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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
- -----------------------------------------------------------------------------------------------------
(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.
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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
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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 af