 1996, pursuant to which each such individual serves as an officer of the
Company (Messrs. Binzak and Ware are referred to herein individually as
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an "Executive" and collectively as the "Executives"). The employment agreement
with Mr. Binzak provides for an annual base salary of $415,000, with possible
increases at the sole discretion of the Board, and a term of five years. The
employment agreement with Mr. Ware provides for an annual base salary of
$275,000 for the first year, $300,000 for the second year and $325,000 for the
third year of his employment with the Company, and a term of three years. Each
such employment agreement provides that, if the Company terminates the
Executive's employment other than for Cause (as defined in such employment
agreement), or if the Executive terminates his employment for Good Reason (as
defined in such employment agreement), the Company will pay to the Executive a
lump sum payment equal to his accrued and unpaid annual salary, bonuses and
vacation pay, as well as any previously deferred compensation, and will continue
to make periodic payments of his annual base salary for the remainder of his
contract term (less any amounts such Executive receives from another employer
during that time). If the Company terminates the Executive's employment for
Cause, if the Executive terminates his employment with the Company other than
for Good Reason, or if the Executive's employment is terminated by reason of
death or disability, the Company will pay to the Executive or his estate his
accrued and unpaid annual salary, bonuses and vacation pay, as well as any
previously deferred compensation. Neither of these employment agreements provide
for any obligations of any of the parties upon a change in control of the
Company.
Equity and Bonus Compensation Agreement
As of August 24, 1995, the Company and Mr. Diller entered into the Equity
and Bonus Compensation Agreement pursuant to which the Company agreed to sell
Mr. Diller 220,994 shares of HSNi Common Stock at $22.625 per share in cash (the
"Initial Diller Shares") and an additional 220,994 shares of HSNi Common Stock
for the same per share price (the "Additional Diller Shares") payable by means
of a cash payment of $2,210 and an interest-free, secured, non-recourse
promissory note in the amount of $4,997,779. The promissory note is secured by
the Additional Diller Shares and by that portion of the Initial Diller Shares
having a fair market value on the purchase date of 20% of the principal amount
of the promissory note. In addition, the Company granted options to Mr. Diller
options to purchase 1,895,847 shares of HSNi Common Stock at $22.625 per share
(the "Diller Options"). The Diller Options were granted in tandem with
conditional SARs which become exercisable only in the event of a change in
control of the Company and in lieu of exercise of the Diller Options. The
Initial and Additional Diller Shares and the Diller Options were issued to Mr.
Diller below the market price of $24.75 on August 24, 1995.
Mr. Diller also was granted a bonus arrangement, contractually independent
from the promissory note, pursuant to which he received a bonus payment of
approximately $2.5 million on August 24, 1996 and will receive a further such
payment on August 24, 1997, except that the bonuses will be paid immediately
upon a Change in Control of the Company or upon termination of Mr. Diller's
employment either by the Company other than for Cause or by Mr. Diller prior to
a Change of Control with good reason (as such terms are defined in the Equity
and Bonus Compensation Agreement). Mr. Diller also received $966,263 for payment
of taxes by Mr. Diller due to the compensation expense which resulted from the
difference in the per share fair market value of HSNi Common Stock and the per
share purchase price of the Initial Diller Shares and Additional Diller Shares.
Termination Agreement
The Company has entered into a termination agreement with Michael Drayer,
the previous Executive Vice President, General Counsel and Secretary. This
agreement provides that, upon termination other than for cause, Mr. Drayer will
receive a lump sum cash payment equal to his effective annual salary as of the
date of his termination, plus any earned and unused vacation and sick time, plus
the amount of any contribution otherwise payable for his benefit under the
401(k) Plan for the year in which termination occurs, plus any additional
severance as provided for under the Company's standard executive severance
policy in effect as of the date of the agreement. The termination agreement also
provides that Mr. Drayer will receive paid medical benefits for a one-year
period following termination or until alternative medical coverage is obtained.
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77
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Diller, the Chairman of the Board and Chief Executive Officer of the
Company and Chairman of the Board of Home Shopping, is the sole holder of the
voting stock of the BDTV Entities. Liberty was the controlling shareholder of
Home Shopping prior to the Home Shopping Merger and, by virtue of its interest
in the BDTV Entities, may, subject to certain regulatory and other requirements,
acquire a controlling interest in the Company.
During April 1996, Home Shopping sold a majority of its interest in HSN
Direct Joint Venture, its infomercial operation, for $5.9 million to certain
entities controlled by Flextech P.L.C., a company controlled by TCI. Home
Shopping received $4.9 million in cash at closing and is due an additional $1.0
million payable in four equal annual installments commencing on February 1,
1997. Home Shopping will retain a 15% interest in the venture and a related
corporation.
During 1996, Home Shopping, along with JPC formed Shop Channel, a
television shopping venture based in Tokyo. TCI International, a subsidiary of
TCI owns a 50% interest in JPC, the 70% shareholder in the venture. Home
Shopping owns a 30% interest in the venture. During 1996, Home Shopping
contributed $1,770,000 to the venture. In addition, Home Shopping sold inventory
and provided services in the amount of $730,000 to Shop Channel during 1996.
During 1994, a subsidiary of Home Shopping and Black Entertainment
Television, Inc. ("BET") entered into an agreement to promote a direct response
marketing program and a shop-at-home show concept known as "BET Shop." That
agreement terminated in December 1996. TCI beneficially owns an 18.3% interest
in BET.
In the normal course of business, Home Shopping enters into agreements with
the operators of cable television systems and operators of broadcast television
stations for the carriage of Home Shopping programming. Home Shopping has
entered into agreements with a number of cable operators that are affiliates of
TCI. These long-term contracts provide for a minimum subscriber guarantee and
incentive payments based on the number of subscribers. Payments by Home Shopping
to TCI and certain of its affiliates under these contracts for cable commissions
and advertising were approximately $11.4 million for the calendar year ended
December 31, 1996. In addition, Home Shopping received $212,000 in payments
during calendar year 1996 for rental of a satellite transponder from a wholly
owned subsidiary of TCI.
On January 27, 1997, the Board of Directors approved a three year
consulting arrangement with Leo J. Hindery, Jr., a former member of the Board of
Directors of Home Shopping and the former managing General Partner and Chief
Executive Officer of InterMedia Partners. Mr. Hindery subsequently was appointed
President of TCI. TCI has an approximate 49% limited partnership interest in
InterMedia Partners. Home Shopping had entered into cable carriage agreements
with InterMedia on terms and conditions that are consistent with Home Shopping's
other cable agreements. Home Shopping paid Intermedia $.5 million in calendar
year 1996 for cable commissions and advertising. Under the consulting
arrangement, Mr. Hindery received fully vested options to purchase 40,500 shares
of HSNi Common stock at an exercise price of $32.78. These options expire in one
third increments in 1998, 1999 and 2000. Mr. Hindery also received an additional
2,250 options at an exercise price of $25.86. Of those options, 750 were vested
at the date of grant and 750 vest during May 1997 and 1998 and will expire five
years from the date of vesting.
As of December 31, 1996, SKTV owned a 33.447% membership interest in
Blackstar. Mr. Oxendine serves as Chairman and CEO of Blackstar. Home Shopping
currently maintains broadcast affiliation agreements with Stations WBSF-TV,
Melbourne, Florida; KBSP-TV, Salem, Oregon; and WBSX-TV, Ann Arbor, Michigan for
which Blackstar is the parent company. Home Shopping recorded affiliation
payments of $4.7 million relating to the Blackstar stations in calendar year
1996. See "HSNi Broadcasting -- SKTV, Inc. -- The Stations."
As part of the employment agreement entered into by Home Shopping and Mr.
Held, Home Shopping agreed to lend Mr. Held $1.0 million for the purpose of
purchasing a residence in the Tampa/St. Petersburg area. During September 1996,
Mr. Held received that loan from Home Shopping. The loan bears interest at 5%
per annum, and the principal and any accrued and unpaid interest becomes due and
payable in the event
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78
that Mr. Held is terminated for any reason, on the first anniversary of such
termination, or immediately in the event that the residence is sold or
transferred. In the event that, after completion of improvements to be
undertaken within a reasonable period of time following the purchase of the
residence, the fair market value of the residence is less than $800,000, Mr.
Held is required to repay a portion of the principal amount of the loan equal to
the difference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
(1) -- Consolidated Financial Statements
Report of Independent Auditors -- Ernst & Young LLP.
Independent Auditors' Report -- Deloitte & Touche LLP.
Consolidated Statements of Operations for the Year Ended
December 31, 1996, the Four Months Ended December 31, 1995,
and the Years Ended August 31, 1995 and 1994.
Consolidated Balance Sheets as of December 31, 1996, and
1995.
Consolidated Statements of Stockholders' Equity for the Year
Ended December 31, 1996, the Four Months Ended December 31,
1995, and the Years Ended August 31, 1995 and 1994.
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1996, the Four Months Ended December 31, 1995,
and the Years Ended August 31, 1995 and 1994.
Notes to Consolidated Financial Statements.
(2) -- Consolidated Financial Statement Schedules
SCHEDULE PAGE
NUMBER NUMBER
- -------- ------
II -- Valuation and Qualifying Accounts........................... 83
The reports of the Company's independent auditors with respect to the
above-listed financial statement schedule appear on pages 31 and 32.
All other financial statements and schedules not listed have been omitted
since the required information is included in the Consolidated Financial
Statements or the notes thereto, or is not applicable or required.
(3) -- Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 -- Agreement and Plan of Merger by and among Silver King
Communications, Inc., Thames Acquisition Corporation and
Savoy Pictures Entertainment, Inc., as amended and restated
August 13, 1996 filed as Appendix A to the Company's
Definitive Proxy Statement, November 20, 1996, is
incorporated herein by reference.
2.2 -- Agreement and Plan of Exchange and Merger by and among
Silver King Communications, Inc., House Acquisition Corp.,
Home Shopping Network, Inc. and Liberty HSN, Inc. as of
August 25, 1996 filed as Appendix B to the Company's
Definitive Proxy Statement, November 20, 1996, is hereby
incorporated by reference.
3.1 -- Amended and Restated Certificate of Incorporation of the
Company filed as Exhibit 3.1 to the Company's Form 10-K,
August 31, 1994, is incorporated herein by reference.
3.2 -- Amendment to Certificate of Incorporation of the Company.
3.3 -- Amended and Restated By-Laws of the Company filed as Exhibit
3.2 to the Company's Form 10-K, August 31, 1994, is
incorporated herein by reference.
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79
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.1 -- Indenture dated as of March 1, 1996, for Home Shopping and
United States Trust Company of New York, as Trustee relating
to Home Shopping's 5.87% Convertible Subordinated Debentures
due March 1, 2006, filed as Exhibit 4.0 to Home Shopping's
Form S-3 Registration No. 333-10511, August 20, 1996, is
incorporated herein by reference.
4.2 -- First Supplemental Indenture dated as of December 20, 1996,
among Home Shopping Network, Inc., Silver King
Communications, Inc. and United States Trust Company of New
York, as Trustee filed as Exhibit 4.1 to Home Shopping Form
8-K/A, December 19, 1996, is incorporated herein by
reference.
4.3 -- Indenture, dated as of June 25, 1993, for the Savoy 7%
Convertible Subordinated Debentures due July 1, 2003, filed
as Exhibit 4(d) to Savoy's S-1 Registration Statement No.
33-63192, is incorporated herein by reference.
4.4 -- First Supplemental Indenture, dated as of October 24, 1993,
for the Savoy 7% Convertible Debentures due July 1, 2003,
filed as Exhibit 4(e) to Savoy's S-1 Registration Statement
No. 33-70160, is incorporated herein by reference.
4.5 -- Second Supplemental Indenture, dated as of December 17,
1993, for the Savoy 7% Convertible Debentures due July 1,
2003, filed as Exhibit bearing the same title in Savoy's
Form 10-K December 31, 1993, is incorporated herein by
reference.
4.6 -- Third Supplemental Indenture dated as of December 19, 1996
for the Savoy 7% Convertible Debentures due July 1, 2003,
filed as Exhibit 4.1 to Savoy's Form 8-K, December 19, 1996,
is incorporated herein by reference.
4.7 -- Form of Common Stock Certificate.
10.1 -- Form of Affiliation Agreements between the Company and Home
Shopping filed as Exhibit 10.2 to the Company's Registration
Statement on Form 10, as amended, is incorporated herein by
reference.
*10.2 -- Form of 1992 Stock Option and Restricted Stock Plan between
the Company and Home Shopping filed as Exhibit 10.6 to the
Company's Registration Statement on Form 8, as amended, is
incorporated herein by reference.
10.3 -- 1986 Stock Option Plan for Employees dated August 1, 1986,
filed as Exhibit 10.33 to the Company's Form S-1
Registration Statement No. 33-8560, dated October 15, 1986,
is incorporated herein by reference.
*10.4 -- Form of Retirement Savings and Employment Stock Ownership
Plan filed as Exhibit 10.8 to the Company's Registration
Statement on Form 8, as amended, is incorporated herein by
reference.
10.5 -- Form of Indemnification Agreement filed as Exhibit 10.10 to
the Company's Registration Statement on Form 10, as amended,
is incorporated herein by reference.
10.6 -- Credit Agreement by and between the Company and Chemical
Bank and other participating lenders filed as Exhibit 10.15
to the Company's Form 10-K, August 31, 1994, is incorporated
herein by reference.
10.7 -- Consulting Agreement, as amended, by and between the Company
and Vincent F. Barresi filed as Exhibit 10.16 to the
Company's Form 10-K, August 31, 1994, is incorporated herein
by reference.
10.8 -- Form of Loan Agreement, as amended, by and between Silver
King Capital Corporation, Inc. and Roberts Broadcasting
Company of Denver filed as Exhibit 10.17 to the Company's
Form 10-K, August 31, 1994, is incorporated herein by
reference.
10.9 -- Form of Shareholder Agreement by and among Silver King
Capital Corporation, Inc., Roberts Broadcasting Company of
Denver, Michael V. Roberts and Steven C. Roberts filed as
Exhibit 10.18 to the Company's Form 10-K, August 31, 1994,
is incorporated herein by reference.
10.10 -- Amendment to Credit Agreement by and between the Company and
Chemical Bank and other participating lenders dated August
31, 1994 filed as Exhibit 10.20 to the Company's Form 10-K,
August 31, 1995, is incorporated herein by reference.
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80
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.11 -- Termination Agreements by and between the Company and James
M. Lawless, Steven H. Grant, Michael Drayer and Joan E.
Halfaker dated October 30, 1995, filed as Exhibit 10.22 to
the Company's Form 10-K, August 31, 1995, are incorporated
herein by reference.
10.12 -- Limited Liability Company Agreement (the "LLC"), Funding
Agreement and Form of First Amendment to LLC, Registration
Rights Agreement and associated documents between the
Company, the Class A Shareholders of Blackstar
Communications, Inc. and Fox Television Stations, Inc. dated
June 27, 1995 and August 18, 1995, filed as Exhibit 10.23 to
the Company's Form 10-K, August 31, 1995, are incorporated
herein by reference.
*10.13 -- 1986 Stock Option Plan for Employees dated August 1, 1986,
filed as Exhibit 10.33 to Home Shopping's Form S-1
Registration Statement No. 33-8560, dated October 15, 1986,
is incorporated herein by reference.
*10.14 -- First, Second, Third and Fourth Amendments to the 1986 Stock
Option Plan for Employees filed as Exhibit 10.31 to Home
Shopping's Form 10-K, December 31, 1993, are incorporated
herein by reference.
*10.15 -- Form of 1990 Executive Stock Award Program dated October 17,
1990, as amended, filed as Exhibit 10.23 to Home Shopping's
Form 10-K, August 31,1991, is incorporated herein by
reference.
10.16 -- Stock Purchase Agreement by and between Home Shopping and
The National Registry Inc. dated April 28, 1992, filed as
Exhibit 10.29 to Home Shopping's Form 10-K, August 31, 1992,
is incorporated herein by reference.
10.17 -- Form of Amendment dated as of July 28, 1994, to Affiliation
Agreements between Home Shopping Club, Inc. and SKC filed as
Exhibit 10.19 to Home Shopping's Form 10-K, December 31,
1994, is incorporated herein by reference.
10.18 -- Credit Card Program Agreement, dated as of February 16,
1994, by and among Home Shopping, participating subsidiaries
and General Electric Capital Corporation filed as Exhibit
10.30 to Home Shopping's Form 10-K, December 31, 1993, is
incorporated herein by reference.
*10.19 -- Amended and Restated Home Shopping Network, Inc. Retirement
Savings Plan and Trust Agreements, which incorporates by
reference the Home Shopping Network, Inc. Retirement Savings
and Employee Stock Ownership Plan and Trust filed as Exhibit
10.33 to Home Shopping's Form 10-K, December 31, 1993, is
incorporated herein by reference.
*10.20 -- Home Shopping Network, Inc. Employee Stock Purchase Plan and
Part-Time Employee Stock Purchase Plan filed as Exhibit
10.30 to Home Shopping's Form 10-K, December 31, 1994, is
incorporated herein by reference.
*10.21 -- Home Shopping Network, Inc. Employee Equity Participation
Plan and Agreement and Declaration of Trust filed as Exhibit
10.31 to Home Shopping's Form 10-K, December 31, 1994, is
incorporated herein by reference.
*10.22 -- Home Shopping Network, Inc. 1996 Stock Option Plan for
Employees filed as Exhibit A to the Home Shopping Definitive
Proxy Statement, March 28, 1996, is incorporated herein by
reference.
*10.23 -- Home Shopping Network, Inc. 1996 Stock Option Plan for
Outside Directors filed as Exhibit B to the Home Shopping
Definitive Proxy Statement, March 28, 1996, is incorporated
herein by reference.
10.24 -- Binding Term Sheet for the Stockholders Agreement dated
August 24, 1995, between Barry Diller and Liberty Media
Corporation and the First Amendment thereto dated August 25,
1996, filed as Appendix I to the Company's Definitive Proxy
Statement, November 20, 1996, are incorporated herein by
reference.
10.25 -- Exchange Agreement dated as of December 20, 1996 by and
between the Registrant and Liberty HSN, Inc.
*10.26 -- Equity and Bonus Compensation Agreement dated as of August
24, 1995 between Barry Diller and the Company.
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81
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.27 -- Silver King Communications, Inc. 1995 Stock Incentive Plan
filed as Appendix G to the Company's Definitive Proxy
Statement, November 20, 1996, is incorporated herein by
reference.
*10.28 -- Silver King Communications, Inc. Directors' Stock Option
Plan filed as Appendix H to the Company's Definitive Proxy
Statement, November 20, 1996, is incorporated herein by
reference.
*10.29 -- Employment Agreement between the Company and Douglas Binzak
dated as of February 13, 1996.
*10.30 -- Employment Agreement between the Company and Adam Ware dated
as of May 28, 1996.
*10.31 -- Employment Agreement between Home Shopping and James G.
Held, dated as of November 24, 1995 filed as Exhibit 10.35
to Home Shopping's Form 10-K, December 31, 1995, is
incorporated herein by reference.
*10.32 -- Employment Agreement between Home Shopping and Mary Ellen
Pollin, dated as of December 15, 1995 filed as Exhibit 10.36
to Home Shopping's Form 10-K, December 31, 1995, is
incorporated herein by reference.
*10.33 -- Employment Agreement between Home Shopping and James G.
Gallagher, dated as of October 14, 1996.
10.34 -- Letter Agreement dated April 3, 1996 between Home Shopping
Network, Inc. and Gen. H. Norman Schwartzkopf.
10.35 -- Shareholders Agreement dated December 12, 1996 Relating to
Jupiter Shop Channel Co;. Ltd among Jupiter Programming Co;.
Ltd, Home Shopping Network, Inc. and Jupiter Shop Channel
Co;. Ltd.
10.36 -- Services and Trademark License Agreement dated as of
December 12, 1996 between Home Shopping Network, Inc. and
Jupiter Shop Channel Co;. Ltd.
10.37 -- Purchase and Sale Agreement among Home Shopping Network
GmbH, Home Shopping Network, Inc., Quelle Schickedanz AG &
Co, Mr. Thomas Kirch and Dr. Georg Kofler dated January 16,
1997.
10.38 -- Joint Venture Agreement Between Quelle Schickedanz AG & Co.,
Home Shopping Network, Inc., Home Shopping Network GmbH, Mr.
Thomas Kirch and Dr. Georg Kofler, filed as Exhibit 5.3 to
the Purchase and Sale Agreement.
10.39 -- License Agreement dated as of January 1, 1996 between Ronald
A. Katz Technology Licensing, L.P. and Home Shopping
Network, Inc.
10.40 -- Shareholder Agreement dated as of April 26, 1996 by and
among Channel 66 of Vallejo, California, Inc., Whitehead
Media of California, Inc. and Silver King Capital
Corporation, Inc.
10.41 -- Loan Agreement dated as of April 26, 1996 by and between SKC
Investments, Inc. and Channel 66 of Vallejo, California,
Inc.
10.42 -- Credit Agreement dated as of August 2, 1996, among Home
Shopping Network, Inc., as borrower, Home Shopping Club,
Inc. and HSN Realty, Inc., as guarantors, the Chase
Manhattan Bank, as Administrative Agent, LTCB Trust Company,
as Collateral Agent, the Bank of New York Company, Inc., as
Documentation Agent and the Lenders filed as Exhibit 10.38
to Home Shopping's Form 10-Q, June 30, 1996, is incorporated
herein by reference.
10.43 -- Pledge Agreement dated as of August 2, 1996, made by Home
Shopping Network, Inc., a Delaware corporation, in favor of
LTCB Trust Company, a New York trust company, as collateral
agent for the Secured Parties under the Credit Agreement
dated as of August 2, 1996, among the Pledgor, as borrower,
Home Shopping Club, Inc. and HSN Realty, Inc., as
guarantors, The Chase Manhattan Bank, as Administrative
Agent, LTCB Trust Company, as Collateral Agent, The Bank of
New York Company, Inc., as Documentation Agent, and the
Lenders, filed as Exhibit 10.39 to Home Shopping's Form
10-Q, June 30, 1996, is incorporated herein by reference.
10.44 -- Joint Venture and License Agreement, dated as of June 12,
1992, between Savoy Pictures Entertainment, Inc. and Home
Box Office, Inc. (confidential treatment for portions
thereof granted), filed as an exhibit bearing the same title
in Savoy's S-1 Registration Statement No. 33-57596, is
incorporated herein by reference.
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82
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.45 -- License Agreement, dated as of June 12, 1992, among Savoy
Pictures Entertainment, Inc. and Home Box Office, Inc.
(confidential treatment of portions thereof granted), filed
as an exhibit bearing the same title in Savoy's S-1
Registration Statement No. 33-57596, is incorporated herein
by reference.
10.46 -- Warrant Agreement, dated as of March 2, 1992, between Savoy
Pictures Entertainment, Inc. and Allen & Company
Incorporated, filed as an exhibit bearing the same title in
Savoy's S-1 Registration Statement No. 33-57596, is
incorporated herein by reference.
10.47 -- Warrant Agreement, dated as of March 2, 1992, between Savoy
Pictures Entertainment, Inc. and GKH Partners, L.P., filed
as an exhibit bearing the same title in Savoy's S-1
Registration Statement No. 33-57596, is incorporated herein
by reference.
10.48 -- Warrant Agreement, dated as of April 20, 1994 between Savoy
and GKH Partners, L.P., filed as an exhibit bearing the same
title in Savoy's Form 10-Q, March 31, 1994, is incorporated
herein by reference.
10.49 -- Subscription and Shareholders Agreement, dated as of October
28, 1994 by and among SF Multistations, Inc., FTS
Investments, Inc. and Savoy Stations, Inc., filed as an
exhibit bearing the same title in Savoy's Form 8-K, August
22, 1995, is incorporated herein by reference.
10.50 -- Subscription and Shareholders Agreement, dated as of October
28, 1994 by and among SF Broadcasting of Wisconsin, Inc.,
FTS Investments, Inc. and Savoy Stations, Inc., as amended,
filed as an exhibit bearing the same title in Savoy's Form
8-K, August 22, 1995, is incorporated herein by reference.
10.51 -- Credit Agreement, dated as of June 1, 1995, among Savoy, the
financial institutions from time to time part thereto and
Chemical Bank as Administrative Agent and Collateral Agent,
filed as Exhibit 10 to Savoy's Form 10-Q, June 30, 1995, is
incorporated herein by reference.
10.52 -- First Amendment and Waiver, dated as of March 11, 1996, to
the Credit Agreement, dated as of June 1, 1995, among Savoy,
the financial institutions party thereto and Chemical Bank,
as Administrative Agent and Collateral Agent, filed as
Exhibit 10(r) to Savoy's Form 10-K, December 31, 1995, is
incorporated herein by reference.
10.53 -- Credit Agreement, dated as of June 30, 1995, among SF
Broadcasting of Green Bay, Inc., SF Broadcasting of Mobile,
Inc., SF Broadcasting of New Orleans, Inc., and SF
Broadcasting of Honolulu, Inc., the financial institutions
from time to time party thereto, Chemical Bank, as
administrative agent and as collateral agent, First Union
National Bank of North Carolina, as managing agent, and The
Bank of New York, Natwest Bank, N.A. and Banque Paribas as
co-agents, filed as an exhibit bearing the same title in
Savoy's Form 8-K, August 22, 1995, is incorporated herein by
reference.
10.54 -- Station Affiliation Agreement, dated as of April 28, 1995,
between Fox Broadcasting Company and SF Broadcasting of
Green Bay, Inc., filed as Exhibit 10(u) to Savoy's Form
10-K, December 31, 1995, is incorporated herein by
reference.
10.55 -- Station Affiliation Agreement, dated as of August 22, 1995,
between Fox Broadcasting Company and SF Broadcasting of
Honolulu, Inc., filed as Exhibit 10(v) to Savoy's Form 10-K,
December 31, 1995, is incorporated herein by reference.
10.56 -- Station Affiliation Agreement, dated as of August 22, 1995,
between Fox Broadcasting Company and SF Broadcasting of
Mobile, Inc., filed as Exhibit 10(w) to Savoy's Form 10-K,
December 31, 1995, is incorporated herein by reference.
10.57 -- Form of Amendment and Waiver to the Credit Agreement, dated
as of June 30, 1995, among SF Broadcasting of New Orleans,
Inc., SF Broadcasting of Mobile, Inc., SF Broadcasting of
Honolulu, Inc. and SF Broadcasting of Green Bay, Inc., as
borrowers, the financial institutions from time to time
party thereto, and The Chase Manhattan Bank (formerly known
as Chemical Bank)(as administrative agent and collateral
agent), filed as Exhibit 10.1 to Savoy's Form 10-Q,
September 30, 1996, is incorporated herein by reference.
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83
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.58 -- Amended and Restated Stock Option Plan (including form of
Stock Options Agreement) filed as Exhibit 4.1 to Savoy's
Registration Statement No. 33-70740, is incorporated herein
by reference.
*10.59 -- Savoy 1995 Stock Option Plan filed as Exhibit 10(t) to
Savoy's Form 10-K, December 31, 1995, is incorporated herein
by reference.
21 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Deloitte & Touche LLP
27 -- Financial Data Schedule (for SEC use only).
- ---------------
* Reflects management contracts and compensatory plans.
(b) Reports on Form 8-K.
On December 23, 1996, the Company filed a report on Form 8-K setting forth
the approval by the shareholders of the Company, Savoy and the Home Shopping of
the Savoy Merger and the Home Shopping Merger which were consummated on December
19, 1996 and December 20, 1996, respectively. The Company also reported the name
change for the Company approved by the shareholders on December 19, 1996.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 10, 1997
HSN, INC.
By: /s/ BARRY DILLER
------------------------------------
Barry Diller
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 10, 1997.
SIGNATURE TITLE
--------- -----
/s/ BARRY DILLER Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer
Barry Diller
/s/ JAMES G. HELD Director and Vice Chairman
- -----------------------------------------------------
James G. Held
/s/ JED B. TROSPER Vice President, Chief Financial Officer and
- ----------------------------------------------------- Treasurer (Principal Financial Officer)
Jed B. Trosper
/s/ BRIAN J. FELDMAN Controller (Chief Accounting Officer)
- -----------------------------------------------------
Brian J. Feldman
/s/ VICTOR KAUFMAN Director and Office of the Chairman
- -----------------------------------------------------
Victor Kaufman
/s/ JOHN E. OXENDINE Director
- -----------------------------------------------------
John E. Oxendine
Director
- -----------------------------------------------------
Bruce M. Ramer
Director
- -----------------------------------------------------
H. Norman Schwarzkopf
/s/ ELI J. SEGAL Director
- -----------------------------------------------------
Eli J. Segal
/s/ SIDNEY J. SHEINBERG Director
- -----------------------------------------------------
Sidney J. Sheinberg
/s/ RICHARD E. SNYDER Director
- -----------------------------------------------------
Richard E. Snyder
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SCHEDULE II
HSN, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED CHARGED BALANCE
AT TO TO AT
BEGINNING COSTS AND OTHER DEDUCTIONS -- END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DESCRIBE(1) OF PERIOD
- ----------- --------- --------- ----------- ------------- ---------
(IN THOUSANDS)
Allowance for doubtful accounts:
Year ended December 31, 1996..... $ 68 $ 23 $2,751 $(163) $2,679
==== ===== ====== ===== ======
Four months ended December 31,
1995.......................... $ 82 $ 51 $ -- $ (65) $ 68
==== ===== ====== ===== ======
Year ended August 31, 1995....... $ 73 $ 179 $ -- $(170) $ 82
==== ===== ====== ===== ======
Year ended August 31, 1994....... $236 $(163) $ -- $ -- $ 73
==== ===== ====== ===== ======
- ---------------
(1) Write-off fully reserved accounts receivable.
(2) Amount relates to mergers with Savoy Pictures Entertainment, Inc. and
subsidiaries and Home Shopping Network, Inc. and subsidiaries.
83