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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 0-20570
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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.)
1 HSN DRIVE, ST. PETERSBURG, FLORIDA
(Address of principal executive offices)
33729
(Zip Code)
(813) 572-8585
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Total number of shares of outstanding stock as of August 8, 1997:
Common stock................ 43,526,372
Class B common stock........ 12,227,647
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------
(In thousands, except per share data)
NET REVENUES
Home Shopping......................................... $250,950 $ -- $512,369 $ --
Broadcasting.......................................... 13,476 10,924 25,770 22,036
Other................................................. 1,259 -- 7,098 --
-------- ------- -------- -------
Total net revenues............................ 265,685 10,924 545,237 22,036
-------- ------- -------- -------
Operating costs and expenses:
Cost of sales......................................... 149,503 65 308,118 193
Selling and marketing................................. 33,217 -- 68,510 --
General and administrative............................ 23,890 2,876 46,719 5,744
Engineering and programming........................... 17,813 2,999 36,260 6,030
Depreciation and amortization......................... 20,532 3,404 41,491 6,862
-------- ------- -------- -------
Total operating costs and expenses............ 244,955 9,344 501,098 18,829
-------- ------- -------- -------
Operating profit.............................. 20,730 1,580 44,139 3,207
-------- ------- -------- -------
Other income (expense):
Interest income....................................... 1,172 591 2,513 1,210
Interest expense...................................... (6,468) (2,221) (13,490) (4,633)
Miscellaneous......................................... (3,031) 194 (6,260) 331
-------- ------- -------- -------
(8,327) (1,436) (17,237) (3,092)
-------- ------- -------- -------
Earnings before income taxes and minority interest...... 12,403 144 26,902 115
Income tax expense...................................... (9,546) (596) (20,675) (1,173)
Minority interest....................................... (385) -- 15 --
-------- ------- -------- -------
NET EARNINGS (LOSS)..................................... $ 2,472 $ (452) $ 6,242 $(1,058)
======== ======= ======== =======
Net earnings (loss) per common share.................... $ .05 $ (.05) $ .12 $ (.11)
======== ======= ======== =======
Weighted average shares outstanding..................... 51,949 9,484 51,302 9,471
======== ======= ======== =======
The accompanying notes are an integral part of these statements.
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HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------------------------
June 30,
--------------------- December 31,
ASSETS 1997 1996 1996
- --------------------------------------------------------------------------------------------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents................................... $ 30,795 $ 19,837 $ 42,606
Accounts and notes receivable, net.......................... 53,618 3,447 56,832
Inventories, net............................................ 127,167 -- 100,527
Deferred income taxes....................................... 32,366 1,614 40,842
Other current assets, net................................... 5,421 632 7,791
---------- -------- ----------
Total current assets...................................... 249,367 25,530 248,598
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 100,493 73,674 95,472
Buildings and leasehold improvements........................ 63,467 18,313 63,739
Furniture and other equipment............................... 19,684 1,918 20,414
---------- -------- ----------
183,644 93,905 179,625
Less accumulated depreciation and amortization.... 82,235 71,698 73,959
---------- -------- ----------
101,409 22,207 105,666
Land........................................................ 14,956 2,158 14,944
Projects in progress........................................ 11,719 158 1,365
---------- -------- ----------
128,084 24,523 121,975
OTHER ASSETS
Intangible assets, net...................................... 1,518,539 55,305 1,545,947
Cable distribution fees, net ($38,643; $0; and $40,892,
respectively, to related parties)......................... 108,767 -- 113,594
Long-term investments ($16,804; $0; and $5,581,
respectively, in related parties)......................... 33,742 5,140 30,121
Notes receivable, net of current portion ($843; $0; and
$1,639, respectively, from related parties)............... 12,229 17,321 17,741
Deferred income taxes....................................... 4,580 -- 1,926
Deferred charges and other, net............................. 28,425 3,627 36,330
---------- -------- ----------
1,706,282 81,393 1,745,659
---------- -------- ----------
$2,083,733 $131,446 $2,116,232
========== ======== ==========
The accompanying notes are an integral part of these statements.
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HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------------------------
June 30,
---------------------- December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 1996
- --------------------------------------------------------------------------------------------------
(In thousands)
CURRENT LIABILITIES
Current maturities of long-term obligations................ $ 9,563 $ 12,819 $ 42,906
Accounts payable........................................... 86,797 -- 95,421
Programming fees ($8,637; $0; and $9,051, respectively, to
related parties)......................................... 32,507 -- 40,717
Other accrued liabilities.................................. 76,834 6,361 93,998
---------- --------- ----------
Total current liabilities........................ 205,701 19,180 273,042
LONG-TERM OBLIGATIONS(net of current maturities)........... 291,564 89,480 271,430
DEFERRED INCOME TAXES...................................... -- 14,595 --
OTHER LONG-TERM LIABILITIES, NET........................... 50,029 -- 56,875
MINORITY INTEREST.......................................... 365,541 -- 356,136
COMMITMENTS AND CONTINGENCIES.............................. -- -- --
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value; authorized 15,000,000;
50,000; and 15,000,000 shares, respectively, no shares
issued and outstanding................................... -- -- --
Common stock -- $.01 par value; authorized 150,000,000;
30,000,000; and 150,000,000 shares, respectively; issued
and outstanding 36,249,001; 7,075,332; and 35,992,903
shares, respectively..................................... 363 71 360
Class B -- convertible common stock -- $.01 par value;
authorized, 30,000,000; 2,415,945; and 30,000,000 shares,
respectively; issued and outstanding, 10,225,056;
2,415,945; and 10,225,056 shares, respectively........... 102 24 102
Additional paid-in capital................................. 1,290,064 127,401 1,285,277
Accumulated deficit........................................ (110,420) (111,181) (116,662)
Unearned compensation...................................... (4,213) (3,126) (5,330)
Note receivable from key executive for common stock
issuance................................................. (4,998) (4,998) (4,998)
---------- --------- ----------
1,170,898 8,191 1,158,749
---------- --------- ----------
$2,083,733 $ 131,446 $2,116,232
========== ========= ==========
The accompanying notes are an integral part of these statements.
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HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
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Note
Receivable
from Key
Executive
Class B for
Convertible Additional Unearned Common
Common Common Paid-In Accumulated Compen- Stock
Stock Stock Capital Deficit sation Issuance Total
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
BALANCE AT JANUARY 1, 1996... $ 70 $ 24 $ 126,119 $(110,123) $(3,621) $(4,998) $ 7,471
Issuance of common stock upon
exercise of stock
options.................... 1 -- 695 -- -- -- 696
Income tax benefit related to
stock options exercised.... -- -- 587 -- -- -- 587
Amortization of unearned
compensation related to
grant of stock options to
key executive.............. -- -- -- -- 495 -- 495
Net loss for the six months
ended June 30, 1996........ -- -- -- (1,058) -- -- (1,058)
---- ---- ---------- --------- ------- ------- ----------
BALANCE AT JUNE 30, 1996..... $ 71 $ 24 $ 127,401 $(111,181) $(3,126) $(4,998) $ 8,191
==== ==== ========== ========= ======= ======= ==========
BALANCE AT JANUARY 1, 1997... $360 $102 $1,285,277 $(116,662) $(5,330) $(4,998) $1,158,749
Issuance of common stock upon
exercise of stock
options.................... 3 -- 3,389 -- -- -- 3,392
Income tax benefit related to
stock options exercised.... -- -- 1,398 -- -- -- 1,398
Amortization of unearned
compensation related to
grant of stock options to
key executive.............. -- -- -- -- 495 -- 495
Expense related to executive
stock award program and
stock options.............. -- -- -- -- 112 -- 112
Expense related to employee
equity participation
plan....................... -- -- -- -- 510 -- 510
Net earnings for the six
months ended June 30,
1997....................... -- -- -- 6,242 -- -- 6,242
---- ---- ---------- --------- ------- ------- ----------
BALANCE AT JUNE 30, 1997..... $363 $102 $1,290,064 $(110,420) $(4,213) $(4,998) $1,170,898
==== ==== ========== ========= ======= ======= ==========
The accompanying notes are an integral part of these statements.
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HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Six Months Ended
June 30,
-------------------
1997 1996
- ---------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net earnings (loss)......................................... $ 6,242 $(1,058)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 31,710 6,862
Amortization of cable distribution fees................ 9,734 --
Deferred income taxes.................................. 12,454 966
Non-cash operating expense............................. (9,389) --
Equity in losses of unconsolidated affiliates.......... 6,317 --
Inventory carrying adjustment.......................... (4,522) --
Non-cash interest expense.............................. 2,109 420
Amortization of unearned compensation.................. 1,117 495
Provision for losses on accounts and notes
receivable............................................ 528 73
(Gain) loss on retirement or sale of fixed assets...... 119 (196)
Minority interest...................................... (15) --
Changes in current assets and liabilities:
Decrease in accounts receivable...................... 3,464 1,047
Increase in inventories.............................. (22,118) --
Decrease in other current assets..................... 2,370 567
Decrease in accounts payable......................... (8,624) --
Increase (decrease) in accrued liabilities........... (17,193) 750
Increase in cable distribution fees.................... (4,907) --
Decrease in deferred charges and other................. 7,225 25
--------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 16,621 9,951
--------- -------
Cash flows from investing activities:
Capital expenditures...................................... (16,803) (311)
Capital contributions received............................ 9,000 --
Increase in long-term investments and notes receivable.... (9,938) (7,701)
Proceeds from long-term notes receivable.................. 5,154 2,502
Payment of merger costs................................... (6,349) (622)
Proceeds from sale of fixed assets........................ 274 2,320
--------- -------
NET CASH USED IN INVESTING ACTIVITIES............. (18,662) (3,812)
--------- -------
Cash flows from financing activities:
Principal payments on long-term obligations............... (179,162) (6,138)
Borrowings from unsecured credit facility................. 166,000 --
Proceeds from issuance of common stock.................... 3,392 696
--------- -------
NET CASH USED IN FINANCING ACTIVITIES............. (9,770) (5,442)
--------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (11,811) 697
Cash and cash equivalents at beginning of period............ 42,606 19,140
--------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 30,795 $19,837
========= =======
The accompanying notes are an integral part of these statements.
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HSN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements of HSN, Inc. and
Subsidiaries (the "Company") are unaudited and should be read in conjunction
with the audited Consolidated Financial Statements and Notes thereto for the
year ended December 31, 1996.
In the opinion of the Company, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist of normal recurring items. Interim results
are not necessarily indicative of results for a full year. The interim Condensed
Consolidated Financial Statements and Notes thereto are presented as permitted
by the Securities and Exchange Commission and do not contain certain information
included in the Company's audited Consolidated Financial Statements and Notes
thereto.
The Condensed 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 dates
of acquisition (collectively, the "Mergers") on December 19, 1996 and December
20, 1996, respectively.
NOTE B -- RECLASSIFICATION
Certain amounts in the Condensed Consolidated Financial Statements for June
30, 1996, have been reclassified to conform to the 1997 presentation, including
costs associated with the operations of the broadcast stations which were
classified as general and administrative expense in 1996 and were reclassified
to engineering and programming expense in 1997.
NOTE C -- CREDIT FACILITIES AND CONVERTIBLE SUBORDINATED DEBENTURES
On May 1, 1997, the Company entered into a new $275.0 million Revolving
Credit Facility (the "New Facility") with a $35.0 million sub-limit for letters
of credit. The New Facility, which replaced both the Home Shopping Revolving
Credit Facility and the Company's Secured Senior Term Loans, expires on May 1,
2002. The New Facility is unsecured and the interest rate on borrowings is tied
to the London Interbank Offered Rate plus an applicable margin. At June 30,
1997, there were $86.0 million in outstanding borrowings under the New Facility,
and $170.8 million was available for borrowing after taking into account
outstanding letters of credit.
In March 1996, SF Broadcasting, a subsidiary of Savoy, entered into an
Amendment and Waiver to the SF Broadcast Facility which provided a waiver of
certain covenants for the quarters ended September 30, 1996 and December 31,
1996 and amended certain covenants for the first two quarters of 1997. The
Company was in compliance with the amended terms and all other covenants at June
30, 1997.
In connection with the Mergers, the Company became a joint and several
obligor with respect to the Home Shopping Network 5 7/8% Convertible
Subordinated Debentures and to the Savoy Pictures Entertainment, Inc. 7%
Convertible Subordinated Debentures. The liability of Home Shopping and Savoy is
subordinated under these debentures.
NOTE D -- INCOME TAXES
The Company had taxable income for the quarter and six months ended June
30, 1997, which was used to offset net operating losses.
On June 23, 1997, the Internal Revenue Service ("IRS") completed the
examination of Home Shopping's federal income tax returns for fiscal years 1992,
1993 and 1994. The IRS proposed adjustments resulting in a potential tax
deficiency of $9.3 million, primarily related to the disallowance of deductions
pertaining to a legal settlement and stock options exercised under the 1986
Cable Operators Stock Option
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HSN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Plan. On July 23, 1997, the Company made a payment of $1.3 million of tax and
$.3 million of interest, for all undisputed issues. These undisputed issues were
related to inter-period allocations of tax deductions, which will reverse in
subsequent periods. The Company maintains it has meritorious positions with
respect to the disputed adjustments and intends to file a protest with the IRS.
To minimize interest expense in the event of an unfavorable outcome, the Company
deposited $2.8 million with the IRS during July 1997.
In addition, the IRS reversed its position on an issue with respect to a
former related party, which will result in a refund of $5.0 million in taxes and
interest related to fiscal years 1986 to 1989.
The effects of the settlement of undisputed items, the potential impact of
the undisputed items, and the $5.0 million refund were provided for in previous
years and, accordingly, had no impact on the income tax provision for the
quarter and six months ended June 30, 1997.
The Company believes it has made adequate provision for all outstanding tax
issues.
NOTE E -- EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per common share is based on net earnings (loss)
divided by the weighted average number of common shares outstanding, giving
effect to stock options and convertible debt when applicable. Fully diluted
earnings (loss) per common share is considered to be the same as primary
earnings (loss) per common share since the effect of certain potentially
dilutive securities is anti-dilutive in all periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is effective for financial
statements issued for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. Management has not yet determined whether SFAS 128 will have
any material impact on the Company's per share amounts.
NOTE F -- CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and short-term investments. Short-term investments consist primarily of
auction preferred shares, money market funds and certificates of deposit with
original maturities of less than 91 days.
Supplemental disclosures of cash flow information:
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
------------------
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
CASH PAID FOR:
Interest.................................................. $10,043 $ 3,620
Income taxes.............................................. 7,853 264
CASH RECEIVED FOR:
Income tax refund......................................... 125 --
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HSN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE G -- 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.
- ---------------------------------------------------------------------------------
Six Months Ended
June 30,
-------------------
Summarized Operating Information 1997 1996
- ---------------------------------------------------------------------------------
(In thousands)
Net revenue................................................. $32,147 $ 66,961
Operating expenses.......................................... 33,272 120,796
Operating loss.............................................. (1,125) (53,835)
Net loss.................................................... (4,823) (65,259)
- -----------------------------------------------------------------------------------------------
June 30,
-------------------- December 31,
Summarized Balance Sheet Information 1997 1996 1996
- -----------------------------------------------------------------------------------------------
(In thousands)
Current assets........................................... $ 36,406 $124,488 $ 61,901
Non-current assets....................................... 289,449 323,665 302,195
Current liabilities...................................... 28,364 48,557 60,716
Non-current liabilities.................................. 115,990 177,914 124,198
Minority interest........................................ 119,856 71,320 112,717
NOTE H -- SUBSEQUENT EVENT
On July 17, 1997, the Company announced the consummation of the
acquisition, in a stock-for-stock transaction, of approximately 49.6% of the
outstanding Ticketmaster Group, Inc. ("Ticketmaster") equity securities from
Paul G. Allen by issuing 7,238,507 of the Company's common stock at an assumed
price of $28.44. The Company issued 2,002,591 shares of the Company's Class B
common stock in accordance with Liberty Media Inc.'s contingent right to receive
such shares. Subsequently, the Company acquired, through open market purchases,
an additional 132,000 shares of Ticketmaster stock for $2.2 million.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
HSN, Inc. (the "Company" or "HSNi") is a holding company, the subsidiaries
of which conduct the operations of the Company's various business activities. On
December 19 and 20, 1996, the Company merged with Savoy Pictures Entertainment,
Inc. ("Savoy") and Home Shopping Network, Inc. ("Home Shopping"), respectively,
(collectively, the "Mergers"). 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. The electronic
retailing business operates two services, The Home Shopping Network ("HSN") and
America's Store, through an indirect wholly-owned subsidiary, Home Shopping
Club, Inc. ("HSC"). The television broadcasting business owns and operates
twelve full-power UHF television stations (the "SKTV Stations") and four
full-power VHF television stations ("SF Broadcasting"). SF Broadcasting is 50%
owned by each of Savoy and Fox Broadcasting Company ("Fox").
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS. THESE ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE IDENTIFIED BELOW, WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS. THE WORDS
"BELIEVE," "EXPECT," "ANTICIPATE," "OPTIMISTIC," "INTEND," "AIM," "WILL," AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY UNDERTAKES NO OBLIGATION
TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
AS WELL AS AFFECT THE COMPANY'S ABILITY TO ACHIEVE ITS GOALS REFERRED TO HEREIN,
INCLUDE BUT ARE NOT LIMITED TO, THE FOLLOWING: BUSINESS AND GENERAL ECONOMIC
CONDITIONS, COMPETITIVE FACTORS, CHANNEL SPACE AVAILABILITY, THE COST AND
AVAILABILITY OF APPROPRIATE MERCHANDISE AND DELIVERY SERVICES, CONSOLIDATION
WITHIN THE CABLE INDUSTRY, COST OF CARRIAGE OF THE COMPANY'S PROGRAMMING AND
CHANGES IN THE REGULATORY ENVIRONMENT.
A. CONSOLIDATED RESULTS OF OPERATIONS
The following discussions present the material changes in the consolidated
results of operations of the Company for the quarter and six months ended June
30, 1997, compared with the same periods in 1996. The operations for the quarter
and six months ended June 30, 1996, consist solely of the operations of the SKTV
Stations. To provide a more meaningful comparison of operating results, a
separate pro forma section is included as supplemental information. This section
compares revenues and cost of revenues for the quarter and six months ended June
30, 1996 and 1997, as if the Mergers occurred on January 1, 1996. Reference
should also be made to the Condensed Consolidated Financial Statements included
herein.
QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 VS. QUARTER AND SIX MONTHS ENDED JUNE
30, 1996
NET REVENUES
For the quarter and six months ended June 30, 1997, total revenues of the
Company increased $254.8 million and $523.2 million, respectively, compared to
the same periods in 1996. These significant increases were primarily the result
of the Company's acquisition of Home Shopping in late December of 1996.
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OPERATING COSTS AND EXPENSES
For the quarter and six months ended June 30, 1997, total operating costs
and expenses increased $235.6 million and $482.3 million, respectively, compared
to the same periods in 1996. As shown in the table below, operating costs and
expenses for Home Shopping for the quarter and six months ended June 30, 1997,
excluding purchase accounting effects and including the elimination of
intercompany engineering and programming expenses, accounted for $221.7 million,
or 94.1%, and $449.0 million, or 93.1%, respectively of the increase in, the
Company's total operating costs and expenses.
- ----------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
-------------------- --------------------
$ $
Increase Home Increase Home
from Shopping from Shopping
1996 Expenses 1996 Expenses
- ----------------------------------------------------------------------------------------------------
(In millions, except %)
Operating costs and expenses:
Cost of sales....................................... $149.4 $147.3 $308.0 $299.7
Selling and marketing............................... 33.2 32.6 68.5 67.3
General and administrative.......................... 21.0 20.0 41.0 37.8
Engineering and programming......................... 14.9 12.9 30.2 26.3
Depreciation and amortization....................... 17.1 8.9 34.6 17.9
------ ------ ------ ------
Total operating costs and expenses.......... $235.6 $221.7 $482.3 $449.0
====== ====== ====== ======
OTHER INCOME (EXPENSE), NET
For the quarter and six months ended June 30, 1997, interest income
increased $.6 million and $1.3 million, respectively, due to the higher combined
cash balance of the merged entity.
For the quarter and six months ended June 30, 1997, interest expense
increased $4.2 million and $8.9 million, respectively, compared to the same
periods in 1996, due to the higher combined debt balance of the merged entity
and non-cash interest expense related to preliminary purchase accounting
adjustments arising from the Mergers.
For the quarter and six months ended June 30, 1997, the Company had net
miscellaneous expense primarily due to equity losses totaling $3.0 million and
$6.3 million, respectively, relating to the Company's investments in Home Order
Television GmbH & Co. and Jupiter Shop Channel Co;. Ltd. For the quarter and six
months ended June 30, 1996, the Company had net miscellaneous income of $.2
million and $.3 million, respectively.
INCOME TAXES
The Company's effective tax rate for the quarter and six months ended June
30, 1997 of 77%, calculated on earnings before income taxes and minority
interest, is higher than the statutory rate due primarily to the amortization of
non-deductible goodwill and other acquired intangibles, the non-recognition of
net operating losses from less than 80% owned subsidiaries, certain
non-deductible executive compensation and state income taxes. The Company's
effective tax rate is expected to exceed the statutory rate for the remainder of
1997.
MINORITY INTEREST
Minority interest represents Liberty HSN, Inc.'s ("Liberty HSN") 19.9%
interest in Home Shopping's results of operations and Fox's 50% interest in SF
Broadcasting's results of operations for the quarter and six months ended June
30, 1997.
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NET EARNINGS
As a result of the above factors, net earnings for the quarter and six
months ended June 30, 1997 increased $2.9 million and $7.3 million,
respectively, compared to the same periods in 1996.
ACTUAL NET REVENUES AND COST OF REVENUES FOR THE QUARTER AND SIX MONTHS ENDED
JUNE 30, 1997 VS. PRO FORMA NET REVENUES AND COST OF REVENUES FOR THE QUARTER
AND SIX MONTHS ENDED JUNE 30, 1996
The Mergers resulted in significant changes in the Company's results of
operations. Accordingly, the following discussion of revenues and cost of
revenues is presented for illustrative purposes only. The pro forma information
is not necessarily indicative of the revenues and cost of revenues which would
have actually been reported had the Mergers occurred as of January 1, 1996, nor
is it necessarily indicative of future revenues and cost of revenues.
The pro forma revenues and cost of revenues are presented to show the
acquisitions of Home Shopping and Savoy as if the transactions occurred on
January 1, 1996. Revenues and cost of revenues specifically related to Savoy's
motion picture operations are excluded from the 1996 pro forma amounts as these
activities ceased prior to the Mergers. Any future revenue or expense from
Savoy's motion picture operations will relate to the winding up of these
operations and are expected to be insignificant.
For the quarter and six months ended June 30, 1997, total revenues for the
Company increased $8.9 million, or 3.5%, to $265.7 million from $256.8 million
and $21.4 million, or 4.1%, to $545.2 million from $523.8 million, respectively,
compared to the same pro forma periods in 1996. The increase in revenues for the
quarter and six months ended June 30, 1997, resulted primarily from an increase
in net sales for Home Shopping of $7.0 million, or 2.9%, to $251.0 million from
$244.0 million and $12.8 million, or 2.6%, to $512.4 million from $499.6
million, respectively, compared to the same pro forma periods in 1996.
Net sales of HSC increased $21.3 million, or 10.0%, and $39.2 million, or
9.0%, for the quarter and six months ended June 30, 1997, respectively. HSC's
sales reflect increases of 13.5% and 12.8% in the number of packages shipped and
decreases of 7.7% and 9.2% in the average price per unit sold for the quarter
and six months ended June 30, 1997, respectively, compared to the same pro forma
periods in 1996. The increase in HSC net sales was primarily offset by planned
decreases in net sales of wholly-owned subsidiaries, HSN Mail Order, Inc. ("Mail
Order"), and the retail outlet stores of $10.9 million and $2.7 million,
respectively, for the quarter ended June 30, 1997 and $17.1 million and $5.2
million, respectively, for the six months then ended, compared to the same pro
forma periods in 1996.
The Company believes that the improved sales in the quarter and six months
ended June 30, 1997, compared to the same pro forma periods in 1996, were
primarily the result of ongoing changes made to the Company's merchandising and
programming strategies. Management is continuing to take additional steps to
improve sales by changing the mix of products sold, introducing new products,
reducing the average price per unit, creating exciting programming and taking
measures to increase the customer base. Additional personnel have been hired to
assist in implementing these new merchandising and programming strategies.
Management has reformatted the former Spree! service to America's Store which
was launched in January 1997. This change was designed to focus America's Store
on some of the most popular product areas of electronic retailing. This service
has undergone various format changes to date, and the Company is continuing to
develop this service. There can be no assurance that the additional changes to
the Company's merchandising and programming strategies will achieve management's
intended results.
For the quarter and six months ended June 30, 1997, HSC's merchandise
return percentage decreased to 23.4% from 24.7% and to 22.6% from 24.8%,
respectively, compared to the same periods in 1996. Management believes that the
lower return rate is primarily attributable to the decrease in the average price
per unit and the mix of products sold, which may vary in subsequent quarters.
Promotional price discounts decreased to 1.8% from 3.3% of HSC sales for the
quarter ended June 30, 1997 and to 1.7% from 3.5% for the six months ended June
30, 1997, compared to the same pro forma periods in 1996, as fewer discounts
were offered.
11
13
At June 30, 1997 and 1996, HSC had approximately 4.7 million active
customers. An active customer is one who has completed a transaction within the
last eighteen months or placed an order within the last seven months. In
addition, 60.6% of active customers have made more than one purchase in the last
eighteen months, compared to 59.3% at June 30, 1996.
The following table highlights the changes in the estimated unduplicated
television household reach of HSN, the Company's primary service, for the twelve
months ended June 30, 1997:
Cable* Broadcast Satellite Total
(In thousands of households)
Households -- June 30, 1996......................... 45,891 19,802 3,788 69,481
Net additions/(deletions)........................... 3,642 (1,087) -- 2,555
Shift in classification............................. 326 (326) -- --
Change in Nielsen household counts.................. -- (926) -- (926)
------ ------ ----- ------
Households -- June 30, 1997......................... 49,859 17,463 3,788 71,110
====== ====== ===== ======
- ---------------
* Households capable of receiving both broadcast and cable transmissions are
included under cable and therefore are excluded from broadcast to present
unduplicated household reach. Cable households included 3.4 million and 1.4
million direct broadcast satellite ("dbs") households at June 30, 1997 and
1996, respectively, and therefore, these households are excluded from
satellite.
According to industry sources, as of June 30, 1997, there were 96.9 million
homes in the United States with a television set, 64.6 million basic cable
television subscribers and 3.8 million homes with satellite dish receivers,
excluding dbs.
In addition, as of June 30, 1997, approximately 10.4 million cable
television households could be reached by America's Store, of which 3.8 million
are on a part-time basis. Of the total cable television households receiving
America's Store, 9.0 million also receive HSN.
During the remainder of 1997, cable system contracts covering 2.7 million
cable subscribers are subject to termination or renewal. This represents 5.4% of
the total number of unduplicated cable households receiving HSN. The Company is
pursuing both renewals and additional cable television system contracts, but
channel availability, competition, consolidation within the cable industry and
cost of carriage are some of the factors affecting the negotiations for cable
television system contracts. Although management cannot determine the percentage
of expiring contracts that will be renewed or the number of households that will
be added through new contracts, management believes that a majority of these
contracts will be successfully renegotiated.
The Company, as part of its disengagement strategy, has selected its Miami,
Florida station as the initial station which will cease broadcasting HSN and
commence broadcasting its new local programming format in the Spring of 1998.
The Miami station currently carries HSN. Management is continuing to evaluate
the effects that the disaffiliation will have on Home Shopping's ability to
reach some of its existing customers in the Miami area, including a reduction in
revenues or additional expenses to secure carriage of HSN. The Company believes
that the process of disaffiliation can be successfully managed to minimize
adverse consequences. Upon disaffiliation, the Company plans on carrying
predominantly its own local programming. There can be no assurance that the
Company will be successful in its strategy to develop and broadcast its new
programming format.
For the quarter and six months ended June 30, 1997, broadcasting revenues
for SF Broadcasting increased $.9 million, or 7.5%, to $13.2 million from $12.3
million and $2.0 million, or 8.8%, to $25.0 million from $23.0 million,
respectively, compared to the same pro forma periods in 1996. For the quarter
and six months ended June 30, 1997, other revenues of $1.3 million and $7.1
million, respectively, relate to the motion picture business of Savoy which was
discontinued in 1996. The Company does not expect significant additional
revenues from this business.
For the quarter and six months ended June 30, 1997, cost of sales decreased
$3.2 million, or 2.1%, to $149.5 million from $152.7 million and $10.5 million,
or 3.3%, to $308.1 million from $318.6 million,
12
14
respectively, compared to the same pro forma periods in 1996. The decrease in
cost of sales for the quarter and six months ended June 30, 1997, primarily
relates to a decrease in cost of sales for Home Shopping of $4.4 million, or
2.9%, to $147.3 million from $151.7 million and $16.7 million, or 5.3%, to
$299.7 million from $316.5 million, respectively, compared to the same pro forma
periods in 1996. As a percentage of net sales, Home Shopping's cost of sales
decreased to 58.7% from 62.2% and to 58.5% from 63.3%, respectively, compared to
the same pro forma periods in 1996.
Cost of sales of HSC increased $7.3 million and $2.6 million, respectively,
for the quarter and six months ended June 30, 1997. This was offset by decreases
of $10.9 million and $17.1 million, respectively, in cost of sales of Mail Order
and the retail outlet stores as a result of the planned reduction in revenues
for these subsidiaries. As a percentage of HSC's net sales, cost of sales
decreased to 59.9% from 62.5% and to 59.6% from 64.3%, respectively, compared to
the pro forma quarter and six months ended June 30, 1996.
Management believes the decreases in Home Shopping's and HSC's cost of
sales when compared to pro forma 1996, are primarily the result of changes in
merchandising and programming strategies, as discussed above.
For the quarter and six months ended June 30, 1997, compared to the same
pro forma periods in 1996, the decrease in cost of sales of Home Shopping was
offset in part by $1.3 million and $7.1 million increases in cost of sales
related to Savoy's discontinued motion picture business. Significant additional
cost of sales are not expected from the motion picture business.
EBITDA AND ATTRIBUTABLE EBITDA
Earnings before interest, income taxes, depreciation and amortization
("EBITDA") is defined as operating profit plus depreciation and amortization.
EBITDA is presented here as a management tool and as a valuation methodology for
companies in the media, entertainment and communications industries. EBITDA does
not purport to represent cash provided by operating activities. EBITDA should
not be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. The
Company owns 50% of the common equity and 100% of the voting stock of SF
Broadcasting. As a result of voting and management control, SF Broadcasting's
operating results are consolidated with the Company's operating results.
Attributable EBITDA reflects 50% of SF Broadcasting's EBITDA based on the
Company's common equity ownership. For the quarter and six months ended June 30,
1997, EBITDA for the Company was $41.3 million and $85.6 million, respectively,
compared to $29.6 million and $54.8 million, respectively, for the same periods
in 1996 on a pro forma basis. Attributable EBITDA for the Company for the
quarter and six months ended June 30, 1997, was $39.6 million and $83.2 million,
respectively, compared to $28.1 million and $52.6 million, respectively, for the
same periods in 1996 on a pro forma basis.
B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $18.6 million for the twelve
months ended June 30, 1997. In addition the Company acquired cash of $52.7
million in connection with the Mergers, and received capital contributions of
$9.0 million. These cash proceeds were used to reduce outstanding borrowings by
$46.8 million, pay for capital expenditures of $17.6 million and pay cable
distribution fees of $16.0 million. Net earnings adjusted for non-cash items
totaled $62.1 million for the twelve months ended June 30, 1997. The increase in
working capital of $37.3 million for the twelve months ended June 30, 1997, is
primarily the result of the Mergers and the purchase accounting adjustments
recorded in connection therewith.
Net cash provided by operating activities of $16.6 million was the primary
source of cash for the six months ended June 30, 1997. These cash proceeds,
capital contributions received and available cash were used principally to
reduce outstanding borrowings by $13.2 million, pay for capital expenditures and
pay cable distribution fees of $10.0 million. Net earnings adjusted for non-cash
items totaled $56.4 million for the six months ended June 30, 1997. The increase
in working capital of $68.1 million for the six months ended June 30, 1997, is
primarily the result of the reduction in the current maturities of long-term
obligations.
13
15
Accounts and notes receivable at June 30, 1997 included "FlexPay" accounts
receivable totaling $21.8 million compared to $20.3 million at December 31,
1996. It is expected that the Company's financing of "FlexPay" accounts
receivable will not have a significant impact on its liquidity position.
The inventory balance is net of a carrying adjustment of $23.4 million at
June 30, 1997, compared to $27.9 million at December 31, 1996, which is
primarily related to product which is inconsistent with Home Shopping's sales
and merchandising philosophy.
Capital expenditures were $16.8 million for the six months ended June 30,
1997. Home Shopping has initiated a plan to improve and expand the capabilities
of its computer systems and accordingly, capital expenditures are expected to
range from $10.0 million to $15.0 million for the remainder of 1997. When
completed, Home Shopping expects to achieve savings in its call center and
fulfillment operations.
As discussed in Net Revenues and Cost of Revenues for the Quarter and Six
Months -- Actual vs. Pro forma, in connection with the new broadcasting of
independent programming in the Miami, Florida area, the Company anticipates
capital expenditures for the buildout of the Miami Station. These capital
expenditures, combined with capital expenditures for SF Broadcasting, are
anticipated to range from $11.0 million to $15.0 million for the remainder of
1997.
On May 1, 1997, the Company entered into a new $275.0 million Revolving
Credit Facility (the "New Facility") with a $35.0 million sub-limit for letters
of credit. The New Facility, which replaced both the Home Shopping Revolving
Credit Facility and the Company's Secured Senior Term Loans, expires on May 1,
2002. The New Facility is unsecured, and the interest rate on borrowings is tied
to the London Interbank Offered Rate plus an applicable margin. At August 1,
1997, there were $76.0 million of outstanding borrowings under the New Facility
and $172.4 million was available for borrowing after taking into account
outstanding letters of credit.
In April 1997, the Company paid $5.0 million of subscriptions payable
related to its investment in HOT and expects to pay the remaining $5.0 million
in September 1997. The Company also has certain ongoing funding obligations.
During the remainder of 1997, management expects to pay cable distribution
fees of $24.0 million to $29.0 million, relating to new and current contracts
with cable system operators to carry Home Shopping's programming.
During the six months ended June 30, 1997, the Company received cash
proceeds of $3.4 million from the exercise of .3 million options to purchase the
Company's common stock. At July 31, 1997, 11.1 million options to purchase the
Company's common stock were outstanding and exercisable at prices ranging
between $2.00 and $148.21. The exercise of such options would result in a cash
inflow to the Company of $60.0 million.
During July and August 1997, the Company purchased a total of 132,000
shares of Ticketmaster Group, Inc. ("Ticketmaster") stock in the open market for
$2.2 million. The Company may purchase additional shares in the future to
maintain its ownership percentage.
In management's opinion, available cash, internally generated funds and the
New Facility will provide sufficient capital resources to meet the Company's
foreseeable needs.
During the quarter and six months ended June 30, 1997, the Company did not
pay any cash dividends, and none are permitted under the Company's existing
credit facility.
SEASONALITY
The Company believes seasonality does impact its retailing segment but not
to the same extent it impacts the retail industry in general.
14
16
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information required by Item 2 is set forth under Item 4 which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 17, 1997, the Company acquired from Paul G. Allen 12,283,014 shares
of Ticketmaster common stock, no par value, in exchange for 7,238,507 shares of
the Company's common stock, par value $.01 per share ("Common Stock"), subject
to the issuance of up to an additional 3,257,328 shares of Common Stock to be
reserved for contingent issuance in July 1998 if the average market price of the
Common Stock over a specified period prior to such date is below $29 per share,
pursuant to the terms of a Stock Exchange Agreement between Mr. Allen and the
Company dated May 20, 1997 (the "Stock Exchange Agreement"). The issuance of the
Common Stock by the Company to Mr. Allen was a private placement under Section
4(2) of the Securities Act of 1933, as amended, which did not involve any public
offering of the Common Stock. The full text of the Stock Exchange Agreement was
filed as Exhibit 1 to the Company's Current Report on Form 8-K dated July 17,
1997, and is incorporated herein by reference.
Pursuant to the rules of the National Association of Securities Dealers,
Inc. (the "NASD"), the issuance of shares of Common Stock under the Stock
Exchange Agreement required stockholder approval given that the number of shares
of Common Stock that could be issued under the Stock Exchange Agreement could be
equal to or in excess of 20% of the number of shares of Common Stock outstanding
before such issuance. Pursuant to the rules of the NASD and in accordance with
the Delaware General Corporation law (the "DGCL") and HSNi's Amended and
Restated Certificate of Incorporation, as amended, the affirmative vote or
written consent of the holders of a majority of the voting power of outstanding
Common Stock entitled to vote (with holders of Common Stock and HSNi Class B
Common Stock voting together as a single class) is necessary to approve the
issuance of the Common Stock under the Stock Exchange Agreement. On May 20,
1997, in accordance with Section 228(d) of the DGCL and Article II, Section 8 of
HSNi's Amended and Restated By-laws, stockholders representing approximately 71%
of the total outstanding voting power (or 9,809,111 shares of Class B Common
Stock) of HSNi acted without a meeting of stockholders by written consent to
approve the stock issuance and the transactions contemplated in connection
therewith. The Company did not solicit consents of stockholders generally and no
other consents were obtained in connection with the approval of the exchange
transaction. For further information, see the Information Statement dated June
27, 1997 of the Company on Schedule 14C sent to stockholders and filed with the
Securities and Exchange Commission on that date.
ITEM 6(A) -- EXHIBITS
Exhibit 27 -- Financial Data Schedule (for SEC use only).
ITEM 6(B) -- REPORTS ON FORM 8-K
A report on Form 8-K filed July 29, 1997, reported completion on July 17,
1997, of the acquisition by the Company of Paul G. Allen's interest in
Ticketmaster in a stock-for-stock transaction.
15
17
SIGNATURES
Pursuant to the requirement 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.
/s/ HSN, INC.
------------------------------------------------
(Registrant)
Dated August 14, 1997 /s/ BARRY DILLER
------------------------------------------------
- ---------------------------------------------- Barry Diller
Chairman of the Board and Chief Executive
Officer
Dated August 14, 1997 /s/ JED B. TROSPER
------------------------------------------------
- ---------------------------------------------- Jed B. Trosper
Vice President, Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Dated August 14, 1997 /s/ BRIAN J. FELDMAN
------------------------------------------------
- ---------------------------------------------- Brian J. Feldman
Controller
(Chief Accounting Officer)
16
5
1,000
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
30,795
0
53,618
0
127,167
249,367
210,319
82,235
2,083,733
205,701
291,564
0
0
363
1,170,535
2,083,733
545,237
545,237
308,118
308,118
192,980
0
13,490
26,902
20,675
6,242
0
0
0
6,242
.12
.12
