<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION FILE NO. 333-06007
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
NATIONAL MEDIA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
13-2658741
(I.R.S. EMPLOYER IDENTIFICATION NO.)
1700 WALNUT STREET
PHILADELPHIA, PENNSYLVANIA 19103
(215) 772-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CONSTANTINOS I. COSTALAS, VICE CHAIRMAN OF THE BOARD
NATIONAL MEDIA CORPORATION
1700 WALNUT STREET
PHILADELPHIA, PENNSYLVANIA 19103
(215) 772-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH COPIES TO:
STEPHEN T. BURDUMY, ESQUIRE GERALD S. TANENBAUM, ESQUIRE
KLEHR, HARRISON, HARVEY, BRANZBURG & CAHILL GORDON & REINDEL
ELLERS 80 PINE STREET
1401 WALNUT STREET NEW YORK, NEW YORK 10005
PHILADELPHIA, PENNSYLVANIA 19102 (212) 701-3000
(215) 568-6060
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursu-
ant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities registered on this Form are to be offered on a de-
layed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or inter-
est reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering pursu-
ant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier ef-
fective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act regis-
tration statement number of the earlier effective registration statement for
the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH A DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRA-
TION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION
8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
Subject to Completion
2,000,000 Shares Dated July 3, 1996
LOGO
LOGO
Common Stock
(par value $.01 per share)
All of the Common Stock, par value $.01 per share (the "Common Stock"), offered
hereby is being offered by National Media Corporation, a Delaware corporation
(the "Company").
The Common Stock is listed on the New York Stock Exchange ("NYSE") and the
Philadelphia Stock Exchange ("PHLX") under the symbol "NM." On July 1, 1996,
the reported last sale price of the Common Stock on the NYSE was $18.00 per
share. See "Price Range of Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE CONSID-
ERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ------------------------------------------------------------------------------------------
Total(3) $ $ $
- ------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain lia-
bilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $450,963.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to an additional
300,000 shares of Common Stock on the same terms as set forth above, solely to
cover over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock being offered by this Prospectus are offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Cahill
Gordon & Reindel, counsel for the Underwriters. It is expected that delivery of
the shares of Common Stock offered hereby will be made against payment therefor
on or about , 1996 at the offices of J.P. Morgan Securities Inc., 60
Wall Street, New York, New York.
J.P. MORGAN & CO. TUCKER ANTHONY
INCORPORATED
, 1996
<PAGE>
[MAP OF WORLD HIGHLIGHTING BROADCAST REGIONS]
[PRODUCT SHOT]
[PRODUCT SHOT]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE PHILADELPHIA
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTIN-
UED AT ANY TIME.
2
<PAGE>
No person is authorized to give any information or make any representations not
contained or incorporated by reference in this Prospectus and, if given or
made, such information or representations must not be relied upon as having
been authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Stock in any jurisdiction to any person to whom it is unlawful to make such of-
fer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Incorporation of Certain Documents by
Reference............................. 3
Prospectus Summary..................... 4
Risk Factors........................... 8
The Company............................ 14
Use of Proceeds........................ 16
Price Range of Common Stock and
Dividend Policy....................... 16
Capitalization......................... 17
Pro Forma Consolidated Financial
Statements............................ 18
Selected Financial and Operating Data.. 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Management's Discussion and Analysis of
Financial
Condition and Results of Operations.... 24
Business................................ 29
Management.............................. 39
Description of Capital Stock............ 42
Underwriting............................ 46
Legal Matters........................... 47
Experts................................. 47
Available Information................... 48
Index to Financial Statements........... F-1
</TABLE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and Exchange
Commission (the "Commission") (File No. 1-6715) are incorporated by reference
in this Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996;
(b) the Company's Current Report on Form 8-K dated May 17, 1996;
(c) the Company's Current Report on Form 8-K/A dated June 14, 1996; and
(d) the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, dated August 28, 1990,
including all amendments and reports filed for the purpose of updating
such description.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Securities Exchange Act, of 1934, as amended
(the "Exchange Act"), after the date of this Prospectus and prior to the termi-
nation of the offering (the "Offering") shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of the filing of such
reports and documents. Any statement contained in a document incorporated by
reference herein shall be modified or superseded for all purposes to the extent
that a statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such ear-
lier statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of such person,
a copy of any or all documents specifically incorporated by reference in this
Prospectus, other than exhibits to such documents unless such exhibits are spe-
cifically incorporated by reference therein. Requests should be directed to
Marshall A. Fleisher, Esq., Vice President (Legal) and Corporate Secretary, Na-
tional Media Corporation, 1700 Walnut Street, Philadelphia, Pennsylvania 19103
(telephone 215-772-5000).
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements (in-
cluding the notes thereto) appearing elsewhere in this Prospectus. Except as
set forth in the financial statements or otherwise noted herein, the informa-
tion contained in the Prospectus relating to the Company's capital stock, in-
cluding the Summary Historical and Pro Forma Financial and Other Data, the Pro
Forma Consolidated Financial Statements and the Selected Financial and Operat-
ing Data, assumes that there will be no exercise of the Underwriters' over-al-
lotment option. References herein to a particular fiscal year of the Company
shall mean the year ended March 31 of the stated year (i.e., the fiscal year
ended March 31, 1996 shall be referred to as "fiscal 1996"). Unless the context
otherwise requires, references in this Prospectus to the "Company" or "National
Media" shall refer to National Media Corporation, a Delaware corporation, and
its subsidiaries.
THE COMPANY
National Media is a global leader in the use of direct response transactional
television programming, known as infomercials, to market consumer products. Na-
tional Media is the world's largest publicly held infomercial company, making
infomercial programming available to more than 260 million households in 60
countries worldwide.
The Company manages all phases of marketing the majority of its products in
both the United States and international markets, including product selection
and development, manufacturing by third parties, production and broadcast of
infomercials, order processing and fulfillment and customer service. The
Company's products are primarily concentrated in the automotive, beauty and
personal care, crafts, health and fitness, kitchen and household, music, out-
door and self-improvement categories. At any given time, the Company broadcasts
infomercials concerning approximately 75 products in one or more geographic
markets worldwide.
Net revenues for fiscal 1996 were $292.6 million, a 66.1% increase over the
prior year. Net income for fiscal 1996 was $16.6 million, compared to a net
loss of $672,000 for the prior year. In the fall of 1994, the Company commenced
a corporate restructuring. Since then, the Company has achieved strong revenue
and net income performance, posting its sixth consecutive profitable quarter in
the fourth quarter of fiscal 1996. Strengthened by these recent financial re-
sults, National Media is pursuing a business strategy focusing on: (i) ex-
panding its global presence, (ii) developing and marketing innovative consumer
products to enhance its library of infomercial programs and (iii) lowering
costs by becoming a fully-integrated provider of consumer product marketing
services.
Expand Global Presence. The Company is continuing its efforts to expand its po-
sition as a worldwide leader in infomercial programming. Through its existing
media time and order fulfillment operations, the Company has the ability to de-
liver infomercial programming and products to over 260 million households
worldwide. The Company intends to aggressively increase its number of media
outlets in new and existing markets through strategic acquisitions and long-
term and other agreements with various network affiliates and cable networks.
At present, the Company has ongoing relationships, some of which are long-term,
with networks in North America such as America's Talking, BET, CNBC, Discovery,
E!, ESPN2, The Family Channel, FX, Home Team Sports, The Learning Channel,
Lifetime Television, The Nashville Network, The New Inspirational Network,
Product Information Network, SCIFI Channel, TV Food Network and USA Network and
internationally, with satellite channels such as Eurosport, Flextech
(Starstream) and The NBC Superchannel. The Company has also acquired the rights
to use a twenty-four hour digital satellite transponder to broadcast its
infomercials in Europe.
In addition to increasing its media time in existing markets, National Media
plans to enter additional geographic markets, including South Africa, mainland
China, India and Indonesia. Initial entry into these markets is currently ex-
pected by the end of calendar year 1997.
Develop and Market Innovative Products to Enhance Library of Infomercial Pro-
grams. The Company continually seeks out the most innovative consumer products
which it can market and distribute profitably. The Company has built an in-
house product development/marketing department responsible for researching, de-
veloping and analyzing products and product ideas. The Company augments its
product development activities through strategic relationships with Mitsui &
Co., Ltd., one of the world's largest diversified services companies, certain
media companies and various third-party manufacturers.
4
<PAGE>
The Company believes that its large library of infomercial programs, together
with its extensive international operations and expertise in product sourcing,
in-bound telemarketing, order fulfillment and customer service, gives it a sig-
nificant competitive advantage over others desiring to enter its existing or
new markets. While the Company incurs certain initial and ongoing costs in con-
nection with adapting a product and infomercial for specific markets, the pri-
mary expenses of product and infomercial development and infomercial production
are incurred when the product/infomercial is first developed for its initial
target market. Thus, as the Company obtains sufficient media time in additional
markets, it can quickly, efficiently and relatively inexpensively begin selling
products in such new markets.
The Company believes that by further expanding its coverage into other parts of
the world it will be able to further leverage its library of infomercial pro-
grams and products by extending the time period during which each product gen-
erates revenues and, therefore, the total worldwide revenues for a particular
product. At present, the Company's total product/infomercial library available
for introduction into each new market consists of over 100 products.
Lower Costs by Becoming a Fully-Integrated Provider of Consumer Product Market-
ing Services. National Media seeks to be the low-cost provider in the
infomercial industry. The Company has created a state of the art order fulfill-
ment system to service its North American operations and is working to more
fully integrate its entire worldwide operations. The Company also continues to
explore methods to better control each step in the development and life cycle
of a product/infomercial and develop its expertise in, and refine its systems
with regards to, product sourcing, in-bound telemarketing, order fulfillment
and customer service. National Media believes that its current competitive ad-
vantages of purchased block media time, multi-country coverage and fully-inte-
grated program production, product sourcing and order fulfillment, as well as
the development of new long-term media and marketing partners, provide it with
a strong base from which it can continue to lower its costs.
RECENT DEVELOPMENTS
On October 25, 1995, the Company acquired DirectAmerica Corporation and Cali-
fornia Production Group, Inc. (collectively, "DirectAmerica"). DirectAmerica is
a leading infomercial production company which produces infomercials for the
Company as well as third parties.
On May 17, 1996, the Company acquired Positive Response Television, Inc. ("Pos-
itive Response"). Positive Response was a publicly traded direct marketing com-
pany and producer of infomercials. Its net revenues for the year ended December
31, 1995 were approximately $63.4 million. The Company's acquisition of Posi-
tive Response will enhance its internal capability to produce a substantial
number of its infomercials in the future and provide it with an internal
telemarketing capability.
On July 1, 1996, the Company acquired Prestige Marketing Limited and Prestige
Marketing International Limited (collectively, "Prestige"), and on July 2,
1996, the Company acquired Suzanne Paul Holdings Pty Limited and its operating
subsidiaries (collectively, "Suzanne Paul"), two direct response television
marketing companies.
Prestige operates out of Auckland, New Zealand. It produces its own short-form
and long-form direct response television spots and broadcasts these and third-
party shows in New Zealand. Prestige also licenses its shows for broadcast
throughout Asia and the Pacific Rim and in Russia. Prestige conducts its own
in-bound telemarketing, order fulfillment and customer service functions. In
fiscal 1996, Prestige had net revenues of $18.7 million and net income of $3.3
million.
Suzanne Paul operates out of Sydney, Australia and broadcasts its programming
in Australia. Suzanne Paul conducts its own in-bound telemarketing, order ful-
fillment and customer service functions. In the nine months ended March 31,
1996, Suzanne Paul had net revenues of $16.2 million and net income of $2.3
million.
The acquisitions of Prestige and Suzanne Paul extend the reach of the Company's
programming firmly into the New Zealand, Australian and Southeast Asian market-
places. The acquisitions immediately expand the Company's presence in nine
countries and add three countries to the Company's geographic reach.
5
<PAGE>
The aggregate consideration paid by the Company for Prestige and Suzanne Paul
was approximately $4.2 million in cash, a $2.8 million note payable maturing on
December 5, 1996 and 787,879 shares of Common Stock. Upon consummation of these
acquisitions, the Company funded approximately $4.6 million in dividends pay-
able to shareholders of Suzanne Paul. In addition, the Company may be required
to pay up to an aggregate of an additional $5.0 million in Common Stock, valued
at then present market prices, in 1997 and 1998, contingent upon the levels of
net income achieved in those years by Prestige and Suzanne Paul.
THE OFFERING
COMMON STOCK OFFERED............... 2,000,000 shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING........................... 22,420,104 shares (1)
USE OF PROCEEDS....................
To retire approximately $13.5 million of
indebtedness incurred in connection with
the acquisitions of Positive Response,
Prestige and Suzanne Paul; provide
approximately $10.0 million for the
acquisition and retention of media access
contracts, including acquiring the right
to use, for a one-year period, a twenty-
four hour analog satellite transponder to
be utilized by the Company to air its
infomercials in European markets; and
provide approximately $10.0 million for
general corporate purposes, including
working capital requirements and
expenditures related to potential future
acquisitions. Pending the application of
Offering proceeds to the above uses, the
Company will invest the proceeds in short-
term income producing investments. See
"Use of Proceeds."
NYSE AND PHLX TRADING SYMBOL....... "NM"
DIVIDEND POLICY....................
The Company has not declared or paid a
cash dividend on its Common Stock since
the quarter ended December 31, 1990, and
the Board of Directors does not anticipate
that dividends will be paid in the
foreseeable future. In addition, the
Company's ability to pay dividends is
restricted pursuant to the terms of
certain financing agreements between the
Company and its principal lender, as well
as by the terms of the Company's Series B
Preferred Stock (as defined). See
- --------- "Description of Capital Stock."
(1) Includes 787,879 shares of Common Stock issued in connection with the ac-
quisitions of Prestige and Suzanne Paul, but does not include, as of June
30, 1996, 1,220,000 shares of Common Stock issuable upon the conversion of
the Company's Series B Preferred Stock; 6,069,552 shares of Common Stock
issuable upon exercise of certain warrants with a weighted average exercise
price of $5.56 per share; 1,919,000 shares of Common Stock issuable upon
exercise of options granted to certain directors, officers, employees and
consultants of the Company with a weighted average exercise price of $6.90
per share; 193,213 shares of Common Stock issuable pursuant to Positive Re-
sponse's stock option plan; 3,000,000 shares of Common Stock issuable upon
exercise of options which may be granted pursuant to the Company's 1991 Op-
tion Plan if a proposed increase in shares available under the Plan re-
ceives stockholder approval at the Company's 1996 Annual Meeting of Stock-
holders; any shares of Common Stock which may be issuable in connection
with the Prestige or Suzanne Paul transactions in 1997 or 1998, contingent
upon the level of net income achieved by Prestige and Suzanne Paul in those
years; or any shares of Common Stock which may be issuable in connection
with the DirectAmerica transaction, contingent upon the level of revenues
generated through January 31, 1997.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following table presents summary historical financial and other data for
each of the fiscal years in the five-year period ended March 31, 1996, as well
as pro forma financial data (i) giving effect to the acquisitions of
DirectAmerica (solely for Statement of Operations Data and Other Data), Posi-
tive Response, Prestige and Suzanne Paul (collectively, the "Acquisitions") and
(ii) giving effect to the Acquisitions and as adjusted for the Offering, as if
the Acquisitions and the Offering had occurred as of April 1, 1995 for State-
ment of Operations Data and Other Data (excluding the current ratio) and as of
March 31, 1996 for Balance Sheet Data and the current ratio in Other Data. The
historical financial data set forth below has been derived from the Company's
consolidated financial statements and notes thereto, which have been audited by
Ernst & Young LLP. The data set forth below should be read in conjunction with
"Pro Forma Consolidated Financial Statements," "Selected Financial and Operat-
ing Data," "Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations" and the Company's audited consolidated financial state-
ments and notes thereto, as well as the historical financial statements and
notes thereto of DirectAmerica, Positive Response, Prestige and Suzanne Paul
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
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YEARS ENDED MARCH 31,
PRO FORMA
AS ADJUSTED PRO FORMA 1996 1995 1994 1993 1992
----------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands, except per
share data
STATEMENT OF OPERATIONS DATA:
Net revenues $374,889 $374,889 $292,607 $176,167 $172,602 $141,997 $102,218
Gross profit 70,853 70,853 54,891 26,601 21,317 28,762 13,282
Operating income 23,337 23,337 21,119 317 (8,399) 6,706 (6,318)
Income (loss) before
income taxes 22,592 21,631 20,104 (372) (8,699) 6,335 (6,788)
Net income (loss) 16,815 16,024 16,579 (672) (8,699) 6,259 (4,854)
Income (loss) per common
share(1)
Primary $ 0.62 $ 0.64 $ 0.74 $ (0.05) $ (0.72) $ 0.48 $ (0.44)
Fully-diluted $ 0.60 $ 0.61 $ 0.71 $ (0.05) $ (0.72) $ 0.48 $ (0.44)
<CAPTION>
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AT MARCH 31,
PRO FORMA
AS ADJUSTED PRO FORMA 1996 1995 1994 1993 1992
Dollars in thousands ----------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency) $ 75,504 $ 51,143 $ 38,722 $ 22,081 $ 1,377 $ 7,995 $ (1,780)
Total assets 201,287 181,304 116,548 64,143 47,475 46,771 34,258
Short-term debt 901 5,279 876 184 4,770 2,917 3,603
Long-term debt 4,139 13,278 4,054 3,613 448 1,090 1,492
Shareholders' equity 130,551 97,051 56,462 26,625 10,571 17,630 11,143
<CAPTION>
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YEARS ENDED MARCH 31,
PRO FORMA
AS ADJUSTED PRO FORMA 1996 1995 1994 1993 1992
Dollars in thousands ----------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Gross profit margin 18.9% 18.9% 18.8% 15.1% 12.4% 20.3% 13.0%
Operating margin(2) 6.2% 6.2% 7.2% 3.3% 0.4% 5.2% (3.3%)
Current ratio(3) 2.18 1.75 1.72 1.69 1.04 1.29 0.92
EBITDA(4) $ 27,768 $ 27,768 $ 23,218 $ 7,485 $ 2,278 $ 9,453 $ (2,334)
Infomercials aired
during period -- -- 110 90 63 65 49
Country coverage(5) -- -- 60 42 32 19 11
</TABLE>
- ---------
(1) Income (loss) per common share amounts have been computed based upon the
weighted average number of common shares and dilutive common share equiva-
lents (options and warrants to purchase Common Stock and Series B Preferred
Stock) outstanding using the "if converted method" in fiscal 1996 and 1995
and the "treasury stock method" in fiscal 1994, 1993 and 1992. For fiscal
1996 and 1995, net income used to compute primary net income per share
equals net income, plus after-tax interest expense incurred on outstanding
long-term debt and after-tax interest income earned on the investment of
excess proceeds from the assumed exercise of all outstanding options and
warrants to purchase Common Stock after repurchase using the treasury stock
method of 20% of the Company's outstanding Common Stock. For fiscal 1995,
1994, 1993 and 1992, the effect of the exercise of options and warrants to
purchase Common Stock and the conversion of Series B Preferred Stock was
not assumed in the calculation of net income (loss) per common share be-
cause the effect was anti-dilutive.
(2) Operating margin represents operating income plus severance expense of ap-
proximately $2.7 million in fiscal 1995 and unusual charges of approxi-
mately $2.9 million, $9.0 million, $725,000 and $3.0 million for fiscal
1995, 1994, 1993 and 1992, respectively, divided by net revenues.
(3) Current ratio represents the ratio of total current assets to total current
liabilities.
(4) EBITDA represents earnings before interest, income taxes, depreciation and
amortization plus severance expense of approximately $2.7 million in fiscal
1995 and unusual charges of approximately $2.9 million, $9.0 million,
$725,000 and $3.0 million for fiscal 1995, 1994, 1993 and 1992, respective-
ly.
(5) Country coverage represents countries where the Company's infomercials
could be viewed by consumers as of the indicated year end.
7
<PAGE>
RISK FACTORS
The shares of Common Stock offered hereby involve certain risks. In addition to
the other information set forth and incorporated by reference in this Prospec-
tus, the following factors should be considered carefully by prospective in-
vestors in evaluating an investment in the shares of Common Stock offered here-
by.
NATURE OF THE INFOMERCIAL INDUSTRY
The worldwide infomercial industry is relatively new and is characterized by
growth and competition for products, customers and media access. The success of
the Company in this industry will depend in part on its continued access to me-
dia time, introduction of successful products, ability to enhance its product
lines and support product marketing and sales with efficient order fulfillment
and customer services and successfully integrate the entities or businesses the
Company has or may acquire into an efficient global company. The future reve-
nues of the business will depend substantially on the Company's continuing
ability to create and maintain an effective, integrated organization to
develop, introduce and market products that address changing consumer needs on
a timely basis, establish and maintain effective distribution channels for its
products and develop new geographic markets and expand established geographic
markets. There can be no assurance that the Company will be able to achieve
these goals. While the Company maintains an internal product development group,
there can be no assurance that present and potential third party product prov-
iders will wish to market products through the Company in the future. Any sig-
nificant delay or reduction in product introductions could have a material ad-
verse effect on the Company's results of operations.
DEPENDENCE ON FOREIGN SALES
The Company had no sales outside the United States and Canada prior to June
1991. The Company now markets products to consumers in over 60 countries. In
fiscal 1996, 1995 and 1994, approximately 51.6%, 45.7% and 26.7%, respectively,
of the Company's net revenues were derived from sales to customers outside the
United States and Canada. Such sales represented a 87.6% increase in fiscal
1996 from fiscal 1995, a 74.8% increase in fiscal 1995 from fiscal 1994 and a
22.6% increase in fiscal 1994 from fiscal 1993. In fiscal 1996, 1995 and 1994,
sales in Germany accounted for approximately 7.0%, 13.0% and 12.0%, respective-
ly, of the Company's net revenues. In early 1994, the Company began airing its
infomercials in Asia. Sales of the Company's products in Asia accounted for ap-
proximately 32.4% of the Company's net revenues for fiscal 1996. After giving
effect to the Acquisitions (as defined) on a pro forma basis, sales of the
Company's products in Asia, a significant portion of which were made in Japan,
would have accounted for approximately 35.1% of the Company's net revenues for
fiscal 1996. International sales activity results in increased working capital
requirements as a result of additional lead time for delivery and payment of
product prior to receipt of sale proceeds. While the Company's foreign opera-
tions have the advantage of airing infomercials that have been successful in
the United States, as well as successful infomercials produced by companies
with limited media access and distribution capabilities, there can be no assur-
ance that the Company's foreign operations will continue to generate increases
in net revenues. In addition, the Company is subject to the risks of doing
business abroad, including adverse fluctuations in currency exchange rates,
transportation delays and interruptions, political and economic disruptions,
the imposition of tariffs and import and export controls and increased customs
or local regulations. The occurrence of any one or more of the foregoing could
have a material adverse effect on the Company's results of operations.
ENTERING INTO NEW MARKETS
As the Company enters into new markets, including Asia and South America, it is
faced with the uncertainty of never having done business in that commercial,
political and social setting. Accordingly, despite the Company's best efforts,
its likelihood of success in each new market which it enters is unpredictable
for reasons particular to each such market. It is also possible that, despite
the Company's apparently successful entrance into a new market, some unforeseen
circumstance will arise which will limit the Company's ability to continue to
do business or to expand in that new market.
8
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DEPENDENCE ON NEW PRODUCTS; UNPREDICTABLE MARKET LIFE; AND PRODUCT RETURNS
The Company is dependent on its continuing ability to develop or obtain rights
to new products to supplement or replace existing products as they mature
through their product life cycles. The Company's five most successful products
in each of fiscal 1996, 1995 and 1994 accounted for approximately 46.0%, 54.0%
and 67.0%, respectively, of the Company's net revenues for such periods. For
the most part, the Company's five most successful products change from year to
year.
Product sales for a given period will depend upon, among other things, a posi-
tive customer response to the Company's infomercials, the Company's effective
management of product inventory and the stage in their life cycles of products
sold during such period. Customer response to infomercials depends on many
variables, including the appeal of the products being marketed, the effective-
ness of the infomercials, the availability of competing products and the tim-
ing and frequency of air-time. There can be no assurance that the Company's
new products will receive market acceptance. In addition, in the event the
Company does not have an adequate supply of inventory, as a result of produc-
tion delays or shortages or inadequate inventory management, it may lose po-
tential product sales. The ability of the Company to manage its inventory,
particularly in the international market, is of critical importance due to the
Company's practice of minimizing its inventory of a given product. It is pos-
sible that, during a product's life, problems may arise regarding regulatory,
intellectual property, product liability or other issues which may affect the
continued viability of the product for sale. Most of the Company's products
have a limited market life for sales through infomercials. Historically, the
majority of products generate their most significant domestic revenue in their
introductory year, while foreign revenues have tended to have been generated
more evenly over a longer period. In the event the number of times an
infomercial is broadcast within a market is increased, the market life of such
product in such market may decrease. There can be no assurance that a product
which has produced significant sales will continue to produce significant or
any sales in the future. As a result, the Company is dependent on its ability
to effectively manage the life cycles of products and to continue to identify
and successfully market new products. The failure of newly introduced products
or significant delays in the introduction of, or failure to introduce, new
products would adversely impact the Company's results of operations in terms
of both lost opportunity cost and actual loss of dollars invested.
Even when market acceptance for the Company's new products occurs, the
Company's results of operations may be adversely impacted by returns of such
products. While the Company establishes reserves against such returns which it
believes are adequate based upon historic levels and product mix, there can be
no assurance that the Company will not experience unexpectedly high levels of
returns (in excess of its reserves) for certain products. In the event that
returns exceed reserves, the Company's results of operations would be ad-
versely affected.
DEPENDENCE ON THIRD PARTY MANUFACTURERS AND SERVICE PROVIDERS
The Company is dependent on strategic partners and other third party sources,
both foreign and domestic, to manufacture all of its products, although it
does not depend on any one particular supplier for a majority of its products.
The Company is also dependent to an extent upon a number of companies which
serve to fulfill orders placed for the Company's products and/or provide
telemarketing services. The inability of the Company, either temporarily or
permanently, to obtain a timely supply of product to fulfill sales orders for
a specific product or to satisfy orders for such product could have a material
adverse effect on the Company's results of operations. Moreover, because the
time from the initial approval of a product by the Company's product develop-
ment department to the first sale of such product is relatively short, the
Company's ability to identify sources that can meet its production and order
fulfillment deadlines at reasonable costs and produce a high-quality product
or render quality service is important to its business, and there can be no
assurance that the Company will successfully locate such sources. Since the
Company often relies on foreign manufacturers, it must allow longer lead times
to order products to fulfill customer orders, and utilizing such foreign manu-
facturers exposes the Company to the general risks of doing business abroad.
DEPENDENCE ON MEDIA ACCESS
The Company is dependent on having access to media time to televise its
infomercials on cable networks, network affiliates and local stations. In the
normal course of business, the Company's media contracts expire pursuant to
their terms from time to time. There can be no assurance that, as existing
contracts expire, the Company will be able to purchase or renew media time on
a long-term basis or at favorable price levels. The Company purchases a
9
<PAGE>
significant amount of its media time from cable television and satellite net-
works. These cable television and satellite networks assemble programming for
transmission to multiple and local cable system operators. These cable system
operators may not be required to carry all of the network's programming. The
Company currently does not pay and is not paid for the "privilege" of being
broadcast by these operators. It is possible that, if demand for air time
grows, these operators will begin to charge the Company to continue broadcast-
ing the Company's infomercials or limit the amount of time available for
broadcast. Recently, larger multiple system operators have elected to change
their operations by selling "dark" time (i.e., the hours during which a sta-
tion does not broadcast its own programming). Significant increases in the
cost of media time or significant decreases in the Company's access to media
time, including, but not limited to, any failure to renew or extend existing
agreements, could have a material adverse effect on its results of operations.
There can also be no assurances that, even if the Company secures media ac-
cess, its programming will attract viewers or that its products will enjoy
consumer acceptance.
A significant portion of the Company's media time is purchased under contracts
which are one year or greater in length. Such contracts require the Company to
make advance purchases and commitments to purchase media time. To the extent
the Company does not manage such media time effectively, such failure could
have a material adverse effect on the Company's results of operations. Howev-
er, in the past the Company has generally been able to maintain a flow of
infomercials to fill media time where it has advance commitments. In addition,
as part of its media strategy, the Company arranges to sell a portion of its
media time to others. There can be no assurance, however, that the Company
will be able to use all of its media time or sell it to others or that, upon
expiration of such long-term contracts, the Company will be able to success-
fully negotiate extensions of such contracts. The inability of the Company to
extend one or more of such contracts on reasonable terms as they expire could
have a material adverse effect on the Company's results of operations.
RECENT LOSSES
While the Company had net income of $16.6 million during fiscal 1996, the Com-
pany has suffered net losses in three of its last five fiscal years, including
net losses of approximately $670,000 in fiscal 1995 and approximately $8.7
million in fiscal 1994. Based upon this deterioration in the Company's finan-
cial condition and the presence of certain other conditions, as of July 13,
1994, the Company's independent auditors opined that substantial doubt existed
as to the Company's ability to continue as a going concern. However, as a re-
sult of a series of capital raising transactions in fiscal 1995 and the
Company's recent profitability, at March 31, 1996 the Company's working capi-
tal had increased to approximately $38.7 million. The Company's fiscal 1996
and fiscal 1995 audited financial statements contain unqualified opinions of
its independent auditors. No assurance can be given that the Company's opera-
tions will continue to be profitable and/or that its financial position will
continue to improve.
LITIGATION INVOLVING THE COMPANY
The Company in recent years has been involved in significant legal proceed-
ings. Abbreviated information regarding the current status of material pending
litigation involving the Company is set forth below. However, as it pertains
to previously reported matters, such information does not purport to be com-
plete and is qualified in its entirety by the detailed description of the le-
gal and regulatory proceedings set forth in the reports filed by the Company
pursuant to the Exchange Act and incorporated by reference herein. Such de-
scriptions variously include information relating to the status of the pro-
ceedings and the Company's evaluation of the claims made against it. Certain
of such previously reported matters have been resolved substantially in accor-
dance with the terms set forth in such prior disclosure. In addition, as set
forth above, the Company consummated the acquisition of DirectAmerica on Octo-
ber 25, 1995. As of such date, DirectAmerica was a party to several litigation
proceedings. As a result of the acquisition of DirectAmerica, any liability
which DirectAmerica may have in connection with such litigation becomes the
responsibility of the wholly-owned subsidiary of the Company into which
DirectAmerica was merged. Although certain of the former shareholders of
DirectAmerica have agreed to indemnify the Company against certain of such li-
abilities, it is not possible to predict with any accuracy what, if any, lia-
bility the Company may have in connection with such matters. Further, as dis-
cussed above, the Company consummated the acquisition of Positive Response on
May 17, 1996 and the acquisitions of Prestige and Suzanne Paul on July 1 and
2, 1996, respectively. As a result of these acquisitions, all liabilities of
Positive Response, Prestige and Suzanne Paul became liabilities of the respec-
tive wholly-owned subsidiary of the Company into which each of Positive Re-
sponse, Prestige and Suzanne Paul was merged.
Lachance and Efron and Cohen Class Actions. In July and December 1994, stock-
holders filed purported class action lawsuits in federal court against the
Company and certain of its former officers and directors in connection
10
<PAGE>
with an aborted merger transaction with ValueVision International, Inc.
("ValueVision"). The parties have reached an agreement in principle to settle
these matters, along with certain similar actions filed in Delaware state
court. Such settlements provided for cash payments by the Company's insurer of
approximately $1.1 million and cash payments by the Company of $375,000, as to
which the Company recorded a charge against earnings in the fourth quarter of
fiscal 1995. Consummation of these federal court settlements is subject, among
other things, to the approval of such court.
Positive Response Shareholders' California Class Action. On May 1, 1995, a pur-
ported class action suit was filed in the United States District for the Cen-
tral District of California against Positive Response and its principal execu-
tive officers alleging that Positive Response has made false and misleading
statements in its public filings, press releases and other public statements
with respect to its business and financial prospects. The suit was filed on be-
half of all persons who purchased Positive Response common stock during the pe-
riod from January 4, 1995 to April 28, 1995. The suit seeks unspecified compen-
satory damages and other equitable relief. An amended complaint was filed on
June 9, 1995, which added more plaintiffs and expanded the class period from
November 1994 to April 28, 1995. Positive Response moved to dismiss the amended
complaint and the amended complaint was dismissed in late July 1995. On or
about September 25, 1995, the plaintiffs filed a second amended complaint,
which added additional officers as defendants and attempted to set forth new
facts to support plaintiffs' entitlement to legal relief. On October 31, 1995,
Positive Response again moved to dismiss plaintiffs' entire action. The basis
of Positive Response's new motion was its contention that plaintiffs failed to
allege any new facts in support of a claim that has already been dismissed.
Oral argument in connection with Positive Response's motion was held on Decem-
ber 11, 1995. Positive Response's motion to dismiss was denied. Discovery is
continuing.
Ab Roller Plus Patent Litigation. On March 1, 1996, Precise Exercise Equipment
("Precise") filed suit in the United States District Court for the Central Dis-
trict of California against certain parties, including the Company, alleging
patent infringement, unfair competition and other intellectual property claims.
Such claims relate to an alleged infringement of Precise's patent for an exer-
cise device. The suit claims that a product marketed by the Company pursuant to
a license granted by a third party violates Precise's patent. Pursuant to the
terms of such license, the third party is contractually obligated to indemnify
the Company in this suit. The suit seeks an injunction and treble damages. The
Company's independent legal counsel has issued an opinion to the Company that
the product marketed by the Company does not infringe upon Precise's patent.
REGULATORY MATTERS
The infomercial industry is regulated by the Federal Trade Commission (the
"FTC"), the United States Post Office, the Consumer Product Safety Commission
(the "CPSC"), the Federal Communications Commission (the "FCC"), the Food and
Drug Administration (the "FDA"), various States' Attorneys General and other
state and local consumer protection and health agencies. The FTC directly regu-
lates marketers of products, such as the Company, credit card companies which
process customer orders and others involved in the infomercial and direct mar-
keting industries.
The Company's marketing activities and/or products have been and will continue
to be subject to the scrutiny of each of the aforementioned regulatory agen-
cies. An adverse determination or extended investigation by any of these agen-
cies could have a material adverse effect on the Company. Moreover, the domes-
tic and international regulatory environments in which the Company operates are
subject to change from time to time. It is possible that changes in the regula-
tions to which the Company is subject might have a material adverse effect on
the Company's business or results of operations. As a result of prior settle-
ments with the FTC, the Company has agreed to two consent orders. Prior to the
Company's recent acquisition of Positive Response, Positive Response and its
Chief Executive Officer, Michael S. Levey, also agreed to a consent order with
the FTC. Among other things, such consent orders require the Company, Positive
Response and Mr. Levey to submit compliance reports to the FTC staff. The Com-
pany, Positive Response and Mr. Levey have submitted compliance reports as well
as additional information requested by the FTC staff. In addition, in connec-
tion with the acquisition by the Company of Positive Response, both the Company
and Positive Response were required pursuant to such consent orders to, and
did, notify the FTC of such acquisition and Michael S. Levey was required to,
and did, notify the FTC of his pending affiliation with the Company. In early
June 1996, the Company received a request from the FTC for additional informa-
tion regarding 2 of the Company's infomercials in order to determine whether
the Company is operating in compliance with the consent orders referred to
above. Such request also included a request for additional information concern-
ing the
11
<PAGE>
Company's acquisition of Positive Response. The Company is responding to such
request. It is possible that the notifications referred to above will result in
additional requests for information from the Company and Mr. Levey and/or addi-
tional scrutiny of the Company's operations. In an effort to maintain continued
compliance with the terms of its consent order, shortly following its acquisi-
tion of Positive Response, the Company caused Positive Response to cease airing
one of its infomercials until the Company could make such changes to such
infomercial or take such other actions as it deems appropriate to conform such
infomercial to the Company's standards, if possible. After giving effect to the
Acquisitions on a pro forma basis, such infomercial would have contributed less
than 4.0% to the Company's consolidated net revenues for the quarter ended
March 31, 1996. The Company is also considering changes to other Positive Re-
sponse infomercials. The Company does not believe that such infomercials or the
Company's actions regarding them will have a material adverse effect on the
Company's financial condition.
On February 24, 1994, the staff of the CPSC notified the Company that it had
made a preliminary determination that a particular model of the Company's Juice
Tiger(R) product presents a "substantial product hazard" under the Consumer
Product Safety Act. The CPSC staff requested that the Company take voluntary
corrective action to ameliorate such alleged product hazard. While the Company
has disputed that the model in question presents a substantial product hazard,
the Company and the CPSC staff recently agreed upon the form and nature of vol-
untary action proposed by the Company to address the CPSC staff's concerns. The
Company has implemented the agreed upon plan. The Company also recently re-
ceived notification of a provisional acceptance of a proposed form of settle-
ment agreement with the Company, which includes a civil penalty. The cost of
implementing the corrective plan and the civil penalty, as well as the other
terms of the settlement agreement will not have a material adverse effect on
the Company's financial condition or results of operations if the settlement
agreement is finalized in the form proposed.
The Company's international business is subject to the laws and regulations of
England, the European Union, Japan and other countries in which the Company
sells its products, including, but not limited to, the various consumer and
health protection laws and regulations in the countries in which the program-
ming is broadcast, where applicable. If any significant actions were brought
against the Company or any of its subsidiaries in connection with a breach of
such laws or regulations, including the imposition of fines or other penalties,
or against one of the entities through which the Company obtains a significant
portion of its media access, the Company could be materially adversely affect-
ed. There can be no assurance that changes in the laws and regulations of any
territory which forms a significant portion of the Company's market will not
adversely affect the Company's financial condition or results of operations.
PRODUCT LIABILITY CLAIMS
Products sold by the Company may expose it to potential liability from claims
by users of such products, subject to the Company's rights, in certain instanc-
es, to indemnification against such liability from the manufacturers of such
products. The Company generally requires the manufacturers of its products to
carry product liability insurance, although in certain instances where a lim-
ited quantity of products are purchased from non-U.S. vendors, the vendor may
not be formally required to carry product liability insurance. Certain of such
vendors, however, may in fact maintain such insurance. There can be no assur-
ance that such parties will maintain this insurance or that this coverage will
be adequate to cover all potential claims, including claims by the Company for
indemnification. The Company currently maintains product liability insurance
coverage in amounts which it believes to be adequate. There can be no assurance
that the Company will be able to maintain such coverage or obtain additional
coverage on acceptable terms, or that such insurance will provide adequate cov-
erage against all potential claims.
COMPETITION
The Company competes directly with several companies which generate sales from
infomercials. The Company also competes with a large number of consumer product
companies and retailers which have substantially greater financial, marketing
and other resources than the Company, some of which have recently commenced, or
indicated their intent to conduct, direct response marketing. The Company also
competes with companies that make imitations of the Company's products at sub-
stantially lower prices. Products similar to the Company's products may be sold
in department stores, pharmacies, general merchandise stores and through maga-
zines, newspapers, direct mail advertising and catalogs.
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<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's executive officers have substantial experience and expertise in
the Company's business and make significant contributions to its growth and
success. The unexpected loss of the services of one or more of such individuals
could have a material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the shares of Common Stock currently issued,
issuable upon conversion or exercise of securities convertible into or exercis-
able for Common Stock or of the shares of Common Stock offered hereby could ad-
versely affect the market value of the Common Stock, depending upon the timing
of such sales, and, in the case of convertible and exercisable securities, may
effect a dilution of the book value per share of Common Stock. See "Description
of Capital Stock--Shares Eligible for Future Sale."
13
<PAGE>
THE COMPANY
National Media is a global leader in the use of direct response transactional
television programming, known as infomercials, to market consumer products.
National Media is the world's largest publicly held infomercial company, mak-
ing infomercial programming available to more than 260 million households in
60 countries worldwide. Net revenues for fiscal 1996 were approximately $292.6
million, a 66.1% increase over the prior year. Net income for fiscal 1996 was
approximately $16.6 million, compared to a net loss of approximately $670,000
for the prior year.
The Company manages all phases of marketing the majority of its products in
both the United States and international markets, including product selection
and development, manufacturing by third parties, production and broadcasting
of infomercials, order processing and fulfillment and customer service. The
Company's products are concentrated in the automotive, beauty and personal
care, crafts, health and fitness, kitchen and household, music, outdoor and
self-improvement categories. At any given time, the Company broadcasts
infomercials concerning approximately 75 products in one or more geographic
markets worldwide.
In the fall of calendar 1994, Mark Hershhorn was appointed as President of the
Company and Brian McAdams and Constantinos Costalas were appointed as Chairman
and Vice Chairman of the Company, respectively. Since then, the Company has
implemented a strategy involving the recruitment of management personnel with
experience in the direct-response industry and other areas relevant to the
Company's business strategy, the improvement of its product development and
sourcing operations and its in-house order fulfillment and customer service
capabilities, the further expansion of current operations into the interna-
tional marketplace and the development of other distribution outlets, particu-
larly through its strategic partners and retail stores. As a result of the im-
plementation of this strategy, the recapitalization of the Company which oc-
curred in late 1994, the settlement of the majority of the Company's outstand-
ing litigation and the introduction of the new team of senior managers, Na-
tional Media has achieved strong revenue and net income performance, posting
its sixth consecutive profitable quarter in the fourth quarter of fiscal 1996.
Strengthened by these recent financial results, National Media is pursuing a
business strategy focusing on: (i) expanding its global presence, (ii) devel-
oping and marketing innovative consumer products to enhance its library of
infomercial programs and (iii) lowering costs by becoming a fully-integrated
provider of consumer product marketing services.
Expand Global Presence. The Company is continuing its efforts to expand its
position as a worldwide leader in infomercial programming. Through its exist-
ing media time and order fulfillment operations, the Company has the ability
to deliver infomercial programming and products to over 260 million households
worldwide. The Company intends to aggressively increase its number of media
outlets in new and existing markets through strategic acquisitions and long-
term and other agreements with various network affiliates and cable networks.
At present the Company has ongoing relationships, some of which are long term,
with networks in North America such as America's Talking, BET, CNBC, Discov-
ery, E!, ESPN2, The Family Channel, FX, Home Team Sports, The Learning Chan-
nel, Lifetime Television, The Nashville Network, The New Inspirational Net-
work, Product Information Network, SCIFI Channel, TV Food Network and USA Net-
work and internationally, with satellite channels such as Eurosport, Flextech
(Starstream) and The NBC Superchannel. The Company has also acquired the
rights to use a twenty-four hour digital satellite transponder to broadcast
its infomercials in Europe.
In addition to increasing its media time in existing markets, National Media
plans to enter additional geographic markets, including South Africa, mainland
China, India and Indonesia. Initial entry into these markets is currently ex-
pected by the end of calendar year 1997.
Develop and Market Innovative Products to Enhance Library of Infomercial Pro-
grams. The Company continually seeks out the most innovative consumer products
which it can market and distribute profitably. The Company has built an in-
house product development/marketing department responsible for researching,
developing and analyzing products and product ideas. The Company augments its
product development activities through strategic relationships with Mitsui &
Co., Ltd., one of the world's largest diversified services companies, certain
media companies and various third-party manufacturers.
The Company believes that its large library of infomercial programs, together
with its extensive international operations and expertise in product sourcing,
in-bound telemarketing, order fulfillment and customer service, gives it a
significant competitive advantage over others desiring to enter its existing
or new markets. While the Company incurs certain initial and ongoing costs in
connection with adapting a product and infomercial for specific markets,
14
<PAGE>
the primary expenses of product and infomercial development and infomercial
production are incurred when the product/infomercial is first developed for its
initial target market. Thus, as the Company obtains sufficient media time in
additional markets, it can quickly, efficiently and relatively inexpensively
begin selling products in such new markets.
The Company believes that by further expanding its coverage into other parts of
the world it will be able to further leverage its library of infomercial pro-
grams and products by extending the time period during which each product gen-
erates revenues and, therefore, the total worldwide revenues for a particular
product. At present, the Company's total product/infomercial library available
for introduction into each new market consists of over 100 products.
Lower Costs by Becoming a Fully-Integrated Provider of Consumer Product Market-
ing Services. National Media seeks to be the low-cost provider in the
infomercial industry. The Company has created a state of the art order fulfill-
ment system to service its North American operations and is working to more
fully integrate its entire worldwide operations. The Company also continues to
explore methods to better control each step in the development and life cycle
of a product/infomercial and develop its expertise in, and refine its systems
with regards to, product sourcing, in-bound telemarketing, order fulfillment
and customer service. National Media believes that its current competitive ad-
vantages of purchased block media time, multi-country coverage and fully-inte-
grated program production, product sourcing and order fulfillment, as well as
the development of new long-term media and marketing partners, provide it with
a strong base from which it can continue to lower its costs.
During the past 10 months, the Company has acquired DirectAmerica, Positive Re-
sponse, Prestige and Suzanne Paul. The acquisitions of DirectAmerica and Posi-
tive Response have provided the Company with greater infomercial production ca-
pabilities, enhanced telemarketing capabilities and additional products for its
infomercial library. The acquisitions of Prestige and Suzanne Paul extend the
reach of the Company's programming firmly into the New Zealand, Australian and
Southeast Asian marketplaces and add infomercials to its library.
The Company is a Delaware corporation, with its principal executive offices lo-
cated at 1700 Walnut Street, Philadelphia, Pennsylvania 19103 (telephone number
(215) 772-5000).
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<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering (after deducting underwriting discounts and
estimated expenses associated with the Offering) will be approximately $
($ if the Underwriters' over-allotment option is exercised in full). The
Company will use the net proceeds to (i) retire approximately $13.5 million of
indebtedness incurred in connection with the acquisitions of Positive Response,
Prestige and Suzanne Paul; (ii) provide approximately $10.0 million for the ac-
quisition and retention of media access contracts, including acquiring the
rights to use, for a one-year period, a twenty-four hour analog satellite tran-
sponder to be utilized by the Company to air its infomercials in European mar-
kets; and (iii) provide approximately $10.0 million for general corporate pur-
poses, including working capital requirements and expenditures related to po-
tential future acquisitions. Pending the application of Offering proceeds to
the above uses, the Company will invest the proceeds in short-term income pro-
ducing investments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is listed on the NYSE and the PHLX under the symbol "NM." The
following table presents the high and low last sales prices as reported by the
New York Stock Exchange for the periods indicated.
<TABLE>
<CAPTION>
=============
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year ended March 31, 1994
First Quarter $10.25 $ 4.62
Second Quarter 7.00 4.62
Third Quarter 7.12 4.87
Fourth Quarter 11.62 6.00
Fiscal Year ended March 31, 1995
First Quarter $ 9.87 $ 3.87
Second Quarter 5.25 3.25
Third Quarter 5.87 3.50
Fourth Quarter 8.12 4.50
Fiscal Year ended March 31, 1996
First Quarter $ 9.87 $ 7.12
Second Quarter 14.50 9.37
Third Quarter 21.00 13.75
Fourth Quarter 21.50 15.00
Fiscal Year ending March 13, 1997
First Quarter (through July 1, 1996) $20.62 $16.00
</TABLE>
On July 1, 1996, the reported last sale price of the Common Stock on the NYSE
was $18.00 per share.
The Company has not declared or paid a cash dividend on its Common Stock since
the quarter ended December 31, 1990, and the Board of Directors does not antic-
ipate that dividends will be paid in the foreseeable future. In addition, the
Company's ability to pay dividends is restricted pursuant to the terms of cer-
tain financing agreements between the Company and its principal lender, as well
as by the terms of the Company's Series B Preferred Stock. See "Description of
Capital Stock."
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CAPITALIZATION
The table below sets forth the consolidated short-term debt and capitalization
of the Company (i) as of March 31, 1996, (ii) on a pro forma basis to reflect
the Acquisitions (other than the DirectAmerica acquisition, which is included
in the Company's consolidated financial statements as of March 31, 1996) and
(iii) on a pro forma basis to reflect such Acquisitions and as adjusted for the
Offering, as if such Acquisitions and the Offering had occurred on March 31,
1996. See "Use of Proceeds", "Pro Forma Consolidated Financial Statements" and
"Selected Financial and Operating Data." This table should be read in conjunc-
tion with the consolidated financial statements of the Company and the notes
thereto and the historical financial statements and the notes thereto of Posi-
tive Response, Prestige and Suzanne Paul appearing elsewhere in this Prospec-
tus.
<TABLE>
<CAPTION>
-------------------------------
AT MARCH 31, 1996
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
<S> <C> <C> <C>
Dollars in thousands
Short-term debt $ -- $ 4,378 $ --
Current portion of long-term debt and capital
lease obligations 876 901 901(1)
-------- -------- --------
Total short-term debt $ 876 $ 5,279 $ 901
-------- -------- --------
Long-term debt and capital lease obligations $ 4,054 $ 13,278 $ 4,139(1)
-------- -------- --------
Shareholders' equity
Preferred stock, $.01 par value, 10,000,000
shares authorized, 136,375 shares of Series
B Convertible Preferred Stock issued and
outstanding (liquidation preference of
$5,455) $ 1 $ 1 $ 1
Common stock, $.01 par value, 50,000,000
shares authorized, 18,177,292 shares issued
and outstanding, 20,801,944 shares issued
and outstanding as adjusted to give effect
to such Acquisitions and 22,801,944 shares
issued and outstanding, as adjusted to give
effect to such Acquisitions and the
Offering (2) 182 208 228
Additional paid-in capital 48,135 88,857 122,337
Retained earnings 16,569 16,410 16,410
Treasury stock, 686,710 shares, at cost (3,791) (3,791) (3,791)
Notes receivable, directors, officers,
employees, consultants and others (473) (473) (473)
Foreign currency translation adjustment (4,161) (4,161) (4,161)
-------- -------- --------
Total shareholders' equity $ 56,462 $ 97,051 $130,551
-------- -------- --------
Total liabilities and shareholders' equity $116,548 $181,304 $201,287
======== ======== ========
</TABLE>
- ---------
(1) In connection with the acquisitions of Positive Response, Prestige and Su-
zanne Paul, the Company intends to utilize approximately $13.5 million of the
proceeds from the Offering to repay debt incurred in connection with such ac-
quisitions.
(2) Does not include 1,363,750 shares of Common Stock issuable upon the conver-
sion of the Company's Series B Preferred Stock outstanding at March 31, 1996;
6,159,552 shares of Common Stock issuable upon exercise of certain warrants
outstanding at March 31, 1996 with a weighted average exercise price of $5.55
per share; 1,922,332 shares of Common Stock issuable upon exercise of options
outstanding at March 31, 1996 granted to certain directors, officers, employees
and consultants of the Company with a weighted average exercise price of $6.89
per share; 193,213 shares of Common Stock issuable pursuant to Positive Re-
sponse's stock option plan; 3,000,000 shares of Common Stock issuable upon ex-
ercise of options which may be granted pursuant to the Company's 1991 Option
Plan, if a proposed increase in shares available under the Plan receives stock-
holder approval at the Company's 1996 Annual Meeting of Stockholders; any
shares of Common Stock which may be issuable in connection with the Prestige or
Suzanne Paul transactions in 1997 or 1998, contingent upon the net income
achieved by Prestige and Suzanne Paul in those years; or any shares of Common
Stock which may be issuable in connection with the DirectAmerica transaction,
contingent upon the level of revenues generated through January 31, 1997.
17
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Pro Forma Consolidated Balance Sheet (unaudited) at March 31,
1996 and Pro Forma Consolidated Statement of Income (unaudited) for the 12
months ended March 31, 1996 give pro forma effect to (i) the acquisitions of
DirectAmerica (solely for Pro Forma Statement of Income data), Positive Re-
sponse, Prestige and Suzanne Paul (the "Acquisitions") and (ii) the sale by the
Company of the 2,000,000 shares of Common Stock offered hereby with an assumed
public offering price of $18.00 per share and the use of a portion of the net
proceeds therefrom to reduce indebtedness incurred in connection with the ac-
quisitions of Positive Response, Prestige and Suzanne Paul as if such transac-
tions occurred as of April 1, 1995 for the Pro Forma Consolidated Statement of
Income and as of March 31, 1996 for the Pro Forma Consolidated Balance Sheet.
The Pro Forma Consolidated Financial Statements do not give effect to interest
which is expected to be earned on the investment of the net cash proceeds of
the Offering after repayment of indebtedness or any synergies or costs savings
which may result from the Acquisitions, including potential cost savings re-
sulting from (i) integrating Positive Response's fulfillment operations with
those of the Company, (ii) discounts available from increases in the volume of
media time purchased and (iii) the elimination of duplicative costs as a result
of Positive Response no longer being a public company.
The pro forma information is based on (i) the historical consolidated financial
statements of the Company included herein, (ii) the historical combined finan-
cial statements of DirectAmerica included herein, (iii) the historical consoli-
dated financial statements of Positive Response included herein, (iv) a combi-
nation of the historical financial statements of Prestige included herein and
(v) the historical combined financial statements of Suzanne Paul included here-
in, giving effect to the Acquisitions under the purchase method of accounting
and the assumptions and adjustments described in the accompanying notes to the
Pro Forma Consolidated Financial Statements. The allocation of the aggregate
purchase price for the Acquisitions, together with the liabilities assumed pur-
suant thereto, to the net assets acquired pursuant to the Acquisitions has been
based on management's preliminary estimates of the fair value of such assets
and liabilities. The final allocation may differ from these estimates. The pur-
chase price for the Acquisitions does not include contingent consideration
which may be required to be paid in connection with the DirectAmerica, Prestige
and Suzanne Paul acquisitions, but does include the shares of Common Stock is-
sued into escrow which may be payable in connection with the Positive Response
acquisition.
The pro forma information does not purport to be indicative of the combined re-
sults of operations or financial position that would have been reported had
these transactions taken place as of April 1, 1995, with respect to the Pro
Forma Consolidated Statements of Income data, or as of March 31, 1996, with re-
spect to the Pro Forma Consolidated Balance Sheet data, or future results of
operations or financial position of the Company. The Pro Forma Consolidated Fi-
nancial Statements should be read in conjunction with the Company's historical
consolidated financial statements and the notes thereto and the historical fi-
nancial statements and notes thereto of DirectAmerica, Positive Response, Pres-
tige, and Suzanne Paul included elsewhere herein.
18
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1996
HISTORICAL
----------------------------------------------------
ADJUSTMENTS ADJUSTMENTS
NATIONAL DIRECT POSITIVE SUZANNE FOR FOR PRO FORMA
MEDIA AMERICA RESPONSE PRESTIGE(1) PAUL (2,3) ACQUISITIONS (4) PRO FORMA OFFERING AS ADJUSTED
---------- ------- -------- ----------- ---------- ---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands, except per
share data
Revenues:
Product sales... $ 285,676 $ -- $43,362 $17,097 $19,330 $ -- $ 365,465 $ -- $ 365,465
Royalties....... 5,597 1,485 1,971 1,701 -- (3,268)(5) 7,486 -- 7,486
Production
income......... -- 692 -- -- -- (270)(5) 422 -- 422
Sales
commissions and
other revenues. 1,334 8 173 -- 1 -- 1,516 -- 1,516
---------- ------ ------- ------- ------- ------- ---------- --------- ----------
Net revenues.... 292,607 2,185 45,506 18,798 19,331 (3,538) 374,889 -- 374,889
Operating costs
and expenses:
Media purchases. 86,518 -- 23,437 2,822 3,585 -- 116,362 -- 116,362
Direct costs ... 151,198 1,266 20,934 8,361 9,295 (3,380)(5) 187,674 -- 187,674
Selling, general
and (100)(6)
administrative. 33,772 1,011 6,029 2,430 2,314 2,060 (7) 47,516 -- 47,516
Interest income. -- -- (36) (11) (73) -- (120) -- (120)
Interest
expense........ 1,015 -- -- -- -- 811 (8) 1,826 (961)(11) 865
---------- ------ ------- ------- ------- ------- ---------- --------- ----------
Total operating
costs and
expenses....... 272,503 2,277 50,364 13,602 15,121 (609) 353,258 (961) 352,297
---------- ------ ------- ------- ------- ------- ---------- --------- ----------
Income (loss)
before income
taxes.......... 20,104 (92) (4,858) 5,196 4,210 (2,929) 21,631 961 22,592
Income taxes.... 3,525 18 (1,648) 1,827 1,504 381 (9) 5,607 170 (12) 5,777
---------- ------ ------- ------- ------- ------- ---------- --------- ----------
Net income
(loss)......... $ 16,579 $ (110) $(3,210) $ 3,369 $ 2,706 $(3,310) $ 16,024 $ 791 $ 16,815
========== ====== ======= ======= ======= ======= ========== ========= ==========
Income per share
Primary......... $ 0.74 $ 0.64 (10) $ -- $ 0.62(10)
========== ========== ========= ==========
Fully-diluted... $ 0.71 $ 0.61 (10) $ -- $ 0.60(10)
========== ========== ========= ==========
Weighted average
number of common
and common
equivalent
shares
outstanding
Primary......... 23,175,900 26,114,138 (10) 2,000,000 (13) 28,114,138(10)
========== ========== ========= ==========
Fully-diluted... 23,287,600 26,225,838 (10) 2,000,000 (13) 28,225,838(10)
========== ========== ========= ==========
</TABLE>
- ---------
(1) Amounts included for Prestige have been translated from New Zealand dollars
to U.S. dollars at the approximate average exchange rate during the year
ended March 31, 1996 (US$1.0 = NZ$1.506).
(2) Amounts included for Suzanne Paul have been translated from Australian dol-
lars to U.S. dollars at the approximate average exchange rate during the
year ended March 31, 1996 (US$1.0 = A$1.336).
(3) Historically, Suzanne Paul's fiscal year end is June 30. Fourth quarter net
revenues for the year ended June 30, 1995 were 33.6% of Suzanne Paul's to-
tal net revenues for the year ended June 30, 1995. As such, 33.6% of each
fiscal 1995 statement of income item was added to the corresponding item
for the 9 month period ended March 31, 1996 for the purpose of determining
Suzanne Paul's historical statement of income for the year ended March 31,
1996.
(4) Represents the pro forma adjustments related to the DirectAmerica, Positive
Response, Prestige and Suzanne Paul acquisitions.
(5) Reflects the elimination of (i) royalty and production revenue generated by
DirectAmerica and Positive Response and the related expense incurred by the
Company from infomercials produced by DirectAmerica and Positive Response
for the Company and (ii) royalty and production revenue generated by Pres-
tige and the related expense incurred by Suzanne Paul under an existing
royalty and production agreement between them.
(6) Reflects the reduction in base salary of a major DirectAmerica shareholder
under his new employment agreement with the Company.
19
<PAGE>
(7) Reflects the amortization of goodwill in connection with the Acquisitions,
which will be amortized over 20 years from the date of the relevant Acqui-
sition.
(8) Reflects the interest expense associated with the note payable of $2.8 mil-
lion maturing on December 5, 1996 and the borrowings under the Company's
revolving credit facility to fund the cash portion of the purchase price
and the $4.6 million dividend paid in connection with the Prestige and Su-
zanne Paul acquisitions.
(9) Reflects the reduced tax benefit resulting from the application of the
Company's lower effective tax rate for the period to Positive Response's
losses and also reflects the increased tax benefit received as a result of
the interest expense incurred in connection with the Prestige and Suzanne
Paul acquisitions.
(10) Pro forma net income per share and pro forma as adjusted net income per
share are computed as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FULLY-
PRIMARY DILUTED
---------- ----------
<S> <C> <C>
Company's weighted average shares and common equivalent
shares outstanding: 23,175,900 23,287,600
Assumed issuance of shares for the Acquisitions:
DirectAmerica (additional shares for period prior to
acquisition date (October 25, 1995)).................... 313,586 313,586
Positive Response........................................ 1,836,773 1,836,773
Prestige................................................. 706,651 706,651
Suzanne Paul............................................. 81,228 81,228
---------- ----------
Pro forma weighted average shares........................ 26,114,138 26,225,838
========== ==========
Pro forma net income..................................... $ 16,024 $ 16,024
Addback to net income under the "if converted" method.... 570 --
---------- ----------
Pro forma net income for the Acquisitions................ $ 16,594 $ 16,024
========== ==========
Pro forma net income per share........................... $ 0.64 $ 0.61
========== ==========
Pro forma net income per share as adjusted for the
Offering computed as follows:
Pro forma weighted average shares outstanding as shown... 26,114,138 26,225,838
Pro forma shares issued in the Offering.................. 2,000,000 2,000,000
---------- ----------
Pro forma shares after the Offering...................... 28,114,138 28,225,838
========== ==========
Pro forma net income as adjusted for the Offering........ $ 16,815 $ 16,815
Addback to net income under the "if converted" method.... 570 --
---------- ----------
Pro forma net income as adjusted for the Offering........ $ 17,385 $ 16,815
========== ==========
Pro forma net income per share as adjusted for the
Offering................................................ $ 0.62 $ 0.60
========== ==========
</TABLE>
Pro forma net income per share as adjusted for the Offering on a primary and
fully-diluted basis would have been $0.65 and $0.63, respectively, after giving
effect on an after-tax basis to interest income of $824,000 associated with in-
vesting the portion of the net cash proceeds of the Offering after repayment of
indebtedness assuming a 5.0% interest rate.
(11) Reflects the elimination of interest expense associated with indebtedness
incurred in connection with the Positive Response, Prestige and Suzanne
Paul acquisitions.
(12) Reflects the income tax expense associated with the interest expense re-
flected in footnote (11) above.
(13) Reflects the issuance of 2,000,000 shares in the Offering.
20
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
AT MARCH 31, 1996
HISTORICAL
-------------------------------------
ADJUSTMENTS ADJUSTMENTS
NATIONAL POSITIVE SUZANNE FOR FOR PRO FORMA
MEDIA RESPONSE PRESTIGE(1) PAUL(2) ACQUISITIONS(3) PRO FORMA OFFERING AS ADJUSTED
-------- -------- ----------- ------- --------------- --------- ----------- -----------
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............ $ 18,405 $ 2,487 $ 792 $ 797 $ 375(4) $ 22,856 $ 19,983 (8) $ 42,839
Accounts receivable,
net.................... 32,051 5,469 3,857 3,441 (2,644)(4,5,6) 42,174 -- 42,174
Inventories............. 22,605 2,022 2,086 2,563 (400)(6) 28,876 -- 28,876
Prepaid expenses and
other.................. 19,323 7,265 65 189 (1,000)(6) 25,842 -- 25,842
-------- ------- ------- ------- ------- -------- -------- --------
Total current assets.... 92,384 17,243 6,800 6,990 (3,669) 119,748 19,983 139,731
Property and equipment,
net.................... 6,954 618 773 470 -- 8,815 -- 8,815
Other assets............ 2,907 676 -- 186 (762)(6) 3,007 -- 3,007
Goodwill and
intangibles, net....... 14,303 -- 19 2 35,410 (6) 49,734 -- 49,734
-------- ------- ------- ------- ------- -------- -------- --------
Total assets............ $116,548 $18,537 $ 7,592 $ 7,648 $30,979 $181,304 $ 19,983 $201,287
======== ======= ======= ======= ======= ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank... $ -- $ 1,578 $ -- $ -- $ -- $ 1,578 $ (1,578)(9) $ --
Accounts payable........ 20,412 1,329 681 492 -- 22,914 -- 22,914
Accrued expenses........ 26,510 3,366 396 211 775 (5,6) 31,258 -- 31,258
Sellers' note........... -- -- -- -- 2,800 (6) 2,800 (2,800)(9) --
Current portion of long-
term debt and capital
lease obligations...... 876 25 -- -- -- 901 -- 901
Other................... 5,864 401 1,059 2,332 (502)(4,5) 9,154 -- 9,154
-------- ------- ------- ------- ------- -------- -------- --------
Total current
liabilities............ 53,662 6,699 2,136 3,035 3,073 68,605 (4,378) 64,227
Long-term debt and
capital lease
obligations............ 4,054 85 -- -- 9,139 (7) 13,278 (9,139)(9) 4,139
Other liabilities....... 2,370 -- -- -- -- 2,370 -- 2,370
Shareholder current
account................ -- -- 417 -- (417)(4) -- -- --
-------- ------- ------- ------- ------- -------- -------- --------
Total liabilities....... 60,086 6,784 2,553 3,035 11,795 84,253 (13,517) 70,736
Shareholders' equity.... 56,462 11,753 5,039 4,613 19,184 (6) 97,051 33,500 (10) 130,551
-------- ------- ------- ------- ------- -------- -------- --------
Total liabilities and
shareholders' equity... $116,548 $18,537 $ 7,592 $ 7,648 $30,979 $181,304 $ 19,983 $201,287
======== ======= ======= ======= ======= ======== ======== ========
</TABLE>
- ---------
(1) Amounts included for Prestige have been translated from New Zealand dollars
to U.S. dollars at the approximate exchange rate in effect as of March 31,
1996 (US$1.0 = NZ$1.4688).
(2) Amounts included for Suzanne Paul have been translated from Australian dol-
lars to U.S. dollars at the approximate exchange rate in effect as of March
31, 1996 (US$1.0 = A$1.2774).
(3) Reflects the pro forma adjustments related to the Positive Response, Pres-
tige and Suzanne Paul acquisitions.
(4) Reflects the settlement of advances between the prior shareholders of Pres-
tige and Suzanne Paul and the respective acquired companies.
(5) Reflects the elimination of intercompany balances.
(6) Reflects the excess of the purchase price for the Positive Response, Pres-
tige and Suzanne Paul acquisitions over the net assets acquired under the
purchase method of accounting. The purchase price allocation for Positive
Response, Prestige and Suzanne Paul are based on management's preliminary
estimates of the fair value of assets acquired and liabilities assumed. The
consideration for each of the acquisitions is as follows:
Positive Response: reflects issuance of 1,836,773 shares of the Company's
Common Stock, 211,146 of which were issued into escrow and may be payable un-
der certain circumstances, valued at $25.9 million.
Prestige: reflects issuance of 706,651 shares of the Company's Common Stock
valued at $13.2 million and payment of approximately $4.2 million in cash.
Suzanne Paul Holdings: reflects issuance of 81,228 shares of the Company's
Common Stock valued at $1.5 million and a note payable of $2.8 million matur-
ing on December 5, 1996. The Company satisfied a dividend payable to the for-
mer shareholders of Suzanne Paul in the amount of $4.6 million, which was
funded by the Company with borrowings under the Company's revolving credit
facility.
(7) Reflects borrowings under the Company's revolving credit facility required
to fund the cash portion of the purchase price and related dividend payable
in connection with the Prestige and Suzanne Paul acquisitions.
21
<PAGE>
(8) Reflects the net proceeds of the Offering after repayment of debt incurred
in connection with the Positive Response, Prestige and Suzanne Paul acqui-
sitions.
(9) Reflects the repayment of borrowings under the Company's revolving credit
facility, outstanding Positive Response indebtedness and repayment of the
$2.8 million note payable maturing on December 5, 1996 issued to the share-
holders of Suzanne Paul.
(10) Reflects the issuance of 2,000,000 shares in the Offering and the result-
ing capital in excess of par value at the assumed public offering price of
$18.00 per share, net of offering costs.
22
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table presents selected financial and other data for each of the
fiscal years in the five-year period ended March 31, 1996. The financial data
for such fiscal years has been derived from the Company's consolidated finan-
cial statements and notes thereto, which have been audited by Ernst & Young
LLP. The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's audited consolidated financial statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
----------------------------------------------------------
YEARS ENDED MARCH 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands,
except per share data
STATEMENT OF OPERATIONS
DATA:
Net revenues $292,607 $176,167 $172,602 $141,997 $102,218
Gross profit 54,891 26,601 21,317 28,762 13,282
Operating income 21,119 317 (8,399) 6,706 (6,318)
Income (loss) before
income taxes 20,104 (372) (8,699) 6,335 (6,788)
Net income (loss) 16,579 (672) (8,699) 6,259 (4,854)
Income (loss) per common
share(1)
Primary $ 0.74 $ (0.05) $ (0.72) $ 0.48 $ (0.44)
Fully-diluted $ 0.71 $ (0.05) $ (0.72) $ 0.48 $ (0.44)
<CAPTION>
----------------------------------------------------------
AT MARCH 31,
1996 1995 1994 1993 1992
Dollars in thousands -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency) $ 38,722 $ 22,081 $ 1,377 $ 7,995 $ (1,780)
Total assets 116,548 64,143 47,475 46,771 34,258
Short-term debt 876 184 4,770 2,917 3,603
Long-term debt 4,054 3,613 448 1,090 1,492
Shareholders' equity 56,462 26,625 10,571 17,630 11,143
<CAPTION>
----------------------------------------------------------
YEARS ENDED MARCH 31,
1996 1995 1994 1993 1992
Dollars in thousands -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Gross profit margin 18.8% 15.1% 12.4% 20.3% 13.0%
Operating margin (2) 7.2% 3.3% 0.4% 5.2% (3.3%)
Current ratio (3) 1.72 1.69 1.04 1.29 0.92
EBITDA (4) $ 23,218 $ 7,485 $ 2,278 $ 9,453 $ (2,334)
Infomercials aired
during period 110 90 63 65 49
Country coverage (5) 60 42 32 19 11
</TABLE>
- ---------
(1) Income (loss) per common share amounts have been computed based upon the
weighted average number of common shares and dilutive common share equiva-
lents (options and warrants to purchase Common Stock and Series B Preferred
Stock) outstanding using the "if converted method" in fiscal 1996 and 1995
and the "treasury stock method" in fiscal 1994, 1993 and 1992. For fiscal
1996 and 1995, net income used to compute net income per common share
equals net income, plus after-tax interest expense incurred on outstanding
long-term debt and after-tax interest income earned on the investment of
excess proceeds from the assumed exercise of all outstanding options and
warrants to purchase Common Stock after repurchase using the treasury stock
method of 20% of the Company's outstanding Common Stock. For fiscal 1995,
1994, 1993 and 1992, the effect of the exercise of options and warrants to
purchase Common Stock and the conversion of Series B Preferred Stock was
not assumed in the calculation of net income (loss) per common share be-
cause the effect was anti-dilutive.
(2) Operating margin represents operating income plus severance expense of ap-
proximately $2.7 million in fiscal 1995 and unusual charges of approxi-
mately $2.9 million, $9.0 million, $725,000 and $3.0 million for fiscal
1995, 1994, 1993 and 1992, respectively, divided by net revenues.
(3) Current ratio represents the ratio of total current assets to total current
liabilities.
(4) EBITDA represents earnings before interest, income taxes, depreciation and
amortization plus severance expense of approximately $2.7 million in fiscal
1995 and unusual charges of approximately $2.9 million, $9.0 million,
$725,000 and $3.0 million for fiscal 1995, 1994, 1993 and 1992, respective-
ly.
(5) Country coverage represents countries where the Company's infomercials
could be viewed by consumers as of the indicated year end.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As more fully described elsewhere herein, the Company is engaged in the direct
marketing of consumer products, primarily through the use of infomercials, in
both domestic and international markets. The Company has historically been de-
pendent on a limited number of successful products to generate a significant
portion of its domestic net revenues. The Company's strategies are designed to
reduce the risk associated with relying on a limited number of successful prod-
ucts for a disproportionate amount of its revenues. These include expanding its
global presence, developing and marketing innovative products to enhance its
library of infomercial programs and lowering costs by becoming a fully-inte-
grated provider of consumer product marketing services. International expansion
has resulted in an increasing percentage of the Company's revenues being gener-
ated from the international infomercial marketplace. As the Company enters new
markets overseas, it is able to air infomercials from its existing library,
thus reducing its dependence on new products and new infomercial productions.
The Company takes advantage of product awareness created by its infomercials
and extends the sales life of its products through non-infomercial distribution
channels. These include retail arrangements and agreements with manufacturers
of consumer products pursuant to which the Company's strategic partners supply
new products and retail distribution channels for product sales.
RESULTS OF OPERATIONS
The following table sets forth operating data of the Company as a percentage of
net revenues for the periods indicated below.
<TABLE>
<CAPTION>
--------------------
YEARS ENDED MARCH
31,
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Operating costs and expenses:
Media purchases 29.6 29.5 32.5
Direct costs 51.7 55.4 55.1
Selling, general and administrative 11.5 11.8 12.0
Severance expense for former Chairman
and Chief Executive Officer -- 1.5 --
Unusual charges -- 1.6 5.2
Interest expense 0.3 0.4 0.2
----- ----- -----
Total operating costs and expenses 93.1 100.2 105.0
----- ----- -----
Income (loss) before income taxes 6.9 (0.2) (5.0)
----- ----- -----
Net income (loss) 5.7% (0.4)% (5.0)%
===== ===== =====
</TABLE>
Comparison of Fiscal 1996 with Fiscal 1995
Net revenues were $292.6 million in fiscal 1996 as compared to $176.2 million
in fiscal 1995, an increase of $116.4 million or 66.1%.
Domestic net revenues were $141.6 million in fiscal 1996 as compared to $95.8
million in fiscal 1995, an increase of $45.8 million or 47.8%. Domestic
infomercial and non-infomercial net revenues increased by $45.3 million and
$500,000, respectively. Domestically, the Company produced 15 new infomercials
in fiscal 1996 as compared to 6 in fiscal 1995. The increase in net revenues
resulted from sales generated from certain of such new infomercials, princi-
pally sales of the Company's Ab-Roller Plus product, and the continued sales
from infomercials originated in prior years. The increase in the absolute num-
ber of new infomercials in fiscal 1996 was the result of the revitalization of
the Company's marketing department and an increase in working capital. In fis-
cal 1995, new infomercial production
24
<PAGE>
was adversely affected by the aborted ValueVision tender offer. See note 14 to
the Company's consolidated financial statements. Returns as a percentage of
gross revenues decreased from 11.8% in fiscal 1995 to 6.4% in fiscal 1996. The
decrease in returns as a percentage of gross revenues was primarily due to a
change in the Company's sales mix toward lower priced products, which histori-
cally have experienced a lower return rate. Approximately 36.9%, 17.9% and
15.0% of the Company's fiscal 1996 domestic net revenues were generated from
sales of its Ab-Roller Plus, E-Force and Regal Ware Royal Diamond Cookware
products, respectively. The Ab-Roller Plus generated approximately 76.1% of
fourth quarter fiscal 1996 domestic net revenues.
Foreign net revenues were $151.0 million in fiscal 1996 as compared to $80.4
million in fiscal 1995, an increase of $70.6 million or 87.8%. The increase in
net revenues from foreign sales was due to the Company's continuing expansion
in the Asian market and the continued expansion of the Company's foreign oper-
ations from over 40 countries at the end of fiscal 1995 to over 60 countries
in Europe and Asia at the end of fiscal 1996. European net revenues increased
11.7% from $50.5 million in fiscal 1995 to $56.4 million in fiscal 1996. Asian
net revenues were $94.6 million in fiscal 1996 as compared to $29.9 million in
fiscal 1995. On a local currency basis, Asian net revenues for the year in-
creased 247.0% over the prior year. The increase was principally the result of
a full year of operations in Japan, the acquisition of additional airtime in
Japan and the Company's entrance into new countries, such as Malaysia, New
Zealand, Australia and the Philippines in fiscal 1996. The Company is able to
leverage its existing infomercial library so that international net revenues
are not dependent on any one or a few products. The Company did not commence
airing the Ab-Roller Plus infomercial internationally until after March 31,
1996. Therefore, in fiscal 1996, the Company generated no sales from the air-
ing of its Ab-Roller Plus infomercial in international markets.
Total operating costs and expenses were $272.5 million in fiscal 1996 as com-
pared to $176.5 million in fiscal 1995, an increase of $96.0 million or 54.4%.
This corresponded with the 66.1% increase in net revenues over the prior year.
Media purchases were $86.5 million (net of $13.8 million in media sales) in
fiscal 1996 as compared to $52.0 million (net of $13.5 million in media sales)
in fiscal 1995, an increase of $34.5 million or 66.3%, principally as a result
of the 66.1% increase in net revenue over the prior year. The ratio of media
purchases to net revenues remained relatively stable at 29.6% in fiscal 1996
as compared to 29.5% in fiscal 1995. A slight decrease in the ratio of inter-
national media purchases to net revenues was offset by a slight increase in
the ratio domestically.
Direct costs consist of the cost of materials, freight, infomercial produc-
tion, commissions and royalties, order fulfillment, in-bound telemarketing,
credit card authorization and warehousing. Direct costs were $151.2 million in
fiscal 1996 as compared to $97.6 million in fiscal 1995, an increase of $53.6
million or 54.9%. This increase was primarily a result of the 66.1% increase
in net revenues in fiscal 1996. As a percentage of net revenues, direct costs
were 51.7% in fiscal 1996 and 55.4% in fiscal 1995. Domestically, direct costs
as a percentage of net revenues decreased by approximately 3.8 percentage
points, primarily due to a reduction in order fulfillment and commission
costs. Internationally, direct costs as a percentage of net revenues decreased
approximately 3.7 percentage points, primarily due to reduced product and
freight costs. The Company experienced a significant reduction of freight
costs in the Asian markets in fiscal 1996. These costs are typically higher
upon initial entrance into a market. The Company entered the Japanese market
in July 1994.
Selling, general and administrative expenses were $33.8 million in fiscal 1996
as compared to $20.8 million in fiscal 1995, an increase of $13.0 million or
62.5%, primarily due to costs associated with domestic and international ex-
pansion. Selling, general and administrative expenses as a percentage of net
revenues decreased slightly from 11.8% in fiscal 1995 to 11.5% in fiscal 1996.
Interest expense was approximately $1.0 million in fiscal 1996 as compared to
$689,000 in fiscal 1995, an increase of approximately $326,000. This increase
was primarily due to an increase in the Company's average outstanding debt
balance and a full year of amortization of the loan discount ($399,000) asso-
ciated with the Company's $5.0 million term loan obtained in October 1994.
The Company had an effective tax rate of 17.5% for fiscal 1996. The primary
reason for this rate was the benefit obtained by the Company from the utiliza-
tion of net operating loss carryforwards. The Company's effective tax rate is
expected to increase in fiscal 1997 because the benefit from remaining avail-
able net operating loss carryforwards, which relate primarily to employee
stock options, will be recorded directly to shareholders' equity if realized.
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The Company had net income of $16.6 million in fiscal 1996 as compared to a
net loss of $672,000 in fiscal 1995, an improvement of $17.3 million. This was
primarily a result of the 66.1% growth in the Company's net revenues combined
with a 3.7 percentage point reduction in direct costs as a percentage of net
revenues. In addition, the prior year included approximately $2.7 million in
severance expense to the Company's former Chairman and unusual charges of $2.9
million.
Comparison of Fiscal 1995 with Fiscal 1994
Net revenues were $176.2 million in fiscal 1995 as compared to $172.6 million
in fiscal 1994, an increase of $3.6 million or 2.1%.
Domestic net revenues were $95.8 million in fiscal 1995 as compared to $126.6
million in fiscal 1994, a decrease of $30.8 million or 24.3%. Domestic
infomercial and non-infomercial net revenues decreased by $25.2 million and
$5.6 million, respectively. The decrease in infomercial net revenues was pri-
marily due to a reduction in the number of infomercials available for airing
during fiscal 1995. New infomercial production was adversely affected by the
events of the early part of 1995 relating to the ValueVision tender offer. See
note 14 to the Company's consolidated financial statements. The Company intro-
duced 6 new infomercials in fiscal 1995 as compared to 17 in fiscal 1994. Do-
mestic net revenues were also unfavorably impacted by a change in the
Company's sales mix toward higher priced products, which have historically ex-
perienced a higher return rate. Returns as a percentage of gross revenues in-
creased from 8.5% in fiscal 1994 to 11.8% in fiscal 1995. The decline in non-
infomercial net revenues was primarily a result of the Company's decision to
receive royalties for certain products in lieu of full sales participation in
retail distribution. Despite the $5.6 million decline in non-infomercial net
revenue, the Company realized approximately $1.0 million of additional gross
profit from these revenues during fiscal 1995. In addition, as a result of its
decision to shift away from owning inventory for retail sales in favor of roy-
alty arrangements with manufacturers, the Company believes it has provided it-
self with a more stable and steady stream of royalty revenue with limited as-
sociated inventory risk. Approximately 54.0% and 15.0% of the Company's fiscal
1995 domestic net revenues were generated from sales of its Powerwalk Plus
product and Regal Ware Royal Diamond Cookware products, respectively.
Foreign net revenues were $80.4 million in fiscal 1995 as compared to $46.0
million in fiscal 1994, an increase of $34.4 million or 74.8%. On a local cur-
rency basis, foreign net revenues for the year increased 67.7% over the prior
year. The increase in net revenues from foreign sales was primarily due to the
Company's successful entrance into the Japanese market which began in late
July 1994. Japanese net revenues were $25.7 million for the period ended March
31, 1995. The remaining $8.7 million increase in foreign net revenues was due
to the continued expansion of the Company's foreign operations from 30 coun-
tries at the end of fiscal 1994 to over 40 countries in Europe and the Middle
East at the end of fiscal 1995. The Company is able to leverage its existing
infomercial library so that foreign net revenues are not dependent on any one
or a few products.
Total operating costs and expenses were $176.5 million for fiscal 1995 as com-
pared to $181.3 million in fiscal 1994, a decrease of $4.8 million or 2.6%.
Media purchases were $52.0 million (net of $13.5 million in media sales) in
fiscal 1995 as compared to $56.2 million (net of $5.6 million in media sales)
in fiscal 1994, a decrease of $4.2 million or 7.5%, principally as a result of
a decrease in domestic infomercial airings. The ratio of media purchases to
net revenues decreased from 32.5% in fiscal 1994 to 29.5% in fiscal 1995 as a
result of a higher proportion of current year net revenues being generated in
international markets characterized by more effective media costs. Interna-
tionally, the ratio of media purchases to net revenues further benefited from
increased availability of lower cost time while the domestic ratio was favor-
ably impacted by an effective mix of media time utilized to air Company prod-
ucts and media time sold.
Direct costs were $97.6 million in fiscal 1995 as compared to $95.1 million in
fiscal 1994, an increase of $2.5 million or 2.7%. This increase was a result
of the 2.1% increase in net revenues during the year. As a percentage of net
revenues, direct costs remained stable at 55.4% in fiscal year 1995 and 55.1%
in fiscal year 1994. Domestically, direct costs as a percentage of net reve-
nues decreased by 1.9 percentage points as a result of a reduction in non-
infomercial direct costs. Higher infomercial product costs due to a change in
product mix were offset by a reduction
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in freight, telemarketing and commission costs. The reduction in non-
infomercial direct costs was due to the Company's decision to receive royal-
ties for certain products in lieu of full sales participation in retail.
Internationally, direct costs as a percentage of net revenues increased ap-
proximately 4.2 percentage points, primarily due to increased freight, ful-
fillment and processing costs as a result of the Company's expansion into new
countries, especially Japan. These costs are typically higher upon initial en-
trance into a market.
Selling, general and administrative expenses were $20.8 million in fiscal 1995
as compared to $20.7 million in fiscal 1994, a decrease of $100,000 or 0.5%.
Selling, general and administrative expenses as a percentage of net revenues
decreased in fiscal 1995 to 11.8% from 12.0% in fiscal 1994. The reduction in
selling, general and administrative expenses as a percentage of net revenues
in fiscal year 1995 was accomplished despite costs associated with the
Company's entrance into the Japanese market and an increased provision for bad
debt expense of $750,000 primarily related to royalties due from a single cus-
tomer. As a result of staff reductions made in late fiscal 1994 and early fis-
cal 1995, the Company reduced its domestic personnel costs by $1.8 million.
During fiscal 1995, the Company incurred severance expense of approximately
$2.7 million relating to the resignation of the Company's former Chairman and
Chief Executive Officer. See note 8 to the Company's consolidated financial
statements.
The Company's results of operations for fiscal 1995 included unusual charges
of $2.9 million relating to settlement of ongoing litigation and associated
legal fees. See note 14 to the Company's consolidated financial statements.
$1.1 million of such unusual charges were incurred in the fourth quarter of
fiscal 1995.
Included in the unusual charges of $9.0 million for fiscal 1994 was $4.1 mil-
lion for certain legal settlements. In addition, the Company recognized addi-
tional expenses during the period including: $1.1 million in legal fees asso-
ciated with the aforementioned settlements and class action lawsuits; $1.0
million related to the relocation of the Company's fulfillment center to Phoe-
nix, Arizona; $1.3 million in costs associated with the terminated tender of-
fer and agreement of merger with ValueVision; $725,000 in severance related to
personnel reductions; $591,000 in costs associated with two aborted stock of-
ferings; and $200,000 in other costs.
Interest expense was $689,000 in fiscal 1995 as compared to $300,000 in fiscal
1994, an increase of $389,000. This increase reflects interest at 9.5% as well
as amortization of the loan discount ($150,000) and loan origination fees as-
sociated with the Company's $5.0 million term loan obtained in October 1994
and higher interest rates during fiscal 1995.
The Company had a net loss of $672,000 in fiscal 1995 as compared to a net
loss of $8.7 million in fiscal 1994, an improvement of approximately $8.0 mil-
lion.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $38.7 million at March 31, 1996 compared to
$22.1 million at March 31, 1995, an increase of $16.6 million. This was prin-
cipally due to increases in accounts receivable and inventory associated with
the Company's increased sales volume and with the Company's domestic and in-
ternational expansion. Cash flow provided by operations was $5.5 million for
the year ended March 31, 1996 as compared to $1.9 million for the prior year.
The $17.3 million increase in net income for the period was partially offset
by the aforementioned increase in working capital accounts.
The Company's international revenues are subject to foreign exchange risk. To
the extent that the Company incurs local currency expenses that are based on
locally denominated sales volume (order fulfillment and media costs), this ex-
posure is reduced significantly. The Company closely monitors exchange rate
movements and will protect short term cash flows through the use of options
and/or futures contracts when appropriate. The Company has recently obtained a
$50.0 million foreign exchange line for such purposes. In the long term, the
Company believes that it has the ability to change prices in a timely manner
in order to react to major currency fluctuations.
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The Company had capital expenditures of approximately $3.9 million in fiscal
1996, of which approximately $2.0 million related to the updating of its world-
wide information management system. The Company has budgeted approximately $4.0
million for capital expenditures in fiscal 1997, including in excess of $1.0
million for its worldwide information management system.
The Company has a $20.0 million revolving credit facility which is available
for working capital and general corporate purposes as well as for the issuance
of letters of credit. At March 31, 1996, the Company had approximately $3.8
million of letters of credit outstanding and no outstanding borrowings under
the revolving credit facility.
The Company believes that its available cash, cash from operations and avail-
able borrowings under its revolving credit facility will be sufficient to meet
its normal operating, capital expenditure and debt service requirements for the
near term.
In fiscal 1996, the Company received approximately $7.6 million from the exer-
cise of stock options and warrants and the repayment of existing loans by cer-
tain executive officers. These funds were used to continue the Company's global
expansion and for working capital purposes. At March 31, 1996, the Company had
a total of 8,081,884 stock options and warrants outstanding which, while having
a dilutive effect on future earnings per share if exercised, would provide the
Company with approximately $47.0 million in additional capital.
The Company intends to continue to pursue acquisition and expansion opportuni-
ties as they may arise. In connection therewith, it may be necessary for the
Company to pursue sources of financing for such transactions outside of the
Company's existing sources. Subsequent to March 31, 1996, the Company completed
its acquisition of Positive Response in a stock for stock transaction, which
resulted in the issuance of approximately 1,836,773 shares of the Company's
Common Stock, 211,146 of which have been issued into escrow and may be deliv-
ered to the former shareholders of Positive Response within 18 months, upon the
realization of certain assets, and the repayment by the Company of approxi-
mately $1.0 million of outstanding debt of Positive Response. Subsequent to
March 31, 1996, the Company also acquired two direct response marketing compa-
nies, Prestige and Suzanne Paul. The aggregate consideration paid by the Com-
pany for Prestige and Suzanne Paul was approximately $4.2 million in cash, $2.8
million in a note payable December 5, 1996 and 787,879 shares of Common Stock.
Upon consummation of these acquisitions, the Company also funded a dividend of
approximately $4.6 million to the shareholders of Suzanne Paul. In addition,
the Company may be required to issue an additional $5.0 million in Common
Stock, valued at then present market prices, in 1997 and 1998, contingent upon
the levels of net income achieved in those years by Prestige and Suzanne Paul.
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BUSINESS
National Media is a global leader in the use of direct response transactional
television programming, known as infomercials, to market consumer products. Na-
tional Media is the world's largest publicly held infomercial company making
infomercial programming available to more than 260 million households in 60
countries worldwide.
BACKGROUND
The infomercial industry was first developed in the United States after the FCC
rescinded its limitations on advertising minutes per hour in 1984, thereby per-
mitting 30-minute blocks of television advertising. The deregulation of the ca-
ble television industry and the resulting proliferation of cable channels in-
creased the available media time and led to the growth of the United States
infomercial industry. Producers of infomercials combined direct response mar-
keting and retailing principles within a television talk show-type format and
purchased media time from cable channels to air their infomercials. After an
initial growth period, the industry consolidated through the end of the 1980s.
At the same time, increased attention from the FTC and federal and state con-
sumer protection agencies led to greater regulation of the industry and to the
development of the National Infomercial Marketing Association as a self-regula-
tory organization. By the early 1990s, infomercials and home shopping cable
channels had become a more accepted forum for obtaining information about prod-
ucts and services and making purchases from home. As the infomercial industry
has matured, the variety of products marketed through infomercials has steadily
increased. Today, offerings as diverse as car care products and computers are
marketed through infomercials.
The development of the international infomercial industry began in Western Eu-
rope following the initial industry development in the United States. Quantum
Marketing International, which was acquired by the Company in 1991, was one of
the pioneers in the international infomercial industry's development, commenc-
ing operations in 1990. The industry expanded throughout Europe and then into
non-European markets through the early 1990s and continues to expand into other
worldwide markets today. Whereas domestically, distribution of products through
infomercials is viewed as an alternative to retail, mail order and other means
of distribution, in many international markets, distribution through tradi-
tional channels is not readily accessible to many consumers. As a result of
these factors, the Company believes that it has an opportunity to be a primary
distributor of innovative consumer products in the international marketplace.
STRATEGY
National Media's goal is to be recognized as a worldwide leader in direct mar-
keting. Through direct response transactional television programming and inte-
grated consumer marketing techniques, the Company is pursuing a business strat-
egy focusing on: (i) expanding its global presence, (ii) developing and market-
ing innovative consumer products to enhance its library of infomercial programs
and (iii) lowering costs by becoming a fully-integrated provider of consumer
product marketing services.
Expand Global Presence. The Company is continuing its efforts to expand its po-
sition as a worldwide leader in infomercial programming. Through its existing
media time and order fulfillment operations, the Company has the ability to de-
liver infomercial programming and products to over 260 million households
worldwide. The Company intends to aggressively increase its number of media
outlets in new and existing markets through strategic acquisitions and long-
term and other agreements with various network affiliates and cable networks.
At present, the Company has ongoing relationships, some of which are long-term,
with networks in North America such as America's Talking, BET, CNBC, Discovery,
E!, ESPN2, The Family Channel, FX, Home Team Sports, The Learning Channel,
Lifetime Television, The Nashville Network, The New Inspirational Network,
Product Information Network, SCIFI Channel, TV Food Network and USA Network
and, internationally, with satellite channels such as Eurosport, Flextech
(Starstream) and The NBC Superchannel. The Company has also acquired the rights
to use a twenty-four hour digital satellite transponder to broadcast its
infomercials in Europe.
In addition to increasing media time in existing markets, National Media plans
to enter additional geographic markets, including South Africa, mainland China,
India and Indonesia. Initial entry into these markets is currently expected by
the end of calendar year 1997.
Develop and Market Innovative Products to Enhance Library of Infomercial Pro-
grams. The Company continually seeks out the most innovative consumer products
which it can market and distribute profitably. The Company has
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built an in-house product development/marketing department responsible for re-
searching, developing and analyzing products and product ideas. The Company
augments its product development activities through strategic relationships
with Mitsui & Co., Ltd., one of the world's largest diversified services compa-
nies, certain media companies and various third-party manufacturers.
The Company believes that its large library of infomercial programs, together
with its extensive international operations and expertise in product sourcing,
in-bound telemarketing, order fulfillment and customer service, gives it a sig-
nificant competitive advantage over others desiring to enter its existing or
new markets. While the Company incurs certain initial and ongoing costs in con-
nection with adapting a product and infomercial for specific markets, the pri-
mary expenses of product and infomercial development and infomercial production
are incurred when the product/infomercial is first developed for its initial
target market. Thus, as the Company obtains sufficient media time in additional
markets, it can quickly, efficiently and relatively inexpensively begin selling
products in such new markets.
The Company believes that by further expanding its coverage into other parts of
the world it will be able to further leverage its library of infomercial pro-
grams and associated products by extending the time period during which each
product generates revenues and, therefore, the total worldwide revenues for a
particular product. At present, the Company's total product/infomercial library
available for introduction into each new market consists of over 100 products.
Lower Costs by Becoming a Fully-Integrated Provider of Consumer Product Market-
ing Services. National Media seeks to be the low-cost provider in the
infomercial industry. The Company has created a state of the art order fulfill-
ment system to service its North American operations and is working to more
fully integrate its entire worldwide operations. The Company also continues to
explore methods to better control each step in the development and life cycle
of a product/infomercial and develop its expertise in, and refine its systems
with regards to, product sourcing, in-bound telemarketing, order fulfillment
and customer service. National Media believes that its current competitive ad-
vantages of purchased block media time, multi-country coverage and fully-inte-
grated program production, product sourcing and order fulfillment, as well as
the development of new long-term media and marketing partners, provide it with
a strong base from which it can continue to lower its costs.
PRODUCT DEVELOPMENT
The Company's product development/marketing department researches and develops
new products that may be suited for direct response television marketing and
subsequent marketing through non-infomercial distribution channels. The
Company's product development staff develops new product ideas from a variety
of sources, including inventors, suppliers, trade shows, industry conferences,
strategic alliances with manufacturing and consumer product companies and the
Company's ongoing review of new developments within its targeted product cate-
gories. As a result of the Company's prominence in the infomercial industry, it
also receives unsolicited new product proposals from independent third parties.
The Company currently reviews over 100 new product proposals per month. That
number is expected to increase through the acquisition of Positive Response and
as the Company otherwise grows. The evaluation phase of product development
generally takes two to eight weeks, depending upon the product being reviewed.
During this phase, the Company (i) evaluates the suitability of the product for
television demonstration and explanation, (ii) anticipates the perceived value
of the product to consumers, (iii) determines whether an adequate and timely
supply of the product can be obtained and (iv) analyzes whether the estimated
profitability of the product satisfies the Company's criteria.
During fiscal 1996, the Company acquired the Flying Lure fishing product busi-
ness, a well-known brand name in the outdoor category. Additionally, in order
to develop new products, the Company works closely with certain consumer prod-
uct companies such as (i) Blue Coral, Inc. and the Media Group (Durable Prod-
ucts) in the car wax and auto care segment, (ii) CSA, Inc. and Venture Aerobic
Products, Inc. in the health and fitness product segment and (iii) Regal Ware,
Inc. in the housewares segment. A clear advantage of these relationships is
that the Company's partner will typically provide research and development sup-
port and assume inventory responsibility, thereby reducing the Company's finan-
cial risk as well as its working capital requirements.
The Company has continued to devote attention to the development of products
specifically targeted at the European and international markets, primarily in
the music category. In fiscal 1996, the Company introduced 5 new products for
European-developed infomercials and has plans to introduce approximately 5 new
products in fiscal
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1997. The Company regularly reviews its infomercial library to select those
products which it believes will be successful in Europe and/or Asia. With new
products, this selection process is usually completed within one year of the
introduction of a product domestically. When a product which was initially sold
domestically is selected for international distribution, the infomercial is
dubbed and product literature is created in the appropriate foreign languages.
In addition, a review of the product's and the infomercial's compliance with
local laws is completed. The Company then begins airing the infomercial inter-
nationally. Typically, infomercials are first aired internationally by the Com-
pany in its European markets. While the majority of the Company's infomercials
aired internationally have historically originated from its United States oper-
ations, the Company also airs infomercials and distributes products of other
independent domestic infomercial companies internationally, including four of
the industry's other leading infomercial companies (Guthy-Renker Corporation,
Inphomation, Inc., the Media Group and Kent and Spiegel). The Company brought
20 new products to market globally during fiscal 1996 and expects to bring ap-
proximately 30 new products to market during fiscal 1997.
The Company obtains the rights to new products created by third parties through
various licensing arrangements generally involving royalties related to sales
of the product. The amount of the royalty is negotiated and generally depends
upon the level of involvement of the third party in the development and market-
ing of the product. The Company generally pays the smallest royalty to a third
party that only provides a product concept. A somewhat higher royalty is paid
to a third party that has fully developed and manufactured a product. The Com-
pany also obtains the rights to sell products which have already been devel-
oped, manufactured and marketed through infomercials produced by other compa-
nies. In such cases, the Company generally pays a higher royalty rate to the
third party because of the relatively small amount of the Company's resources
required to develop the product. The Company generally seeks exclusive world-
wide rights to all products in all means of distribution. In some cases, the
Company does not obtain all marketing and distribution rights, but seeks to re-
ceive a royalty on sales made by the licensor pursuant to the rights retained
by the licensor.
INFOMERCIAL DEVELOPMENT AND TEST MARKETING
Once the Company decides to bring a product to market, it arranges for the pro-
duction of a 30-minute infomercial that will provide in-depth demonstrations
and explanations of the product. The Company attempts to present a product in
an entertaining and informative manner utilizing a variety of program formats,
including live talk shows and live paid studio audience programs. The Company's
infomercials are currently produced in-house or by independent production com-
panies with experience in the Company's product categories in the United States
and other countries. The acquisition of Positive Response will enhance the
Company's internal capability to produce a substantial number of infomercials
in the future. The production of an infomercial generally takes approximately 8
to 16 weeks to complete, at a cost typically ranging from $150,000 to $300,000
per infomercial. In addition, producers, hosts and spokespersons generally re-
ceive fees based upon sales of the product.
Following completion of the production of an infomercial, the program is then
tested in the United States in specific time slots on both national cable net-
works and targeted broadcast stations. If a show achieves acceptable results in
the market tests, it is generally aired on a rapidly increasing schedule on ca-
ble networks and broadcast channels. During this initial phase, the Company may
modify the creative presentation of the infomercial and/or the retail pricing,
depending upon viewer response. After the initial marketing phase, the Company
may adjust the frequency of a program's airings to achieve a schedule of pro-
grams that it believes maximizes the profitability of all of the Company's
products being marketed through infomercial programming at a given time. In
general, the Company airs each infomercial domestically for 4 to 10 months or
more, after which the potential may exist for international airings which may
range from 12 to 24 months, or longer in some instances.
The Company believes that it has the largest library of infomercials and asso-
ciated products in the world. As of March 31, 1996, the Company's library in-
cluded over 100 infomercials and products. The Company believes that this li-
brary is a significant asset when it negotiates to gain access to media time,
particularly in new markets.
MEDIA ACCESS
An important part of the Company's ability to successfully market products is
its access to media time. The Company's infomercial programming is presently
available to more than 260 million households in 60 countries worldwide, in-
cluding Argentina, Australia, Austria, the Benelux countries, Brazil, Canada
Denmark, Ecuador, most
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Eastern European countries, Finland, France, Germany, Greece, Ireland, Italy,
Japan, Mexico, certain Middle Eastern countries, New Zealand, Norway, Peru,
Portugal, Russia, Singapore, Spain, certain South American countries, Sweden,
Switzerland, Taiwan, Turkey, the United Kingdom and the United States. The Com-
pany has current plans to open new markets in South Africa, mainland China, In-
dia and Indonesia by calendar year end 1997.
At present, the Company utilizes approximately 1,000 hours of cable and broad-
cast television time per week in the United States and in excess of 650 hours
per week internationally, most of which is satellite and terrestrial broadcast
time, to air its infomercials. For the most part, cable broadcast technology is
not as prevalent internationally as it is in North America. The Company be-
lieves that a large and productive inventory of media time is necessary to
maintain a competitive advantage and allows the Company to maximize the reve-
nue-producing potential from its library of infomercials. Historically, approx-
imately one-half of the Company's cable air time in the United States and over
two-thirds of the Company's satellite and terrestrial air time internationally
has been purchased under long-term contracts that provide for specific time
slots over the life of the respective contracts.
Domestic. Domestically, the Company purchases most of its cable television time
directly from cable networks and their respective media representatives, and
presently has commitments for cable television time slots for periods ranging
from one month to four years. Such commitments for cable television access are
generally longer in duration than broadcast television time, which is often
purchased on an "as available" basis. These cable networks presently include:
America's Talking, BET, CNBC, Discovery, E!, ESPN2, The Family Channel, FX,
Home Team Sports, The Learning Channel, Lifetime Television, The Nashville Net-
work, The New Inspirational Network, Product Information Network, SCIFI Chan-
nel, TV Food Network and USA Network. The Company believes that at least one of
the above networks is carried by every local cable system carrier throughout
the United States.
In addition to domestic air time purchased on cable networks, the Company also
purchases broadcast television time from network affiliates and independent
stations. Broadcast television time segments are purchased primarily in 30-min-
ute spots. The Company also purchases 60 and 120-second spots where economi-
cally feasible and adapts portions of its infomercials for airings in such
spots. The time segments on broadcast television are purchased primarily on a
quarterly basis based on the availability of programming time. In the event
that the Company determines that such time slots are not advantageous to the
Company, the Company is able to terminate such agreements quickly. The Company
intends to continue to pursue opportunities in new television markets through
other cable channels, cable operators and with additional broadcast television
stations in existing television markets. The Company believes that there is
currently more than an adequate supply of broadcast television time available
from these sources in the United States to satisfy the Company's needs. In fis-
cal 1996, approximately 51.0% of the media time purchased by the Company in
North America came from cable television and approximately 49.0% came from net-
work affiliates and independent television stations. The Company's infomercials
generally are aired in the United States between the hours of 3:00 a.m. and
2:00 p.m., Eastern time, seven days a week.
Recently, larger multiple system operators in the United States have elected to
sell air time which was previously left unutilized, or "dark." The Company be-
lieves that this may create an opportunity to lower its cost of airtime as well
as obtain additional airtime in desired markets. The Company generally has the
right to sell any media time it may have the right to use. During fiscal 1996,
the Company maintained a broker relationship with several companies to which it
sold air time. In addition to generating revenues, this ability to resell ex-
cess time reduces some of the risk associated with large purchases of media
time.
International. Internationally, the Company's infomercials are aired on one or
more of three technologies in its market territories: (i) satellite transmis-
sion direct to homes with satellite reception dishes, (ii) cable operators who
retransmit satellite broadcasts to cable-ready homes and (iii) terrestrial
broadcast television. The Company's satellite air time is obtained through
long-term agreements with companies that own or lease satellite transponder
time. When negotiating to gain access to media time in a new market, the Com-
pany believes that its existing library of more than 100 infomercials which are
available for immediate introduction into such new market, together with its
general industry experience, gives it a significant competitive advantage.
Since 1991, the Company has entered into a number of long-term, exclusive con-
tracts with pan-European satellite channels such as Eurosport, Flextech
(Starstream) and The NBC Super Channel. The Company recently extended its
agreement with Eurosport, the
32
<PAGE>
leading European sports channel, providing the Company with 48 hours of time
per week in which to air its Quantum Channel-branded programming. During the
term of these contracts, the Company is generally entitled to broadcast pro-
gramming continuously for a specified period of time and is guaranteed a speci-
fied amount of satellite television hours per month. Under some of these ar-
rangements, the Company has rights of first refusal for any additional
infomercial air time that becomes available. In Japan, the Company purchases
its media time exclusively through its partner, Mitsui & Co., Ltd. As a result
of these media relationships, the Company's transactional television program-
ming can be seen in the Middle East, Asia and in virtually every country in Eu-
rope, and its products are available for purchase in approximately 60 coun-
tries. The Company's long-term media contracts in Europe expire at various
dates from August 1996 through 1999. The Company believes it will be able to
renew, extend or replace such agreements on reasonable terms. As was the case
with the extension of the Eurosport contract, the Company expects that it will
face increases in costs associated with the renewal of certain of its media
contracts, which increases are not expected to have a material adverse effect
on the Company. The Company intends to aggressively pursue marketing relation-
ships in additional markets.
SOURCING AND MANUFACTURING
The Company uses sources in the United States and several countries in Europe
and Asia to manufacture products sold through its infomercials. The Company has
entered into strategic partnerships with several manufacturers in various prod-
uct categories in an effort to reduce its dependence on third party manufactur-
ers. The Company believes that its strategic partnership strategy reduces the
risk of supply problems, such as delays in receiving shipments, which could
have a material adverse effect on the success of a product. The Company closely
monitors the availability of supplies of products and promptly adjusts the air
time of an infomercial for a product which cannot be adequately supplied. Addi-
tionally, the Company employs a technical/engineering firm in Hong Kong to co-
ordinate and direct the Company's manufacturing sources in Asia and to monitor
the quality of the products manufactured in such countries. The same product
manufacturing sources may be utilized irrespective of whether an infomercial is
being aired in the United States or internationally.
Before the Company takes any sizeable inventory position in a product, the Com-
pany test markets the product. The Company then purchases additional inventory
of the product which generally takes four to six weeks to deliver.
IN-BOUND TELEMARKETING
The Company strives to create a problem-free fulfillment process for its cus-
tomers consisting of in-bound telemarketing, order fulfillment and customer
service. The first step in this process is the order-taking function known as
in-bound telemarketing. Customers may order products marketed through
infomercials during or after the infomercial by calling a telephone number
(toll-free in the United States), which is shown periodically on the television
screen during the broadcast. Both domestically and internationally, the Company
currently subcontracts its telemarketing function to one of various third par-
ties that provide this service for a fee based principally on the number of
telephone calls answered. In all instances domestically and in most instances
internationally, in-bound telemarketers electronically transmit orders to the
Company's order fulfillment centers where the product is packaged and shipped.
In certain cases, at the time of purchase, the in-bound telemarketers also pro-
mote, "cross-sell" and "up-sell" complementary and/or additional products re-
lating to the product for which the inquiry is received. Such sales efforts are
orchestrated by the Company's marketing personnel who script the sales ap-
proaches of the telemarketing personnel.
In September 1995, the Company began to take steps to reduce its telemarketing
costs. In connection with its settlement of litigation with ValueVision, the
Company entered into an agreement with ValueVision pursuant to which
ValueVision agreed to provide telemarketing services to the Company for a mini-
mum of one million telephone calls a year over a three year period. In addi-
tion, the Company's acquisition of Positive Response provides the Company with
an internal telemarketing capability which the Company intends to expand.
The majority of customer payments in the United States are made by credit card
over the telephone with the remainder paid by check. In Europe and Asia, prod-
ucts are generally delivered to consumers on a "cash on delivery" basis. In
other areas of the world, payment by check at the time of order is not uncom-
mon.
33
<PAGE>
ORDER FULFILLMENT
The Company's North American order fulfillment center is located in Phoenix,
Arizona. Activities at this facility include receiving merchandise from manu-
facturers, inspecting merchandise for damages or defects, storing product for
later delivery, the assembly, as required, packaging and shipping of products
and processing of customer returns. The Company's Phoenix order fulfillment
center, an approximately 188,000 square foot facility, processes substantially
all orders for the Company's products sold in North America. The Company pri-
marily uses bulk shippers to deliver products to customers in the United
States. In certain instances, the manufacturer of the product ships orders di-
rectly to the customer. Each customer is charged a shipping and handling fee,
which varies among products.
Since the Company's restructuring in 1994, the Company has taken many steps
towards reducing its per-order fulfillment costs in North America and contin-
ues to strive to become the leading low-cost provider of infomercial marketing
services. The Company believes that, among other things, its receiving, ware-
housing, processing and shipping methods and billing systems give it a compet-
itive advantage over other infomercial companies in the United States. The
Company intends to replace the Positive Response order fulfillment system with
existing capacity at its Phoenix order fulfillment center.
Throughout most of Europe and Asia, the Company operates the warehousing, or-
der fulfillment, distribution and customer service functions of its business
through independent agents, each of which is responsible for a particular ter-
ritory. European products are shipped by the Company or the manufacturer to
independent warehouses in Rotterdam, The Netherlands and Middlesex, England.
Products are then shipped to independent fulfillment centers throughout Europe
that process the Company's European sales orders. In Asia, products are pri-
marily shipped to warehouses in Japan controlled by the Company's partner,
Mitsui & Co., Ltd., from which the orders are fulfilled and shipped. Outside
Europe and Asia, the Company generally contracts with independent licensees
who buy the Company's products outright and then sell them to consumers, both
through infomercials and through other local distribution channels, under con-
ditions and standards prescribed and monitored by the Company. In many inter-
national countries, the Company's products are delivered to purchasers through
the postal system on a "cash on delivery" basis.
CUSTOMER SERVICE
An important aspect of the Company's marketing strategy is to maintain and im-
prove the quality of customer service. The Company operates toll-free customer
service telephone numbers and maintains its own customer service department in
Phoenix, Arizona to respond to customer inquiries, provide product information
to customers and process product returns for its North American operations.
Outside of the United States and Canada, customer service is provided on a
contract basis through third parties whose operations are monitored by the
Company.
The Company generally offers an unconditional 30-day money back return policy
to purchasers of any of its products. In addition, products are generally cov-
ered by warranties offered by the manufacturer. The terms of such warranties
vary depending upon the product and the manufacturer. The average return rate
of the Company's products for each of fiscal 1996, 1995 and 1994 was 9.3%,
14.3% and 11.7%, respectively. International sales carry a higher average re-
turn rate due to the "cash on delivery" terms of a significant portion of this
business. In countries where the Company depends upon the postal system for
deliveries on a "cash on delivery" basis, official return rates include in-
stances in which there is no answer at the attempted delivery site and in
which a person at the delivery site does not have the cash on hand at the time
of delivery. The Company believes that its return experience is within the
customary range for direct marketing businesses.
NON-INFOMERCIAL MARKETING
Based on the success of certain of its products in traditional retail markets
and the evolution of its business, the Company believes that its transactional
television programming is effective in building consumer awareness of its
products, as well as positioning the Company to act as the media marketing
partner for manufacturers of consumer products. The Company attempts to capi-
talize on its ability to create product awareness and to act as a media mar-
keting partner to extend the sales life of its products by shifting products
from traditional infomercial programming to non-infomercial marketing channels
such as retail distribution, catalogs, direct mail, direct response print ads,
television home shopping programs, credit card statement inserts and other
channels resulting from the development of strategic partnerships. The Company
believes that established manufacturers are increasingly regarding
infomercials as a desirable vehicle to showcase their products to create and
build brand-awareness and generate follow-up product sales through traditional
retail outlets.
34
<PAGE>
Prior to fiscal 1992, a limited amount of the Company's sales had been through
non-infomercial distribution channels that did not include retail distribution.
In fiscal 1992, the Company began selling products through traditional retail
channels, such as mass merchandisers (e.g., Venture, Caldor, Target, Sears,
Montgomery Ward and Kmart), specialty retailers (e.g., Bass Pro Shops) and
wholesale clubs (e.g., BJ's Wholesale Club and PACE). During fiscal 1994, the
Company entered into agreements with strategic partners who handle the retail
marketing and pay a royalty to the Company (based on retail sales) in consider-
ation for the television advertising of the product which is funded by the Com-
pany. In fiscal 1996, 1995 and 1994, non-infomercial distribution channels ac-
counted for 3.3%, 6.2% and 9.3%, respectively, of the Company's net revenues.
This decrease is the result of the significant worldwide growth of the
Company's infomercial revenues.
The Company intends to pursue further expansion of its retail operations in or-
der to capitalize on the consumer brand-awareness created by the Company's
infomercials and reinforced by the "As Seen On TV" in-store signage. The Com-
pany believes that the product exposure created by the Company's transactional
television programming enables the Company and its strategic partners to uti-
lize traditional retail distribution channels without incurring any of the ad-
ditional advertisement costs that other consumer product companies may incur.
In this manner, the Company believes that it will be able to market products to
consumers who view its programming, but do not traditionally purchase products
through direct response marketing.
PRODUCTS
The Company markets consumer products in a variety of categories, including
those listed below. In fiscal 1996, the Company offered a total of over 100
products to consumers in one or more geographic markets worldwide, of which
82.0% were products sold through the Company's infomercials and 18.0% were
products sold through infomercials produced by other companies and aired by the
Company. Of the products sold through the Company's infomercials in fiscal
1996, approximately 41 were products first introduced by the Company in fiscal
1996 and approximately 69 were products that were originally offered in previ-
ous years. Through its international programming, the Company has brought to
the international marketplace many of its products that had been successfully
marketed in the United States, including Auri car polish, the Flying Lure fish-
ing lure, Bruce Jenner's Super Step Stair Climber and the Minimax Exercise Sys-
tem, Tony Little's Target Training System video tapes and Regal Ware Royal Dia-
mond Cookware. The following table sets forth examples of some of the products
currently marketed and sold through the Company's infomercials in one or more
geographic markets throughout the world, their respective product categories
and the fiscal year in which each infomercial was first aired.
<TABLE>
<CAPTION>
FISCAL YEAR
PRODUCT CATEGORY PRODUCT OFFERINGS FIRST AIRED
- ---------------- ----------------- -----------
<S> <C> <C>
Automotive Motor-Up 1996
Touchless Car Care 1995
Autofom Car Polish 1993
ColorCote 2000 Colored Car Polish 1992
Auri Car Polish 1990
Beauty & Personal Care Accents 1996
Jet Aire Professional Hair Styling System 1993
Frankie Avalon's Zero Pain Topical Pain Reliever 1993
Sudden Youth Skin Care System 1992
Crafts Bedazzler Plus Bead Punch Kit 1993
Purrfect Punch Embroidery System 1992
Health & Fitness Ab-Roller Plus 1996
Top Ten Trainer 1996
E-Force 1995
Powerwalk Plus 1994
Bruce Jenner's Minimax Exercise System 1994
Bruce Jenner's Stairclimber Plus Stair Climber 1993
Tony Little's Target Training System Video Tapes 1993
Bruce Jenner's Super Step Stair Climber 1992
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR
PRODUCT CATEGORY PRODUCT OFFERINGS FIRST AIRED
- ---------------- ----------------- -----------
<S> <C> <C>
Kitchen & Household Goo Gone 1995
Regal Ware Royal Diamond Cookware 1994
Sterling Spring Water Filter 1993
American Harvest Jet Stream Oven 1992
Deni Turbo Sealer Food Packager 1992
Astonish All-Purpose Cleaner 1991
Music Dance Party 1996
Legends 1996
Shades of Love 1996
Alltime Classics 1995
Hits of the 60's 1995
Hits of the 70's 1995
Rock and Roll Days 1995
Outdoor Medicus Golf Club 1993
Kangaroo Lure Fishing Lure 1993
Flying Lure Fishing Lure 1992
Self-improvement Alphanetics Reading Improvement Materials 1992
The Human Calculator Mathematics Teaching Materials 1991
</TABLE>
The Company's five most successful products in each of fiscal 1996, 1995 and
1994 accounted for approximately 46.0%, 54.0%, and 67.0%, respectively, of the
Company's net revenues for such periods. The Company continues to be depen-
dent, in significant part, upon its ability to develop or obtain rights to new
products to supplement and replace existing products as they mature through
their product life cycles. The Company's expansion into international markets
has reduced its dependency on new shows by lengthening the potential duration
of the life cycle of programs that comprise the Company's infomercial library.
Historically, the majority of the Company's products generate their most sig-
nificant domestic revenues in the first 6 months following initial airing of
the product's infomercial. Internationally, however, products typically gener-
ate revenues more evenly over a longer period due, in part, to the introduc-
tion of such products into new markets each year. To illustrate an
infomercial's life cycle, the Company derived fiscal 1996 net infomercial rev-
enue as follows: 38.5% from products introduced during fiscal 1996, 42.5% from
products introduced during fiscal 1995 and 1994 and 19.0% from products intro-
duced prior to fiscal 1994.
BACKLOG
The timing of orders is largely influenced by the degree of consumer response
to product offerings, inventory levels, marketing strategies, seasonality and
overall economic conditions. Backlog orders for the Company at April 30, 1996
and 1995 were approximately $13.7 million and $6.4 million, respectively. Av-
erage monthly backlog orders for fiscal 1996 were approximately $8.5 million.
The consumer is notified upon placement of an order that normal shipping time
is four to six weeks. Orders in excess of anticipated production capacity are
included in backlog figures. However, product shortages, cancellations, re-
turns and allowances may reduce the amount of sales realized from the fulfill-
ment of backlog orders.
COMPETITION
The Company competes directly with several companies which generate sales from
infomercials. The Company also competes with a large number of consumer prod-
uct companies and retailers which have substantially greater financial, mar-
keting and other resources than the Company, some of which have recently com-
menced, or indicated their intent to conduct, direct response marketing. The
Company also competes with companies that make imitations of the Company's
products at substantially lower prices. Products similar to the Company's
products may be sold in department stores, pharmacies, general merchandise
stores and through competing infomercials, magazines, newspapers, direct mail
advertising and catalogs.
36
<PAGE>
MANAGEMENT INFORMATION SYSTEMS
The Company's computer system features programs which allow the Company to man-
age its media time purchases and program scheduling, the flow of product order
information among its telemarketers, its order fulfillment center, its credit
card clearing house and the flow of shipping, billing and payment information.
The Company believes that its management information systems are currently ade-
quate. However, in order to facilitate growth and to integrate fully its inter-
national operations, the Company is in the process of enhancing its computer
systems related to all phases of its operations. The Company expended approxi-
mately $2.0 million for this project in fiscal 1996 and has budgeted in excess
of $1.0 million for fiscal 1997 for this project.
GOVERNMENT REGULATION
Various aspects of the Company's business are subject to regulation and ongoing
review by a variety of federal, state, and local agencies, including the FTC,
the United States Post Office, the CPSC, the FCC, the FDA, various States' At-
torneys General and other state and local consumer protection and health agen-
cies. The statutes, rules and regulations applicable to the Company's opera-
tions, and to various products marketed by it, are numerous, complex and sub-
ject to change.
As a result of prior settlements with the FTC, the Company has agreed to two
consent orders. Prior to the Company's recent acquisition of Positive Response,
Positive Response and its Chief Executive Officer, Michael S. Levey, also
agreed to a consent order with the FTC. Among other things, such consent orders
require the Company, Positive Response and Mr. Levey to submit compliance re-
ports to the FTC staff. The Company, Positive Response and Mr. Levey have sub-
mitted compliance reports as well as additional information requested by the
FTC staff. In addition, in connection with the acquisition by the Company of
Positive Response, both the Company and Positive Response were required pursu-
ant to such consent orders to, and did, notify the FTC of such acquisition and
Michael S. Levey was required to, and did, notify the FTC of his pending affil-
iation with the Company. In early June 1996, the Company received a request
from the FTC for additional information regarding 2 of the Company's
infomercials in order to determine whether the Company is operating in compli-
ance with the consent orders referred to above. Such request also included a
request for additional information concerning the Company's acquisition of Pos-
itive Response. The Company is responding to such request. It is possible that
the notifications referred to above will result in additional requests for in-
formation from the Company and Mr. Levey and/or additional scrutiny of the
Company's operations. In an effort to maintain continued compliance with the
terms of its consent order, shortly following its acquisition of Positive Re-
sponse, the Company caused Positive Response to cease airing one of its
infomercials until the Company could make such changes to such infomercial or
take such other actions as it deems appropriate to conform such infomercial to
the Company's standards, if possible. After giving effect to the Acquisitions
on a pro forma basis, such infomercial would have contributed less than 4.0% to
the Company's consolidated net revenues for the quarter ended March 31, 1996.
The Company is also considering changes to other of Positive Response's
infomercials. The Company does not believe that such infomercials or the
Company's actions regarding them will have a material adverse effect on the
Company's financial condition.
On February 24, 1994, the staff of the CPSC notified the Company that it had
made a preliminary determination that a particular model of the Company's Juice
Tiger product presents a "substantial product hazard" under the provisions of
the Consumer Product Safety Act. The CPSC staff requested that the Company take
voluntary corrective action to ameliorate such alleged product hazard. While
the Company has disputed that the model in question presents a substantial
product hazard, the Company and the CPSC staff recently agreed upon the form
and nature of voluntary action proposed by the Company to address the CPSC
staff's concerns. The Company has implemented the agreed upon plan. The Company
also recently received notification of a provisional acceptance of a proposed
form of settlement agreement with the Company, which includes a civil penalty.
The cost of implementing the corrective plan and such civil penalty, as well as
the other terms of the settlement agreement, will not have a material adverse
effect on the Company's financial condition or results of operations if the
settlement agreement is finalized in the form proposed.
The Company's international business is subject to the laws and regulations of
England, the European Union, Japan and other countries in which the Company
sells its products, including, but not limited to, the various consumer and
health protection laws and regulations in the countries in which the program-
ming is broadcast, where applicable. If any significant actions were brought
against the Company or any of its subsidiaries in connection
37
<PAGE>
with a breach of such laws or regulations, including the imposition of fines or
other penalties, or against one of the entities through which the Company ob-
tains a significant portion of its media access, the Company could be materi-
ally adversely affected. There can be no assurance that changes in the laws and
regulations of any territory which forms a significant portion of the Company's
market will not adversely affect the Company's financial condition or results
of operations.
The Company collects and remits sales tax in the states in which it has a phys-
ical presence. Certain states in which the Company's only activity is direct
marketing have attempted to require direct marketers, such as the Company, to
collect and remit sales tax on sales to customers residing in such states. A
decision in 1995 of the United States Supreme Court held that Congress can ena-
ble the states to impose a sales tax, although Congress has taken no action to
that effect. The Company is prepared to collect sales taxes for other states,
if laws are passed requiring such collection. The Company does not believe that
a change in the tax laws requiring the collecting of sales tax will have a ma-
terial adverse effect on the Company's financial condition or results of opera-
tions.
PROPERTIES
The Company leases office space for its principal executive offices in Phila-
delphia, Pennsylvania. The lease, which commenced in May 1992, provides for the
Company to rent office space of approximately 30,000 square feet. The annual
rent is $14.75 per square foot but may be increased based on the tenant's pro-
portional share of building expenses. In April 1995, the Company exercised its
option to terminate the lease at the end of the initial five year term, effec-
tive October 31, 1997, and in connection therewith, as called for by the lease,
paid a termination fee of $220,000. At the present time, the Company is negoti-
ating a new lease for office space in another building in center city Philadel-
phia.
The Company also leases approximately 188,000 square feet in Phoenix, Arizona
for warehousing, order fulfillment and customer service operations. The Company
currently has approximately 30,000 square feet of office space available for
subletting or expansion. The annual lease payments for this lease range from
approximately $500,000 for fiscal year 1997 to $1.1 million for fiscal years
2010 through 2014.
The Company leases approximately 10,800 square feet of office space in London,
England. The lease expires in February 2001. The lease requires annual rent
payment of (Pounds)253,584 ($387,400 as of May 31, 1996) through February 28,
1998 and (Pounds)269,433 thereafter. Additionally, pursuant to the terms of
such lease, the Company must pay a basic service charge for services provided
by the landlord. For the fiscal year ended March 31, 1996, the Company paid a
basic service charge of (Pounds)34,283.
EMPLOYEES
As of March 31, 1996, the Company had approximately 275 full-time employees.
The Company also utilizes contract laborers at its order fulfillment center in
Phoenix, Arizona. None of the Company's employees are covered by collective
bargaining agreements and management considers relations with its employees to
be good.
TRADEMARKS
The Company has a number of registered trademarks and other common law trade-
mark rights for certain of its products and marketing programs. It is the
Company's policy that it will seek to fully protect its trademark rights in its
future products and programs and will vigorously defend its trademark rights.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages and positions, and a brief description of
the business experience, of the Company's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION IN THE COMPANY
- ---- --- -----------------------
<S> <C> <C>
Brian McAdams 54 Chairman of the Board, Chairman of the Executive Committee and
Director
Mark P. Hershhorn 46 President, Chief Executive Officer and Director
David J. Carman 45 Executive Vice President and Director of the Company,
President and Chief Executive Officer of Quantum International
Limited
Constantinos I. Costalas 60 Vice Chairman and Director
James A. Jernigan 53 Executive Vice President of the Company and President and
Chief Operating Officer of Quantum North America, Inc. (North
American operating subsidiary of the Company)
John W. Kirby 36 Executive Vice President of the Company and Chairman, Chief
Executive Officer and President of DirectAmerica
Michael S. Levey 47 Executive Vice President of the Company and Chairman and Chief
Executive Officer of Positive Response
John J. Sullivan 49 Senior Vice President, Administration, Planning and Investor
Relations
Dolores Dinyon 41 Senior Vice President, Global Product Development and
Marketing
Marshall A. Fleisher, 44 Vice President (Legal) and Corporate Secretary
Esq.
James M. Gallagher 40 Vice President and Chief Financial Officer
Michael J. Emmi 54 Director
Frederick S. Hammer 60 Director
Ira M. Lubert 46 Director
Charles L. Andes 65 Director
Jon W. Yoskin II 56 Director
Albert R. Dowden 55 Director
William M. Goldstein, 60 Director
Esq.
</TABLE>
BRIAN MCADAMS has served as Chairman of the Board and Chairman of the Executive
Committee of the Company since September 1994. He was also Chief Executive Of-
ficer of the Company from September 1994 to April 1995. From 1976 through No-
vember 1994, Mr. McAdams served as President and Chief Executive Officer and
continues to serve as a Director of McAdams, Richman & Ong, Inc., a national
advertising and design firm. In 1994, he was named Chairman of such firm and
continues in that role today. He is also a Director of Crusader Savings and
Loan Association and Chairman of the Penjerdel Telecommunications Committee.
Mr. McAdams served on the board of the Council of the Better Business Bureau
between 1989 and 1995. He has served as a Director of the Company since June
1990.
MARK P. HERSHHORN has served as President of the Company since August 1994, has
been Chief Executive Officer of the Company and Chairman of Quantum since April
1995 and served as Chief Operating Officer of the Company from August 1994 un-
til April 1995. From June 1993 to August 1994, Mr. Hershhorn served as Presi-
dent and Chief Operating Officer of Buckeye Communications, Inc., a licensing
and theme park development company. From December 1991 to April 1993, Mr.
Hershhorn was President and Chief Operating Officer of the Company. From April
1990 until December 1991, Mr. Hershhorn was Senior Vice President of Food Oper-
ations and Joint Ventures for Nutri/System, Inc. From 1985 to January 1990, Mr.
Hershhorn was an executive with The Franklin Mint in Philadelphia, Pennsylva-
nia, serving as Vice President and Chief Financial Officer, as well as a Direc-
tor. Mr. Hershhorn has served as a Director of the National Infomercial Market-
ing Association since September 1994 and was elected to its Executive Committee
in September 1995. Mr. Hershhorn has also served on the Board of Direc-
39
<PAGE>
tors of the Wharton Graduate School of Finance since 1995. He has served as a
Director of the Company since September 1994.
DAVID J. CARMAN served as President and Chief Operating Officer of Quantum
since joining the Company in December 1991 until April 1995, has been Presi-
dent and Chief Executive Officer of Quantum since April 1995, and has been Ex-
ecutive Vice President of the Company since September 1994. From June 1991 to
August 1994, Mr. Carman served as Vice President of the Company. From October
1989 to June 1991, Mr. Carman had been Vice President in charge of European,
Central Pacific, Australian and New Zealand operations of The Franklin Mint.
Between 1986 and 1989, he had been President of various international subsidi-
aries of The Franklin Mint. Prior to that time, Mr. Carman held a Teaching
Fellowship at an Australian university and was President of his own strategic
consulting company. He has served as a Director of the Company since April
1993.
CONSTANTINOS I. COSTALAS has been the Vice Chairman of the Company since Sep-
tember 1994 and was the Senior Financial and Legal Officer from April 1995 un-
til May 1996. He served as Chairman of the Board, President and Chief Execu-
tive Officer of Glendale Bancorporation and as Chairman of the Board, Presi-
dent and Chief Executive Officer of Glendale National Bank of New Jersey until
February 1994. Such positions were held since 1985 and 1976, respectively. He
has served as a Director of the Company since May 1993.
JAMES A. JERNIGAN was promoted to the position of President of the Company's
North American Operations in January 1996. Mr. Jernigan has served as Execu-
tive Vice President of the Company and Chief Operating Officer for North Amer-
ican Operations since September 1994. From June 1994 until September 1994, he
served as Senior Vice President and Chief Operating Officer of the Company.
From January 1992 until June 1994, Mr. Jernigan was Vice President, Manufac-
turing, Sourcing and International Operations of the Company. He was Vice
President of Sourcing and International Operations at The Franklin Mint from
December 1987 to January 1992.
JOHN W. KIRBY has served as Chairman of the Board, Chief Executive Officer and
President of DirectAmerica since August 1994 and as Executive Vice President
of National Media since the Company's acquisition of DirectAmerica in October
1995. Mr. Kirby previously served as Chairman of the Board, Chief Executive
Officer and President of California Production Group, Inc. ("CAPG") from Janu-
ary 1991 until the Company's acquisition of CAPG in October 1995.
MICHAEL S. LEVEY serves as Executive Vice President of the Company and Chief
Executive Officer of Positive Response. Mr. Levey founded Positive Response in
1988. From 1985 to 1989, Mr. Levey was employed by Twin Star Productions,
where he produced infomercials and developed fulfillment, outbound marketing
and product selection activities.
JOHN J. SULLIVAN has served as Senior Vice President, Administration, Planning
and Investor Relations of the Company since April 1995 and as Vice President,
Treasurer and Chief Financial Officer of the Company from September 1991 to
April 1995. From 1989 to 1991, Mr. Sullivan was Chief Financial Officer of
Gold Medal Sporting Goods. Prior to that time, Mr. Sullivan was employed by
The Franklin Mint for more than 18 years in various capacities, most recently
as Corporate Controller.
DOLORES DINYON has been Senior Vice President, Global Marketing and Product
Development since January 1995. From May 1991 until January 1995, Ms. Dinyon
was Vice President of Marketing and Sales for Myron Manufacturing ("Myron").
Prior to joining Myron, Ms. Dinyon served as Vice President of Marketing for
the Female Collectibles and Home Decor division of The Franklin Mint.
MARSHALL A. FLEISHER, ESQ. has served as Vice President (Legal) and Corporate
Secretary of the Company since December 1994. From September 1992 to December
1994, Mr. Fleisher was the Company's Vice President and General Counsel for
Business Affairs. From July 1984 to August 1992, Mr. Fleisher practiced law at
the firm of Duane, Morris & Heckscher in Philadelphia, Pennsylvania, where, as
a partner and an associate, he specialized in finance, intellectual property
and general corporate law.
40
<PAGE>
JAMES M. GALLAGHER has served as Vice President and Chief Financial Officer of
the Company since May 1996. From October 1993 to May 1996, Mr. Gallagher
served as Vice President and Corporate Controller of the Company. Prior to
joining the Company, Mr. Gallagher was employed by Ernst & Young LLP, an in-
ternational public accounting firm, where Mr. Gallagher was employed in vari-
ous capacities from January 1979 to October 1993, most recently as senior man-
ager.
MICHAEL J. EMMI has served as Chairman of the Board, Chief Executive Officer
and President of Systems & Computer Technology Corporation, a provider of com-
puter software and services, since May 1985. Mr. Emmi is also a Director of
CompuCom Systems, Inc., Premier Solutions, Inc. and The Franklin Institute and
is the Chairman of the Pennsylvania Chapter of the American Electronics Asso-
ciation. He has served as a Director of the Company since April 1995.
FREDERICK S. HAMMER has been a partner of Inter-Atlantic Securities Corpora-
tion, an investment banking firm focused primarily on the financial services
industry, since December 1994. From February 1993 to June 1994, Mr. Hammer was
Chairman of Mutual of America Capital Management Corporation. From 1989 until
1993, Mr. Hammer was President of the SEI Asset Management Group in Wayne,
Pennsylvania. From 1989 until 1991, Mr. Hammer was Mazur Fellow at the Wharton
School of the University of Pennsylvania. Mr. Hammer presently serves on the
Board of Directors of Alco Standard Corporation, Tri-Arc Financial Services,
Inc., Search Capital, Inc. and United Student Aid Group, and was previously a
director of Meritor Savings Bank. He has served as a Director of the Company
since October 1994.
IRA M. LUBERT has served as Managing Director of Radnor Venture Management
Company and of Technology Leaders Management, Inc., both of which are venture
capital management companies, since 1988. Mr. Lubert is a Director of CompuCom
Systems, Inc. He has served as a Director of the Company since December 1994.
CHARLES L. ANDES has served as Chief Executive Officer of Interactive Market-
ing Ventures since January 1995 and as Chief Executive Officer and President
of the Eastern Technology Council, an affiliation of industry leaders in tech-
nology fields who collaborate and cooperate on a broad range of technology re-
lated matters, since 1991. From 1986 until 1991, Mr. Andes was President and
Chief Executive Officer of The Franklin Institute in Philadelphia, a world-re-
nowned science museum and research center. Mr. Andes is a Director of Informa-
tion Systems Acquisition Corporation and First Union National Bank, N.A.,
Chairman of the Pennsylvania Academy of the Fine Arts and is Vice Chairman of
the Pennsylvania Intergovernmental Corporation Authority, a board created by
the Commonwealth of Pennsylvania to oversee the operating and capital budgets
of the City of Philadelphia. He has served as a Director of the Company since
October 1994.
JON W. YOSKIN II has served as Chairman, Chief Executive Officer and a Direc-
tor of Tri-Arc Financial Services Inc., a provider of specialized insurance
products to the financial services industry, since 1986. Prior to that time,
he worked in the insurance and banking industries with companies such as
Meritor Savings Bank, TransAtlantic Life Insurance Assurance Company and Royal
Oak Insurance Company. He has served as a Director of the Company since June
1994.
ALBERT R. DOWDEN has served as a Director, President and Chief Executive Offi-
cer of Volvo North American Corporation and Senior Vice President of AB Volvo
since January 1991. Prior to such time, he served in various other positions
with Volvo North America Corporation since 1974, most recently as Executive
Vice President and Deputy to the President and Chief Executive Officer from
June 1989 to January 1991. Mr. Dowden also serves on the Board of Directors of
the National Association of Manufacturers, the Association of International
Automobile Manufacturers, the Business Committee for the Arts, the Center for
International Leadership, the Madison Square Boys & Girls Club, the United Way
of New York City, the Cortland Trust, the American Scandinavian Foundation,
the American Intercultural Student Exchange, the American Institute for Public
Service and the Swedish American Chamber of Commerce. He has served as a Di-
rector of the Company since August 1995.
WILLIAM M. GOLDSTEIN, ESQ. is a Managing Partner and Chairman of the Tax De-
partment of the law firm of Drinker Biddle & Reath in Philadelphia, Pennsylva-
nia, where he has practiced since 1982. Mr. Goldstein specializes in federal
taxation, securities law and general corporate law. He previously held the po-
sition of Deputy Assistant Secretary for Tax Policy with the United States De-
partment of Treasury. Mr. Goldstein is also a Director of Integra LifeSciences
Corporation. He has served as a Director of the Company since April 1996.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value $.01 per share ("Preferred Stock"). At the Company's 1996
Annual Meeting of Stockholders, scheduled for July 25, 1996, the Company's
Board of Directors intends to seek the approval of the Company's stockholders
of a proposal to increase the number of authorized shares of Common Stock to
75,000,000. As of June 30, 1996, the Company had 19,632,225 shares of Common
Stock outstanding, which shares were held by approximately 847 holders. Of the
authorized shares of Preferred Stock, 500,000 shares are designated as Series
A Junior Participating Preferred Stock, par value $.01 per share (the "Series
A Preferred Stock"), for use in connection with the Company's Rights Plan
(discussed below) (the "Rights Plan"). In addition, as of June 30, 1996,
122,000 shares of the Company's Series B Convertible Preferred Stock (the
"Series B Preferred Stock") were outstanding and held of record by
approximately 50 holders. All of the issued and outstanding shares of Common
Stock are fully paid and nonassessable.
The following summary description of the Common Stock, the Series A Preferred
Stock and the Series B Preferred Stock does not purport to be complete and is
qualified in its entirety by reference to the Company's Certificate of Incor-
poration (the "Certificate of Incorporation"), the Company's Bylaws (the "By-
laws") and to the applicable provisions of the Delaware General Corporation
Law (the "DGCL").
COMMON STOCK
The holders of validly issued and outstanding shares of Common Stock are enti-
tled to one vote per share held of record on all matters to be voted upon by
stockholders. At a meeting of stockholders at which a quorum is present, a ma-
jority of the votes cast decides all questions other than the election of di-
rectors (as discussed below under "--Preferred Stock--Series B Preferred
Stock"), unless the matter is one upon which a different vote is required by
express provision of the DGCL, the Certificate of Incorporation or Bylaws.
There is no cumulative voting with respect to the election of directors (or
any other matter).
The holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities of the Company. In addi-
tion, there are no redemption or sinking fund provisions applicable to the
Common Stock.
In the event of liquidation, dissolution or winding up of the Company, holders
of Common Stock are entitled to participate equally and ratably, share for
share, in all assets remaining after payment of liabilities and obligations of
the Company and all preferential amounts to which the holders of shares at the
time outstanding of all classes of stock having prior rights thereto may be
entitled.
Subject to the rights of any holders of any class of capital stock having
prior rights as to dividends, the holders of Common Stock are entitled to re-
ceive ratably such dividends as the Board of Directors may declare out of
funds legally available therefor, when and if so declared. The payment by the
Company of dividends, if any, rests within the discretion of the Board of Di-
rectors and will depend upon the Company's then prevailing results of opera-
tions, financial condition and capital expenditure plans, as well as other
factors considered relevant by the Board of Directors. The Board of Directors
does not anticipate that dividends will be paid in the near future. Further-
more, the Series B Preferred Stock and certain financing agreements to which
the Company is a party include financial covenants restricting the payment of
dividends. See "Price Range of Common Stock and Dividend Policy" and "--Pre-
ferred Stock--Series B Preferred Stock."
PREFERRED STOCK
The Company's Board of Directors is authorized, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock, in one or
more series, with such voting powers, preferences, special rights, qualifica-
tions, limitations or restrictions as shall be set forth in resolutions pro-
viding for the creation thereof adopted by the Board of Directors.
Series A Preferred Stock
In January 1994, the Company designated 500,000 shares of Series A Preferred
Stock for possible future issuance pursuant to the terms of the Rights Plan
described below under "Stockholder Rights Plan." As of May 31, 1996, no shares
of the Series A Preferred Stock were issued or outstanding.
42
<PAGE>
The holders of the Series A Preferred Stock are entitled to receive quarterly
cash dividends, equal to the greater of: (i) $0.40 or (ii) 100 times the aggre-
gate per share amount of all non-cash dividends or other distributions (other
than dividends payable in shares of Common Stock) declared on the Common Stock
since the immediately preceding quarterly dividend date (subject to certain ad-
justments). Such quarterly dividends are cumulative and subject to the rights
of any holders of Preferred Stock ranking prior and superior to the Series A
Preferred Stock.
Each holder of Series A Preferred Stock is entitled to 100 votes per share on
all matters submitted to a vote of the Company's stockholders. If at any time
dividends on the Series A Preferred Stock are in arrears in an amount equal to
6 quarterly dividends thereon, a default period will commence (the "Default Pe-
riod.") During a Default Period, all holders of Preferred Stock, voting as a
class, irrespective of series, shall have the right to elect 2 directors. A De-
fault Period will continue until all accrued and unpaid dividends and all cur-
rent quarterly dividends are declared and paid or set apart for payment. When-
ever quarterly dividends payable on the Series A Preferred Stock are in arrears
(regardless of whether a Default Period has occurred) and until all such divi-
dends are paid in full, the Company is not permitted to: (i) declare or pay
dividends on, make any other distributions on or redeem or purchase or other-
wise acquire, any shares of stock ranking junior to or on a parity with (either
as to dividends or upon liquidation, dissolution or winding up) the Series A
Preferred Stock; (ii) purchase or otherwise acquire any shares of Series A Pre-
ferred Stock (unless, among other things, the purchase offer is made to all
holders of such Series A Preferred Stock) or (iii) permit any subsidiary of the
Company to purchase or otherwise acquire any shares of capital stock of the
Company.
In the event of the liquidation, dissolution or winding up of the Company, no
distribution shall be made to holders of stock ranking junior to the Series A
Preferred Stock, unless the holders of the Series A Preferred Stock have first
received $40,000 per share, plus an amount equal to all accrued and unpaid div-
idends thereon (subject to certain adjustments). The Company has the option to
redeem the Series A Preferred Stock, in whole or in part at any time, at a re-
demption price equal to 100 times the current per share market price of the
Common Stock on the date the notice of redemption is given, together with un-
paid accumulated dividends through the date of the redemption (subject to cer-
tain adjustments). The Series A Preferred Stock will rank junior in right to
all other series of the Preferred Stock with respect to distribution of assets
and the payment of dividends, unless the terms of such series expressly provide
otherwise.
Series B Preferred Stock
In October 1994, the Company authorized the issuance of up to 400,000 shares of
Series B Preferred Stock, of which a total of 255,796 shares were issued in
connection with certain equity raising transactions completed by the Company.
As of June 30, 1996, 122,000 shares of Series B Preferred Stock remained issued
and outstanding.
Each share of the Series B Preferred Stock is valued at $40.00 per share for
conversion purposes and is presently convertible at the option of the holder
into shares of Common Stock at a price of $4.00 per share of Common Stock (sub-
ject to certain adjustments). In the event the Board of Directors declares a
dividend on the Common Stock, the holders of Series B Preferred Stock shall be
entitled to receive dividends declared on the Common Stock as if the shares of
Series B Preferred Stock had been converted into shares of Common Stock as of
the record date for such dividend. Except as to the election of directors, each
share of the Series B Preferred Stock has voting rights which are equivalent to
the total number of shares of Common Stock into which the share of the Series B
Preferred Stock is convertible. From and after the date on which 125,000 or
more shares of Series B Preferred Stock were first issued and for so long as
50.0% or more of such shares of Series B Preferred Stock were not converted
into Common Stock or transferred to any new holder(s), the holders of the Se-
ries B Preferred Stock had the right to elect 2 Directors. The Series B Pre-
ferred Stockholders' right to elect 2 Directors terminated in late May 1996.
However, 2 of the Series B Preferred Stockholders have a contractual right to
representation on the Board of Directors.
In the event of any liquidation, dissolution or winding up of the Company,
holders of the Series B Preferred Stock are entitled to receive an amount equal
to $40.00 for each share of Series B Preferred Stock held by such holder. In
the event that there are insufficient funds to pay $40.00 for each share of Se-
ries B Preferred Stock held, the Company's assets will be distributed on a pro-
rata basis to such holders. In addition, the Company must obtain the consent of
at least 60.0% of the outstanding shares of Series B Preferred Stock prior to:
(i) altering or changing the rights, preferences or privileges of the Series B
Preferred Stock in a manner which would adversely affect the holders thereof;
(ii) creating any class of securities prior to or in parity with the Series B
Preferred Stock with respect to
43
<PAGE>
voting, dividends, liquidation rights or otherwise; (iii) doing any act which
would result in the taxation of the holders of the Series B Preferred Stock
under Section 305 of the Internal Revenue Code of 1986; (iv) declaring any
dividend on a series or class of stock other than the Series B Preferred
Stock; or (v) repurchasing shares of any class or series of capital stock of
the Company.
STOCKHOLDER RIGHTS PLAN
Pursuant to a Stockholder Rights Plan, dated as of January 3, 1994, between
the Company and Mellon Securities Trust Company, the Company declared a divi-
dend of one preferred share purchase right (collectively, the "Rights") for
each outstanding share of Common Stock to the stockholders of record on the
close of business on January 13, 1994. Unless the Board of Directors directs
otherwise, one Right will be issued with respect to each share of Common Stock
(including the shares of Common Stock offered hereby) that becomes outstanding
prior to the occurrence of certain potential change-in-control events.
The Rights become exercisable upon certain potential change-in-control events.
When exercisable, the Rights entitle holders to purchase one one-hundredth of
a share (subject to adjustment) of Series A Preferred Stock at an exercise
price of $40.00 per Right (subject to adjustment). Thereafter, upon the occur-
rence of certain additional events, the Rights entitle holders to receive,
upon exercise at the then current exercise price, Common Stock (or, in certain
circumstances, cash, property or other securities of the Company) having a
value equal to two times the exercise price of the Right. In the event that
the Company is acquired in a merger or other business combination, or 50% or
more of the Company's assets or earning power is sold or transferred, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon exercise at the then current exercise price of the
Right, common stock of the acquiring or surviving company having a value equal
to two times the exercise price of the Right.
After the occurrence of certain potential change-in-control events, Rights
held by a person that beneficially owns more than 15% of the outstanding
shares of Common Stock (an acquiring person) or any affiliate or associate of
an acquiring person will become null and void and thereafter cannot be exer-
cised or exchanged by any such person.
Exercise or exchange of the Rights will cause substantial dilution to a person
or group attempting to acquire control of the Company without the approval of
the Board of Directors. Except under certain circumstances, the Board of Di-
rectors may cause the Company to redeem the Rights in whole, but not in part,
at a price of $.001 per Right.
The Rights expire on January 13, 2004, if not earlier redeemed or exchanged.
The Rights have no voting or dividend privileges. Until such time as the
Rights become exercisable, they are attached to and do not trade separately
from the Common Stock.
This summary description of the Rights and Rights Plan does not purport to be
complete and is qualified in its entirety by reference to the Rights Plan.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 22,420,104 shares of Common Stock will be
outstanding. Of these shares, 21,827,104 shares of Common Stock, including the
shares offered hereby, have been registered under the Securities Act and are
freely tradeable without restriction or further registration under the Securi-
ties Act, unless purchased by "affiliates" of the Company as that term is de-
fined in Rule 144 under the Securities Act. In connection with the Company's
acquisition of Positive Response, the Company is obligated to file a registra-
tion statement registering 193,213 shares of Common Stock issuable pursuant to
Positive Response's stock option plan. Additionally, in connection with the
Company's acquisitions of Prestige and Suzanne Paul, the Company may be obli-
gated to issue up to an aggregate of $5.0 million of Common Stock in 1997 and
1998, at the then current market price, which, with certain exceptions will be
freely tradeable upon issuance. In addition, as of June 30, 1996, (i)
1,220,000 shares of Common Stock were issuable upon the conversion of out-
standing shares of Series B Preferred Stock, (ii) 6,069,552 shares of Common
Stock were issuable upon exercise of certain outstanding warrants with a
weighted average exercise price of $5.56 per share and (iii) 1,919,000 shares
of Common Stock were issuable upon the exercise of options granted to certain
directors, officers, employees and consultants of the Company with a weighted
average exercise price of $6.90 per share, all of which shares of Common
Stock, and any shares of Common Stock to be issued in connection with the
DirectAmerica acquisition, contingent upon the level of revenues generated
through January 31, 1997, will be registered or will generally be freely
tradeable without restriction under the Securities Act. If stockholder ap-
proval is received at the Company's 1996 Annual Meeting of Stockholders for a
proposal increasing the number of shares of Common Stock available for issu-
ance pursuant to its 1991 Option Plan, the Company will register 3,000,000
shares of Common Stock for issuance upon exercise of options granted or to be
granted pursuant to the 1991 Option Plan.
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<PAGE>
The Company and certain of its stockholders have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any se-
curities convertible into or exercisable or exchangeable for shares of Common
Stock, for a period of 120 days after the date hereof, without the prior writ-
ten consent of J.P. Morgan Securities Inc., with certain limited exceptions.
DGCL AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Certificate of Incorporation and the Bylaws provide that the number of di-
rectors of the Company will be fixed from time to time exclusively by the Board
of Directors, the Board of Directors will consist of not less than three nor
more than eleven directors and, subject to any rights of holders of Preferred
Stock of the Company, if any, and unless the Board of Directors determines oth-
erwise, a majority of the directors then in office may fill any vacancies on
the Board of Directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Mellon Securities
Trust Company.
45
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwrit-
ers named below, for which J.P. Morgan Securities Inc. and Tucker Anthony In-
corporated are acting as representatives (the "Representatives"), have sever-
ally agreed to purchase, and the Company has agreed to sell to them, the re-
spective number of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
J.P. Morgan Securities Inc............................................
Tucker Anthony Incorporated...........................................
---------
Total............................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several Under-
writers to purchase shares of Common Stock are subject to the approval of cer-
tain legal matters by counsel and certain other conditions. The Underwriters
are obligated to take and pay for all such shares of Common Stock, if any are
taken.
The Underwriters propose initially to offer such shares of Common Stock di-
rectly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not
in excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After the shares of Common Stock are released for sale to the public, the of-
fering price and such concessions may be changed.
The Company has granted to the Underwriters an option, expiring at the close on
the 30th day after the date of this Prospectus, to purchase up to 300,000 addi-
tional shares of Common Stock at the public offering price, less the underwrit-
ing discount. The Underwriters may exercise such option solely for the purpose
of covering over-allotments, if any. To the extent that the Underwriters exer-
cise such option, each Underwriter will have a firm commitment, subject to cer-
tain conditions, to purchase approximately the same percentage of such addi-
tional shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Common Stock offered
hereby.
The Company has agreed to indemnify the Underwriters against certain liabili-
ties, including liabilities under the Securities Act.
The Company and certain of its stockholders have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any se-
curities convertible into or exercisable or exchangeable for shares of Common
Stock, for a period of 120 days after the date hereof, without the prior writ-
ten consent of J.P. Morgan Securities Inc., with certain limited exceptions.
J.P. Morgan Securities Inc. has in the past provided financial advisory serv-
ices to the Company for which it has received customary fees.
46
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed upon
for the Company by Klehr, Harrison, Harvey, Branzburg & Ellers, Philadelphia,
Pennsylvania. Certain members of such firm hold in the aggregate 11,000 shares
of Common Stock. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership in-
cluding a professional corporation), New York, New York.
This Prospectus may include forward looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Although
the Company believes that its expectations are based on reasonable assumptions,
it can give no assurance that its goals or strategies will be achieved. Impor-
tant factors that could cause actual results to differ materially from those
reflected in the forward looking statements made herein include any delay in
realizing, or inability to realize, the anticipated synergies related to the
Acquisitions and any other factors and assumptions related to forward-looking
statements set forth elsewhere in this Prospectus. Examples of forward-looking
statements include, but are not limited to (a) projections of capital expendi-
tures, capital structure and other financial items, (b) statements of plans and
objectives of the Company or its management or Board of Directors, including
the introduction of new infomercials and products, or estimates or predictions
of actions by customers, suppliers, competitors or regulatory authorities, (c)
infomercials and statements of future economic performance and (d) statements
of assumptions underlying other statements about the Company or its business.
EXPERTS
The consolidated financial statements, including the schedule incorporated by
reference herein, of National Media Corporation at March 31, 1996 and 1995 and
for each of the three years in the period ended March 31, 1996, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing else-
where herein and are included, or incorporated by reference, in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The combined financial statements of DirectAmerica Corporation and California
Production Group, Inc. at September 30, 1995 and for the nine months ended Sep-
tember 30, 1995, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Positive Response Television, Inc. at
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995, appearing in this Prospectus and Registration Statement have
been audited by Deloitte and Touche, LLP, independent auditors, as stated in
their report appearing elsewhere herein and have been so included in reliance
upon the report given upon the authority as experts in accounting and auditing.
The financial statements of Prestige Marketing Limited at March 31, 1996 and
1995 and for each of the two years in the period ended March 31, 1996, appear-
ing in this Prospectus and Registration Statement have been audited by Ernst &
Young, independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Prestige Marketing International Limited at March
31, 1996 and 1995 and for each of the two years in the period ended March 31,
1996, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The combined special purpose financial statements of Suzanne Paul Holdings Pty
Limited Group of companies in Australia (Suzanne Paul Holdings Pty Limited and
its operating subsidiaries) at March 31, 1996 and at June 30, 1995 and for the
nine months ended March 31, 1996 and the year ended June 30, 1995, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
47
<PAGE>
AVAILABLE INFORMATION
National Media is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other in-
formation with the Commission. Such reports, proxy statements and other infor-
mation filed by the Company can be inspected and copied at prescribed rates at
the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Commission's regional offices located
at 7 World Trade Center, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The Common
Stock of the Company is listed on both the NYSE and the PHLX, and such re-
ports, proxy statements and other information concerning the Company may be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005 and the PHLX, 1900 Market Street, Philadelphia, Pennsylvania 19103.
The Company has filed with the Commission a registration statement on Form S-3
under the Securities Act of 1933, as amended, with respect to the shares of
Common Stock offered hereby (such registration statement, together with all
exhibits thereto, is hereinafter referred to as the "Registration Statement").
This Prospectus does not contain all the information set forth in the Regis-
tration Statement, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. For further information with respect
to the Company and the shares of Common Stock offered hereby, reference is
hereby made to the Registration Statement. Statements contained in this Pro-
spectus as to the contents of any document filed with, or incorporated by ref-
erence in, the Registration Statement are not necessarily complete, and in
each instance are qualified in all respects by such reference to the Registra-
tion Statement.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NATIONAL MEDIA CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-3
Consolidated Balance Sheets as of March 31, 1996 and 1995 F-4
Consolidated Statements of Operations for the years ended March 31,
1996, 1995 and 1994 F-5
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the years ended March 31,
1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8
DIRECTAMERICA CORPORATION AND CALIFORNIA PRODUCTION GROUP, INC. COMBINED
FINANCIAL STATEMENTS
Report of Independent Auditors F-21
Combined Balance Sheet as of September 30, 1995 F-22
Combined Statement of Operations for the nine month period ended
September 30, 1995 F-23
Combined Statement of Shareholders' Equity for the nine month period
ended September 30, 1995 F-24
Combined Statement of Cash Flows for the nine month period ended
September 30, 1995 F-25
Notes to Combined Financial Statements F-26
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES CONSOLIDATED
FINANCIAL STATEMENTS
AUDITED
Independent Auditors' Report F-29
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-30
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993 F-31
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993 F-32
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993 F-33
Notes to Consolidated Financial Statements F-34
UNAUDITED
Consolidated Balance Sheet (Unaudited) as of March 31, 1996 F-42
Consolidated Statements of Operations (Unaudited) for the three month
periods ended March 31, 1996 and March 31, 1995 F-43
Consolidated Statements of Cash Flows (Unaudited) for the three month
periods ended March 31, 1996 and March 31, 1995 F-44
Notes to Consolidated Financial Statements F-45
PRESTIGE MARKETING LIMITED FINANCIAL STATEMENTS
Company Directory as at March 31, 1996 F-48
Directors' Report for the year ended March 31, 1996 F-49
Auditor's Report F-50
Statement of Financial Position as at March 31, 1996 and 1995 F-51
Statement of Movements in Equity for the years ended March 31, 1996 and
1995 F-52
Statement of Financial Performance for the years ended March 31, 1996
and 1995 F-53
Statement of Cash Flows for the years ended March 31, 1996 and 1995 F-54
Notes to the Financial Statements F-55
</TABLE>
F-1
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRESTIGE MARKETING INTERNATIONAL LIMITED FINANCIAL STATEMENTS
Company Directory as at March 31, 1996 F-60
Directors' Report for the year ended March 31, 1996 F-61
Auditor's Report F-62
Statement of Financial Position as at March 31, 1996 and 1995 F-63
Statement of Movements in Equity for the years ended March 31, 1996 and
1995 F-64
Statement of Financial Performance for the years ended March 31, 1996
and 1995 F-65
Statement of Cash Flows for the years ended March 31, 1996 and 1995 F-66
Notes to the Financial Statements F-67
SUZANNE PAUL HOLDINGS PTY LIMITED GROUP SPECIAL PURPOSE COMBINED
FINANCIAL STATEMENTS
Report of Independent Auditors F-70
Combined Balance Sheets as of March 31, 1996 and June 30, 1995 F-71
Combined Statements of Operations for the nine months ended March 31,
1996 and year ended June 30, 1995 F-72
Combined Statements of Shareholders' Equity for the nine months ended
March 31, 1996 and year ended June 30, 1995 F-73
Combined Statements of Cash Flows for the nine months ended March 31,
1996 and year ended June 30, 1995 F-74
Notes to the Combined Financial Statements F-75
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
National Media Corporation
We have audited the accompanying consolidated balance sheets of National Media
Corporation as of March 31, 1996 and 1995, and the related consolidated state-
ments of operations, cash flows, and shareholders' equity for each of the three
years in the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Na-
tional Media Corporation at March 31, 1996 and 1995, and the consolidated re-
sults of its operations and its cash flows for each of the three years in the
period ended March 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
May 13, 1996, except for Note 19,
as to which the date is May 30, 1996
F-3
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED BALANCE SHEETS
-------------
<TABLE>
<CAPTION>
AT MARCH 31,
1996 1995
-------- -------
<S> <C> <C>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
ASSETS
Current assets:
Cash and cash equivalents $ 18,405 $13,467
Accounts receivable, net 32,051 14,344
Inventories 22,605 15,387
Prepaid media 4,271 2,660
Prepaid show production 5,469 3,463
Deferred costs 4,102 1,820
Prepaid expenses and other current assets 2,339 1,228
Deferred income taxes 3,142 1,782
-------- -------
Total current assets 92,384 54,151
Property and equipment, net 6,954 4,413
Excess of cost over net assets of acquired businesses and
other intangible assets, less accumulated amortization of
$2,548 and $1,918 14,303 4,659
Other assets 2,907 920
-------- -------
TOTAL ASSETS $116,548 $64,143
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,412 $12,093
Accrued expenses 26,510 17,786
Deferred revenue 1,771 279
Income taxes payable 1,344 300
Deferred income taxes 2,749 1,428
Current portion of long-term debt and capital lease
obligations 876 184
-------- -------
Total current liabilities 53,662 32,070
Long-term debt and capital lease obligations 4,054 3,613
Deferred income taxes 393 354
Other liabilities 1,977 1,481
Shareholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000
shares; issued 136,375 and 255,796 shares Series B
convertible preferred stock (liquidation preference of
$5,455) 1 3
Common stock, $.01 par value; authorized 50,000,000 shares;
issued 18,177,292 and 14,879,542 shares 182 149
Additional paid-in capital 48,135 31,877
Retained earnings 16,569 (10)
-------- -------
64,887 32,019
Treasury stock, 686,710 shares, at cost (3,791) (3,791)
Notes receivable, directors, officers, employees,
consultants, and others (473) (1,868)
Foreign currency translation adjustment (4,161) 265
-------- -------
Total shareholders' equity 56,462 26,625
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $116,548 $64,143
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE 1996 1995 1994
DATA ----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product sales $ 285,676 $ 168,689 $ 167,920
Retail royalties 5,597 5,303 3,694
Sales commissions and other revenues 1,334 2,175 988
----------- ---------- ----------
Net revenues 292,607 176,167 172,602
Operating costs and expenses:
Media purchases 86,518 51,961 56,215
Direct costs 151,198 97,605 95,070
Selling, general, and administrative 33,772 20,766 20,667
Severance expense for former Chairman and
Chief Executive Officer -- 2,650 --
Unusual charges -- 2,868 9,049
Interest expense 1,015 689 300
----------- ---------- ----------
Total operating costs and expenses 272,503 176,539 181,301
----------- ---------- ----------
Income (loss) before income taxes 20,104 (372) (8,699)
Income taxes 3,525 300 --
----------- ---------- ----------
Net income (loss) $ 16,579 $ (672) $ (8,699)
=========== ========== ==========
Income (loss) per common and common
equivalent share:
Primary $ 0.74 $ (0.05) $ (0.72)
=========== ========== ==========
Fully-diluted $ 0.71 $ (0.05) $ (0.72)
=========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding:
Primary 23,175,900 14,023,800 12,077,900
=========== ========== ==========
Fully-diluted 23,287,600 14,023,800 12,077,900
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Preferred stock:
Beginning balance $ 3 $ -- $ --
Conversion to common stock (119,421 shares) (2) -- --
Issuance of investment units -- 3 --
------- ------- -------
Ending balance 1 3 --
Common stock:
Beginning balance 149 144 123
Conversion of preferred stock (1,194,210 shares) 12 -- --
Exercise of stock options (1,219,099; 41,500; and
2,052,418 shares) 12 -- 21
Exercise of warrants (198,985 shares) 2 -- --
Issuance of shares for acquisition of DirectAmerica
(554,456 shares) 6 -- --
Issuance of shares to settle litigation (106,000 and
500,000 shares) 1 5 --
Stock grant (25,000 shares) -- -- --
------- ------- -------
Ending balance 182 149 144
Additional paid-in capital:
Beginning balance 31,877 19,026 13,363
Issuance of investment units -- 9,083 --
Issuance of shares to settle litigation 724 1,726 --
Issuance of shares for acquisition of DirectAmerica 6,994 -- --
Conversion of preferred stock (11) -- --
Issuance of warrants in connection with term loan -- 1,800 --
Exercise of warrants 1,033 -- --
Exercise of stock options 5,123 242 5,652
Stock grant 344 -- --
Reissuance of treasury shares -- -- 11
Tax benefit from exercise of stock options 2,051 -- --
------- ------- -------
Ending balance 48,135 31,877 19,026
Retained earnings:
Beginning balance (10) 662 9,361
Net income (loss) 16,579 (672) (8,699)
------- ------- -------
Ending balance 16,569 (10) 662
Treasury stock:
Beginning balance (3,791) (3,791) (3,892)
Reissuance of treasury shares (18,265 shares) -- -- 101
------- ------- -------
Ending balance (3,791) (3,791) (3,791)
Notes receivable:
Beginning balance (1,868) (4,504) (496)
Collection of notes receivable 2,483 2,636 642
Exercise of stock options (1,088) -- (4,650)
------- ------- -------
Ending balance (473) (1,868) (4,504)
Foreign currency translation adjustment:
Beginning balance 265 (966) (829)
Translation adjustment for the year (4,426) 1,231 (137)
------- ------- -------
Ending balance (4,161) 265 (966)
------- ------- -------
Total shareholders' equity $56,462 $26,625 $10,571
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------
YEARS ENDED MARCH 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $16,579 $ (672) $(8,699)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,099 1,650 1,628
Amortization of loan discount 399 150 --
Provision for deferred rent expense 384 402 363
Tax benefit from exercise of stock options 2,051 -- --
Decrease (increase) in:
Accounts receivable, net (18,242) 1,139 (3,577)
Inventories (8,591) (3,987) (360)
Prepaid cable and advertising costs (3,936) (370) (662)
Deferred costs (2,282) 402 807
Other current assets (1,060) (395) (106)
Increase (decrease) in:
Accounts payable 8,569 (415) 1,839
Accrued expenses 9,505 4,713 6,422
Deferred revenue 1,236 (1,456) (903)
Income taxes payable 1,044 300 (520)
Other (2,225) 440 1,548
------- ------- -------
Net cash provided by (used in) operating
activities 5,530 1,901 (2,220)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (3,923) (832) (1,815)
Cost of companies acquired, net of cash acquired (897) -- --
------- ------- -------
Net cash used in investing activities (4,820) (832) (1,815)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of investment units -- 9,415 --
Proceeds from borrowings -- 5,000 442
Payments on long-term debt (166) (952) (1,565)
Exercise of stock options and warrants 5,085 242 1,022
Net (repayments) borrowings under lines of credit -- (3,819) 2,334
Payments received on notes receivable 2,483 492 583
------- ------- -------
Net cash provided by financing activities 7,402 10,378 2,816
Effect of exchange rate changes on cash and cash
equivalents (3,174) 425 (34)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents 4,938 11,872 (1,253)
Cash and cash equivalents at beginning of year 13,467 1,595 2,848
------- ------- -------
Cash and cash equivalents at end of year $18,405 $13,467 $ 1,595
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 528 $ 546 $ 339
======= ======= =======
Taxes on income $ 430 $ -- $ 30
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock issued upon exercise of stock options
for notes receivable $ 1,088 $ -- $ 4,650
======= ======= =======
Purchase of equipment financed by capital lease $ -- $ -- $ 442
======= ======= =======
Common stock issued for acquisition $ 7,000 $ -- $ --
======= ======= =======
Note payable and other liabilities used to finance
acquisition $ 1,496 $ -- $ --
======= ======= =======
Issuance of stock to settle litigation $ 725 $ 1,700 $ --
======= ======= =======
Settlement of severance expense with note
receivable $ -- $ 1,700 $ --
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
National Media Corporation is engaged in the direct marketing of consumer prod-
ucts principally through television media. The Company currently brings
infomercial programming to over 60 countries.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of National Media
Corporation and its wholly-owned subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
notes to consolidated financial statements. Actual results could differ from
those estimates.
Revenue Recognition and Reserve for Returned Merchandise
Product sales and retail royalty revenue are recognized when the product is
shipped. Generally, it is the Company's policy to refund unconditionally the
total price of merchandise returned within 30 days. The Company provides an al-
lowance, based upon experience, for returned merchandise.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when pur-
chased to be cash equivalents.
Accounts Receivable
The allowance for doubtful accounts was $2,127,000 and $1,954,000 at March 31,
1996 and 1995, respectively.
Inventories
Inventories consist principally of products purchased for resale, and are
stated at the lower of cost (determined by the first-in, first-out method) or
market.
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method based on the estimated useful lives of
the assets or lease terms.
Excess of Cost Over Net Assets Acquired and Other Intangible Assets
Excess of cost over net assets of acquired businesses ("goodwill") is being am-
ortized by the straight-line method over 20 to 40 years. Other intangible as-
sets are being amortized by the straight-line method over 2 to 5 years. Amorti-
zation expense for excess of cost over net assets acquired and other intangible
assets was $629,000, $336,000, and $415,000 for the years ended March 31, 1996,
1995, and 1994, respectively. The recoverability of goodwill is evaluated at
the operating unit level by an analysis of operating results and consideration
of other significant events or changes in the business environment. If an oper-
ating unit has current operating losses and based upon projections there is a
likelihood that such operating losses will continue, the Company will measure
impairment on the basis of undiscounted expected future cash flows from opera-
tions before interest for the remaining amortization period.
Show Production Costs
Costs related to the production of the Company's direct response televised ad-
vertising programs are capitalized and amortized over the estimated useful life
of the production. Show production expense was $8,630,000, $6,077,000, and
$6,833,000 for the years ended March 31, 1996, 1995, and 1994, respectively.
Production expense for 1996, 1995, and 1994 included $1,900,000, $1,100,000,
and $2,600,000, respectively, for amounts written down related to unsuccessful
shows.
F-8
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Deferred Revenue and Costs
Deferred revenue consists of funds received by the Company for items ordered,
but not shipped. The related costs are deferred and expensed as orders are
shipped. The Company also defers direct costs on product orders for which the
funds are not yet received and expenses these costs as orders are shipped.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Per Share Amounts
Income (loss) per share amounts have been computed based upon the weighted av-
erage number of common shares and dilutive common equivalent shares (stock op-
tions, warrants, and preferred stock) outstanding using the "if converted meth-
od" in 1996 and 1995 and the "treasury stock" method in 1994. For 1996, net in-
come used to compute primary earnings per share equals net income, plus after-
tax interest expense incurred on outstanding long-term debt and after-tax in-
terest income earned on the assumed investment of excess proceeds from the con-
version of all outstanding warrants and stock options after repurchase using
the treasury stock method of 20% of the Company's outstanding common stock. For
1995 and 1994, the effect of the exercise of stock options and warrants and the
conversion of convertible preferred stock was not assumed in the calculation of
loss per share because the effect was anti-dilutive.
Foreign Currency Translation
Results of operations for the Company's foreign subsidiaries are translated us-
ing the average exchange rates during the period, while assets and liabilities
are translated into U.S. dollars using the rate at the balance sheet date. Re-
sulting translation adjustments are recorded as a component of shareholders'
equity.
Accounting Standards Issued But Not Yet Adopted
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
Number 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which addresses accounting for the
impairment of long-lived assets such as property and equipment, identifiable
intangible assets, and goodwill related to those assets. The prospective imple-
mentation of FAS 121, which must be adopted in the first quarter of fiscal year
1997, is not expected to have a material effect on the Company's consolidated
financial position or results of operations.
In October 1995, the FASB issued Statement Number 123 (FAS 123), "Accounting
for Stock-Based Compensation," which prescribes accounting and reporting stan-
dards for all stock-based compensation plans, including employee stock options
and restricted stock plans. Under FAS 123, companies may adopt a fair value
method of expense recognition for all stock-based compensation or continue to
account for all stock-based compensation under the measurement standards of Ac-
counting Principles Board Opinion Number 25 (APB 25), "Accounting for Stock Is-
sued to Employees." The Company will continue to follow the accounting provi-
sions of APB 25 in determining compensation expense and will provide the pro
forma disclosures as required by Statement 123 beginning in fiscal 1997.
2. ACQUISITIONS
On October 25, 1995, the Company completed the acquisition of all of the issued
and outstanding capital stock of DirectAmerica Corporation and California Pro-
duction Group, Inc. (collectively, "DirectAmerica") for 554,456 shares of the
Company's common stock valued at $7,000,000. The Company may be required to is-
sue additional shares of common stock to the shareholders of DirectAmerica if
royalties from sales of products for which DirectAmerica produced infomercials
exceed $5,000,000 for a period ending January 31, 1997. Any additional shares
issued will be recognized as an additional cost of the acquired enterprise. The
acquisition was accounted for as a purchase and is included in the Company's
financial statements from the date of acquisition. A total of
F-9
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
$8,500,000 in assets were acquired and included excess of cost over acquired
assets of $7,800,000, which is being amortized over 20 years.
Had this purchase been made at April 1, 1994, pro forma unaudited condensed
results from operations would have been as follows (in thousands, except per
share data):
--------------
<TABLE>
<CAPTION>
YEARS ENDED MARCH
31,
1996 1995
-------- --------
<S> <C> <C>
Net revenues $293,365 $176,346
Net income (loss) $ 16,279 $ (461)
Primary income (loss) per share $ .72 $ (.03)
Fully diluted income (loss) per share $ .69 $ (.03)
</TABLE>
These pro forma amounts do not give effect to any shares of the Company's com-
mon stock which may be issued to the shareholders of DirectAmerica contingent
upon certain revenue levels being achieved.
On October 16, 1995, the Company completed the purchase of assets related to
the "Flying Lure" product from United Brands International Corp. and Langer
Technologies, Inc. The purchase price of $1,900,000 included $1,000,000 pay-
able in cash and a two-year promissory note bearing interest at 9.0% in the
principal amount of $900,000. In addition, the Company agreed to pay $596,000
over three years for a covenant not to compete. The Company may be required to
make additional payments of up to $6,000,000 if worldwide sales of "Flying
Lure" products exceed certain targeted levels. Any such additional amounts
will be recognized as additional cost of the "Flying Lure" assets. Total as-
sets acquired, principally the brand name and product rights, non-compete and
product development talent, were approximately $2,500,000. These amounts are
included in excess of cost over net assets of acquired businesses and other
intangible assets.
3. ACCRUED EXPENSES
Accrued expenses include the following (in thousands):
-----------
<TABLE>
<CAPTION>
MARCH 31,
1996 1995
------ ------
<S> <C> <C>
Allowance for product refunds and returns $5,089 $3,371
Accrual for management bonus 4,212 --
Accrual for legal settlements 573 1,875
Accrual for media purchases 2,298 3,207
Accrual for sales and VAT tax 2,154 2,311
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
------------
<TABLE>
<CAPTION>
MARCH 31,
1996 1995
------- ------
<S> <C> <C>
Furniture, fixtures and office equipment $11,877 $7,735
Leasehold improvements 1,074 938
Equipment under capital leases 442 720
------- ------
13,393 9,393
Less accumulated depreciation and amortization (6,439) (4,980)
------- ------
Total $ 6,954 $4,413
======= ======
</TABLE>
Depreciation and amortization expense for property and equipment, including
equipment under capital lease, was $1,470,000, $1,314,000, and $1,213,000 for
the years ended March 31, 1996, 1995, and 1994, respectively.
F-10
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following (in thou-
sands):
<TABLE>
<CAPTION>
-------------
MARCH 31,
1996 1995
------ ------
<S> <C> <C>
Term loan, net of discount $3,749 $3,350
Note payable 900 --
Obligations under capital leases 281 447
------ ------
4,930 3,797
Less current portion 876 184
------ ------
Long-term portion $4,054 $3,613
====== ======
</TABLE>
In October 1994, the Company obtained a $5,000,000 five-year secured term loan
with an independent investor pursuant to a Note and Warrant Purchase Agreement.
The Company issued to the investor a warrant (the "Loan Warrants") to purchase
2,250,000 shares (subject to adjustment) of common stock. The Loan Warrants are
exercisable at a price of $4.80 per share of common stock at any time from and
after September 30, 1995 until September 30, 2004. Based on an independent val-
uation analysis, the Company valued the Loan Warrants at $1,800,000. The corre-
sponding loan discount is being amortized over the life of the loan (60 months)
and the amortization is included in interest expense. On April 20, 1995, the
term loan was purchased by a bank. All material terms of the loan remained un-
changed. The term loan bears interest on the unpaid principal amount at prime
plus .5%, and is payable monthly. The term loan is payable in annual install-
ments of $1,000,000 commencing December 1, 1996 with the remaining balance due
September 30, 1999.
In November 1995, the Company obtained a $5,000,000 revolving line of credit
(the "Line") from a bank pursuant to a Loan and Security Agreement. The Line,
which was increased in May 1996 to allow for up to $5,000,000 of cash advances
or a total of $7,500,000 of cash advances and letters of credit, is available
until September 30, 1996 at which time its continuation will be considered. In-
terest on cash advances under the Line will accrue at varying rates based, at
the Company's option, on the bank's national commercial rate, the London
Interbank Offering Rate (LIBOR) plus 1.0% or for amounts outstanding up to a
maximum amount of $1,000,000, a rate of 1.0% over the bank's certificate of de-
posit rate. The agreement requires the Company to pay an annual fee of .5% on
the unused portion of the Line and maintain an average quarterly compensating
balance of $2,500,000 subject to a .25% deficiency fee. Advances under the Line
are limited to 70% of qualified domestic receivables, 30% of domestic inventory
with a $1,500,000 maximum cap, and 20% of prepaid media. At March 31, 1996,
there were no borrowings outstanding under this facility, however, $3,800,000
of the Line was used for the issuance of letters of credit.
The term loan and the Line are secured by a lien on all of the inventory, re-
ceivables, trademarks, tradenames, service marks, copyright and all other as-
sets of the Company and its subsidiaries. Such lien on certain nondomestic as-
sets of the Company is subordinate to a lien held by Barclays Bank PLC. At
present, the Company has an overdraft line with Barclays Bank PLC in the amount
of (Pounds)200,000 (approximately $300,000). The Line is also secured by the
pledge of a certificate of deposit in the amount of $1,000,000. Under its
agreements with the bank, the Company is subject to certain restrictions, in-
cluding the payment of dividends, and must comply with covenants including the
maintenance of specific ratios. The Company is in compliance with these re-
strictions and covenants. The face value of the Company's debt approximates its
fair value.
F-11
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Long-term debt maturities and payments due under capital lease obligations are
as follows (in thousands):
<TABLE>
<CAPTION>
-----------------------
YEAR
ENDING LONG-TERM CAPITAL LEASE
MARCH 31, DEBT OBLIGATIONS
--------- --------- -------------
<S> <C> <C>
1997 $1,250 $137
1998 1,650 117
1999 1,000 75
2000 2,000 --
------ ----
5,900 329
Less: Interest portion -- 48
Loan discount 1,251 --
------ ----
Total $4,649 $281
====== ====
</TABLE>
6. SERIES B CONVERTIBLE PREFERRED STOCK
In October 1994, the Company authorized the issuance of a series of preferred
stock designated "Series B Convertible Preferred Stock," par value $.01 per
share, consisting of 400,000 shares, of which a total of 255,796 shares were
issued in connection with the private placements, as described in Note 12. At
March 31, 1996, there were 136,375 shares outstanding.
Each share of preferred stock is valued at $40.00 per share for conversion pur-
poses and is presently convertible at the option of the holder into shares of
common stock at a price of $4.00 per share of common stock (subject to adjust-
ment). The holders of shares of preferred stock shall be entitled to receive
dividends declared on the common stock as if the shares of preferred stock had
been converted into shares of common stock. Except as to the election of direc-
tors, each share of preferred stock has voting rights equivalent to the total
number of shares of common stock into which the share of the preferred stock is
convertible. The holders of the preferred stock, voting as a class, have the
right to elect two directors; the holders of the common stock, voting as a
class, have the right to elect the remaining directors. The preferred stock-
holders' right to elect two directors terminates under certain circumstances.
At March 31, 1996, there were 9,566,000 shares of common stock reserved for
conversion of preferred stock, for exercise of stock options and warrants, for
issuance under the 1995 Management Incentive Plan, and for matching contribu-
tions under the Company's 401(k) plan. The Company would receive proceeds of
approximately $47,000,000 upon exercise of all options and warrants currently
outstanding.
7. INCOME TAXES
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
---------------------------------
FEDERAL STATE FOREIGN TOTAL
------- ------ ------- -------
1996
<S> <C> <C> <C> <C>
Current (1) $ 9,722 $1,174 $1,258 $12,154
Deferred (4,825) (761) 1,324 (4,262)
Benefit of net operating loss carryforward (4,367) -- -- (4,367)
------- ------ ------ -------
Provision for income taxes $ 530 $ 413 $2,582 $ 3,525
======= ====== ====== =======
<CAPTION>
1995
<S> <C> <C> <C> <C>
Current $ -- $ 100 $ 200 $ 300
Deferred (495) -- 495 --
------- ------ ------ -------
Provision for income taxes $ (495) $ 100 $ 695 $ 300
======= ====== ====== =======
<CAPTION>
1994
<S> <C> <C> <C> <C>
Current $ -- $ -- $ -- $ --
Deferred 209 -- (209) --
------- ------ ------ -------
Provision for income taxes $ 209 $ -- $ (209) $ --
======= ====== ====== =======
</TABLE>
- ---------
(1) In 1996, current income taxes payable were reduced by approximately
$2,100,000 due to the exercise of employee stock options that are deduct-
ible for income tax purposes but do not affect net income.
F-12
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Pretax income (loss) was taxed under the following jurisdictions (in thou-
sands):
<TABLE>
<CAPTION>
------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
United States $15,525 $(1,530) $(7,979)
Foreign 4,579 1,158 (720)
------- ------- -------
Total $20,104 $ (372) $(8,699)
======= ======= =======
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
-----------------
MARCH 31,
1996 1995
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,883 $ 9,493
Alternative minimum tax credit carryforward 724 469
Investment tax credit carryforward 66 66
Accrued vacation and severance pay 207 785
Inventory and accounts receivable reserves 2,416 1,824
Reserve for legal settlements 572 840
Other 559 546
------- --------
Total deferred tax assets 9,427 14,023
Valuation allowance (5,321) (10,451)
------- --------
Deferred tax assets 4,106 3,572
Deferred tax liabilities:
Prepaid media and other costs 1,282 1,078
Tax over book depreciation 393 360
Deferred production costs 731 682
Deferred sales 1,700 1,452
------- --------
Total deferred tax liabilities 4,106 3,572
------- --------
Net deferred tax asset $ -- $ --
======= ========
</TABLE>
The decrease in the valuation allowance recorded against deferred tax assets is
primarily allocable to the utilization of U.S. net operating loss carryforwards
from March 31, 1995 to March 31, 1996.
A reconciliation of the Company's provision for income taxes to the provision
for income taxes at the U.S. federal statutory rate of 35% is as follows (in
thousands):
<TABLE>
<CAPTION>
----------------------
YEARS ENDED MARCH
31,
1996 1995 1994
------ ----- -------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $7,036 $(126) $(2,958)
Tax effect of:
Net operating loss -- 126 2,958
Utilization of net operating loss carryforward (4,367) -- --
Foreign income taxes 980 200 --
State and local income taxes 268 100 --
Nondeductible items 301 -- --
Other (693) -- --
------ ----- -------
Income tax expense $3,525 $ 300 $ --
====== ===== =======
</TABLE>
F-13
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
At March 31, 1996, the Company has the following loss and credit carryforwards
for tax purposes (in thousands):
<TABLE>
<CAPTION>
--------------------
AMOUNT EXPIRATION
------- ------------
<S> <C> <C>
U.S. net operating loss $13,953 2009 to 2010
Alternative minimum tax credit 724 unlimited
Investment tax credit 66 1998 to 2001
</TABLE>
The U.S. net operating loss carryforward is related primarily to the exercise
of employee stock options. For financial reporting purposes, a valuation allow-
ance has been recognized to offset the deferred tax assets related to the en-
tire U.S. net operating loss carryforward. If that portion of the loss
carryforward related to the exercise of stock options is realized, the result-
ing tax benefit will be recorded directly to shareholders' equity.
Undistributed earnings of the Company's foreign subsidiaries amounted to ap-
proximately $7,400,000 at March 31, 1996. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Distribution of those earnings in
the form of dividends or otherwise would be subject to U.S. income taxes, re-
duced by foreign tax credits.
8. SEVERANCE TO FORMER CHAIRMAN
In September 1994, the Chairman of the Board and Chief Executive Officer of the
Company resigned. In connection with his resignation, he and the Company exe-
cuted a letter agreement. The Company recorded severance expense of $2,650,000
in fiscal year 1995, pursuant to the terms of the letter agreement and the
terms of his employment agreement. In connection with the former Chairman's
resignation as a member of the Company's Board of Directors and the Company's
settlement of the ValueVision litigation as discussed in Note 14, the Company
and the former Chairman entered into further agreements in part amending the
earlier agreements. Pursuant to such agreements, the Company (i) paid the for-
mer Chairman $50,000 per month through March 31, 1995, (ii) forgave two notes
made by the former Chairman, in the principal amount of $1,646,189, (iii) ac-
celerated the vesting of 750,000 options to acquire shares of the Company's
common stock in accordance with the terms of his employment agreement, and (iv)
retained the former Chairman as a consultant for a term of 36 months at a cost
of $300,000. He will continue to be eligible to participate in the 1991 Option
Plan until 90 days after the termination of his services as a consultant.
9. STOCK OPTIONS
The Company has stock option plans under which, as amended, a maximum of
5,065,000 shares of common stock may be issued upon exercise of incentive or
nonincentive stock options, special options, or stock appreciation rights
granted pursuant to such plans. To date, the exercise price of options issued
under the Plans has been market or related to market. All employees of the Com-
pany, as well as directors, officers, and third parties providing services to
the Company are eligible to participate in the Plans.
Pursuant to employment agreements with various officers of the Company who en-
tered into employment agreements after August 31, 1991, as well as certain
other agreements, the Board of Directors has authorized the grant of options to
purchase up to 1,232,000 shares of common stock at exercise prices equal to the
market price at the time of grant. In each case, the grant of option was an in-
ducement to the execution of an employment or other agreement.
F-14
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Options granted vest over a period ranging from the date of grant up to a max-
imum of three years. Options may be exercised up to a maximum of 10 years from
date of grant.
<TABLE>
<CAPTION>
------------
SHARES UNDER
OPTION
------------
<S> <C>
Outstanding at April 1, 1993 2,723,924
Granted 1,590,000
Exercised at average of $2.76 per share (2,052,418)
Expired and canceled (181,666)
------------
Outstanding at March 31, 1994 2,079,840
Granted 1,165,590
Exercised at average of $5.84 per share (41,500)
Expired and canceled (295,834)
------------
Outstanding at March 31, 1995 2,908,096
Granted 350,000
Exercised at average of $4.22 per share (1,219,099)
Expired and canceled (116,665)
------------
Outstanding at March 31, 1996 1,922,332
============
Exercisable at March 31, 1996 1,384,004
============
Exercise price $3.88-$12.99
============
Shares available for future grant at March 31, 1996 26,681
============
Shares available for future grant at March 31, 1995 70,016
============
</TABLE>
The 26,681 shares available for future grant do not include 190,000 stock op-
tions granted in connection with certain officers' employment agreements with
the Company. In the event such options are not approved by the Company's
stockholders, such options shall be deemed automatically to be converted into
stock appreciation rights having an established price of $12.99 per share and
otherwise having terms and conditions similar to such options.
10. NOTES RECEIVABLE, DIRECTORS, OFFICERS, EMPLOYEES, CONSULTANTS, AND OTHERS
The note receivable of $473,000 at March 31, 1996 was received in connection
with the issuance of common stock upon exercise of stock options. The note
bears interest at a rate of 5.50% per annum and is payable on the earlier of
the sale of any of the shares of common stock acquired upon such exercise or
the termination of the obligor's employment with the Company.
11. STOCK PURCHASE RIGHTS
On January 13, 1994, the Company distributed one preferred share purchase
right on each outstanding share of its common stock. The rights will become
exercisable only if, without the Company's consent or waiver, a person or
group acquires 15% or more of the Company's outstanding common stock or an-
nounces a tender offer, the consummation of which would result in ownership by
a person or group of 15% or more of the Company's outstanding common stock.
Each right will entitle shareholders to buy one one-hundredth of a share of a
new series of junior participating preferred stock at an exercise price of
$40. In addition, upon the occurrence of certain events, the holders of rights
will thereafter have the right to receive, upon exercise at the then-current
exercise price, common stock (or, in certain circumstances, cash, property, or
other securities of the Company) having a value equal to two times the exer-
cise price of the right. In the event that the Company is acquired in a merger
or other business combination, or 50% or more of the Company's assets or earn-
ing power is sold, proper provision will be made so
F-15
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
that each holder of a right will thereafter have the right to receive, upon
exercise at the then-current exercise price of the right, common stock of the
acquiring or surviving company having a value equal to two times the exercise
price of the right. Any rights that are, or were, under certain circumstances,
beneficially owned by such a 15% owner will immediately become null and void.
The holders of rights, as such, have no rights as stockholders of the Company.
The Company has the ability to redeem the rights at $.001 per right until the
occurrence of certain specified events.
12. EQUITY INVESTMENT
During the year ended March 31, 1995, the Company raised a total of $9,415,000
(net of $872,000 of offering costs) through the sale, in privately negotiated
transactions, of a total of 255,796 investment units ("Units"). Each Unit con-
sisted of one share of preferred stock, par value $.01 per share, of the Com-
pany and a warrant (the "Warrants") to purchase twelve (12) shares (subject to
adjustment) of common stock, par value $.01 per share, of the Company. Each
share of preferred stock is valued at $40 per share for conversion purposes,
is convertible into common stock at a price of $4.00 per common share (subject
to adjustment) and carries no preferred dividend right. The Warrants are exer-
cisable at a price of $4.80 per share of common stock, except for those appli-
cable to 3,546 Units which are exercisable at a price of $5.74 per share of
common stock. At March 31, 1996, 243,296 warrants to acquire 2,919,552 shares
of the Company's common stock are outstanding and exercisable, and expire be-
tween October 5, 2004 and December 19, 2004.
Certain executive officers and directors of the Company participated in the
aforementioned private placement acquiring 17,921 Units. The purchase price of
these Units was at the same prices as offered to other investors.
13. COMMITMENTS AND CONTINGENCIES
The Company rents warehouse and office space under various operating leases
which expire through December 2013 including a lease with a related party as
described in Note 16. Future minimum lease payments (exclusive of real estate
taxes and other operating expenditures) as of March 31, 1996 under noncancel-
able operating leases with initial or remaining terms of one year or more are
as follows for the years ended March 31 (in thousands):
<TABLE>
<S> <C>
1997 $ 1,848
1998 1,661
1999 1,423
2000 1,395
2001 1,293
Thereafter 12,198
-------
$19,818
=======
</TABLE>
Rent expense under various operating leases aggregated $2,335,000, $2,119,100,
and $2,483,500 in 1996, 1995, and 1994, respectively. Subleased building space
rental income aggregated $85,300, $140,500, and $148,600 for 1996, 1995, and
1994, respectively.
During fiscal year 1996, the Company expended $86,518,000 on media purchases,
a portion of which were made under long-term agreements. According to the
terms of one such agreement between the Company and a cable television network
which extends through December 1997, the Company is obligated to purchase a
specific number of television hours per calendar year. The agreement is can-
celable by the cable television network with six months' written notice, only
in the event that it decides to telecast its own programming on a 24-hours-
per-day basis. In addition, the Company has long-term agreements with certain
Pan European satellite channels to purchase a specific number of television
hours per week at a minimum guaranteed amount. These contracts expire at vari-
ous dates from August 1997 to July 1999. Total commitments under these media
contracts are: $33,768,000 in 1997; $28,879,000 in 1998; $10,261,000 in 1999;
and $889,000 in 2000.
F-16
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. LITIGATION AND REGULATORY MATTERS
Shareholders' Federal Class Actions
In fiscal year 1996, the Company settled a class action complaint involving
allegations concerning disclosure by the Company of its ongoing relationship
with Positive Response Television, Inc., an infomercial producer, and Ronic,
S.A., a supplier of the Company. The settlement resulted in cash payments by
the Company's insurer of $2,175,000 and the issuance of 106,000 shares of com-
mon stock. The Company recorded a charge in fiscal year 1995 of $725,000 in
connection with this matter.
Terminated Tender Offer and Merger Agreement with ValueVision International,
Inc.
In April 1994, the Company filed suit in federal court against ValueVision In-
ternational, Inc. ("ValueVision") alleging that ValueVision had wrongfully
terminated its amended tender offer. In May 1994, ValueVision answered the
Company's complaint and set forth various counterclaims. In April 1995, par-
ties to this litigation entered into a settlement agreement. In connection
with the settlement agreement, the Company and ValueVision executed a
Telemarketing, Production and Post-Production Agreement (the "Telemarketing
Agreement") and a Joint Venture Agreement. Pursuant to the Telemarketing
Agreement, ValueVision is obligated to provide to the Company over a three-
year period inbound telephone call-taking services at rates more favorable
than those currently being paid by the Company. ValueVision is also obligated
to provide to the Company certain production and post-production services.
As additional consideration for the services to be provided by ValueVision un-
der the Telemarketing Agreement, the Company granted to ValueVision warrants
(the "Warrants") to purchase up to 500,000 shares of the Company's common
stock at a price of $8.865 per share (subject to adjustment pursuant to the
antidilution provisions of the Warrants). This price was based on a premium
over the average 20-day market value prior to the date of settlement. The War-
rants will vest with respect to an equal number of shares on each of the thir-
teen-month, 2-year and 3-year anniversaries of the effective date (November
24, 1995), provided that ValueVision satisfies certain conditions. The War-
rants will expire on the tenth anniversary of the effective date.
As part of the settlement, the Company and ValueVision also entered into a
Joint Venture Agreement. Pursuant to the Joint Venture Agreement, the Company
is required, subject to certain exceptions, to negotiate in good faith with
ValueVision to form a joint venture to pursue home shopping opportunities out-
side of the United States and Canada before pursuing such opportunities by it-
self or with certain third parties. ValueVision granted the Company similar
rights with respect to infomercial opportunities ValueVision may have outside
the United States and Canada.
In connection with the matters discussed above, the Company (1) reimbursed its
former Chairman $50,000 for certain legal costs, (2) paid substantially all
amounts due to the former Chairman under the Consulting Agreement described in
Note 8, and (3) paid $220,000 in connection with the early termination of the
lease described in Note 16.
The issuance of the Warrants to ValueVision required the prior consent of the
holders of the promissory notes issued pursuant to the Note Agreement as dis-
cussed in Note 5. As an inducement to the Noteholders to permit the issuance
of the Warrants, the Company issued the Noteholders warrants (the "Waiver War-
rants") to purchase 500,000 shares of the Company's common stock at a price of
$10.00 per share. At March 31, 1996, there were warrants to purchase 490,000
shares outstanding. These warrants expire on November 28, 1996.
Shareholders' Class Actions
In 1994, class action lawsuits were filed in federal court and Delaware Chan-
cery Court against the Company and certain of its present and former officers
and directors in connection with an aborted merger transaction with
ValueVision. In April 1995, the Company and other parties to the litigation
entered into agreements in principle to settle these actions. These agreements
provide for cash payments of $1,500,000, 75% of which will be paid by the
Company's insurer. The Company recorded a charge of $375,000 for its portion
of the settlement. In April 1996
F-17
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
the lawsuits in the Delaware court were settled for $350,000 with the Company
remitting $87,500 representing its portion of the settlement. The consummation
of the federal court settlement is subject, among other things to the approval
of the court.
Consumer Product Safety Commission Investigation
In February 1994, the staff of the Consumer Product Safety Commission (CPSC)
notified the Company that it had made a preliminary determination that a par-
ticular model of the Company's Juice Tiger product presents a "substantial
product hazard," under the Consumer Product Safety Act. The CPSC staff re-
quested the Company to take voluntary corrective action to ameliorate such al-
leged product hazard. While the Company has disputed that the model in question
presents a substantial product hazard, the Company and the CPSC staff recently
agreed upon the form and nature of voluntary action proposed by the Company to
address the CPSC staff's concerns. The Company has implemented the agreed upon
plan. The Company also received notification of a provisional acceptance of a
proposed form of settlement agreement with the Company, which includes a civil
penalty. The cost of implementing the corrective plan and the civil penalty, as
well as the other terms of the settlement agreement, will not have a material
adverse effect on the Company's financial condition or results of operations if
the settlement agreement is finalized in the proposed form.
Ab Roller Plus Patent Litigation
On March 1, 1996, Precise Exercise Equipment ("Precise") filed suit in the
United States District Court for the Central District of California against
certain parties, including the Company, alleging patent infringement, unfair
competition and other intellectual property claims. Such claims relate to an
alleged infringement of Precise's patent for an exercise device. The suit
claims that a product marketed by the Company pursuant to a license granted by
a third party violates Precise's patent. Pursuant to the terms of such license,
the third party is contractually obligated to indemnify the Company in this
suit. The suit seeks an injunction and treble damages. The Company's indepen-
dent legal counsel has issued an opinion to the Company that the product mar-
keted by the Company does not infringe upon Precise's patent. Management does
not believe that the disposition of this matter will have a material adverse
effect on the Company's results of operations or financial condition.
Other Matters
The Company, in the normal course of its business, is a party to litigation re-
lating to trademark and copyright infringement, product liability, contract-re-
lated disputes, and other actions. It is the Company's policy to vigorously de-
fend all such claims and enforce its rights in these areas. The Company does
not believe any of these actions, either individually or in the aggregate, will
have a material adverse effect on the Company's results of operations or finan-
cial condition.
15. RETIREMENT PLAN
All of the Company's U.S. full-time employees may participate in a 401(k) de-
fined contribution plan. The Company matches employee contributions at levels
that depend on the return on equity of the Company each year. Expense recog-
nized for the plan was $110,000, $40,000, and $12,500 for the years ended March
31, 1996, 1995, and 1994, respectively.
16. RELATED PARTY TRANSACTIONS
The Company leases office space in a building owned by a real estate company
owned by the Company's former Chairman of the Board and CEO. The Company has
exercised its option to terminate the lease, effective October 31, 1997. Rental
expense is $37,000 per month.
F-18
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
17. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment and is engaged in the direct mar-
keting of products principally through television. Information as to the
Company's operations by geographic area, is set forth below (in thousands):
<TABLE>
<CAPTION>
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
U.S. and Canada $141,642 $ 95,714 $126,580
Europe 56,406 50,513 46,022
Asia 94,559 29,940 --
-------- -------- --------
Total $292,607 $176,167 $172,602
======== ======== ========
Operating income (loss):
U.S. and Canada $ 4,080 $ 1,800 $ (1,100)
Europe 5,384 2,008 5
Asia 15,728 3,062 --
Unallocated corporate expenses (4,073) (6,553) (7,304)
-------- -------- --------
Total $ 21,119 $ 317 $ (8,399)
======== ======== ========
Identifiable assets:
U.S. and Canada $ 73,051 $ 28,191 $ 27,780
Europe 19,106 27,779 19,695
Asia 24,391 8,173 --
-------- -------- --------
Total $116,548 $ 64,143 $ 47,475
======== ======== ========
</TABLE>
Operating income is net income before interest and income taxes.
18. UNUSUAL CHARGES
The year ended March 31, 1995 includes unusual charges of $2,868,000 consist-
ing primarily of costs and legal fees related to the settlement of various
litigation and disputes.
Included in the unusual charges of $9,049,000 for the year ended March 31,
1994 is $5,265,000 for certain legal settlements and related legal fees,
$1,000,000 related to the relocation of the fulfillment center; $1,268,000 in
costs associated with anti-takeover defenses and the terminated tender offer
and agreement of merger; $725,000 in severance related to personnel reduc-
tions; $591,000 in costs associated with two aborted stock offerings; and
$200,000 of other charges.
19. SUBSEQUENT EVENTS
On May 17, 1996, the Company acquired all of the issued and outstanding capi-
tal stock of Positive Response Television, Inc. ("PRTV"), a publicly traded
direct marketing company and a producer of infomercials, through a tax-free
merger (the "Merger").
Pursuant to the terms of the Merger, each outstanding share of common stock of
PRTV has been converted into the right to receive .4512 shares of the
Company's common stock. Approximately 1,625,627 shares of the Company's common
stock were issued in connection with the Merger. These shares have a value of
approximately $23,000,000 based on the Company's closing stock price as of the
date the parties reached agreement on the transaction. In addition, an aggre-
gate of 211,146 shares of the Company's common stock, representing .0586
shares of the Company's common stock for each share of PRTV common stock out-
standing at the effective time of the Merger, have been deposited into an es-
crow account and will be deliverable, if at all, within 18 months, only upon
the
F-19
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
realization of the value of certain assets. The acquisition will be accounted
for as a purchase and will be included in the Company's financial statements
from the date of acquisition.
On May 1, 1995, a purported class action suit was filed in the United States
District Court for the Central District of California against PRTV and its
principal executive officers alleging that PRTV has made false and misleading
statements in its public filings, press releases and other public statements
with respect to its business and financial prospects. The suit was filed on be-
half of all persons who purchased PRTV Common Stock during the period from Jan-
uary 4, 1995 to April 28, 1995. The suit seeks unspecified compensatory damages
and other equitable relief. An amended complaint was filed on June 9, 1995,
which added more plaintiffs and expanded the class period from November 1994 to
April 28, 1995. PRTV moved to dismiss the amended complaint and the amended
complaint was dismissed in late July 1995. On or about September 25, 1995, the
plaintiffs filed a second amended complaint, which added additional officers as
defendants and attempted to set forth new facts to support plaintiffs' entitle-
ment to legal relief. On October 31, 1995, PRTV again moved to dismiss plain-
tiffs' entire action. Management does not believe that the disposition of this
matter will have a material adverse effect on the Company's financial condi-
tion.
In late May 1996, the Company executed definitive agreements to acquire all of
the outstanding capital stock of Prestige Marketing International Limited and
Prestige Marketing Limited (collectively, "Prestige") and all of outstanding
capital stock of Suzanne Paul Holdings Pty. Limited Group and its two direct
response television marketing subsidiaries (collectively, "Suzanne Paul").
These acquisitions are subject to certain regulatory notifications and are ex-
pected to be consummated in early July 1996.
The aggregate consideration to be paid by the Company for Prestige and Suzanne
Paul of approximately $21,800,000 consists of $4,200,000 in cash, $2,800,000
for a note payable maturing on December 5, 1996, and the issuance of 787,879
shares of the Company's common stock with a value of approximately $14,800,000
based on the Company's closing stock price as of the date the parties executed
the definitive agreement. The Company may pay up to an aggregate of an addi-
tional $5,000,000 in common stock, valued at the present market prices, in 1997
and 1998, contingent upon levels of net income achieved in those years by Pres-
tige and Suzanne Paul. The acquisitions will be accounted for as purchases.
Upon consummation of such acquisitions, the Company will also fund approxi-
mately $4,600,000 in dividends payable by Suzanne Paul.
Had the purchases of PRTV, Prestige and Suzanne Paul been made at April 1,
1995, pro forma unaudited condensed results from operations for the year ended
March 31, 1996 would have been as follows (in thousands, except per share da-
ta):
<TABLE>
<S> <C>
Net revenues $374,889
Net income $ 16,024
Primary income per share $ 0.64
Fully diluted income per share $ 0.61
</TABLE>
The pro forma information does not purport to be indicative of the combined
results of operations that would have been reported had the transactions taken
place on April 1, 1995 or of future results of operations and does not reflect
synergies or cost savings that may be realized as a result of the acquisitions,
particularly PRTV.
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholder of
DirectAmerica Corporation
We have audited the accompanying combined balance sheet of DirectAmerica Corpo-
ration and California Production Group, Inc. as of September 30, 1995, and the
related combined statement of operations, shareholders' equity and cash flows,
for the nine months ended September 30, 1995. These financial statements are
the responsibility of the Companies' management. Our responsibility is to ex-
press an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audit provides a reasonable basis for our opin-
ion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of
DirectAmerica Corporation and California Production Group, Inc. at September
30, 1995, and the combined results of their operations and their cash flows for
the nine months ended September 30, 1995, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
December 12, 1995
F-21
<PAGE>
DIRECTAMERICA CORPORATION AND
CALIFORNIA PRODUCTION GROUP, INC.
COMBINED BALANCE SHEET
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
----------------
AT SEPTEMBER 30,
1995
----------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 79,454
Accounts receivable, net 520,944
Prepaid expenses 55,069
--------
Total current assets 655,467
Property and equipment, net 103,381
Deposits 10,150
--------
TOTAL ASSETS $768,998
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 64,013
Accrued expenses 408,962
Deferred revenue 132,470
Income taxes payable 11,000
--------
Total current liabilities 616,445
Shareholders' equity:
Common stock, no par value; authorized 505,000 shares;
issued 109,875 shares 3,000
Retained earnings 170,353
--------
173,353
Treasury stock, 2,625 shares, at cost (20,800)
--------
Total shareholders' equity 152,553
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $768,998
========
</TABLE>
See accompanying notes to combined financial statements.
F-22
<PAGE>
DIRECTAMERICA CORPORATION AND
CALIFORNIA PRODUCTION GROUP, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
-----------------
NINE MONTHS ENDED
SEPTEMBER 30,
1995
-----------------
<S> <C>
Revenues:
Royalty income $1,933,470
Production income 849,430
Other revenues 11,000
----------
Net revenues 2,793,900
Operating costs and expenses:
Direct costs 1,481,766
General and administrative costs 1,269,748
----------
Total operating costs and expenses 2,751,514
----------
Income before income taxes 42,386
Income taxes (11,000)
----------
Net income $ 31,386
==========
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE>
DIRECTAMERICA CORPORATION AND CALIFORNIA PRODUCTION GROUP, INC.
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
-----------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1995
COMMON RETAINED TREASURY
STOCK EARNINGS STOCK TOTAL
------ -------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $3,000 $138,967 $ (4,800) $137,167
Net income -- 31,386 -- 31,386
Purchases of treasury shares -- -- (16,000) (16,000)
------ -------- -------- --------
Balance at September 30, 1995 $3,000 $170,353 $(20,800) $152,553
====== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-24
<PAGE>
DIRECTAMERICA CORPORATION AND
CALIFORNIA PRODUCTION GROUP, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------
NINE MONTHS ENDED
SEPTEMBER 30,
1995
-----------------
<S> <C>
Cash flows from operating activities
Net income $ 31,386
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of property and equipment 34,082
Increase in:
Accounts receivable (101,864)
Prepaid expenses (41,671)
Decrease in:
Accounts payable and accrued expenses (2,077)
Deferred revenue (67,530)
Income taxes payable (168,559)
Other (10,467)
---------
Net cash used in operating activities (326,700)
Cash flows from investing activities
Additions to property and equipment (90,713)
Proceeds from sale of marketable securities 216,000
---------
Net cash provided by investing activities 125,287
Cash flows from financing activities
Purchases of treasury shares (16,000)
---------
Net cash used in financing activities (16,000)
---------
Net decrease in cash and cash equivalents (217,413)
Cash and cash equivalents at December 31, 1994 296,867
---------
Cash and cash equivalents at September 30, 1995 $ 79,454
=========
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes $ 184,722
=========
</TABLE>
See accompanying notes to combined financial statements.
F-25
<PAGE>
DIRECTAMERICA CORPORATION AND
CALIFORNIA PRODUCTION GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DirectAmerica Corporation and California Production Group, Inc. (together, the
"Company") are engaged in the production of infomercials (television shows fea-
turing various consumer products designed to motivate television viewers to
place telephone orders for such products), and generate royalties based upon
products sold.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements include the accounts of DirectAmerica Corpo-
ration ("DA") and California Production Group, Inc. ("CPG"). All significant
intercompany accounts and transactions have been eliminated. DA and CPG are un-
der common ownership and management.
Revenue Recognition
Substantially all of the Company's revenues (and consequently most of its ac-
counts receivable) are the result of production agreements with National Media
(see Note 7) and Guthy-Renker Corporation. Under the agreements, the Company is
reimbursed for all approved production expenses; in addition, the Company re-
ceives royalties based on products sold, as provided for under the terms of the
production agreements. These amounts are shown as "production income" and "roy-
alty income," respectively, in the accompanying combined statement of income.
The Company generally defers production income and related production expenses
until the contract is completed. When the completed infomercial production is
delivered to the customer, the production income and expense are recognized. If
estimated total production costs on an infomercial production at any time ex-
ceed the related estimated total production billings, the entire amount of the
estimated loss is recognized immediately.
Deferred Revenue
Deferred revenue, as shown in the accompanying combined balance sheet, com-
prises the excess of production billings over related production costs incurred
(net of recognized estimated losses).
Cash and Cash Equivalents
For purposes of the combined statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method based on the estimated useful lives of
the assets or lease terms.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are determined based on
the differences between financial reporting and tax bases of assets and liabil-
ities and are measured using the enacted tax rates and laws that will be in ef-
fect when the differences are expected to reverse.
Equity
The shares of common stock attributable to each of the individual companies in-
cluded in the combined financial statements are as follows:
<TABLE>
<CAPTION>
-------------
DA CPG
------- -----
<S> <C> <C>
Authorized 500,000 5,000
Issued 105,000 4,875
In Treasury -- 2,625
</TABLE>
F-26
<PAGE>
DIRECTAMERICA CORPORATION AND CALIFORNIA PRODUCTION GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
2. ACCRUED EXPENSES
Accrued expenses include the following at September 30, 1995:
<TABLE>
<S> <C>
Accrual for royalties $ 86,559
Accrual for severance 44,333
Accrual for professional fees 180,000
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 1995:
<TABLE>
<S> <C>
Production and office equipment $124,233
Furniture and fixtures 38,818
Leasehold improvements 9,765
--------
172,816
Less accumulated depreciation and amortization (69,435)
--------
Total $103,381
========
</TABLE>
4. INCOME TAXES
The components of income tax expense for the nine month period ended September
30, 1995 are as follows:
<TABLE>
<CAPTION>
----------------------
FEDERAL STATE TOTAL
------- ------ -------
<S> <C> <C> <C>
Current $7,500 $3,500 $11,000
Deferred -- -- --
------ ------ -------
Total $7,500 $3,500 $11,000
====== ====== =======
</TABLE>
There are no significant differences between the Company's financial reporting
and tax bases of assets and liabilities. As such, no portion of income tax ex-
pense has been classified as deferred.
The effective tax rate of 26% reflects the graduated Federal corporate income
tax rates plus the California statutory rate.
5. COMMITMENTS
The Company rents office space, furniture, and certain other space under vari-
ous operating leases, all of which were on a month-to-month basis at September
30, 1995. Rent expense for the nine-month period ended September 30, 1995 was
approximately $56,100.
6. LITIGATION
The Company, in the normal course of its business, has been party to litigation
relating to trademark and copyright infringement. It is the Company's policy to
vigorously defend such claims and enforce its rights in these areas. The Com-
pany does not believe that any ongoing actions either individually, or in the
aggregate, will have a material adverse effect on the Company's results of op-
erations or financial condition.
F-27
<PAGE>
DIRECTAMERICA CORPORATION AND CALIFORNIA PRODUCTION GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--CONCLUDED
7. RELATED PARTY TRANSACTIONS
As more fully discussed in Note 8, the Company was acquired by National Media
on October 25, 1995. The Company has and will continue to derive a significant
portion of its revenues, incur significant costs of production, and maintain
significant accounts receivable balances from infomercials produced for Na-
tional Media.
As of September 30, 1995, the Company's balance in accounts receivable due from
National Media was $222,566. In addition, the Company received $1,578,775 roy-
alty income and $386,825 production income from National Media for the nine
months ended September 30, 1995.
8. SUBSEQUENT EVENT
On October 25, 1995, all of the outstanding capital stock of DA and CPG were
acquired by National Media through a tax-free merger of the entities with and
into DA Acquisition Corp., a wholly owned subsidiary of National Media. Upon
the consummation of the merger, the separate corporate existence of each of DA
and CPG ceased, and the name of DA Acquisition Corp. was changed to
DirectAmerica Corporation. In connection with the merger, National Media issued
to the shareholders of DA and CPG an aggregate of 554,456 shares of National
Media common stock valued at approximately $7.0 million as of the date the par-
ties reached agreement on the transaction. National Media may be required to
issue additional shares of common stock to the shareholders of DA and CPG if
royalties received by the Company from sales of products for which DA and CPG
have produced infomercials exceed $5 million for the twelve-month period ending
January 31, 1997.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Positive Response Television, Inc.
Sherman Oaks, California
We have audited the consolidated balance sheets of Positive Response Televi-
sion, Inc. and subsidiaries (the "Company") at December 31, 1995 and 1994 and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these fi-
nancial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Positive Response Television,
Inc. and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting prin-
ciples.
Deloitte & Touche LLP
Los Angeles, California
March 25, 1996
F-29
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------
AT DECEMBER 31,
1995 1994
----------- -----------
<S> <C> <C>
ASSETS (NOTE 7)
Current Assets:
Cash and cash equivalents $ 725,000 $ 3,247,000
Restricted cash (Note 7) 1,500,000 1,500,000
Royalties receivable 663,000 1,408,000
Accounts receivable, net of allowance for doubtful
accounts of $237,000 and 152,000, at 1995 and 1994,
respectively 4,887,000 1,938,000
Inventories 2,413,000 1,676,000
Infomercial production costs, net of accumulated
amortization of $2,873,000 and $969,000, at 1995 and
1994, respectively 1,877,000 1,272,000
Current portion of notes receivable (Note 3) 381,000 314,000
Prepaid air time 2,024,000 2,834,000
Prepaid income taxes 2,000 862,000
Prepaid expenses and other current assets 628,000 914,000
Deferred air time 1,647,000 4,192,000
Due from officers (Note 8) 121,000 193,000
----------- -----------
Total current assets 16,868,000 20,350,000
Notes Receivable, Net of Current Portion (Note 3) 129,000 10,000
Furniture, Fixtures and Equipment, net (Note 4) 622,000 615,000
Other Assets 434,000 295,000
----------- -----------
Total Assets $18,053,000 $21,270,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,001,000 $ 1,464,000
Accrued professional fees (Note 8) 323,000 132,000
Deferred revenues 274,000 284,000
Allowance for returns 1,394,000 893,000
Accrued Royalties 497,000 164,000
Other accrued expenses 783,000 590,000
Notes payable--bank (Note 7) 1,839,000 --
Current portion of long-term debt (Note 7) 25,000 23,000
Profit participation payable (Note 5) 276,000 1,196,000
Deferred income taxes (Note 11) 20,000 1,675,000
----------- -----------
Total current liabilities 6,432,000 6,421,000
Long-Term Debt (Note 7) 91,000 116,000
----------- -----------
Total liabilities 6,523,000 6,537,000
----------- -----------
Commitments (Notes 5, 6, 7, 9, 10, 13 and 14)
Shareholders' Equity (Note 10)
Preferred stock, no par value; 5,000,000 shares
authorized, none issued or outstanding
Capital stock, no par value; 15,000,000 shares
authorized, 3,552,986 and 3,549,986 issued and
outstanding at December 31, 1995 and 1994,
respectively 11,352,000 11,335,000
Retained earnings 178,000 3,398,000
----------- -----------
Total shareholders' equity 11,530,000 14,733,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,053,000 $21,270,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------
YEARS ENDED DECEMBER 31,
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
REVENUES:
Product sales $52,239,000 $35,932,000 --
Air time sales 7,610,000 4,068,000 --
Royalty income 3,362,000 2,408,000 $3,075,000
Production income -- 43,000 750,000
Other 196,000 69,000 --
----------- ----------- ----------
Total revenues 63,407,000 42,520,000 3,825,000
----------- ----------- ----------
OPERATING COSTS AND EXPENSES:
Cost of goods sold 13,899,000 7,771,000 --
Other direct operating costs 48,117,000 26,589,000 801,000
Profit participation (Note 5) 314,000 1,496,000 --
General and administrative 6,047,000 3,232,000 1,720,000
Litigation settlement, net (Note 6) -- -- (150,000)
----------- ----------- ----------
Total operating costs and expenses 68,377,000 39,088,000 2,371,000
----------- ----------- ----------
Income (Loss) Before Equity in Earnings
of Ventures (4,970,000) 3,432,000 1,454,000
Equity in Earnings of Ventures (Note 5) -- 105,000 75,000
----------- ----------- ----------
Income (Loss) From Operations (4,970,000) 3,537,000 1,529,000
----------- ----------- ----------
Other Income (Expense):
Gain on exchange of venture interests
(Note 5) -- 164,000 --
Interest income, net 78,000 111,000 (9,000)
Other 17,000 6,000 (41,000)
----------- ----------- ----------
Total other income (expense) 95,000 281,000 (50,000)
----------- ----------- ----------
Income (Loss) Before Provision for Income
Taxes (4,875,000) 3,818,000 1,479,000
Provision (Benefit) for Income Taxes
(Note 11) (1,655,000) 1,527,000 181,000
----------- ----------- ----------
Net Income (Loss) $(3,220,000) $ 2,291,000 $1,298,000
=========== =========== ==========
Pro Forma (Note 11):
Income before provision for income taxes $1,479,000
Provision for income taxes 592,000
----------
Net income $ 887,000
==========
Income (Loss) Per Common Share:
Primary $(0.91) $0.77 $0.49
Fully diluted $(0.91) $0.74 $0.49
Weighted Average Shares Outstanding:
Primary 3,550,076 2,985,498 1,804,239
Fully diluted 3,550,076 3,075,631 1,804,239
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
---------------------------------------------------
SHARES AMOUNT RETAINED EARNINGS TOTAL
--------- ----------- ----------------- -----------
COMMON STOCK
---------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 1,772,684 $ 9,000 $ 246,000 $ 255,000
Shares issued in
private placement, net
of offering costs
(Note 10) 223,756 1,174,000 -- 1,174,000
Dividends -- -- (437,000) (437,000)
Net income -- -- 1,298,000 1,298,000
--------- ----------- ----------- -----------
BALANCE, DECEMBER 31,
1993 1,996,440 1,183,000 1,107,000 2,290,000
Shares issued in
acquisition of
subsidiary (Note 1) 3,546 14,000 -- 14,000
Shares issued in public
offering, net of
offering costs (Note
10) 1,150,000 5,446,000 -- 5,446,000
Shares issued in
private placement, net
of offering costs
(Note 10) 400,000 4,692,000 -- 4,692,000
Net income -- -- 2,291,000 2,291,000
--------- ----------- ----------- -----------
BALANCE, DECEMBER 31,
1994 3,549,986 11,335,000 3,398,000 14,733,000
Shares issued upon
exercise of stock
options (Note 10) 3,000 17,000 -- 17,000
Net loss -- -- (3,220,000) (3,220,000)
--------- ----------- ----------- -----------
BALANCE, DECEMBER 31,
1995 3,552,986 $11,352,000 $ 178,000 $11,530,000
========= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------
YEARS ENDED DECEMBER 31,
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(3,220,000) $ 2,291,000 $1,298,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,161,000 933,000 65,000
Equity in earnings of ventures -- (105,000) (75,000)
Gain on exchange of venture interests -- (164,000) --
Gain on disposal of assets (9,000) -- --
Write-off of receivable -- -- 24,000
Loss on write-off of leasehold
improvements -- -- 21,000
Deferred income taxes (1,655,000) 1,527,000 151,000
Changes in operating assets and
liabilities
Restricted cash -- (1,500,000) --
Royalties receivable 745,000 (1,000,000) (110,000)
Accounts receivable (2,949,000) (1,938,000) --
Production reimbursement receivable -- -- 65,000
Inventories (737,000) (1,676,000) --
Infomercial production costs (2,510,000) (1,846,000) --
Prepaid air time 810,000 (2,820,000) --
Deferred air time 2,545,000 (4,192,000) --
Prepaid income taxes 860,000 (862,000) --
Prepaid expenses and other current assets 275,000 (922,000) (25,000)
Notes receivable (186,000) 206,000 (230,000)
Other assets (209,000) (235,000) --
Accounts payable (463,000) 1,413,000 (99,000)
Accrued professional fees 191,000 (180,000) 312,000
Deferred revenues (10,000) 284,000 --
Allowance for returns 501,000 893,000 --
Accrued Royalties 333,000 164,000 --
Other accrued expenses 194,000 399,000 (128,000)
Profit participation payable (920,000) 1,196,000 --
----------- ----------- ----------
Net cash provided by (used in) operating
activities (4,253,000) (8,134,000) 1,269,000
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture, fixtures and
equipment (184,000) (536,000) (48,000)
Investment in ventures -- 7,000 (164,000)
Due from officers 72,000 (193,000) --
Other 10,000 (72,000) --
----------- ----------- ----------
Net cash used in investing activities (102,000) (794,000) (212,000)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common shares
from public offering -- 5,483,000 (37,000)
Proceeds from issuance of common shares
from private placement -- 4,692,000 1,174,000
Proceeds from issuance of common shares 17,000 -- --
Proceeds from (repayment of) loans from
shareholders -- (223,000) 48,000
Proceeds from bank loan 1,839,000 -- --
Dividends -- -- (437,000)
Other (23,000) 118,000 --
----------- ----------- ----------
Net cash provided by financing
activities 1,833,000 10,070,000 748,000
----------- ----------- ----------
Net (dcrease) increase in cash and cash
equivalents (2,522,000) 1,142,000 1,805,000
Cash and cash equivalents, beginning of
period 3,247,000 2,105,000 300,000
----------- ----------- ----------
Cash and cash equivalents, end of period $ 725,000 $ 3,247,000 $2,105,000
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. THE COMPANY
Positive Response Television, Inc. (the "Company"), is a California corporation
based in Sherman Oaks, California. The Company produces infomercials (televi-
sion shows featuring various consumer products designed to motivate television
viewers to place telephone orders for such products) and generates product
sales through the airing of such infomercials and through other distribution
channels. The consolidated financial statements include the Company and its
wholly owned subsidiaries, Positive Response Media, Inc. ("PRM") and Positive
Response Telemarketing, Inc. ("PRTI"). Ventures in which the Company does not
own a majority interest are accounted for on the equity method (see Note 5).
All intercompany accounts and transactions are eliminated in consolidation.
Certain prior year account balances have been reclassified to conform to cur-
rent year classifications.
PRM, which buys and sells air time, became an operating unit of the Company on
January 1, 1994, the date of its acquisition, in connection with which the Com-
pany issued 3,546 shares of its common stock. Pro forma operating results have
not been presented because they would not differ significantly from actual re-
sults.
PRTI, which is engaged in outbound telemarketing, was incorporated on May 11,
1994 and commenced operations in July 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include checking and money market accounts with orig-
inal maturities of less than ninety days.
Restricted Cash
Restricted cash represents cash held by a bank as collateral for the Company's
line of credit (see Note 7). Such cash is invested in short-term certificates
of deposit.
Inventories
Inventories are valued at the lower of first-in, first-out cost or market and
consist of goods sold in the Company's infomercials.
Infomercial Production Costs
Production costs are capitalized when incurred. The Company amortizes such
costs based upon the ratio of current revenues to total expected revenues. Ad-
ditionally, unamortized deferred production costs are written off when manage-
ment determines that such costs are not recoverable.
Prepaid Air Time
Prepaid air time represents purchased television air time scheduled to air sub-
sequent to the balance sheet date.
Deferred Air Time
The Company defers a portion of purchased television air time that aired during
the current year based on a pro rata share of shipped versus unshipped orders
as of the balance sheet date.
Prepaid and Other Current Assets
Prepaid and other current assets primarily consist of prepaid fulfillment
costs, deferred telemarketing costs (which is deferred under the same basis as
deferred air time) and prepaid insurance costs.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at historical cost. Depreciation
is provided for using the straight-line method over the estimated useful lives
of 5 to 7 years (see Note 4).
Deferred Revenues
Deferred revenues represent 1) cash received for customer orders that have not
yet been shipped at the balance sheet date, and 2) the portion of the televi-
sion airtime billed that has not yet aired as of the balance sheet date.
F-34
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Revenues
Revenues are composed of 1) product sales generated through the airing of
infomercials, 2) bulk sales to retailers and other distributors, 3) sale of
television air time to third parties and ventures accounted for under the eq-
uity method, 4) royalties based on product sales generated by companies to whom
the Company has granted certain marketing and distribution rights on its prod-
ucts, and 5) production income, representing reimbursements by third parties
for approved infomercial production costs. Product sales and royalties are rec-
ognized when products are shipped. Air time sales are recognized when aired.
Prior to 1994, substantially all of the Company's revenues (and consequently
most of the accounts receivable) were the result of production agreements with
National Media Corporation ("National Media") (see Note 14). Under the agree-
ment, the Company was reimbursed by National Media for all approved production
expenses. The reimbursed costs are shown as "production income" in the accompa-
nying statement of income. In addition, the Company receives royalties based on
products sold, as provided for under the production agreement. These amounts
are shown as "royalty income." Nonrefundable guarantees are recognized upon de-
livery of the completed production.
Other Direct Operating Costs
Other direct operating costs consist primarily of air time costs, fulfillment
costs, telemarketing service costs and other selling costs.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differ-
ences between the financial statement and income tax bases of assets and lia-
bilities that will result in taxable or deductible amounts in the future. Such
deferred income tax asset and liability computations are based on enacted tax
laws and rates applicable to periods in which the differences are expected to
affect taxable income. Income tax expense is the tax payable or refundable for
the period plus or minus the change during the period in deferred income tax
assets and liabilities.
The Company operated as a cash-basis "S" corporation for both state and Federal
income tax purposes through December 31, 1993. Effective January 1, 1994, the
Company elected to become a cash-basis "C" corporation (see Note 11).
Earnings per Share
Earnings per share amounts are computed based on the actual weighted average
number of common stock and dilutive common equivalent shares (stock options and
warrants) using the treasury stock method (see Note 10).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates. The most significant estimates re-
late to inventory obsolescence, infomercial production costs and the allowance
for returns.
3. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
-----------------
1995 1994
-------- --------
<S> <C> <C>
Note receivable from Telebrands Corp. $500,000
Note receivable from Transactional Media, Inc. ("TMI") $200,000
Note receivable from National Media 10,000 124,000
-------- --------
Total 510,000 324,000
Current portion 381,000 314,000
-------- --------
Noncurrent portion $129,000 $ 10,000
======== ========
</TABLE>
F-35
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The note receivable from Telebrands Corp. is due in equal monthly installments
through April 1997, including interest at the rate of 8.75% per annum. The note
receivable from TMI was related to the exchange of interest in certain ventures
and is payable in equal installments of $25,000 per month (see Note 5). The
note receivable from National Media related to the settlement of the Company's
lawsuit with National Media (see Note 14) and was payable in equal installments
of $10,000 per month through January 1996.
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
-------------------
1995 1994
---------- --------
<S> <C> <C>
Furniture and fixtures $ 215,000 $171,000
Equipment 608,000 467,000
Vehicles 274,000 274,000
---------- --------
1,097,000 912,000
Less accumulated depreciation 475,000 297,000
---------- --------
$ 622,000 $615,000
========== ========
</TABLE>
5. PROFIT PARTICIPATION AND INVESTMENT IN VENTURES
The Company operates certain infomercial campaigns through profit participation
arrangements which generally involve a sharing of the net profits of the re-
spective campaigns between the Company and its venture partners. The portion of
the net profits due to the venture partners is reflected as components of oper-
ating costs and expenses and current liabilities.
In 1993, the Company entered into two ventures (the Kim Komando Komputer Show
and the Tai Chi Show the "TMI Ventures") with TMI to produce infomercials pro-
moting certain products. Under the terms of the TMI Venture agreements, profits
and losses were shared equally, as were all costs, including those associated
with production and the product marketing campaign. Both the infomercial and
the products they promoted were owned by the TMI Ventures.
Effective April 1, 1994, the TMI Ventures were terminated. Pursuant to the ter-
mination agreement, the Company assigned its interest in the Kim Komando
Komputer Show to TMI in exchange for TMI's interest in the Tai Chi Show and a
$300,000 note (see Note 3). The Company recognized a $164,000 gain upon the ex-
change in 1994.
The following are condensed combined financial statements of operations of the
ventures for the year ended December 31, 1993:
<TABLE>
<CAPTION>
----------
<S> <C>
Revenues $5,508,000
Expenses 5,358,000
----------
Net income $ 150,000
==========
</TABLE>
6. LITIGATION
On May 1, 1995, a purported class action suit was filed in the United States
District Court for the Central District of California (the "Court") against the
Company and its principal executive officers alleging the that Company had made
false and misleading statements in its public filings, press releases and other
public statements with respect to its business and financial prospects. The
suit was filed on behalf of all persons who purchased common stock of the Com-
pany during the period from January 4, 1995 to April 28, 1995. The suit seeks
unspecified compensatory damages and other equitable relief. An amended com-
plaint was filed on June 9, 1995, which complaint added more
F-36
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
plaintiffs and expanded the class period to November 1994 to April 28, 1995.
The Company moved to dismiss the amended complaint and the compliant was dis-
missed by the Court in late July 1995. The plaintiffs were granted sixty days
leave to file another amended complaint to allow them an attempt to state valid
claims against the Company.
On or about September 25, 1995, the plaintiffs filed a Second Amended Complaint
("SAC"). The SAC added new defendants and attempts to set forth new facts to
support plaintiffs' entitlement to legal relief. On October 31, 1995, the Com-
pany again moved to dismiss plaintiffs' entire action. The Court denied the mo-
tion on December 11, 1995. Discovery is continuing.
An investigation of the Company and one of its shareholders by the Federal
Trade Commission ("FTC") for alleged unfair practices in the promotion and sale
of certain products was settled April 23, 1993. The settlement agreement re-
quired the Company to pay $275,000 and to comply with all regulatory require-
ments of the FTC in the Company's future production of infomercials.
The Company is a plaintiff or defendant in a number of commercial litigation
matters. Management of the Company does not believe that the disposition of any
of these matters will have a material adverse effect on the Company's financial
condition.
7. NOTE PAYABLE AND LONG-TERM DEBT
In May 1994, the Company obtained a $1,350,000 bank line of credit (the "Line")
to finance operations and inventory purchases, pursuant to which the Company
must maintain a $1,500,000 security deposit with the bank. In addition,
$200,000 of the Line was applied as a reserve against the Company's merchant
card activity for future returns and charge-backs. The Line is renewable annu-
ally on May 1st and bears interest at a rate per annum one-half percent ( 1/2%)
below the prime rate in effect from time to time. The bank's prime rate at De-
cember 31, 1995 was 8.5%. As of December 31, 1995, the Company's borrowings un-
der this Line were $339,000. Net of total open letters of credit of $146,000,
the total available on the Line at December 31, 1995 was $665,000.
In May 1995, the Company obtained a $2,500,000 line of credit (the "Second
Line") from another institution to finance operations and inventory purchases.
This line of credit contains certain financial covenants, which provide, among
other things, for the maintenance of a minimum consolidated net worth, minimum
liquidity and restrictions on certain expenditures. The Second Line is secured
by certain of the Company's assets, including accounts receivable and invento-
ry. The Second Line is renewable annually on May 1st and bears interest at a
rate per annum one percent (1%) above the bank's reference rate. The bank's
reference rate at December 31, 1995 was 8.5%. As of December 31, 1995, the Com-
pany had borrowed $1,500,000 under this Second Line.
As of December 31, 1995, the Company was not in compliance with several of the
financial covenants, including the minimum net worth and liquidity requirements
under the Second Line. Although the bank has not granted a waiver for these de-
faults, it has elected not to pursue any of its remedies under the Second Line
at this time pending the merger with National Media (see Note 14). In the event
the merger is not consummated, the Company plans to negotiate the agreement.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
-----------------
1995 1994
-------- --------
<S> <C> <C>
Note payable to bank, secured by vehicle, due in
1997, bearing interest at 7.25% per annum $ 9,000 $ 16,000
Lease obligation, secured by vehicle, expiring in
1998, bearing interest at 8% per annum 107,000 123,000
-------- --------
Total long-term debt 116,000 139,000
Less current portion 25,000 23,000
-------- --------
Non-current portion $ 91,000 $116,000
======== ========
</TABLE>
F-37
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
8. RELATED PARTY TRANSACTIONS
The Company has loans to officers totaling $121,000, which mature on December
31, 1996, and bear interest at 8% per annum.
Certain directors and shareholders of the Company provided professional serv-
ices to the Company. The Company incurred $1,516,000, $417,000 and $409,000 in
professional fees from these related parties in 1995, 1994 and 1993, respec-
tively. At December 1995 and 1994, a total of $216,000 and $78,000, respective-
ly, were accrued and payable to these parties.
9. PROFIT SHARING PLAN
The Company maintains a defined contribution profit sharing plan for all its
full-time employees. No contributions were authorized by the Board of Directors
for the years ended December 31, 1995 and 1994. Contribution by the Company to
the Plan in 1993 totaled $96,000.
10. COMMON STOCK AND STOCK OPTIONS
In December 1993, the Company completed a private placement of its common
stock. The Company issued 223,756 shares of its common stock at $5.64 per share
and realized proceeds (net of offering costs) of $1,174,000 from this offering.
On May 11, 1994, the Company completed an initial public offering, issuing one
million shares of its common stock at $6 per share. On June 16, 1994, an addi-
tional 150,000 shares were issued upon exercise of the underwriters' over-al-
lotment option, at $6 per share. The Company's net proceeds, after payment of
all offering costs, were $5,446,000. As part of their consideration, the under-
writers were granted warrants to purchase up to 100,000 shares of the Company's
common stock. The warrants became exercisable on May 4, 1995 at $7.20 per share
and expire on May 3, 1999.
On September 19, 1994, the Company issued an additional 400,000 shares of its
common stock at $12.50 per share in a private placement offering. The Company's
net proceeds, after payment of fees and related expenses, were $4,692,000.
In January 1994, the Company adopted the 1994 Stock Option Plan (the "Plan"),
which reserved 390,088 common shares to be issued for officers, directors and
key employees. In November 1994, the authorized Plan shares were increased to
600,000 shares. As of December 31, 1995, 398,490 options had been granted at
exercise prices ranging from $5.64 per share to $14.875 per share, of which
228,228 were exercisable. As of December 31, 1995, 3,000 options had been exer-
cised with an additional 11,500 options exercised in January 1996. The remain-
ing options become exercisable at 20 percent annual increments through 1999.
All options expire ten years from the date of grant. The exercise price is set
at or above the current stock price at the date of grant.
In October 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The
Company does not plan to adopt the fair value features of the statement and in-
stead will base its accounting on the provisions of Accounting Principles Board
Opinion No. 25.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
--------------------------------
1995 1994 1993(1)
----------- ---------- --------
<S> <C> <C> <C>
Current
Federal $ 20,000
State $ 30,000
Deferred
Federal (1,424,000) $1,184,000 114,000
State (251,000) 343,000 37,000
----------- ---------- --------
$(1,655,000) $1,527,000 $181,000
=========== ========== ========
</TABLE>
F-38
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Deferred income taxes and liabilities consist of the following:
<TABLE>
<CAPTION>
--------------------------------------------
FEDERAL STATE FEDERAL STATE
--------- --------- ----------- ---------
1995 1994
-------------------- ----------------------
<S> <C> <C> <C> <C>
Current Asset:
Net operating loss
carryforwards $ 518,000 -- $ 972,000 $ 122,000
Accounts receivable
reserve 47,000 $ 13,000 41,000 11,000
Reserve for returns 252,000 69,000 284,000 77,000
Reserve for obsolete
inventory 90,000 25,000 37,000 10,000
--------- --------- ----------- ---------
907,000 107,000 1,334,000 220,000
Valuation allowance (268,000) -- (1,334,000) (220,000)
--------- --------- ----------- ---------
Current asset net of
allowance 639,000 107,000 -- --
--------- --------- ----------- ---------
Current Liability:
Cash to accrual
adjustments (630,000) (107,000) (1,424,000) (251,000)
Other (9,000) -- -- --
--------- --------- ----------- ---------
Current liability (639,000) (107,000) (1,424,000) (251,000)
--------- --------- ----------- ---------
Net Current Liability $ -- $ -- $(1,424,000) $(251,000)
========= ========= =========== =========
</TABLE>
A reconciliation between the statutory federal income tax rate and the effec-
tive income tax rates based on continuing operations is as follows:
<TABLE>
<CAPTION>
-----------------------
PRO FORMA
1995 1994 1993(1)
----- ---- ---------
<S> <C> <C> <C>
Federal statutory income tax rate (34.0)% 34.0% 34.0%
State taxes, net of federal benefit (5.1) 6.2 6.2
Effect of losses without current year benefit 4.8
Other 0.4 (0.2) (0.2)
----- ---- ----
Total (33.9)% 40.0% 40.0%
===== ==== ====
</TABLE>
- ---------
(1) 1993 amounts result primarily from the conversion from an S corporation
taxpayer to a C corporation taxpayer using the cash-basis of accounting for
income taxes. The pro forma results of operations in the 1993 statements of
operations are presented as if the Company had been a C corporation with a
combined Federal and state income tax rate of 40%.
The Company has available net operating loss carryforwards for Federal income
tax purposes of $1,522,000, expiring in year 2009.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for income taxes were $0, $862,000 and $37,000 in 1995, 1994 and
1993, respectively. Cash payments for interest were $112,000, $10,000 and
$3,000 in 1995, 1994 and 1993, respectively.
In 1993, the Company purchased an automobile, financing $22,000 of the purchase
price. In 1994, the Company entered into a capital lease for an automobile,
which was capitalized at $130,000 (see Note 7).
13. COMMITMENTS
Leases
The Company leases office space through a lease which expires July 15, 1996,
with a one year renewal option. Rent expense for 1995, 1994 and 1993 was
$219,000, $168,000 and $43,000, respectively.
F-39
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Employment Contracts
The Company has employment contracts with five officers which expire in 1996,
under which annual compensation aggregating $894,000 is to be paid in 1996.
14. NATIONAL MEDIA CORPORATION
In May, 1993, the Company filed a breach of contract and declaratory relief ac-
tion against National Media (see Note 2), alleging that National Media had not
paid royalties earned in connection with the production and airing of a number
of infomercials. The suit also asserted the Company's ownership interest in a
certain service mark and sought reimbursement for attorney's fees and FTC con-
sent decree damages the Company incurred as indemnifiable expenses pursuant to
a written agreement with National Media.
On December 11, 1993, the Company and National Media entered into a settlement
agreement, with National Media agreeing to pay the Company all outstanding roy-
alties and an additional amount aggregating $560,000. The Company received
$300,000 in December 1993, and received $250,000 of its settlement over a 25-
month period commencing January 1994 (see Note 3). In addition, the Company was
relieved of a $10,000 obligation. The settlement also provided that National
Media has sole and exclusive ownership of the service mark, but that all future
shows using that name would be produced exclusively by the Company and hosted
exclusively by Mike Levey, the majority shareholder of the Company. The gain
reported in the 1993 statements of operations are net of attorney's fees asso-
ciated with the litigation in the amount of approximately $390,000. In connec-
tion with the settlement agreement, the Company also entered into a new produc-
tion agreement with National Media.
On October 19, 1994, the Company and National Media entered into a new Market-
ing, Distribution and Service Mark Agreement (the "New Agreement"). Under the
terms of the New Agreement, the Company paid $100,000 to obtain sole right, ti-
tle and interest in and to the "Amazing Discoveries" service mark. In addition,
National Media was granted exclusive rights to distribute certain of the
Company's infomercials in certain United States television markets and certain
foreign countries. As consideration, National Media reimbursed the Company for
one-half of the infomercial production costs, up to a maximum reimbursement of
$125,000, plus royalties ranging from 23% to 25% of Adjusted Net Revenues (as
defined) for sales to end-users and 40% of Adjusted Gross Profit (as defined)
for sales to other distributors.
On January 17, 1996, the Company entered into an Agreement and Plan of Merger
and Reorganization (as amended, the "Merger Agreement"), by and among the Com-
pany, National Media and a wholly-owned subsidiary of National Media ("Merger
Sub"), pursuant to which the Company will be merged with and into Merger Sub
(the "Merger"), the Company's separate corporate existence will be extin-
guished, and the equity interest of the Company's shareholders in the Company
will cease. The surviving corporation will be renamed "Positive Response Tele-
vision, Inc." and it will continue as a wholly-owned subsidiary of National Me-
dia.
Pursuant to the terms of the Merger Agreement, each outstanding share of common
stock of the Company (other than in limited circumstances, shares as to which
dissenters' rights of appraisal have been perfected under Chapter 13 of the
California Corporations Code and shares held by National Media) will be con-
verted into the right to receive a maximum .5239 shares (the "Exchange Ratio")
of National Media's common stock, $.01 par value per share ("NMC Common
Stock"), less a pro rata portion of any Reduction Amount (as defined below).
The Reduction Amount is defined as that number of shares of NMC Common Stock
equal to (x) two, multiplied by (y) the amount, if any, by which the Minimum
Shareholders' Equity (as defined below) exceeds the Company's shareholders' eq-
uity as of December 31, 1995 (subject to adjustment for any material changes
thereto which occur after such date and subject to reduction for certain agreed
upon balance sheet items), divided by (z) $14.125. For purposes of the Merger
Agreement, "Minimum Shareholders' Equity" is defined as $13,000,000, less the
amount of all costs incurred by the Company directly in connection with the
Merger Agreement, the Merger and the transactions contemplated thereby and
given effect in the Company's financial statements. The Merger Agreement also
provides that, under certain circumstances, a number of shares of NMC Common
Stock equal in dollar value (based upon a price of $14.125 per share of NMC
Common Stock) to certain of the Company's balance sheet items and otherwise is-
suable, on a pro rata basis, to the shareholders of the Company (the "Escrow
Shares") will be held in escrow and
F-40
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONCLUDED
will be deliverable out of escrow, if at all, within approximately 18 months
after the anticipated date of closing, only upon the realization of the value
of such items and the satisfaction of certain conditions set forth in the
Merger Agreement and an Escrow Agreement to be entered into pursuant thereto.
The Merger Agreement also provides that each outstanding option to purchase
shares of the Company's stock will be assumed by National Media upon the same
terms and conditions as set forth in the Stock Option Plan and the agreement
pursuant to which each such option was issued, subject, however, to appropriate
adjustment (as to both number of shares and exercise price) to reflect the Ex-
change Ratio (and the effect of the Reduction Amount thereon). Similarly, each
outstanding stock purchase right (if any) will be assumed by National Media
upon the same terms and conditions as set forth in the agreement or instrument
pursuant to which each such stock purchase right was issued or granted, sub-
ject, however, to appropriate adjustment (as to both number of shares and exer-
cise or conversion price) to reflect the Exchange Ratio (and the effect of the
Reduction amount thereon). Currently, there are no stock purchase rights out-
standing.
F-41
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
----------------------------
AT MARCH 31, AT DECEMBER 31,
1996 1995
------------ ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 987,000 $ 725,000
Restricted cash 1,500,000 1,500,000
Royalties receivable 556,000 663,000
Accounts receivable, net of allowance for
doubtful accounts 4,465,000 4,887,000
Inventories 2,022,000 2,413,000
Infomercial production costs, net of accumulated
amortization 2,114,000 1,877,000
Current portion of notes receivable 371,000 381,000
Prepaid air time 1,879,000 2,024,000
Prepaid income taxes 77,000 2,000
Prepaid expenses and other current assets 803,000 628,000
Deferred air time 2,392,000 1,647,000
Due from officers 77,000 121,000
----------- -----------
Total current assets 17,243,000 16,868,000
Notes receivable, net of current portion 129,000 129,000
Furniture, fixtures and equipment, net 618,000 622,000
Other assets 547,000 434,000
----------- -----------
TOTAL ASSETS $18,537,000 $18,053,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,329,000 $ 1,001,000
Accrued professional fees 388,000 323,000
Deferred revenues 373,000 274,000
Allowance for returns 1,307,000 1,394,000
Other accrued expenses 1,151,000 1,280,000
Note payable--bank 1,578,000 1,839,000
Current portion of long-term debt 25,000 25,000
Profit participation payable 520,000 276,000
Income taxes payable 8,000 --
Deferred Income taxes 20,000 20,000
----------- -----------
Total current liabilities 6,699,000 6,432,000
Long-term debt 85,000 91,000
----------- -----------
Total liabilities 6,784,000 6,523,000
----------- -----------
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized, none issued or outstanding
Capital stock, no par value; 15,000,000 shares
authorized, 3,598,077 issued and outstanding 11,563,000 11,352,000
Retained earnings 190,000 178,000
----------- -----------
Total shareholders' equity 11,753,000 11,530,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,537,000 $18,053,000
=========== ===========
</TABLE>
F-42
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------
THREE MONTHS ENDED
MARCH 31,
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Product sales $11,864,000 $20,741,000
Air time sales 2,275,000 858,000
Royalty income 403,000 1,794,000
Production income -- --
Other 24,000 47,000
----------- -----------
Total revenues 14,566,000 23,440,000
----------- -----------
Operating costs and expenses:
Cost of goods sold 2,968,000 5,258,000
Other direct operating costs 9,606,000 16,649,000
Profit participation 453,000 52,000
General and administrative 1,502,000 1,520,000
----------- -----------
Total operating costs and expenses 14,529,000 23,479,000
----------- -----------
Income (loss) from operations 37,000 (39,000)
----------- -----------
Other income (expense)
Interest income (expense), net (18,000) 40,000
Other -- 1,000
----------- -----------
Total other income (expense) (18,000) 41,000
----------- -----------
Income before provision for income taxes 19,000 2,000
Provision for income taxes 8,000 1,000
----------- -----------
Net income $ 11,000 $ 1,000
=========== ===========
Income per common share:
Primary $ 0.00 $ 0.00
=========== ===========
Fully-diluted $ 0.00 $ 0.00
=========== ===========
Weighted average shares outstanding:
Primary 3,679,037 3,778,399
=========== ===========
Fully-diluted 3,679,037 3,835,870
=========== ===========
</TABLE>
F-43
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------
THREE MONTHS ENDED
MARCH 31,
1996 1995
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,000 $ 1,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 232,000 50,000
Deferred income taxes -- 1,000
Changes in operating assets and liabilities:
Royalties receivable 107,000 84,000
Accounts receivable 422,000 (1,999,000)
Inventories 391,000 (443,000)
Infomercial production costs (400,000) (382,000)
Prepaid air time 145,000 (41,000)
Deferred air time (745,000) 2,494,000
Prepaid income taxes (75,000) --
Prepaid expenses and other current assets (176,000) (194,000)
Notes receivable 10,000 99,000
Other noncurrent assets (137,000) (105,000)
Accounts payable 328,000 100,000
Accrued professional fees 65,000 (31,000)
Deferred revenues 98,000 366,000
Allowance for returns (87,000) 667,000
Other accrued expenses (126,000) (251,000)
Profit participation payable 244,000 (384,000)
Income taxes payable 8,000 --
--------- -----------
Net cash provided by operating activities 315,000 32,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment (42,000) (65,000)
Due from officers 44,000 38,000
Other 1,000 8,000
--------- -----------
Net cash provided by (used in) investing activities 3,000 (19,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common shares 211,000 --
Payment of bank loan (261,000) --
Other (6,000) (6,000)
--------- -----------
Net cash used in financing activities (56,000) (6,000)
--------- -----------
Net increase in cash and cash equivalents 262,000 7,000
Cash and cash equivalents, beginning of period 725,000 3,247,000
--------- -----------
Cash and cash equivalents, end of period $ 987,000 $ 3,254,000
========= ===========
</TABLE>
F-44
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
Positive Response Television, Inc. (the "Company"), is a California corporation
based in Sherman Oaks, California. The Company produces infomercials (televi-
sion shows featuring various consumer products designed to motivate television
viewers to place telephone orders for such products) and generates product
sales through the airing of such infomercials and through other distribution
channels. The consolidated financial statements include the Company and its
wholly owned subsidiaries, Positive Response Media, Inc. ("PRM") and Positive
Response Telemarketing, Inc. ("PRTI"). Ventures in which the Company does not
own a majority interest are accounted for on the equity method. All
intercompany accounts and transactions are eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim finan-
cial information and with the requirements of Regulation S-B. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly, the financial position, results of operations and
cash flows for all periods presented, have been made. The results of operations
for the period ended March 31, 1996 are not necessarily indicative of the re-
sults expected for the entire year ending December 31, 1996. Certain prior year
account balances have been reclassified to conform to current year classifica-
tions.
PRM, which buys and sells air time, became an operating unit of the Company on
January 1, 1994, the date of its acquisition, in connection with which the Com-
pany issued 3,546 shares of its common stock. PRTI, which is engaged in out-
bound telemarketing and also provides customer service, was incorporated on May
11, 1994 and commenced operations in July 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Infomercial Production Costs
Production costs are capitalized when incurred. The Company amortizes such
costs based upon the ratio of current revenues to total expected revenues. Ad-
ditionally, unamortized deferred production costs are written off when manage-
ment determines that such costs are not recoverable.
Prepaid Air Time
Prepaid air time represents purchased television air time scheduled to air sub-
sequent to the balance sheet date.
Deferred Air Time
The Company defers a portion of purchased television air time that aired during
the current period based on a pro rata share of shipped versus unshipped orders
as of the balance sheet date.
Allowance for Returns
The allowance for returns is accounted for using the accrual method and is es-
timated based on historical rates and actual returns occurring subsequent to
the balance sheet date.
Revenues
Revenues are composed of 1) product sales generated through the airing of
infomercials, 2) bulk sales to distributors for retail distribution, 3) sale of
television air time to third parties and ventures accounted for under the eq-
uity method, 4) royalties based on product sales generated by companies to whom
the Company has granted certain marketing and distribution rights on its prod-
ucts, and 5) production income, representing reimbursements by third parties
for approved infomercial production costs. Product sales and royalties are rec-
ognized when products are shipped. Air time sales are recognized when aired.
Other Direct Operating Costs
Other direct operating costs consist primarily of air time costs, fulfillment
costs, telemarketing service costs and other selling costs.
F-45
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Income Taxes
Deferred income tax assets and liabilities are computed annually for differ-
ences between the financial statement and income tax bases of assets and lia-
bilities that will result in taxable or deductible amounts in the future. Such
deferred income tax asset and liability computations are based on enacted tax
laws and rates applicable to periods in which the differences are expected to
affect taxable income. Income tax expense is the tax payable or refundable for
the period plus or minus the change during the period in deferred income tax
assets and liabilities.
Earnings per Share
Earnings per share amounts are computed based on the actual weighted average
number of common stock and dilutive common equivalent shares (stock options and
warrants) using the treasury stock method.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates. The most significant estimates re-
late to inventory obsolescence, infomercial production costs and the allowance
for returns.
3. PROFIT PARTICIPATION AND INVESTMENT IN VENTURES
The Company operates certain infomercial campaigns through profit participation
arrangements which generally involve a sharing of the net profits of the re-
spective campaigns between the Company and its profit participants or venture
partners. The portion of the net profits due to the profit participants or ven-
ture partners is reflected as components of operating costs and expenses and
current liabilities.
4. LINES OF CREDIT
The Company has a $1,350,000 bank line of credit (the "Line") to finance opera-
tions and inventory purchases, pursuant to which the Company must maintain a
$1,500,000 security deposit with the bank. In addition, $200,000 of the Line is
applied as a reserve against the Company's merchant card activity for future
returns and charge-backs. The Line matures on August 1, 1996 and bears interest
at a rate per annum one-half percent ( 1/2%) below the prime rate in effect
from time to time. As of March 31, 1996, the Company's borrowings under this
Line was $328,000. Net of total open letters of credit of $370,000, the total
available on the Line at March 31, 1996 was $452,000.
The Company also has a $2,500,000 line of credit (the "Second Line") with an-
other institution to finance operations and inventory purchases. This line of
credit contains certain financial covenants, which provide, among other things,
for the maintenance of a minimum consolidated net worth and restrictions on
certain expenditures. The Second Line is secured by certain of the Company's
assets, including accounts receivable and inventory. The Second Line is renew-
able annually on May 1st and bears interest at a rate per annum one percent
(1%) above the bank's reference rate. Effective May 1, 1996, the Second Line
was extended to June 1, 1996. As of March 31, 1996, the Company had borrowed
$1,250,000 under this Second Line.
As of March 31, 1996, the Company was not in compliance with the minimum net
worth and liquidity requirements under the Second Line. Although the bank has
not granted a waiver for these defaults, it has elected not to pursue any of
its remedies under the Second Line at this time pending the merger with Na-
tional Media (see Note 6). In the event the merger is not consummated, the Com-
pany plans to negotiate the agreement.
5. LITIGATION
On May 1, 1995, a purported class action suit was filed in the United States
District Court for the Central District of California (the "Court") against the
Company and its principal executive officers alleging that the Company had made
false and misleading statements in its public filings, press releases and other
public statements with respect to its business and financial prospects. The
suit was filed on behalf of all persons who purchased common stock of the Com-
pany during the period from January 4, 1995 to April 28, 1995. The suit seeks
unspecified compensatory
F-46
<PAGE>
POSITIVE RESPONSE TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONCLUDED
damages and other equitable relief. An amended complaint was filed on June 9,
1995, which complaint added more plaintiffs and expanded the class period to
November 1994 to April 28, 1995. The Company moved to dismiss the amended com-
plaint and the complaint was dismissed by the Court in late July 1995. The
plaintiffs were granted sixty days leave to file another amended complaint to
allow them an attempt to state valid claims against the Company.
On or about September 25, 1995, the plaintiffs filed a Second Amended Complaint
("SAC"). The SAC added new defendants and attempts to set forth new facts to
support plaintiffs' entitlement to legal relief. On October 31, 1995, the Com-
pany again moved to dismiss plaintiffs' entire action. The Court denied the mo-
tion on December 11, 1995. Discovery is continuing.
The Company is a defendant in a number of commercial litigation matters. Man-
agement of the company does not believe that the disposition of any of these
matters will have a materially adverse effect on the Company's financial condi-
tion.
6. MERGER WITH NATIONAL MEDIA
On January 17, 1996, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement"), by and among the Company, National
Media and a wholly-owned subsidiary of National Media ("Merger Sub"), pursuant
to which the Company will be merged with and into Merger Sub (the "Merger"),
the Company's separate corporate existence will be extinguished, and the equity
interest of the Company's shareholders in the Company will cease. The surviving
corporation will be renamed "Positive Response Television, Inc." and it will
continue as a wholly-owned subsidiary of National Media. The Merger Agreement
was subsequently amended on April 4, 1996.
Pursuant to the terms of the Merger Agreement, each outstanding share of common
stock of the Company (other than, in limited circumstances, shares as to which
dissenters' rights of appraisal have been perfected under Chapter 13 of the
California Corporations code and shares held by National Media) will be con-
verted into the right to receive a maximum .5239 shares (the "Exchange Ratio")
of NMC's common stock, $.01 par value per share ("NMC Common Stock"), less a
pro rata portion of any Reduction Amount (as defined below). The Reduction
Amount is defined as that number of shares of NMC Common Stock equal to (x)
two, multiplied by (y) the amount, if any, by which the Minimum Shareholders'
Equity (as defined below) exceeds the Company's shareholders' equity as of De-
cember 31, 1995 (subject to adjustment for any material changes thereto which
occur after such date and subject to reduction for certain agreed upon balance
sheet items), divided by (z) $14.125. For purposes of the Merger Agreement,
"Minimum Shareholders' Equity" is defined as $13,000,000, less the amount of
all costs incurred by the Company directly in connection with the Merger Agree-
ment, the Merger and the transactions contemplated thereby and given effect in
the Company's financial statements. The Merger Agreement also provides that,
under certain circumstances, a number of shares of NMC Common Stock equal in
dollar value (based upon a price of $14.125 per share of NMC Common Stock) to
certain of the Company's balance sheet items and otherwise issuable, on a pro
rata basis, to the shareholders of the Company (the "Escrow Shares") will be
held in escrow and will be deliverable out of escrow, if at all, within approx-
imately 18 months after the anticipated date of closing, only upon the realiza-
tion of the value of such items and the satisfaction of certain conditions set
forth in the Merger Agreement and an Escrow Agreement to be entered into pursu-
ant thereto.
The Merger Agreement also provides that each outstanding option to purchase
shares of the Company's stock will be assumed by National Media upon the same
terms and conditions as set forth in the Stock Option Plan and the agreement
pursuant to which each such option was issued, subject, however, to appropriate
adjustment (as to both number of shares and exercise price) to reflect the Ex-
change Ratio (and the effect of the Reduction Amount thereon). Similarly, each
outstanding stock purchase right (if any) will be assumed by National Media
upon the same terms and conditions as set forth in the agreement or instrument
pursuant to which each such stock purchase right was issued or granted, sub-
ject, however, to appropriate adjustment (as to both number of shares and exer-
cise or conversion price) to reflect the Exchange Ratio (and the effect of the
Reduction Amount thereon). Currently, there are no such stock purchase rights
outstanding.
F-47
<PAGE>
PRESTIGE MARKETING LIMITED
COMPANY DIRECTORY
AS AT 31 MARCH 1996
<TABLE>
<C> <S> <C>
NATURE OF BUSINESS Direct Response TV Marketing
REGISTERED OFFICE 531 Great South Road
Penrose
AUCKLAND
DIRECTORS P E Meier
S Barnes
SECRETARY P E Meier
AUDITORS Ernst & Young
AUCKLAND
BANKERS ASB Bank
Commercial Division
AUCKLAND
SOLICITORS Shanahan & Co.
AUCKLAND
BUSINESS LOCATION AUCKLAND
SHAREHOLDERS P E Meier 1 ordinary
Prestige Marketing Holdings Ltd 99 ordinary
------------
100 ordinary
============
</TABLE>
F-48
<PAGE>
PRESTIGE MARKETING LIMITED
DIRECTORS' REPORT
FOR THE YEAR ENDED 31 MARCH 1996
<TABLE>
<CAPTION>
$NZ
-----------
<S> <C>
Operating surplus for the year $ 3,789,006
Retained earnings at 1 April 1995 2,293,352
-----------
Leaving available for appropriation 6,082,358
Proposed dividend --
-----------
Leaving retained earnings at 31 March 1996 of 6,082,358
-----------
The directors recommend that no dividend be paid.
It is not proposed to make any transfer to reserves.
The state of the company's affairs at 31 March 1996 was:
Assets totalled 9,747,385
-----------
These were financed by
Shareholders funds of 6,082,458
Liabilities of 3,664,927
-----------
$ 9,747,385
===========
</TABLE>
The company is in the business of direct response TV marketing. The nature of
the company's business has not changed during the year under review.
As required by section 199T of the Companies Act 1955 we disclose the following
information:
Directors' interests: There were no transactions entered into between the di-
rectors and the company.
Use of company information: The Board received no notices during the year from
directors requesting to use company information received in their capacity as
directors which would not have been otherwise available to them.
Share Dealing: No director acquired or disposed of any interest in shares in
the company during the year.
Remuneration and other benefits: Directors remuneration paid during the year or
due and payable is as follows:
<TABLE>
<CAPTION>
$NZ
-----------------
1996 1995
-------- --------
<S> <C> <C>
P E Meier $471,268 $643,768
S Barnes 370,380 532,980
</TABLE>
For and on behalf of the Board
Paul E. Meier /s/
- ---------------------------- Director 24-5-96 Date
Susan Barnes /s/
- ---------------------------- Director 24-5-96 Date
F-49
<PAGE>
AUDITOR'S REPORT
To the Shareholders of Prestige Marketing Limited
We have audited the financial statements on pages F-51 to F-54. The financial
statements provide information about the past financial performance of the com-
pany and its financial position as at 31 March 1995 and 31 March 1996. This in-
formation is stated in accordance with the accounting policies set out on pages
F-55 and F-56.
Directors' Responsibilities
The directors are responsible for the preparation of financial statements which
comply with generally accepted accounting practice and give a true and fair
view of the financial position of the company as at 31 March 1995 and 31 March
1996 and of the results of its operations and cash flows for the years ended on
those dates.
Auditor's Responsibilities
It is our responsibility to express an independent opinion on the financial
statements presented by the directors and report our opinion to you.
Basis of Opinion
An audit includes examining, on a test basis, evidence relevant to the amounts
and disclosures in the financial statements. It also includes assessing:
. the significant estimates and judgements made by the directors in the prepa-
ration of the financial statements; and
. whether the accounting policies are appropriate to the company's circum-
stances, consistently applied and adequately disclosed.
We conducted our audit in accordance with generally accepted auditing standards
in New Zealand. We planned and performed our audit so as to obtain all the in-
formation and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the financial state-
ments are free from material misstatements, whether caused by fraud or error.
In forming our opinion we also evaluated the overall adequacy of the presenta-
tion of information in the financial statements.
Other than in our capacity as auditor we have no relationship with, or interest
in, the company.
Unqualified Opinions
We have obtained all the information and explanations we have required.
In our opinion:
. proper accounting records have been kept by the company so far as appears
from our examination of those records; and
. the financial statements on pages F-51 to F-54:
--comply with generally accepted accounting practice; and
--give a true and fair view of the financial position of the company as at
31 March 1995 and 31 March 1996 and the results of its operations and cash
flows for the years ended on those dates.
Our audit was completed on 24 May 1996 and our unqualified opinions are ex-
pressed as at that date.
Ernst & Young
Auckland, New Zealand
F-50
<PAGE>
PRESTIGE MARKETING LIMITED
STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 1996
<TABLE>
<CAPTION>
$NZ
--------------------------
NOTE 1996 1995
---- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash on hand 663 791
Bank 873,243 387,361
Accounts receivable--trade 3,328,972 2,198,697
Prepayments 68,354 23,350
Intercompany receivables 10 1,248,968 522,753
Inventories 2 3,064,325 1,507,941
---------- ----------
8,584,525 4,640,893
Goodwill 27,542 --
Fixed Assets 3 1,135,318 544,940
---------- ----------
TOTAL ASSETS $9,747,385 $5,185,833
========== ==========
CURRENT LIABILITIES
Accounts payable--trade 1,001,114 1,100,865
Accruals 618,520 351,554
Revenue in advance 46,722 25,722
Intercompany payables 10 344,535 43,890
GST payable 206,940 93,201
Provision for taxation 835,168 398,978
Shareholders' current accounts 5 611,928 878,171
---------- ----------
3,664,927 2,892,381
SHAREHOLDERS EQUITY
Issued capital 6 100 100
Retained earnings 6,082,358 2,293,352
---------- ----------
6,082,458 2,293,452
---------- ----------
TOTAL FUNDS EMPLOYED $9,747,385 $5,185,833
========== ==========
</TABLE>
For and on behalf of the Board
Paul E. Meier /s/ Director
Susan Barnes
/s/ Director
24-5-96 Date 24-5-96 Date
The accompanying notes form part of these financial statements.
F-51
<PAGE>
PRESTIGE MARKETING LIMITED
STATEMENT OF MOVEMENTS IN EQUITY
FOR THE YEAR ENDED 31 MARCH 1996
<TABLE>
<CAPTION>
$NZ
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Equity at 1 April 2,293,452 865,003
Operating surplus for period 3,789,006 1,428,449
---------- ----------
Equity at 31 March $6,082,458 $2,293,452
========== ==========
</TABLE>
The accompanying notes form part of these financial statements.
F-52
<PAGE>
PRESTIGE MARKETING LIMITED
STATEMENT OF FINANCIAL PERFORMANCE
FOR THE YEAR ENDED 31 MARCH 1996
<TABLE>
<CAPTION>
$NZ
----------------------------
NOTE 1996 1995
---- ----------- -----------
<S> <C> <C> <C>
Operating Revenue 7 25,556,214 17,698,686
Cost of sales 8,095,966 7,616,938
----------- -----------
Gross profit 17,460,248 10,081,748
Expenses 8 11,550,196 7,648,974
----------- -----------
Operating surplus before taxation 5,910,052 2,432,774
Taxation expense 4 2,121,046 1,004,325
----------- -----------
Net surplus after taxation $ 3,789,006 $ 1,428,449
=========== ===========
</TABLE>
The accompanying notes form part of these financial statements.
F-53
<PAGE>
PRESTIGE MARKETING LIMITED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 1996
<TABLE>
<CAPTION>
$NZ
-----------------------------
NOTE 1996 1995
---- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from customers 21,136,644 15,364,864
Interest received 63,271 34,439
----------- -----------
21,199,915 15,399,303
----------- -----------
Cash was disbursed to:
Payments to suppliers and employees 16,464,983 13,185,073
Income tax paid 1,684,856 633,825
Interest paid 49,742 862
----------- -----------
18,199,581 13,819,760
----------- -----------
Net cash inflow from operating activities 12 3,000,334 1,579,543
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was applied to:
Purchase of fixed assets 854,175 429,602
Increase in loans and advances 569,915 500,000
Purchase of goodwill 31,249 --
----------- -----------
1,455,339 929,602
----------- -----------
Net cash outflow from investing activities (1,455,339) ( 929,602)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was applied to:
Advances on shareholders current accounts 1,059,241 355,558
----------- -----------
Net cash outflow from financing activities (1,059,241) ( 355,558)
----------- -----------
Net increase in cash held 485,754 294,383
Add opening cash brought forward 388,152 93,769
----------- -----------
Ending cash carried forward $ 873,906 $ 388,152
=========== ===========
</TABLE>
The accompanying notes form part of these financial statements.
F-54
<PAGE>
PRESTIGE MARKETING LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 1996
1. STATEMENT OF ACCOUNTING POLICIES
Reporting Entity
Prestige Marketing Limited is a private company registered under the Companies
Act 1955.
Prestige Marketing Limited is a reporting entity for purposes of the Financial
Reporting Act 1993. The financial statements of Prestige Marketing Limited
have been prepared in accordance with the Financial Reporting Act 1993.
Measurement Base
The accounting principles recognised as appropriate for the measurement and
reporting of earnings and financial position on a historical cost basis are
followed by the company.
Specific Accounting Policies
The following specific accounting policies which materially affect the mea-
surement of financial performance and financial position have been applied:
. Accounts receivable are stated at their estimated realisable value.
. Inventories are stated at the lower of cost, determined on a first-in
first-out basis, and net realisable value.
. Fixed assets are stated at cost less aggregate depreciation. Depreciation
has been calculated using the maximum rates permitted by the Income Tax Act
1976.
<TABLE>
<S> <C>
Motor vehicles 20%-26% DV
Fixtures and fittings 9.5%-25% DV
Office equipment 20%-40% DV
Plant 9.5%-50% DV
</TABLE>
. Goodwill represents the excess of the purchase consideration over the fair
value of net tangible and identifiable assets acquired at the time of ac-
quisition of a business or an equity interest in a subsidiary, in-substance
subsidiary or associate.
Goodwill is amortised by the straight line method over the period during
which benefits are expected to be received. This is a maximum of 5 years.
. Operating lease payments, where the lessors effectively retain substan-
tially all the risks and benefits of ownership of the leased items, are in-
cluded in the determination of the operating profit in equal instalments
over the lease term.
. Transactions in foreign currencies are converted at the New Zealand rate of
exchange ruling at the date of receipt or payment for the transaction. At
balance date foreign monetary assets and liabilities are translated at the
closing rate and variations arising from these translations are included in
the Statement of Financial Performance.
The income tax expense charged to the statement of financial performance
includes both the current year's provision and the income tax effects of
timing differences calculated using the liability method.
Tax effect accounting is applied on a comprehensive basis to all timing
differences. A debit balance in the deferred tax account, arising from tim-
ing differences or income tax benefits from income tax losses, is only
recognised if there is virtual certainty of realisation.
. The financial statements have been prepared on a GST exclusive basis.
. The company qualifies for differential reporting as it is not publicly ac-
countable and there is no separation between the owners and the governing
body. The company has applied all available differential reporting exemp-
tions except for the exemption in respect of FRS-10 Statement of Cash Flows
and SSAP-12 Accounting for Income Tax.
F-55
<PAGE>
PRESTIGE MARKETING LIMITED
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
Changes in Accounting Policies
There have been no changes in accounting policies. All policies have been ap-
plied on bases consistent with those used in previous years.
2. INVENTORY
<TABLE>
<CAPTION>
$NZ
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Goods in transit 903,127 250,924
Inventory 2,161,198 1,257,017
---------- ----------
$3,064,325 $1,507,941
========== ==========
</TABLE>
3. FIXED ASSETS
<TABLE>
<CAPTION>
$NZ
------------------------------
1996
AGGREG
COST DEPREC BOOK VALUE
---------- -------- ----------
<S> <C> <C> <C>
Motor vehicles 237,829 76,360 161,469
Fixtures & fittings 94,487 23,010 71,477
Office equipment 602,360 179,147 423,213
Plant 523,138 261,522 261,616
Capital Work in Progress 217,543 -- 217,543
---------- -------- ----------
$1,675,357 $540,039 $1,135,318
========== ======== ==========
<CAPTION>
$NZ
------------------------------
1995
AGGREG
COST DEPREC BOOK VALUE
---------- -------- ----------
<S> <C> <C> <C>
Motor vehicles 182,852 45,596 137,256
Fixtures & fittings 51,285 14,705 36,580
Office equipment 238,704 83,785 154,919
Plant 356,555 140,370 216,185
Capital Work in Progress -- -- --
---------- -------- ----------
$ 829,396 $284,456 $ 544,940
========== ======== ==========
</TABLE>
4. TAXATION
<TABLE>
<CAPTION>
$NZ
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Net profit before tax 5,910,052 2,432,774
Add back
Timing differences not recognised 402,907 424,393
Permanent differences 22,002 5,277
---------- ----------
Net taxable income $6,334,961 $2,862,444
========== ==========
Taxation charge at 33% 2,090,537 944,607
Prior year tax adjustment (117) --
Additional tax 30,626 59,718
---------- ----------
Taxation expense $2,121,046 $1,004,325
========== ==========
</TABLE>
F-56
<PAGE>
PRESTIGE MARKETING LIMITED
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
Accumulated tax effect of timing differences not recognised amount to
$NZ273,009 asset (1995: $NZ140,050 asset).
<TABLE>
<CAPTION>
$NZ
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Imputation credit account
Opening balance 1,007,892 402,545
Payments to Inland Revenue 1,694,460 594,000
RWT credits attached to interest income 19,434 11,347
---------- ----------
Closing balance $2,721,786 $1,007,892
========== ==========
</TABLE>
5. SHAREHOLDERS' CURRENT ACCOUNTS
Balances at year end:
<TABLE>
<CAPTION>
$NZ
-----------------
1996 1995
-------- --------
<S> <C> <C>
P E Meier 311,722 524,466
S Barnes 300,206 353,705
-------- --------
Total amount owing to shareholders $611,928 $878,171
======== ========
</TABLE>
6. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
$NZ
---------
1996 1995
---- ----
<S> <C> <C>
Authorised capital--100 ordinary shares of $1 each $100 $100
==== ====
Issued and paid up capital--100 ordinary shares of $1 each $100 $100
==== ====
</TABLE>
7. OPERATING REVENUE
<TABLE>
<CAPTION>
$NZ
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Sales 22,376,497 17,047,884
Interest received 63,271 34,439
Foreign currency gains 15,028 1,341
Gain on sale of fixed assets 3,726 --
Other income 3,097,692 615,022
----------- -----------
$25,556,214 $17,698,686
=========== ===========
</TABLE>
8. EXPENSES
Operating surplus was arrived at after charging the following expenses:
<TABLE>
<CAPTION>
$NZ
----------------------
1996 1995
----------- ----------
<S> <C> <C>
Depreciation 267,253 141,222
Bad and doubtful debt expense 235,777 117,529
Interest expense 49,742 862
Loss on disposal of assets -- 3,481
Rental and operating lease expenses 172,452 116,372
Amortisation of goodwill 3,707 --
Donations 5,606 --
Other expenses 10,815,659 7,269,508
----------- ----------
$11,550,196 $7,648,974
=========== ==========
</TABLE>
F-57
<PAGE>
PRESTIGE MARKETING LIMITED
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
9. DIRECTORS' REMUNERATION
The total value of Directors' remuneration including non-monetary benefits was
$NZ841,648 (1995: $NZ1,176,748).
10. RELATED PARTIES
During the year Prestige Marketing Limited had the following transactions with
related parties:
----------------------------------------------------------------
<TABLE>
<CAPTION>
RELATED PARTY RELATIONSHIP TYPE OF TRANSACTION
------------- ------------ -------------------
<S> <C> <C>
Prestige Marketing Holdings Ltd Parent Company Advances
Prestige Marketing International Limited Sister Company License Fees
Suzanne Paul Pty Australia Limited Common Shareholders Export Sales
P E Meier Ultimate Shareholder Salary, Directors fee
S Barnes Ultimate Shareholder Salary, Directors fee
</TABLE>
11. LEASE AND CAPITAL COMMITMENTS
The company has no lease and capital commitments.
12. RECONCILIATION OF NET SURPLUS AFTER TAXATION WITH CASH INFLOW FROM
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
$NZ
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Reported surplus after taxation 3,789,006 1,428,449
Add/(less) non-cash items:
Depreciation 267,523 141,222
Loss/(Gain) on sale of fixed assets (3,726) 3,481
Amortisation of goodwill 3,707 --
----------- -----------
267,504 144,703
Add/(less) items classified as investing activities
Intercompany advance 569,915 500,000
Add/(less) items classified as financing activities
Advances on shareholders current accounts 1,059,241 355,558
Movement in working capital:
Increase in debtors (1,130,275) (1,685,989)
Increase in other current assets (726,215) (522,753)
Increase in prepayments (45,004) (13,165)
Increase in inventory (1,556,384) (713,338)
Increase in taxation payable 436,190 370,500
Increase in trade creditors (99,751) 462,516
Increase in accrued liabilities 494,906 360,728
Increase in other current liabilities (58,799) 892,334
----------- -----------
(2,685,332) (849,167)
----------- -----------
Net cash inflow from operating activities $ 3,000,334 $ 1,579,543
=========== ===========
</TABLE>
F-58
<PAGE>
PRESTIGE MARKETING LIMITED
NOTES TO THE FINANCIAL STATEMENTS--CONCLUDED
13. INVESTMENT IN ASSOCIATE
Prestige Marketing Limited has a 50% investment in Quantum Prestige Limited.
Quantum Prestige Limited is in the business of direct response TV marketing.
The shares are unpaid at 31 March 1996. The company has a balance date of 31
March and has an operating surplus after tax of $NZ nil for the year ended 31
March 1996.
14. CONTINGENT LIABILITIES
Prestige Marketing Limited is acting as a guarantor of a $NZ 1,850,000 loan for
Prestige Marketing Holdings Limited.
15. DIFFERENCES BETWEEN NEW ZEALAND GENERALLY ACCEPTED ACCOUNTING PRACTICE ("NZ
GAAP") AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("US GAAP").
The financial statements have been prepared in accordance with the NZ GAAP. The
accounting policies of the company also comply with US GAAP as at 31 March 1995
and 31 March 1996 and therefore the financial results would not require amend-
ment if the financial statements were to be prepared in accordance with US
GAAP.
F-59
<PAGE>
PRESTIGE MARKETING INTERNATIONAL LIMITED
COMPANY DIRECTORY
AS AT 31 MARCH 1996
<TABLE>
<S> <C>
</TABLE>
NATURE OF BUSINESS International Marketing
REGISTERED OFFICE 531 Great South Road
Penrose
AUCKLAND
DIRECTORS P E Meier
S Barnes
SECRETARY P E Meier
AUDITORS Ernst & Young
AUCKLAND
BANKERS ASB Bank
Commercial Division
AUCKLAND
SOLICITORS Shanahan & Co.
AUCKLAND
BUSINESS LOCATION AUCKLAND
SHAREHOLDERS Prestige Marketing Holdings Ltd
1,000 ordinary
---
1,000 ordinary
---
---
F-60
<PAGE>
PRESTIGE MARKETING INTERNATIONAL LIMITED
DIRECTORS' REPORT
FOR THE YEAR ENDED 31 MARCH 1996
The Board of Directors present their Annual Report including financial state-
ments of the company for the year ended 31 March 1996.
As required by section 211 of the Companies Act 1993 we disclose the following
information:
NATURE OF BUSINESS: The company is in the business of international marketing.
The nature of the company's business has not changed during the year under re-
view.
DIRECTORS' INTERESTS: There were no transactions entered into between the di-
rectors and the company.
REMUNERATION AND OTHER BENEFITS: No remuneration was paid to the directors dur-
ing the year.
AUDIT FEES: No audit fees were payable to any person.
DONATIONS: No donations were made by the company during the year.
DIRECTORS: P E Meier and S Barnes held office as directors during the year. No
other person held the office of director at any time during the year.
EMPLOYEE REMUNERATION: No employee received remuneration and any other benefits
of more than $NZ100,000 during the year.
For and on behalf of the Board
Paul E. Meier /s/
24-5-96
Director
Date
Susan Barnes /s/
24-5-96
Director
Date
F-61
<PAGE>
AUDITOR'S REPORT
To the Shareholders of Prestige Marketing International Limited
We have audited the financial statements on pages F-63 to F-66. The financial
statements provide information about the past financial performance of the com-
pany and its financial position as at 31 March 1995 and 31 March 1996. This in-
formation is stated in accordance with the accounting policies set out on page
F-67.
Directors' Responsibilities
The directors are responsible for the preparation of financial statements which
comply with generally accepted accounting practice and give a true and fair
view of the financial position of the company as at 31 March 1995 and 31 March
1996 and of the results of its operations and cash flows for the years ended on
those dates.
Auditor's Responsibilities
It is our responsibility to express an independent opinion on the financial
statements presented by the directors and report our opinion to you.
Basis of Opinion
An audit includes examining, on a test basis, evidence relevant to the amounts
and disclosures in the financial statements. It also includes assessing:
. the significant estimates and judgements made by the directors in the prepa-
ration of the financial statements; and
. whether the accounting policies are appropriate to the company's circum-
stances, consistently applied and adequately disclosed.
We conducted our audit in accordance with generally accepted auditing standards
in New Zealand. We planned and performed our audit so as to obtain all the in-
formation and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the financial state-
ments are free from material misstatements, whether caused by fraud or error.
In forming our opinion we also evaluated the overall adequacy of the presenta-
tion of information in the financial statements.
Other than in our capacity as auditor we have no relationship with, or interest
in, the company.
Unqualified Opinions
We have obtained all the information and explanations we have required.
In our opinion:
. proper accounting records have been kept by the company so far as appears
from our examination of those records; and
. the financial statements on pages F-63 to F-66:
--comply with generally accepted accounting practice; and
--give a true and fair view of the financial position of the company as at
31 March 1995 and 31 March 1996 and the results of its operations and cash
flows for the years ended on those dates.
Our audit was completed on 24 May 1996 and our unqualified opinions are ex-
pressed as at that date.
Ernst & Young
Auckland, New Zealand
F-62
<PAGE>
PRESTIGE MARKETING INTERNATIONAL LIMITED
STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 1996
<TABLE>
<CAPTION>
$NZ
------------------------
NOTE 1996 1995
---- ---------- --------
CURRENT ASSETS
<S> <C> <C> <C>
Bank 290,076 5,268
Accounts receivable--trade 451,251 90,780
GST receivable 104,781 29,644
Intercompany receivables 6 816,889 10,000
---------- --------
TOTAL ASSETS $1,662,997 $135,692
---------- --------
CURRENT LIABILITIES
<CAPTION>
Accruals 74,678 75,263
<S> <C> <C> <C>
Intercompany payables 6 179,053 22,753
Provision for taxation 88,511 --
---------- --------
342,242 98,016
SHAREHOLDERS EQUITY
Issued capital 3 10,000 10,000
Retained earnings 1,310,755 27,676
---------- --------
1,320,755 37,676
---------- --------
TOTAL FUNDS EMPLOYED $1,662,997 $135,692
========== ========
</TABLE>
For and on behalf of the Board
Paul E. Meier /s/ Susan Barnes /s/
Director
Director
24-5-96 24-5-96
Date
Date
The accompanying notes form part of these financial statements.
F-63
<PAGE>
PRESTIGE MARKETING INTERNATIONAL LIMITED
STATEMENT OF MOVEMENTS IN EQUITY
FOR THE YEAR ENDED 31 MARCH 1996
<TABLE>
<CAPTION>
$NZ
------------------
1996 1995
---------- -------
<S> <C> <C>
Equity at 1 April 37,676 10,000
Operating surplus for period 1,283,079 27,676
---------- -------
Equity at 31 March $1,320,755 $37,676
========== =======
</TABLE>
The accompanying notes form part of these financial statements.
F-64
<PAGE>
PRESTIGE MARKETING INTERNATIONAL LIMITED
STATEMENT OF FINANCIAL PERFORMANCE
FOR THE YEAR ENDED 31 MARCH 1996
<TABLE>
<CAPTION>
$NZ
------------------------
NOTE 1996 1995
---- ---------- --------
<S> <C> <C> <C>
Operating Revenue 4 2,823,230 374,598
Expenses 5 908,173 272,244
---------- --------
Operating surplus before taxation 1,915,057 102,354
Taxation expense 2 631,978 74,678
---------- --------
Net surplus after taxation $1,283,079 $ 27,676
========== ========
</TABLE>
The accompanying notes form part of these financial statements.
F-65
<PAGE>
PRESTIGE MARKETING INTERNATIONAL LIMITED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 1996
<TABLE>
<CAPTION>
$NZ
------------------------
NOTE 1996 1995
---- ---------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from customers 1,575,490 244,174
Interest received 5,243 --
---------- --------
1,580,733 244,174
---------- --------
Cash was disbursed to:
Payments to suppliers and employees 750,564 174,228
Income tax paid 543,467 74,678
Interest paid 1,894 --
---------- --------
1,295,925 248,906
---------- --------
Net cash inflow(outflow) from operating activities 8 284,808 (4,732)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from:
Proceeds from issue of shares -- 10,000
---------- --------
Net cash inflow from financing activities -- 10,000
---------- --------
Net increase in cash held 284,808 5,268
Add opening cash brought forward 5,268 --
---------- --------
Ending cash carried forward $ 290,076 $ 5,268
========== ========
</TABLE>
The accompanying notes form part of these financial statements.
F-66
<PAGE>
PRESTIGE MARKETING INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 1996
1. STATEMENT OF ACCOUNTING POLICIES
Reporting Entity
Prestige Marketing International Limited is a company registered under the Com-
panies Act 1993.
Prestige Marketing International Limited is a reporting entity for purposes of
the Financial Reporting Act 1993. The financial statements of Prestige Market-
ing International Limited have been prepared in accordance with the Financial
Reporting Act 1993.
Measurement Base
The accounting principles recognised as appropriate for the measurement and re-
porting of earnings and financial position on a historical cost basis are fol-
lowed by the company.
Specific Accounting Policies
The following specific accounting policies which materially affect the measure-
ment of financial performance and financial position have been applied:
. Accounts receivable are stated at their estimated realisable value.
. Transactions in foreign currencies are converted at the New Zealand rate of
exchange ruling at the date of receipt or payment for the transaction. At
balance date foreign monetary assets and liabilities are translated at the
closing rate and variations arising from these translations are included in
the Statement of Financial Performance.
. The income tax expense charged to the statement of financial performance in-
cludes both the current year's provision and the income tax effects of tim-
ing differences calculated using the liability method.
Tax effect accounting is applied on a comprehensive basis to all timing
differences. A debit balance in the deferred tax account, arising from tim-
ing differences or income tax benefits from income tax losses, is only
recognised if there is virtual certainty of realisation.
. The financial statements have been prepared on a GST exclusive basis.
. The company qualifies for differential reporting as it is not publicly ac-
countable and there is no separation between the owners and the governing
body. The company has applied all available differential reporting exemp-
tions except for the exemption in respect of FRS-10 Statement of Cash Flows
and SSAP-12 Accounting for Income Tax.
Changes in Accounting Policies
There have been no changes in accounting policies. All policies have been ap-
plied on bases consistent with those used in previous years.
2. TAXATION
<TABLE>
<CAPTION>
$NZ
-------------------
1996 1995
---------- --------
<S> <C> <C>
Net profit before tax 1,915,057 102,354
Add back
Permanent differences -- 585
---------- --------
Net taxable income $1,915,057 $102,939
========== ========
Taxation charge at 33% 631,969 33,970
Additional tax 9 40,708
---------- --------
Taxation expense $ 631,978 $ 74,678
========== ========
IMPUTATION CREDIT ACCOUNT
Opening balance -- --
Payments to Inland Revenue 453,982 --
RWT credits attached to interest income 1,716 --
---------- --------
Closing balance $ 455,698 $ --
========== ========
</TABLE>
F-67
<PAGE>
PRESTIGE MARKETING INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
3. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
$NZ
---------------
1996 1995
------- -------
<S> <C> <C>
Authorised capital--1,000 ordinary shares $10,000 $10,000
======= =======
Issued and paid up capital--1,000 ordinary shares $10,000 $10,000
======= =======
</TABLE>
4. OPERATING REVENUE
<TABLE>
<CAPTION>
$NZ
-------------------
1996 1995
---------- --------
<S> <C> <C>
Commission 2,562,826 374,598
Interest received 5,243 --
Other income 255,161 --
---------- --------
$2,823,230 $374,598
========== ========
</TABLE>
5. EXPENSES
Operating surplus was arrived at after charging the following expenses:
<TABLE>
<CAPTION>
$NZ
-----------------
1996 1995
-------- --------
<S> <C> <C>
Interest expense 1,894 --
Other expenses 906,279 272,244
-------- --------
$908,173 $272,244
======== ========
</TABLE>
6. RELATED PARTIES
During the year Prestige Marketing International Limited had the following
transactions with related parties:
---------------------------------------------------------
<TABLE>
<CAPTION>
RELATED PARTY RELATIONSHIP TYPE OF TRANSACTION
------------- ------------ -------------------
<S> <C> <C>
Prestige Marketing Holdings Ltd Parent Company Advances
Prestige Marketing Limited Sister Company License Fees
Suzanne Paul Pty Australia Limited Common Shareholders Commission
</TABLE>
7. LEASE AND CAPITAL COMMITMENTS
The company has no lease and capital commitments.
8. RECONCILIATION OF NET SURPLUS AFTER TAXATION WITH CASH INFLOW (OUTFLOW) FROM
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
$NZ
-------------------
1996 1995
--------- --------
<S> <C> <C>
Reported surplus after taxation 1,283,079 27,676
Movement in working capital:
Increase in debtors (360,471) (90,780)
Increase in other current assets (882,026) (39,644)
Increase in taxation payable 88,511 --
Increase/(decrease) in accrued liabilities (585) 75,263
Increase in other current liabilities 156,300 22,753
--------- --------
(998,271) (32,408)
--------- --------
Net cash inflow/(outflow) from operating activities $ 284,808 $ (4,732)
========= ========
</TABLE>
F-68
<PAGE>
PRESTIGE MARKETING INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS--CONCLUDED
9. CONTINGENT LIABILITIES
The company has no contingent liabilities.
10. DIFFERENCES BETWEEN NEW ZEALAND GENERALLY ACCEPTED ACCOUNTING PRACTICE ("NZ
GAAP") AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("US
GAAP").
The financial statements have been prepared in accordance with the NZ GAAP. The
accounting policies of the company also comply with US GAAP as at 31 March 1995
and 31 March 1996 and therefore the financial results would not require amend-
ment if the financial statements were to be prepared in accordance with US
GAAP.
F-69
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
National Media Corporation
This report is issued at the request of National Media Corporation in connec-
tion with their acquisition of the Suzanne Paul Holdings Pty Limited Group of
companies in Australia. The special purpose financial statements have been pre-
pared on the basis of Accounting Policies outlined in Note 1 and do not include
all the disclosures needed under Australian requirements.
We have audited the accompanying combined balance sheets of Suzanne Paul Hold-
ings Pty Limited Group as of March 31, 1996 and June 30, 1995, and the related
statements of operations, cash flows, and shareholders' equity for the nine
months ended March 31, 1996 and the year ended June 30, 1995.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by the management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined balance sheets of Suzanne Paul
Holdings Pty Limited Group at March 31, 1996 and June 30, 1995, and the com-
bined results of its operations and its cash flows for the nine months ended
March 31, 1996 and the year ended June 30, 1995 in conformity with generally
accepted accounting principles.
Ernst & Young
Sydney, Australia
June 7, 1996
F-70
<PAGE>
SUZANNE PAUL HOLDINGS PTY LIMITED GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
---------- ----------
MARCH 31, JUNE 30,
1996 1995
$A $A
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,017,069 $ 713,150
Accounts receivable (net) 4,166,985 2,195,327
Inventories 2,270,024 872,013
Prepaid expenses and other current assets 1,246,263 410,509
Due by related party 229,425 --
---------- ----------
Total current assets 8,929,766 4,190,999
Property and equipment (net) 600,301 536,995
Intangible assets (net) 2,578 3,437
Deferred income taxes 237,378 135,178
---------- ----------
TOTAL ASSETS $9,770,023 $4,866,609
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 628,488 $ 490,552
Accrued expenses 269,373 88,074
Due to related parties 1,109,730 703,883
Income tax payable 1,870,993 819,646
---------- ----------
Total current liabilities 3,878,584 2,102,155
Shareholders' equity:
Ordinary shares, $A1 par value, issued 1,001 1,001 1,001
Retained earnings 5,890,438 2,763,453
---------- ----------
Total shareholders' equity 5,891,439 2,764,454
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,770,023 $4,866,609
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-71
<PAGE>
SUZANNE PAUL HOLDINGS PTY LIMITED GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
----------- -----------
9 MONTHS YEAR
ENDED ENDED
MARCH 31, JUNE 30,
1996 1995
$A $A
----------- -----------
<S> <C> <C>
Revenues:
Product sales $21,667,815 $12,446,370
Other revenues 100,598 56,687
----------- -----------
Net revenues 21,768,413 12,503,057
Operating costs and expenses:
Direct costs 4,138,249 2,012,520
Selling, general, and administrative 9,477,507 5,601,028
Interest expense 3,255,669 2,693,794
----------- -----------
Total operating costs and expenses 16,871,425 10,307,342
----------- -----------
Income before income taxes 4,896,988 2,195,715
Income taxes 1,770,003 723,893
----------- -----------
Net income $ 3,126,985 $ 1,471,822
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-72
<PAGE>
SUZANNE PAUL HOLDINGS PTY LIMITED GROUP
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
---------------------
9 MONTHS
ENDED YEAR ENDED
MARCH 31, JUNE 30,
1996 1995
$A $A
---------- ----------
<S> <C> <C>
Common stock (of Suzanne Paul Holdings Pty Ltd)
Beginning balance $ 1,001 $ 1,001
---------- ----------
Ending balance 1,001 1,001
Retained earnings:
Beginning balance 2,763,453 1,291,631
Net income 3,126,985 1,471,822
---------- ----------
Ending balance 5,890,438 2,763,453
---------- ----------
TOTAL SHAREHOLDERS' EQUITY $5,891,439 $2,764,454
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-73
<PAGE>
SUZANNE PAUL HOLDINGS PTY LIMITED GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------- -----------
9 MONTHS
ENDED YEAR ENDED
MARCH 31, JUNE 30,
1996 1995
$A $A
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,126,985 $ 1,471,822
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 126,509 88,526
Increase in:
Accounts receivable, net (1,971,658) (1,771,315)
Inventories (1,398,011) (589,954)
Deferred costs (102,200) (100,618)
Other current assets (835,754) (124,852)
Increase in:
Accrued expenses 137,936 36,961
Income taxes payable 181,299 357,648
Other 1,051,347 757,207
Accounts payable 176,422 323,063
----------- -----------
Net cash provided by operating activities 492,875 448,488
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (188,956) (501,210)
----------- -----------
Net cash used in investing activities (188,956) (501,210)
----------- -----------
Net increase (decrease) in cash and cash equiva-
lents 303,919 (52,722)
Cash and cash equivalents at beginning of year 713,150 765,872
----------- -----------
Cash and cash equivalents at end of year $ 1,017,069 $ 713,150
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Taxes on income $ 819,646 $ 461,998
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-74
<PAGE>
SUZANNE PAUL HOLDINGS PTY LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Suzanne Paul Holdings Pty Limited is engaged in the direct marketing of con-
sumer products principally through television media by the operating companies,
Suzanne Paul Australia Pty Ltd. And Telemall Shopping Pty Ltd.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
These combined financial statements are a pro forma amalgamation of Suzanne
Paul Holdings Pty Ltd, Suzanne Paul (Australia) Pty Ltd, and Telemall Shopping
Pty Ltd. with disregard to present ownership as it is intended that all three
companies in the "group" be acquired by National Media Corporation, a U.S.
listed company.
Basis of Accounting
The financial statements have been prepared in accordance with the historic
cost convention and going concern principle.
Adjustments to Conform to Accounting Principles Generally Accepted in the
United States
The historical records of the three companies are kept in accordance with gen-
erally accepted accounting principles in Australia and in local currency. These
combined financial statements have been prepared in conformity with accounting
principles generally accepted in the United States and do not differ from those
kept for statutory purposes in Australia.
Reserve for Returned Merchandise
It is the Company's policy to refund unconditionally the total price of mer-
chandise returned within 30 days. The Company provides an allowance, based upon
experience, for returned merchandise. The allowance for returns was $A351,000
and $A234,000 at March 31, 1996 and June 30, 1995, respectively.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when pur-
chased to be cash equivalents.
Accounts Receivable
The allowance for doubtful accounts was $A257,000 and $A130,000 at March 31,
1996 and June 30, 1995, respectively.
Inventories
Inventories consist principally of products purchased for resale, and are
stated at the lower of cost (determined by the first-in, first-out method) or
market.
Property and Equipment and Depreciation and Amortization
Property and equipment is stated at cost. Depreciation and amortization are
provided using the reducing balance sheet method based on the estimated useful
lives of the assets.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Joint Ventures
Suzanne Paul Holdings Pty Ltd (SPH) has a 50% interest in the assets, liabili-
ties and output of a joint venture company being incorporated. The other joint
venture partner is Quantum International, a wholly owned subsidiary
F-75
<PAGE>
SUZANNE PAUL HOLDINGS PTY LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
of National Media Corporation. The joint venture made no contribution to the
results for the period at March 31, 1996. The joint venture will be wound up if
the group is acquired by National Media Corporation.
Goodwill
Goodwill represents the excess of the purchase consideration over the fair
value of identifiable net assets acquired at the time of acquisition of a busi-
ness. Goodwill is amortized by the straight-line method over the period during
which benefits are expected to be received. This is taken as being 5 years. Am-
ortization was $A859 and $A1,145 the nine month period ended March 31, 1996 and
the year ended June 30, 1995, respectively.
Advertising Costs
All advertising costs are expensed as incurred. The total amount charged to ad-
vertising expense was $A3,873,000 and $A2,013,000 for the nine months ended
March 31, 1996 and the year ended June 30, 1995, respectively.
2. ACCRUED EXPENSES
Accrued expenses include the following:
<TABLE>
<CAPTION>
--------- --------
MARCH 31, JUNE 30,
1996 1995
$A $A
--------- --------
<S> <C> <C>
Fringe benefits tax $ 30,000 $ --
Sales tax -- 3,927
Superannuation 70,434 11,602
Holiday pay 37,659 27,726
Employee taxes 43,374 43,042
Withholding tax 87,906 1,777
-------- -------
$269,373 $88,074
======== =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
--------- --------
MARCH 31, JUNE 30,
1996 1995
$A $A
--------- --------
<S> <C> <C>
Furniture, fixtures, and office equipment $779,087 $590,133
Motor vehicles 108,000 108,000
-------- --------
887,087 698,133
Less accumulated depreciation 286,786 161,138
-------- --------
Total $600,301 $536,995
======== ========
</TABLE>
Depreciation expense for property and equipment was $A125,648 and $A87,381 for
the nine months ended March 31, 1996 and the year ended June 30, 1995, respec-
tively.
F-76
<PAGE>
SUZANNE PAUL HOLDINGS PTY LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
4. INCOME TAX
<TABLE>
<CAPTION>
---------- ----------
1996 1995
$A $A
---------- ----------
<S> <C> <C>
(A)INCOME TAX EXPENSE $4,896,988 $2,195,715
Income tax prima facie payable on reported
operating profit at 36% and 33%, respectively 1,762,916 724,586
Tax effect of permanent differences:
Goodwill amortization 309 378
Non tax deductible costs 6,778 (1,071)
---------- ----------
Charge to profit and loss account $1,770,003 $ 723,893
(B)INCOME TAX PAYABLE
Charge to property and loss account as above.
Increase (decrease) in amount payable due to
timing
differences, comprising:
--Increase in allowance for doubtful accounts $ 45,720 $ 42,900
--Increase in allowance for returned
merchandise 42,120 55,110
--Increase in allowance for employee
entitlements 2,350 (2,257)
--Allowance for fringe benefits tax 10,800 --
---------- ----------
Estimated liability on current period's profit $1,870,993 $ 819,646
========== ==========
(C)DEFERRED INCOME TAX BENEFIT (FUTURE INCOME
TAX BENEFIT)
Balance at beginning of period $ 135,178 $ 34,560
Transfer for current year resulting from
timing differences 102,200 100,618
---------- ----------
Balance at end of period $ 237,378 $ 135,178
========== ==========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company rents warehouse and office space under various operating leases
which expire September 1997. Future minimum lease payments (exclusive of real
estate taxes and other operating expenditures) as of March 31, 1996 under
noncancellable operating leases with initial or remaining terms of one year or
more are as follows for the year ending March 31:
<TABLE>
<CAPTION>
--------
$A
--------
<S> <C>
1997 $249,892
1998 71,946
--------
$321,838
========
</TABLE>
6. PENSION PLAN
As the group has no pension plan of its own under Australian statutory require-
ments, for every employee, the Company must remit to the Government up to 5% of
gross salary to a maximum amount, for a Superannuation Guarantee Levy. Once the
employee reaches the age of 65, the Government will provide a pension payment.
Superannuation payments in respect of this levy were $A79,273 and $A61,367 for
the nine month period ended March 31, 1996 and the year ended June 30, 1995,
respectively.
7. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in Australia and is engaged in the direct marketing of
products principally through television.
F-77
<PAGE>
SUZANNE PAUL HOLDINGS PTY LIMITED GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--CONCLUDED
8. LITIGATION
Action regarding "Super Slicer"
In December 1995, an application was lodged via the Federal Court of Australia
to restrain K-Tel International (Australia) Pty Limited from selling, advertis-
ing, or distributing in Australia a household utensil known as "super slicer."
Action by Telemall MOH Pty Ltd
In September 1995, the Company received communication seeking to restrain it
from using the name Telemall Shopping as it is alleged that the name Telemall
Shopping confuses the public with the name Telemall MOH Pty Ltd used by a South
Australian company.
9. RELATED PARTY TRANSACTIONS
The following related party transactions occurred during the financial period.
The following transactions are with companies that have a common shareholding
to the Suzanne Paul Group:
Nine months ended March 31, 1996
. Royalties are due to Prestige International to the amount of $A773,000. The
royalty agreement was made under normal commercial terms and conditions.
. An amount of $A229,425 is due from Prestige Marketing. The balance is for
management fees and programming fees. These fees are based on normal commer-
cial terms and conditions.
. A loan was obtained from Tancot Pty Ltd, a company wholly owned by Alan J J
Meier. The balance outstanding is $A414,029. No repayment terms have been
agreed and no interest has been paid or is due.
. A directors fee for $A54,077 was paid to Alan J J Meier. No other director
received any benefits.
. A management fee of $A150,000 was paid to Tancot Pty Ltd in respect of serv-
ices provided by Alan J J Meier. The transaction was made under normal com-
mercial terms and conditions.
Year ended June 30, 1995
. An amount of $A71,946 is payable to Prestige Marketing for management fees
and royalties.
. A directors fee for $A69,712 was paid to Alan J J Meier. No other director
received any benefits.
. Management fees and consulting fees for $A314,767 were paid to Tancot Pty
Ltd in respect of services provided by Alan J J Meier. The consulting fee
and the management fee for $A218,386 remain unpaid at June 30, 1995.
F-78
<PAGE>
NATIONAL MEDIA'S FULFILLMENT CENTER LOCATED IN PHOENIX, ARIZONA
<PAGE>
LOGO
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an itemized statement of all expenses incurred or to be in-
curred in connection with the issuance and distribution of the securities to be
registered:
<TABLE>
<S> <C>
Registration fee* $ 15,863.00
Blue sky filing fees and expenses 35,000.00
NASD filing fee* 5,100.00
Transfer agent and registration fee 10,000.00
Printing and mailing expenses 150,000.00
Legal fees and expenses 165,000.00
Accounting fees and expenses 65,000.00
Miscellaneous 5,000.00
-----------
Total $450,963.00
===========
</TABLE>
- ---------
*Exact; all other fees and expenses are estimates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has adopted in its Certificate of Incorporation and Bylaws the pro-
visions of Section 102(b)(7) of the Delaware General Corporation Law (the
"DGCL") which eliminate or limit the personal liability of a director to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director, except that this provision shall not eliminate or limit the lia-
bility of a director for any breach of the director's duty of loyalty to the
Company or its stockholders, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, under Section 174
of the DGCL, or for any transaction from which the director derived an improper
personal benefit.
Further, the Company's Certificate of Incorporation and Bylaws provide that the
Company shall indemnify all persons whom it may indemnify pursuant to Section
145 of the DGCL to the full extent permitted therein. Section 145 provides,
subject to various exceptions and limitations, that the Company may indemnify
its directors or officers if such director or officer is a party or is threat-
ened to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director or officer of the Company, or is or
was serving at the request of the Company as a director or officer of another
corporation, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connec-
tion with such action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The determination of
whether indemnification is proper under the circumstances, unless made by a
court, shall be made by a majority of a quorum of disinterested members of the
Board of Directors, independent legal counsel or the stockholders of the Compa-
ny. In addition, the Company shall indemnify its directors or officers to the
extent that they have been successful on the merits or otherwise in defense of
any such action, suit or proceeding, or in the defense of any claim, issue or
matter therein, against expenses (including attorneys' fees) actually and rea-
sonably incurred by them in connection therewith.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
The following documents are filed as a part of this Registration Statement.
(Exhibit numbers correspond to the exhibits required by Item 601 of Regulation
S-K for a Registration Statement on Form S-3.)
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
*1 Form of Underwriting Agreement.
*5 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers as to the
legality of the Registrant's Common Stock being registered hereby.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
*10.1 Amended and Restated Loan and Security Agreement, dated June 26,
1996, by and between Registrant, Quantum North America, Inc.,
Quantum International Limited, Positive Response Television, Inc.,
DirectAmerica Corporation and Meridian Bank.
*10.2 Amended and Restated Note, dated June 26, 1996, of Registrant,
Quantum North America, Inc., Quantum International Limited, Positive
Response Television, Inc. and DirectAmerica Corporation to the order
of Meridian Bank.
*10.3 Securities Pledge Agreement, dated June 26, 1996, by Registrant for
the benefit of Meridian Bank.
*23.1 Consent of Ernst & Young, LLP, independent auditors, with respect to
the consolidated financial statements and schedule of the
Registrant.
*23.2 Consent of Ernst & Young, LLP, independent auditors, with respect to
the combined financial statements of DirectAmerica Corporation and
California Production Group, Inc.
*23.3 Consent of Deloitte and Touche, LLP, independent auditors, with
respect to the consolidated financial statements of Positive
Response Television, Inc.
*23.4 Consent of Ernst & Young, independent auditors, with respect to the
financial statements of Prestige Marketing Limited.
*23.5 Consent of Ernst & Young, independent auditors, with respect to the
financial statements of Prestige Marketing International Limited.
*23.6 Consent of Ernst & Young, independent auditors, with respect to the
special purpose combined financial statements of Suzanne Paul
Holdings Pty Limited Group.
*23.7 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers with respect
to the legality of securities being registered (included in the
opinion filed as Exhibit 5 hereto).
**24 Power of Attorney.
</TABLE>
- ---------
*Filed herewith.
**Filed previously.
(b) Financial Statement Schedule VIII is incorporated herein by reference to
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Securities Act") may be permitted to directors, officers and con-
trolling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securi-
ties and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the pay-
ment by the registrant of expenses incurred or paid by a director, officer or
controlling-person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
of the registrant in connection with the securities being registered, the reg-
istrant will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as ex-
pressed in the Securities Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the registrant's annual
report pursuant to section 13(a) or section 15(d) of the Securities Exchange
Act of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the ini-
tial bona fide offering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this Reg-
istration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Regis-
tration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities of-
fered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHO-
RIZED, IN THE CITY OF PHILADELPHIA, COMMONWEALTH OF PENNSYLVANIA, ON THIS 2ND
DAY OF JULY, 1996.
National Media Corporation
/s/ Mark P. Hershhorn
By: _____________________________________
Mark P. Hershhorn, President
and Chief Executive Officer
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board,
* Chairman of the Executive July 2, 1996
- ---------------------------- Committee and Director
BRIAN MCADAMS
President, Chief Executive
/s/ Mark P. Hershhorn Officer and Director July 2, 1996
- ----------------------------
MARK P. HERSHHORN
Executive Vice President
* and Director July 2, 1996
- ----------------------------
DAVID J. CARMAN
Director
* July 2, 1996
- ----------------------------
CHARLES L. ANDES
Vice Chairman of the Board
* and Director July 2, 1996
- ----------------------------
CONSTANTINOS I. COSTALAS
Director
* July 2, 1996
- ----------------------------
ALBERT R. DOWDEN
Director
* July 2, 1996
- ----------------------------
MICHAEL J. EMMI
* Director July 2, 1996
- ----------------------------
FREDERICK S. HAMMER
<PAGE>
SIGNATURE TITLE DATE
Director
* July 2, 1996
- ----------------------------
IRA M. LUBERT
Director
* July 2, 1996
- ----------------------------
JON W. YOSKIN II
Director
* July 2, 1996
- ----------------------------
WILLIAM M. GOLDSTEIN, ESQ.
Vice President and Chief
/s/ James M. Gallagher Financial Officer July 2, 1996
- ---------------------------- (Principal Accounting and
JAMES M. GALLAGHER Financial Officer)
- ---------
* An original Power of Attorney authorizing Mark P. Hershhorn, Constantinos I.
Costalas, Brian McAdams and John J. Sullivan, and each of them individually,
to sign any amendment to this Registration Statement on behalf of certain of-
ficers and directors of the Registrant was included with the signature pages
to the originally filed Registration Statement to which this Amendment No. 1
relates.
/s/ Mark P. Hershhorn
By: ________________________________
Mark P. Hershhorn,
Attorney-in-Fact
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1 Form of Underwriting Agreement.
5 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers as to the legality of the
Registrant's Common Stock being registered hereby.
10.1 Amended and Restated Loan and Security Agreement, dated June 26, 1996, by and between
Registrant, Quantum North America, Inc., Quantum International Limited, Positive Response
Television, Inc., DirectAmerica Corporation and Meridian Bank.
10.2 Amended and Restated Note, dated June 26, 1996, of Registrant, Quantum North America, Inc.,
Quantum International Limited, Positive Response Television, Inc. and DirectAmerica
Corporation to the order of Meridian Bank.
10.3 Securities Pledge Agreement, dated June 26, 1996, by Registrant for the benefit of Meridian
Bank.
23.1 Consent of Ernst & Young, LLP, independent auditors, with respect to the consolidated
financial statements and schedule of the Registrant.
23.2 Consent of Ernst & Young, LLP, independent auditors, with respect to the combined financial
statements of DirectAmerica Corporation and California Production Group, Inc.
23.3 Consent of Deloitte and Touche, LLP, independent auditors, with respect to the consolidated
financial statements of Positive Response Television, Inc.
23.4 Consent of Ernst & Young, independent auditors, with respect to the financial statements of
Prestige Marketing Limited.
23.5 Consent of Ernst & Young, independent auditors, with respect to the financial statements of
Prestige Marketing International Limited.
23.6 Consent of Ernst & Young, independent auditors, with respect to the special purpose combined
financial statements of Suzanne Paul Holdings Pty Limited Group.
23.7 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers with respect to the legality of
securities being registered (included in the opinion filed as Exhibit 5 hereto).
</TABLE>
<PAGE>
EXHIBIT 1
UNDERWRITING AGREEMENT
NATIONAL MEDIA CORPORATION
[ ] Shares
Common Stock
(Par Value $.01 Per Share)
[ ], 1996
J.P. MORGAN SECURITIES INC.
TUCKER ANTHONY INCORPORATED
As Representatives
of the Several Underwriters
Listed in Schedule I hereto
----------
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Dear Sirs:
National Media Corporation, a Delaware corporation (the "Company"),
-------
proposes to issue and sell to the several Underwriters listed in Schedule I
----------
hereto (the "Underwriters"), for whom you are acting as representatives (the
------------
"Representatives"), an aggregate of [ ] shares (the "Underwritten
- ---------------- ------------
Shares") of common stock, par value $.01 per share, of the Company (such shares
- ------
of common stock, together with the rights (the "Rights") attached thereto to
------
purchase the Company's Series A Preferred Stock, par value $.01 per share (the
"Series A Preferred Stock"), issued pursuant to a Stockholder Rights Plan dated
- -------------------------
as of January 3, 1994 between the Company and Mellon Securities Trust Company,
as rights agent (the "Rights Agreement"), being hereinafter referred to as the
----------------
"Common Stock") and, for the sole purpose of covering over-allotments (if any)
- -------------
in connection with the sale of the Underwritten Shares, at the option of the
Underwriters, up to an additional [ ] shares of Common Stock (the "Option
------
Shares"). The Underwritten Shares and the Option Shares are herein referred to
- ------
as the "Shares."
------
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") in accordance with the provisions of the
----------
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Securities Act"), a registration
--------------
statement on Form S-3 (File No. [ ]), including a prospectus, relating to
the Shares.
<PAGE>
-2-
Such registration statement, as amended at the time when it became or shall
become effective, or, if a post-effective amendment is filed with respect
thereto, as amended by such post-effective amendment at the time of its
effectiveness, including in each case information (if any) deemed to be part of
the registration statement at the time of effectiveness pursuant to Rule 430A
under the Securities Act, together with any related registration statement filed
with the Commission for registration of a portion of the Shares which
registration statement becomes effective pursuant to Rule 462(b) under the
Securities Act, is referred to in this Agreement as the "Registration
------------
Statement," and the prospectus in the form first used to confirm sales of Shares
- ---------
is referred to in this Agreement as the "Prospectus." Any reference in this
----------
Agreement to the Registration Statement, any preliminary prospectus or the
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Securities Act, as
of the effective date of the Registration Statement or the date of such
preliminary prospectus or the Prospectus, as the case may be, and any reference
to "amend," "amendment" or "supplement" with respect to the Registration
----- --------- ----------
Statement, any preliminary prospectus or the Prospectus shall be deemed to refer
to and include any documents filed after such date under the Securities Exchange
Act of 1934, as amended, and the rules and regulations of the Commission
thereunder (collectively, the "Exchange Act") that are deemed to be incorporated
------------
by reference therein.
The Company wishes to confirm as follows its agreement with you and the
other several Underwriters on whose behalf you are acting in connection with the
several purchases of the Shares by the Underwriters:
1. The Company agrees to issue and sell the Underwritten Shares to the
several Underwriters as hereinafter provided, and each Underwriter, upon the
basis of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees, severally and not jointly, to purchase
from the Company the respective number of Underwritten Shares set forth opposite
such Underwriter's name in Schedule I hereto at a purchase price of $[ ] per
----------
share (the "Purchase Price").
--------------
In addition, the Company agrees to issue and sell the Option Shares to the
several Underwriters as hereinafter provided, and the Underwriters, upon the
basis of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, shall have the option to purchase, severally and
not jointly, from the Company up to an aggregate of [ ]
<PAGE>
-3-
Option Shares at the Purchase Price for the sole purpose of covering over-
allotments (if any) in connection with the sale of the Underwritten Shares by
the several Underwriters.
If any Option Shares are to be purchased, the number of Option Shares to be
purchased by each Underwriter on an Additional Closing Date (as hereinafter
defined) shall be the number of Option Shares which bears the same ratio to the
aggregate number of Option Shares being purchased on such Additional Closing
Date as the number of Underwritten Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number of Underwritten Shares
----------
increased as set forth in Section 9 hereof) bears to the aggregate number of
Underwritten Shares being purchased from the Company by the several
Underwriters, subject, however, to such adjustments to eliminate any fractional
shares as the Representatives in their sole discretion shall make.
The Underwriters may exercise the option to purchase the Option Shares at
any time (and from time to time) on or before the thirtieth day following the
date of this Agreement, by written notice from the Representatives to the
Company. Such notice shall set forth the aggregate number of Option Shares as
to which the option is being exercised and the date and time when the Option
Shares are to be delivered and paid for, which may be the same date and time as
the Closing Date (as hereinafter defined) but shall not be earlier than the
Closing Date nor later than the tenth full Business Day (as hereinafter defined)
after the date of such notice (unless such time and date are postponed in
accordance with the provisions of Section 9 hereof). Any such notice shall be
given at least two Business Days prior to the date and time of delivery
specified therein.
2. The Company understands that the Underwriters intend (a) to make a
public offering of the Shares as soon after the Registration Statement and this
Agreement have become effective as in the judgment of the Representatives is
advisable and (b) initially to offer the Shares upon the terms set forth in the
Prospectus.
3. Payment for the Shares shall be made to the Company or to its order by
Federal Reserve funds check or checks or wire transfer of immediately available
funds at the office of J.P. Morgan Securities Inc., 60 Wall Street, New York,
New York 10260 at [ ]:00 A.M., New York City time, in the case of the
Underwritten Shares, on [ ], 1996, or at such other time on the same
or such other date, not later than the fifth Business Day thereafter, as the
Representatives and the Company may agree upon in writing or, in the case of
Option Shares, on the date and time
<PAGE>
-4-
specified by the Representatives in the written notice of the Underwriters'
election to purchase such Option Shares. The time and date of such payment for
the Underwritten Shares are referred to herein as the "Closing Date" and the
------------
time and date of each such payment for the Option Shares, if other than the
Closing Date, are herein referred to as an "Additional Closing Date". As used
-----------------------
herein, the term "Business Day" means any day other than a day on which banks
------------
are permitted or required to be closed in New York City.
Payment for the Shares to be purchased on the Closing Date or an Additional
Closing Date, as the case may be, shall be made against delivery to the
Representatives for the respective accounts of the several Underwriters of the
Shares to be purchased on such date registered in such names and in such amounts
as the Representatives shall request in writing not later than one full Business
Day prior to the Closing Date or the Additional Closing Date, as the case may
be, with any transfer taxes payable in connection with the transfer to the
Underwriters of the Shares duly paid by the Company. The certificates for the
Shares will be made available for inspection and packaging by the
Representatives at the office of J.P. Morgan Securities Inc. set forth above not
later than 1:00 P.M., New York City time, on the Business Day prior to the
Closing Date or the Additional Closing Date, as the case may be.
4. The Company represents and warrants to each Underwriter as of the date
hereof and as of the Closing Date that:
(a) (i) no order preventing or suspending the use of any preliminary
prospectus has been issued by the Commission and no proceeding for that
purpose has been instituted or, to the knowledge of the Company, threatened
by the Commission; and (ii) each preliminary prospectus filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act, when so
filed, conformed in all material respects to the requirements of the
Securities Act, and did not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided that the
--------
representations and warranties set forth in this clause (ii) shall not
apply to any statements or omissions made in reliance upon and in
conformity with information relating to any Underwriter furnished to the
Company in writing by such Underwriter through the
<PAGE>
-5-
Representatives expressly for use in any preliminary prospectus;
(b) (i) no order preventing or suspending the use of the Prospectus
has been issued by the Commission and no proceeding for that purpose has
been instituted or, to the knowledge of the Company, threatened by the
Commission; and (ii) the Prospectus conforms or will conform, as the case
may be, in all material respects to the requirements of the Securities Act,
and the Prospectus does not or will not, as the case may be, and will not
as of the applicable date of any amendment or supplement thereto or as of
the Closing Date or any Additional Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided
--------
that the representations and warranties set forth in this clause (ii) shall
not apply to any statements or omissions made in reliance upon and in
conformity with information relating to any Underwriter furnished to the
Company in writing by such Underwriter through the Representations
expressly for use in the Prospectus or any amendment or supplement thereto;
(c) (i) no stop order suspending the effectiveness of the
Registration Statement has been issued by the Commission and no proceeding
for that purpose has been instituted or, to the knowledge of the Company,
threatened by the Commission; and (ii) the Registration Statement conforms
or will conform, as the case may be, in all material respects to the
requirements of the Securities Act, and the Registration Statement does not
or will not, as the case may be, and will not as of the applicable
effective date of any amendment thereto, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided that the representations and warranties set forth in this clause
--------
(ii) shall not apply to any statements or omissions made in reliance upon
and in conformity with information relating to any Underwriter furnished to
the Company in writing by such Underwriter through the Representatives
expressly for use in the Registration Statement or any amendment thereto;
(d) each of the documents filed pursuant to the Exchange Act and
incorporated by reference in the Registration Statement and the Prospectus,
when filed with the Commission, conformed to the requirements of the
Exchange Act and no such
<PAGE>
-6-
document contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading; and any further documents so filed
and incorporated by reference in the Registration Statement and the
Prospectus, when such documents are filed with the Commission, will conform
in all material respects to the requirements of the Exchange Act, and will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading;
(e) no order or notification with respect to any suspension of the
qualification of the Shares for offer and sale in any jurisdiction has been
issued and no proceeding for that purpose has been instituted or, to the
knowledge of the Company, threatened;
(f) Ernst & Young LLP, who are reporting on the audited financial
statements and supporting schedules of (i) the Company, (ii) Direct America
Corporation and California Production Group, Inc. (collectively, "Direct
------
America"), (iii) Prestige Marketing Limited ("Prestige"), (iv) Prestige
------- --------
Marketing International Limited ("Prestige International") and (v) Suzanne
----------------------
Paul Holdings Pty Ltd. ("Suzanne") in each case included or incorporated by
reference in the Registration Statement and the Prospectus, are independent
public accountants within the meaning of the Securities Act; Deloitte &
Touche, L.L.P., who are reporting on the audited financial statements and
supporting schedules of Positive Response Television, Inc. ("Positive
--------
Response") included or incorporated by reference in the Registration
--------
Statement and the Prospectus, are independent public accountants within the
meaning of the Securities Act; the consolidated financial statements of the
Company, and the related notes thereto, included or incorporated by
reference in the Registration Statement and the Prospectus present fairly
the consolidated financial position of the Company and its consolidated
subsidiaries as of the dates indicated and the results of their operations
and the changes in their consolidated cash flows for the periods specified;
the combined financial statements of Direct America, and the related notes
thereto, included or incorporated by reference in the Registration
Statement and the Prospectus present fairly the combined financial position
of Direct America as of the dates indicated and the results of their
operations and the changes in their combined cash flows for the periods
specified; the financial statements of Prestige, and the related notes
thereto,
<PAGE>
-7-
included or incorporated by reference in the Registration Statement and the
Prospectus present fairly the financial position of Prestige as of the
dates indicated and the results of its operations and the changes in its
cash flow for the periods specified; the financial statements of Prestige
International, and the related notes thereto, included or incorporated by
reference in the Registration Statement and the Prospectus present fairly
the financial position of Prestige International as of the dates indicated
and the results of its operations and the changes in its cash flows for the
periods specified; the consolidated financial statements of Suzanne, and
the related notes thereto, included or incorporated by reference in the
Registration Statement and the Prospectus present fairly the consolidated
financial position of Suzanne and its consolidated subsidiaries as of the
dates indicated and the results of the operations and the changes in their
consolidated cash flow for the periods specified; the consolidated
financial statements of Positive Response, and the related notes thereto,
included or incorporated by reference in the Registration Statement and the
Prospectus present fairly the consolidated financial position of Positive
Response and its consolidated subsidiaries as of the dates indicated and
the results of their operations and the changes in their consolidated cash
flows for the periods specified; each of (1) the consolidated financial
statements of the Company, (2) the combined financial statements of Direct
America and (3) the consolidated financial statements of Positive Response
included or incorporated by reference in the Registration Statement and the
Prospectus have been prepared in conformity with United States generally
accepted accounting principles applied on a consistent basis and the
supporting schedules included or incorporated by reference in the
Registration Statement present fairly the information required to be stated
therein; the financial statements of Prestige and Prestige International
included or incorporated by reference in the Registration Statement and the
Prospectus have been prepared in accordance with New Zealand generally
accepted accounting principles applied on a consistent basis and the
supporting schedules included or incorporated by reference in the
Registration Statement present fairly the information required to be stated
therein; the consolidated financial statements of Suzanne included or
incorporated by reference in the Registration Statement and the Prospectus
have been prepared in accordance with Australian generally accepted
accounting principles applied on a consistent basis and the supporting
schedules included or incorporated by reference in the Registration
Statement present fairly the information required
<PAGE>
-8-
to be stated therein; the notes to the financial statements of Prestige and
Prestige International included or incorporated by reference in the
Registration Statement and the Prospectus include, for each period
presented, (x) a reconciliation of each item required to be reconciled
under the Securities Act presented in accordance with United States
generally accepted accounting principles and (y), to the extent applicable
to such financial statements, a discussion of all differences between
United States generally accepted accounting principles and New Zealand
generally accepted accounting principles; the notes to the consolidated
financial statements of Suzanne included or incorporated by reference in
the Registration Statement and the Prospectus include, for each period
presented, (x) a reconciliation of each item required to be reconciled
under the Securities Act presented in accordance with the United States
generally accepted accounting principles and (y), to the extent applicable
to such consolidated financial statements, a discussion of all differences
between United States generally accepted accounting principles and
Australian generally accepted accounting principles; the pro forma
financial information (including the notes thereto) included or
incorporated by reference in the Registration Statement and the Prospectus
(A) presents fairly in all material respects the information shown therein,
(B) was prepared in accordance with the applicable requirements of
Regulation S-X promulgated under the Exchange Act, (C) was prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial information and (D) was properly computed on the bases
described therein; in the opinion of the Company, the assumptions used in
the preparation of such pro forma financial information (including, without
limitation, the notes thereto) were fair and reasonable and the adjustments
used therein were appropriate to give effect to the transactions or
circumstances referred to therein; and no pro forma financial statements or
other pro forma financial information is required to be included or
incorporated by reference in the Registration Statement and the Prospectus
other than those included or incorporated by reference therein;
(g) since the date of the latest consolidated financial statements of
the Company included or incorporated by reference in the Registration
Statement and the Prospectus, there has not been (i) any change in the
Company's issued capital stock, except issuances of shares of Common Stock
issued after the date of such financial statements pursuant to the
Company's employee benefit plans as in effect on the date
<PAGE>
-9-
hereof or (ii) any material adverse change, or any development involving an
event or state of facts which could reasonably be expected to result in a
material adverse change, in or affecting the general affairs, business,
management, financial position, shareholders' equity or results of
operations of the Company and the Subsidiaries (as hereinafter defined),
taken as a whole (each, a "Material Adverse Change"), whether or not
-----------------------
arising from transactions or events occurring in the ordinary course of
business; since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as set forth therein,
(1) there have been no transactions or contracts (written or oral) entered
into or agreed to be entered into by the Company or any of the Subsidiaries
(other than those in the ordinary course of business) which are material to
the Company and the Subsidiaries, taken as a whole, and (2) there has been
no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock;
(h) the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct its
business as described in the Registration Statement and the Prospectus, and
is duly qualified as a foreign corporation for the transaction of business
and is in good standing under the laws of each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires it
to be so qualified, except to the extent that the failure to be so
qualified or be in good standing could not, singly or in the aggregate,
reasonably be expected to have a material adverse effect on the general
affairs, business, management, financial position, shareholders' equity or
results of operations of the Company and the Subsidiaries, taken as a whole
(each, a "Material Adverse Effect");
-----------------------
(i) each direct and indirect foreign and domestic subsidiary of the
Company listed on Schedule II hereto, which constitute all of the
-----------
"significant subsidiaries" of the Company within the meaning of Rule 1-02
of Regulation X under the Exchange Act (each, a "Subsidiary" and,
----------
collectively, the "Subsidiaries"), has been duly incorporated or organized
------------
and is validly existing as a corporation or other business organization
under the laws of its jurisdiction of incorporation, with corporate or
other legal power and authority to own its properties and conduct its
business as described in the Registration Statement and the Prospectus, and
is duly qualified as a foreign corporation or other
<PAGE>
-10-
business organization for the transaction of business and is in good
standing under the laws of each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires it to be so
qualified, except to the extent that the failure to be so qualified or be
in good standing could not, singly or in the aggregate, reasonably be
expected to have a Material Adverse Effect; and all the outstanding shares
of capital stock of each Subsidiary have been duly authorized and validly
issued, are fully paid and non-assessable, are not subject to any
preemptive or similar rights and are owned by the Company, directly or
indirectly, free and clear of all liens, encumbrances, security interests
and claims and restrictions on transferability and voting (other than any
restrictions on transferability as may arise under applicable securities
laws);
(j) this Agreement has been duly and validly authorized, executed and
delivered by the Company;
(k) the Company has the authorized, issued and outstanding
capitalization set forth in the Prospectus under the heading
"Capitalization;" the authorized capital stock of the Company conforms to
the description thereof set forth in the Registration Statement and the
Prospectus, and all of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid and
non-assessable and are not subject to any preemptive or similar rights; the
Rights Agreement has been duly and validly authorized, executed and
delivered by the Company; the Rights outstanding under the Rights Agreement
and to be issued upon issuance of the Shares have been duly authorized; the
Series A Preferred Stock to be issued upon exercise of the Rights has been
duly authorized; the description of the Rights and the Rights Agreement set
forth in the Registration Statement and the Prospectus is accurate in all
material respects; and, except as set forth in the Registration Statement
and the Prospectus, there are no outstanding (i) securities or other
obligations convertible into or exchangeable or exercisable for any shares
of capital stock, or other interest in, the Company or any Subsidiary, (ii)
rights, warrants or options to acquire or purchase any shares of capital
stock of, or other interest in, the Company or any Subsidiary or any such
convertible, exchangeable or exercisable securities or obligations, or
(iii) obligations or understandings to issue or sell any shares of capital
stock of, or other interests in, the Company, any such convertible,
exchangeable or exercisable securities or obligations, or any such
warrants, rights or options;
<PAGE>
-11-
(l) there are no partnerships in which the Company or any of the
Subsidiaries has any direct or indirect controlling interest that would
constitute a "significant subsidiary" within the meaning of Rule 1-02 of
Regulation S-X under the Exchange Act; and, except for the capital stock of
the Subsidiaries and except as set forth in the Registration Statement and
the Prospectus, neither the Company nor any Subsidiary owns, directly or
indirectly, any shares of capital stock or any long-term debt securities or
have any equity interest in any firm, partnership, joint venture or other
entity;
(m) all corporate action required to be taken for the authorization,
issuance and sale of the Shares pursuant to this Agreement has been validly
and sufficiently taken by the Company; the Shares to be issued and sold by
the Company hereunder have been duly authorized for issuance and sale to
the Underwriters pursuant to this Agreement, and, when issued and delivered
by the Company to the Underwriters pursuant to this Agreement against
payment by the Underwriters of the purchase price therefore in accordance
with the terms of this Agreement, will be validly issued, will be fully
paid and non-assessable, will not be subject to any preemptive or similar
rights and will conform to the description thereof in the Prospectus; no
holder of Shares will be subject to personal liability solely by reason of
being such a holder;
(n) the statistical and market-related data included or incorporated
by reference in the Registration Statement and the Prospectus are based on
or derived from sources which are reliable and accurate;
(o) except for compensation to be paid to the Underwriters in
accordance with this Agreement, the Company knows of no outstanding claims
for services, either in the nature of a finder's fee or origination fee,
with respect to any of the transactions contemplated hereby;
(p) the execution and delivery by the Company of, and the full and
timely performance by the Company of its obligations under, this Agreement,
and the consummation of each of the transactions contemplated herein
(including, without limitation, the issuance, sale and delivery of the
Shares), (i) do not and will not result in any violation of the articles of
incorporation or by-laws of the Company and (ii) do not and will not
conflict with, or result in a breach or violation of, any of the terms or
provisions of, or constitute a default (or an event which, with notice or
lapse
<PAGE>
-12-
of time, or both, would constitute a default) under, or give rise to any
right to accelerate the maturity or require the prepayment of any
indebtedness under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary under (1) any indenture, mortgage, loan agreement, note, lease,
partnership agreement, franchise agreement or other agreement or instrument
to which the Company or any Subsidiary is a party or by which any of them
may be bound or affected or to which any of their respective properties or
assets may be subject (each, a "Contract" and collectively, the
--------
"Contracts"), other than such conflict, breach, default, acceleration,
---------
prepayment, lien, charge or encumbrance that could not, individually or in
the aggregate, reasonably be expected to result in any Material Adverse
Effect, (2) any applicable law, rule or regulation (other than the
securities or Blue Sky laws of the various states of the United States of
America) or (3) any judgment, order or decree of any government,
governmental or regulatory instrumentality, agency or body or court,
domestic or foreign, or any arbitrator having jurisdiction over the Company
or any Subsidiary or any of their respective properties or assets;
(q) no authorization, approval, consent or license of, or filing
with, any government, governmental or regulatory instrumentality, agency or
body or court, domestic or foreign (other than as have been made and
obtained and are in full force and effect under the Securities Act or as
may be required under the securities or Blue Sky laws of the various states
of the United States of America), is required for the valid authorization,
issuance, sale and delivery of the Shares by the Company or the full and
timely performance by the Company of each of its obligations under this
Agreement;
(r) neither the Company nor any Subsidiary (i) is in violation of its
articles of incorporation, by-laws or other organizational documents or
(ii) is or with the giving of notice or lapse of time or both would be in
violation of, or in breach of or in default under or in the performance or
observance of, any obligation, agreement, covenant or condition contained
in this Agreement or any Contract or of any judgment, order, decree, law,
rule or regulation applicable to the Company or any Subsidiary, except for
such violations, breaches or defaults that could not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect;
<PAGE>
-13-
(s) except as set forth in the Registration Statement and the
Prospectus, there is no action, suit or proceeding before or by any
government, governmental or regulatory instrumentality, agency or body or
court, domestic or foreign, or any arbitrator now pending or, to the
knowledge of the Company, threatened against or affecting the Company or
any Subsidiary or any affiliate of the Company that, singly or in the
aggregate with all such actions, suits and proceedings (i) could reasonably
be expected to have a Material Adverse Effect or could reasonably be
expected to have a material adverse effect on the consummation of the
transactions contemplated by this Agreement or (ii) is required to be
described in the Registration Statement or the Prospectus that is not so
described;
(t) there are no Contracts or other instruments that are required to
be described in the Registration Statement or the Prospectus or to be filed
or incorporated by reference as exhibits to the Registration Statement that
are not described, filed or incorporated as required;
(u) the Company is not an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended, or a holding company or a
subsidiary of a holding company under the Public Utility Holding Company
Act of 1935, as amended;
(v) the Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida);
(w) except as set forth in the Registration Statement and the
Prospectus, the Company and the Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances, security interests and defects except as could not reasonably
be expected to materially affect the value of such property and could not
reasonably be expected to interfere with the use made or proposed to be
made of such property by the Company and the Subsidiaries; and any real
property and buildings held under lease by the Company and the Subsidiaries
are held by them under valid, existing and enforceable leases with such
exceptions as could not reasonably be expected to interfere with the use
made or proposed to be made of such property and buildings by the Company
and the Subsidiaries;
<PAGE>
-14-
(x) each of the Company and the Subsidiaries owns, possesses or has
obtained all licenses, permits, certificates, consents, orders, approvals
and other authorizations from, and has made all declarations and filings
with, all federal, state, local and other governmental authorities
(including foreign regulatory agencies), all self-regulatory organizations
and all courts and other tribunals, domestic or foreign, necessary to own
or lease, as the case may be, and to operate its properties and to carry on
its business as conducted as of the date hereof, except in each case where
the failure to obtain licenses, permits, certificates, consents, orders,
approvals and other authorizations, or to make all declarations and
filings, could not, singly or in the aggregate, reasonably be expected to
have a Material Adverse Effect, and neither the Company nor any Subsidiary
has received any notice of any proceeding relating to revocation or
modification of any such license, permit, certificate, consent, order,
approval or other authorization, except as described in the Registration
Statement and the Prospectus and except, in each case, where such
revocation or modification could not, singly or in the aggregate,
reasonably be expected to have a Material Adverse Effect;
(y) each of the Company and the Subsidiaries owns or possesses the
patents, patent licenses, trademarks, service marks, trade names,
copyrights and know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures) (collectively, the "Intellectual Property") reasonably
---------------------
necessary to carry on the business conducted by each as described in the
Registration Statement and the Prospectus, except to the extent that the
failure to own or possess such Intellectual Property could not, singly or
in the aggregate, reasonably be expected to have a Material Adverse Effect,
and, except as set forth in the Registration Statement and the Prospectus,
neither the Company nor any Subsidiary has received any notice of
infringement of or conflict with asserted rights of others with respect to
any Intellectual Property, except for notices the content of which, if
accurate, could not, singly or in the aggregate, reasonably be expected to
have a Material Adverse Effect;
(z) there are no labor disputes with the employees of the Company or
any of the Subsidiaries that could, singly or in the aggregate, reasonably
be expected to to have a Material Adverse Effect;
<PAGE>
-15-
(aa) no holder of any securities of the Company has any rights, not
effectively satisfied or waived, to require the Company to register the
sale of any securities under the Securities Act in connection with the
filing of the Registration Statement or the consummation of the
transactions contemplated therein or pursuant to this Agreement;
(bb) the Company and the Subsidiaries are in compliance with any and
all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health or the environment or imposing
liability or standards of conduct concerning any Hazardous Material (as
hereinafter defined) (collectively, "Environmental Laws"), except where
------------------
such noncompliance with Environmental Laws could not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect. The
term "Hazardous Material" means (i) any "hazardous substance" as defined by
------------------
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, (ii) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (iii) any petroleum and
petroleum-based product, (iv) any polychlorinated biphenyl, and (v) any
pollutant or contaminant or hazardous, dangerous, or toxic chemical,
material, waste or substance regulated under or within the meaning of any
other law, rule or regulation;
(cc) except as set forth in the Registration Statement and the
Prospectus, no authorization, approval or consent of any governmental
authority or agency is required (other than those which have already been
obtained) under the laws of any jurisdiction in which the Company or any of
the Subsidiaries conduct their respective businesses in connection with the
ownership by the Company or any Subsidiary of capital stock of any
Subsidiary, any foreign exchange controls or the repatriation of any amount
from or to the Company and the Subsidiaries, except to the extent that the
failure to obtain such authorization, approval or consent could not, singly
or in the aggregate, reasonably be expected to have a Material Adverse
Effect;
(dd) the Company has not taken and will not take, directly or
indirectly, any action designed to, or that might be reasonably expected
to, cause or result in stabilization or manipulation of the price of the
Common Stock, and the Company has not distributed and will not distribute
any prospectus or other offering material in connection with the offering
and sale of the Shares other than any preliminary
<PAGE>
-16-
prospectus filed with the Commission or the Prospectus or other materials
permitted under the Securities Act;
(ee) the Company and the Subsidiaries have filed all federal, state,
local and foreign tax returns which have been required to be filed and have
paid all taxes shown thereon and all assessments received by them or any of
them to the extent that such taxes have become due and are not being
contested in good faith, except for such filings and payments the failure
to timely make or contest could not, singly or in the aggregate, reasonably
be expected to have a Material Adverse Effect; and, except as disclosed in
the Registration Statement and the Prospectus, there is no tax deficiency
which has been or might reasonably be expected to be asserted or threatened
against the Company or any Subsidiary which could, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect;
(ff) the Company and the offering of the Shares contemplated hereby
meet all conditions and requirements for registration on a Form S-3
registration statement under the Securities Act; and
(gg) the Company has delivered to the Underwriters written
agreements, in form and substance satisfactory to the Underwriters, of each
of its directors and executive officers and each of [ ], pursuant
to which each has agreed not to, directly or indirectly, offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock, any
options, warrants or other rights to purchase Common Stock or any
securities exercisable or exchangeable for or convertible into Common Stock
for a period of 120 days after the date of the Prospectus without the prior
written consent of J.P. Morgan Securities Inc.
5. The Company covenants and agrees with each Underwriter as
follows:
(a) to use its best efforts to cause the Registration Statement (if
the Registration Statement shall not have been declared effective prior to
the effective time hereof) and any amendment to the Registration Statement
to become effective at the earliest possible time and, if required, subject
to clause (c) of this Section 5, to file the Prospectus with the Commission
within the time periods specified by Rule 424(b) and Rule 430A under the
Securities Act;
<PAGE>
-17-
(b) to deliver, at the expense of the Company, (i) to each
Representative and to Cahill Gordon & Reindel, counsel for the
Underwriters, a signed copy of the Registration Statement (as originally
filed) and each amendment thereto, in each case including exhibits and all
documents incorporated by reference therein, (ii) to each other Underwriter
a conformed copy of the Registration Statement (as originally filed) and
each amendment thereto, in each case without exhibits but including the
documents incorporated by reference therein and (iii) to each of the
Underwriters, upon request, as many copies of the Prospectus (including all
amendments and supplements thereto and documents incorporated by reference
therein) as the Representatives may reasonably request;
(c) to give the Underwriters prompt notice of the Company's intention
to file any Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus and, before filing any Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus,
whether before or after the time the Registration Statement becomes
effective under the Securities Act, to furnish to each Representative and
counsel for the Underwriters a copy of the proposed Prospectus, amendment
or supplement for review and not to file any such proposed Prospectus,
amendment or supplement to which the Representatives reasonably object;
(d) to advise the Representatives and counsel for the Underwriters
promptly, and to confirm such advice in writing, (i) when the Registration
Statement shall become effective under the Securities Act, (ii) when any
amendment to the Registration Statement shall have become effective under
the Securities Act, (iii) when the Prospectus or any amendment or
supplement thereto shall have been filed with the Commission (iv) of the
receipt of any comments from the Commission with respect to the
Registration Statement or the Prospectus or any amendment or supplement
thereto or of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or
for any additional information, (v) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
of or any order preventing or suspending the use of any Prospectus or the
initiation or threatening of any proceeding for any such purpose, and (vi)
of the receipt by the Company of any order or notification with respect to
any suspension of the qualification of the Shares for offer and sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; and to use its best efforts to prevent the issuance of any
<PAGE>
-18-
such order or notification and, if issued, to obtain as soon as possible
the withdrawal thereof;
(e) if, during such period of time as in the opinion of counsel for
the Underwriters a prospectus relating to the Shares is required by law to
be delivered in connection with sales by an Underwriter or any dealer, any
event shall occur, information shall become known or condition exist as a
result of which it is necessary or advisable to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if it is necessary or advisable to amend or supplement the
Prospectus to comply with law, forthwith, at the sole expense of the
Company, to prepare, and, subject to Section 5(c) above, file with the
Commission and furnish, at the sole expense of the Company, to the
Underwriters and to the dealers (whose names and addresses the
Representatives will furnish to the Company) to which Shares may have been
sold by the Underwriters and any other dealers upon request such amendments
or supplements to the Prospectus as may be necessary so that the statements
in the Prospectus as so amended or supplemented will not, in the light of
the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus will comply with law;
(f) to use its best efforts to register or qualify the Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions
as the Representatives shall request and to continue such registration or
qualification in effect so long as required for distribution of the Shares
and to pay all fees and expenses (including fees and disbursements of
counsel for the Underwriters) incurred in connection with such
qualification;
(g) to make generally available to its security holders and to the
Representatives as soon as practicable, but not later than 15 months after
the effectiveness of the Registration Statement, an earnings statement
covering a period of at least twelve months beginning with the first fiscal
quarter of the Company occurring after the effective date of the
Registration Statement (as such effective date is determined pursuant to
Rule 158 under the Securities Act), which shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 of the Commission
promulgated thereunder;
<PAGE>
-19-
(h) for a period of five years from the date hereof, to furnish to
the Representatives copies of all reports or other communications
(financial or other) furnished to holders of the Common Stock, and copies
of any reports and financial statements furnished to or filed with the
Commission, the National Association of Securities Dealers, Inc. ("NASD")
----
or any national securities exchange;
(i) for a period of 120 days after the date of the Prospectus, not to
directly or indirectly issue, offer, sell, contract to sell, or otherwise
dispose of any shares of Common Stock, any options, warrants or other
rights to purchase Common Stock or any securities exercisable or
exchangeable for or convertible into Common Stock without the prior written
consent of J.P. Morgan Securities Inc., other than (i) the Shares to be
sold hereunder, (ii) options to acquire Common Stock, and shares of Common
Stock issued upon the exercise of options, granted under existing employee
benefit plans as in effect on the date hereof and (iii) shares of Common
Stock issued upon the exercise, exchange or conversion of the securities
listed on Schedule III hereto;
------------
(j) whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated or shall not become effective,
to pay all costs and expenses incident or relating to the performance of
the Company's obligations hereunder, including, without limiting the
generality of the foregoing, all costs and expenses (i) incurred in
connection with the preparation, issuance, execution and delivery of the
Shares, (ii) incurred in connection with the preparation, printing and
filing under the Securities Act of the Registration Statement, any
preliminary prospectus and the Prospectus (including in each case all
exhibits, amendments and supplements thereto and all documents incorporated
therein by reference), (iii) incurred in connection with the registration
or qualification of the Shares under the securities or Blue Sky laws of
such jurisdictions as the Representatives may request (including filing
fees and the fees of counsel for the Underwriters and their disbursements),
(iv) in connection with the listing of the Shares on the New York Stock
Exchange and the Philadelphia Stock Exchange, (v) relating to any filing
with the NASD in connection with the offering of the Shares, (vi) incurred
in connection with the engagement of any qualified independent underwriter
as may be required by NASD rules and regulations, (vii) incurred in
connection with advertising relating to the Shares approved by the Company
(which approval shall not be unreasonably withheld or delayed), (viii)
relating to the fees and expenses of the
<PAGE>
-20-
transfer agent and registrar for the Shares and (x) relating to or in
connection with the printing (including word processing and duplication
costs) and delivery of this Agreement, the agreement among underwriters,
each other document or instrument relating to the underwriting arrangements
and the coordination of the offering of the Shares by the Underwriters, any
dealer agreements, the preliminary and supplemental Blue Sky memoranda and
the furnishing to the Underwriters and dealers of copies of the
Registration Statement and the Prospectus, including mailing and shipping,
as herein provided;
(k) to use the net proceeds of the offering of the Shares as set
forth in the Prospectus under the heading "Use of Proceeds;"
(l) during the period when the Prospectus is required to be delivered
under the Securities Act or the Exchange Act, to file all documents
required to be filed with the Commission pursuant to Section 13, 14 or 15
of the Exchange Act within the time period required by the Exchange Act;
(m) to use its best efforts to effect the approval for trading of the
Shares on the New York Stock Exchange and the Philadelphia Stock Exchange;
and
(n) to deliver copies of the Prospectus to such place or places as
shall be designated by the Representatives not later than 1:00 p.m., New
York City time, on the day after the date hereof.
6. The several obligations of the Underwriters hereunder to purchase
the Underwritten Shares are subject to the performance by the Company of its
obligations hereunder and to the following additional conditions:
(a) the Registration Statement shall have become effective (or if a
post-effective amendment to the Registration Statement is required to be
filed under the Securities Act, such post-effective amendment shall have
become effective) not later than 5:00 P.M., New York City time, on the date
hereof; the Company shall have filed, if required, the Prospectus with the
Commission within the time periods and in the manner specified by Rule
424(b) and Rule 430A under the Securities Act; and all requests for
additional information by the Commission shall have been complied with to
the satisfaction of the Representatives;
<PAGE>
-21-
(b) the representations and warranties of the Company contained herein
shall be true and correct on and as of the Closing Date as if made on and
as of the Closing Date and the Company shall have complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to the Closing Date;
(c) subsequent to the execution and delivery of this Agreement, there
shall not have occurred or become known any Material Adverse Change,
otherwise than as set forth in the Prospectus, the effect of which, in the
judgment of the Representatives, makes it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares on the terms
and in the manner contemplated in the Prospectus (as used in this Section
6(c) "Prospectus" shall mean the Prospectus first used to confirm sales of
the Shares, exclusive of any amendment or supplement thereto thereafter);
(d) the Representatives shall have received on and as of the Closing
Date a certificate of an executive officer of the Company satisfactory to
the Representatives to the effect set forth in subsections (a) and (b) of
this Section 6 and to the further effect that, since the most recent date
as of which information is given in the Prospectus, there shall not have
occurred any Material Adverse Change (as used in this Section 6(d)
"Prospectus" shall mean the Prospectus first used to confirm sales of the
Shares, exclusive of any amendment or supplement thereto thereafter);
(e) Klehr, Harrison, Harvey, Branzburg & Ellers, counsel for the
Company, shall have delivered to the Representatives its signed written
opinion, dated the Closing Date, addressed to the Underwriters, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Registration Statement
and the Prospectus;
(ii) this Agreement has been duly and validly authorized,
executed and delivered by the Company;
(iii) the Shares have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued
and delivered by the Company
<PAGE>
-22-
to the Underwriters pursuant to this Agreement against payment by the
Underwriters of the purchase price therefor in accordance with the
terms of this Agreement, will be validly issued and will be fully paid
and non-assessable;
(iv) the number of authorized shares of capital stock of the
Company is as set forth in the Prospectus under the heading
"Capitalization" and the authorized capital stock of the Company
conforms as to legal matters in all material respects to the
description thereof contained in the Prospectus;
(v) the issuance of the Shares is not subject to preemptive
rights arising by operation of law or under the articles of
incorporation or by-laws of the Company; and no holder of the Shares
will be subject to personal liability solely by reason of being such a
holder;
(vi) there is no action, suit or proceeding before or by any
government, governmental or regulatory instrumentality, agency or body
or court, domestic or foreign, or any arbitrator now pending or, to
the knowledge of such counsel, threatened against or affecting the
Company or any Subsidiary or any affiliate of the Company that is
required to be disclosed in the Registration Statement or the
Prospectus that is not disclosed therein as required;
(vii) the execution and delivery by the Company of, and the
full and timely performance by the Company of its obligations under,
this Agreement, and the consummation of each of the transactions
contemplated herein (including, without limitation, the issuance, sale
and delivery of the Shares), (i) do not and will not result in any
violation of the articles of incorporation or by-laws of the Company
and (ii) do not and will not conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute a
default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, or give rise to any right to
accelerate the maturity or require the prepayment of any indebtedness
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any
Subsidiary under (1) any Contract, other than such conflict, breach,
default, acceleration, prepayment, lien, charge or encumbrance that
could not, individually
<PAGE>
-23-
or in the aggregate, reasonably be expected to result in any Material
Adverse Effect, (2) any applicable law, rule or regulation (other than
the securities or Blue Sky laws of the various states of the United
States of America) or (3) any judgment, order or decree of any
government, governmental or regulatory instrumentality, agency or body
or court, domestic or foreign, or any arbitrator having jurisdiction
over the Company or any Subsidiary or any of their respective
properties or assets;
(viii) no authorization, approval, consent or license of, or
filing with, any government, governmental instrumentality, agency or
body or court, domestic or foreign (other than as have been made and
obtained and are in full force and effect under the Securities Act or
as may be required under the securities or Blue Sky laws of the
various states of the United States of America), is required for the
valid authorization, issuance, sale and delivery of the Shares by the
Company or the full and timely performance by the Company of each of
its obligations under this Agreement;
(ix) the statements in the Prospectus under the headings
"Description of Capital Stock" and "Underwriting" and in the
Registration Statement in Item 15, insofar as such statements purport
to summarize certain legal matters, documents or proceedings, fairly
present in all material respects such legal matters, documents or
proceedings; and
(x) each document incorporated by reference or deemed to be
incorporated by reference in the Registration Statement and the
Prospectus (except for the financial statements, schedules and other
financial and statistical data included therein, as to which such
counsel need express no opinion) complies as to form in all material
respects with the requirements of the Exchange Act;
(xi) no holder of any securities of the Company has any
rights, not effectively satisfied or waived, to require the Company to
register the sale of any securities under the Securities Act in
connection with the filing of the Registration Statement or the
consummation of the transactions contemplated therein or pursuant to
this Agreement;
<PAGE>
-24-
(xii) the Registration Statement and the Prospectus and all
amendments and supplements thereto (except for the financial
statements, schedules and other financial and statistical data
included or incorporated by reference in the Registration Statement
and the Prospectus, as to which counsel need express no opinion)
comply as to form in all material respects with the requirements of
the Securities Act;
(xiii) the Company is not an "investment company" or an
entity "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended, or a
holding company or a subsidiary of a holding company under the Public
Utility Holding Company Act of 1935, as amended;
(xiv) the Registration Statement has become effective under
the Securities Act; all required filings of the Prospectus pursuant to
Rule 424(b) under the Securities Act have been made in the manner and
within the time periods specified by Rule 424(b) and Rule 430A under
the Securities Act; and no stop order suspending the effectiveness of
the Registration Statement or order preventing or suspending the use
of the Prospectus has been issued and no proceeding for any such
purpose has been instituted or, to such counsel's knowledge,
threatened by the Commission under the Securities Act;
in addition, such counsel shall also include a statement to the
effect that nothing has come to the attention of such counsel which
leads such counsel to believe that (i) the Registration Statement
(other than the financial statements and schedules and other financial
and statistical data included or incorporated by reference therein, as
to which such counsel need make no statement nor opinion), when it
became effective, contained or, as of the date such opinion is
delivered, contains any untrue statement of a material fact or omitted
or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) the
Prospectus (other than the financial statements and schedules and
other financial and statistical data included and incorporated by
reference therein, as to which such counsel need make no statement nor
opinion) as of its date contained or, as of the date such opinion is
delivered, contains any untrue statement of a material fact or omitted
or omits to state a material fact necessary in order to make the
<PAGE>
-25-
statements therein, in the light of the circumstances under which they
were made, not misleading;
in rendering such opinions, such counsel may rely (i) as to
matters involving the application of laws other than the laws of the
United States, the Commonwealth of Pennsylvania and the State of New
York and the General Corporation Law of the State of Delaware, to the
extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (reasonably
satisfactory to counsel for the Underwriters) of other counsel
reasonably acceptable to counsel for the Underwriters, familiar with
the applicable laws; and (ii) as to matters of fact, to the extent
such counsel deems proper, on certificates of responsible officers of
the Company and the Subsidiaries and certificates or other written
statements of officials of jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company;
the opinion of such counsel for the Company shall state that the
opinion of any such other counsel is in form satisfactory to such
counsel and, in such counsel's opinion, the Underwriters and they are
justified in relying thereon;
(f) Brian Sisko, Esq., Vice President and General Counsel to the
Company, shall have delivered to the Representatives his signed written
opinion, dated the Closing Date, addressed to the Underwriters, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Registration Statement
and the Prospectus;
(ii) the Company is duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws
of each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires it to be so qualified,
except to the extent that the failure to be so qualified or be in good
standing could not, singly or in the aggregate, reasonably be expected
to have a Material Adverse Effect;
<PAGE>
-26-
(iii) each of the Subsidiaries has been duly incorporated or
organized and is validly existing as a corporation or other business
organization under the laws of its jurisdiction of incorporation, with
corporate or other legal power and authority to own its properties
and conduct its business as described in the Registration Statement
and the Prospectus;
(iv) each of the Subsidiaries has been duly qualified as a
foreign corporation or other business organization for the transaction
of business and is in good standing under the laws of each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires it to be so qualified, except to the
extent that the failure to be so qualified or be in good standing
could not, singly or in the aggregate, reasonably be expected to have
a Material Adverse Effect;
(v) all of the outstanding shares of capital stock of each
Subsidiary have been duly authorized and validly issued, are fully
paid and non-assessable, are not subject to any preemptive or similar
rights and are owned by the Company, directly or indirectly, free and
clear of all liens, encumbrances, security interests and claims and
restrictions on transferability and voting (other than any
restrictions on transferability as may arise under applicable
securities laws);
(vi) this Agreement has been duly and validly authorized,
executed and delivered by the Company;
(vii) the Shares have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued
and delivered by the Company to the Underwriters pursuant to this
Agreement against payment by the Underwriters of the purchase price
therefor in accordance with the terms of this Agreement, will be
validly issued, and will be fully paid and non-assessable;
(viii) the number of authorized shares of capital stock of
the Company is as set forth in the Prospectus under the heading
"Capitalization" and the authorized capital stock of the Company
conforms as to legal matters in all material respect to the
description thereof contained in the Prospectus;
<PAGE>
-27-
(ix) the issuance of the Shares is not subject to preemptive
rights arising by operation of law or under the articles of
incorporation or by-laws of the Company; and no holder of the Shares
will be subject to personal liability solely by reason of being such a
holder;
(x) all of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid
and non-assessable and are not subject to any preemptive or similar
rights; the Rights Agreement has been duly and validly authorized,
executed and delivered by the Company; the Rights outstanding under
the Rights Agreement and to be issued upon issuance of the Shares have
been duly authorized; the Series A Preferred Stock to be issued upon
exercise of the Rights has been duly authorized; and the description
of the Rights and the Rights Agreement set forth in the Registration
Statement and the Prospectus is accurate in all material respects;
(xi) there is no action, suit or proceeding before or by any
government, governmental or regulatory instrumentality, agency or body
or court, domestic or foreign, or any arbitrator now pending or, to
the knowledge of such counsel, threatened against or affecting the
Company or any Subsidiary or any affiliate of the Company that is
required to be disclosed in the Registration Statement or the
Prospectus that is not disclosed therein as required;
(xii) the execution and delivery by the Company of, and the
full and timely performance by the Company of its obligations under,
this Agreement, and the consummation of each of the transactions
contemplated herein (including, without limitation, the issuance, sale
and delivery of the Shares), (i) do not and will not result in any
violation of the articles of incorporation or by-laws of the Company
and (ii) do not and will not conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute a
default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, or give rise to any right to
accelerate the maturity or require the prepayment of any indebtedness
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any
Subsidiary under (1) any Contract, other than such conflict, breach,
default, acceleration, prepayment,
<PAGE>
-28-
lien, charge or encumbrance that could not, individually or in the
aggregate, reasonably be expected to result in any Material Adverse
Effect, (2) any applicable law, rule or regulation (other than the
securities or Blue Sky laws of the various states of the United States
of America) or (3) any judgment, order or decree of any government,
governmental or regulatory instrumentality, agency or body or court,
domestic or foreign, or any arbitrator having jurisdiction over the
Company or any Subsidiary or any of their respective properties or
assets;
(xiii) no authorization, approval, consent or license of, or
filing with, any government, governmental or regulatory
instrumentality, agency or body or court, domestic or foreign (other
than as have been made and obtained and are in full force and effect
under the Securities Act or as may be required under the securities or
Blue Sky laws of the various states of the United States of America),
is required for the valid authorization, issuance, sale and delivery
of the Shares by the Company or the full and timely performance by the
Company of each of its obligations under this Agreement;
(xiv) each document incorporated by reference or deemed to
be incorporated by reference in the Registration Statement and the
Prospectus (except for the financial statements, schedules and other
financial and statistical data included therein, as to which such
counsel need express no opinion) complies as to form in all material
respects with the requirements of the Exchange Act;
(xv) there are no Contracts or other instruments that are
required to be described in the Registration Statement or the
Prospectus or to be filed or incorporated by reference as exhibits to
the Registration Statement that are not described, filed or
incorporated as required; and
(xvi) no holder of any securities of the Company has any
rights, not effectively satisfied or waived, to require the Company to
register the sale of any securities under the Securities Act in
connection with the filing of the Registration Statement or the
consummation of the transactions contemplated therein or pursuant to
this Agreement;
<PAGE>
-29-
in addition, such counsel shall also include a statement to the
effect that nothing has come to the attention of such counsel which
leads such counsel to believe that (i) the Registration Statement
(other than the financial statements and schedules and other financial
and statistical data included or incorporated by reference therein, as
to which such counsel need make no statement nor opinion), when it
became effective, contained or, as of the date such opinion is
delivered, contains any untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) the
Prospectus (other than the financial statements and schedules and
other financial and statistical data included or incorporated by
reference therein, as to which such counsel need make no statement nor
opinion) as of its date contained or, as of the date such opinion is
delivered, contains any untrue statement of a material fact or omitted
or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
in rendering such opinions, such counsel may rely (i) as to
matters involving the application of laws other than the laws of the
United States, the Commonwealth of Pennsylvania and the State of New
York and the General Corporation Law of the State of Delaware, to the
extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (reasonably
satisfactory to counsel for the Underwriters) of other counsel
reasonably acceptable to counsel for the Underwriters, familiar with
the applicable laws; and (ii) as to matters of fact, to the extent
such counsel deems proper, on certificates of responsible officers of
the Company and the Subsidiaries and certificates or other written
statements of officials of jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company and
the Subsidiaries; the opinion of such counsel shall state that the
opinion of any such other counsel is in form satisfactory to such
counsel and, in such counsel's opinion, the Underwriters and they are
justified in relying thereon;
(g) at the time this Agreement is executed and also on the Closing
Date, each of Ernst & Young L.L.P. and Deloitte & Touche, L.L.P. shall have
furnished to the Representatives signed letters, dated the respective dates
of delivery
<PAGE>
-30-
thereof, addressed to the Underwriters, in form and substance satisfactory
to the Representatives, containing statements and information of the type
customarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information
included or incorporated by reference in the Registration Statement and the
Prospectus;
(h) the Representatives shall have received on and as of the Closing
Date a favorable opinion of Cahill Gordon & Reindel, counsel for the
Underwriters, with respect to the due authorization and valid issuance of
the Shares, the Registration Statement, the Prospectus and other related
matters as the Representatives may reasonably request, and such counsel
shall have received such papers and information as it may reasonably
request to enable it to pass upon such matters;
(i) the Shares shall have been approved for trading on the New York
Stock Exchange and the Philadelphia Stock Exchange; and
(j) on or prior to the Closing Date, the Company shall have furnished
to the Representatives such further certificates and documents as the
Representatives shall reasonably request.
The several obligations of the Underwriters to purchase Option Shares hereunder
are subject to satisfaction of the conditions set forth in paragraphs (a)
through (j) above on and as of the applicable Additional Closing Date, except
that the certificate called for by paragraph (d) above, the opinions called for
by paragraphs (e), (f) and (h) above and the letters called for by paragraph (g)
above shall be dated as of, and delivered on, the applicable Additional Closing
Date.
7. The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act from and against any and all losses, claims, damages and liabilities
(including, without limitation, the legal fees and other expenses incurred in
connection with defending or investigating any suit, action or proceeding or any
claim asserted) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by
<PAGE>
-31-
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by such Underwriter through the
Representatives expressly for use in the Registration Statement, the Prospectus,
any amendment or supplement thereto, or any preliminary prospectus.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
from and against any and all losses, claims, damages and liabilities (including,
without limitation, the legal fees and other expenses incurred in connection
with defending or investigating any suit, action or proceeding or any claim
asserted) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only with
reference to information relating to such Underwriter furnished to the Company
in writing by such Underwriter through the Representatives expressly for use in
the Registration Statement, the Prospectus, any amendment or supplement thereto,
or any preliminary prospectus. For purposes of this Section 7 and clauses (a),
(b) and (c) of Section 4, the only written information furnished by the
Underwriters to the Company expressly for use in the Registration Statement and
the Prospectus is the information in the last paragraph on the cover page of the
Prospectus and the [third] paragraph under the heading "Underwriting" in the
Prospectus.
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any person in respect of which indemnity may be sought pursuant to either of the
two preceding paragraphs of this Section 7, such person (hereinafter called the
"Indemnified Person") shall promptly notify the person against whom such
------------------
indemnity may be sought (hereinafter called the "Indemnifying Person") in
-------------------
writing, and the Indemnifying Person, upon request of the Indemnified Person,
shall promptly retain counsel satisfactory to the Indemnified Person to
represent the Indemnified Person and
<PAGE>
-32-
any others the Indemnifying Person may designate in such proceeding and shall
pay the fees and expenses of such counsel related to such proceeding. In any
such proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person unless (a) the Indemnifying Person and the Indemnified
Person shall have mutually agreed to the contrary, (b) there has been a failure
by the Indemnifying Person to promptly retain counsel reasonably satisfactory to
the Indemnified Person or (c) the named parties to any such proceeding
(including any impleaded parties) include both the Indemnifying Person and the
Indemnified Person and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
It is understood that the Indemnifying Person shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for (i)
the fees and expenses of more than one separate firm (in addition to any local
counsel) for all Underwriters and all persons, if any, who control any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act and (ii) the fees and expenses of more than one
separate firm (in addition to any local counsel) for the Company, its directors,
its officers who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either such Section, and that all
such fees and expenses shall be reimbursed as they are incurred. Any such
separate firm for the Underwriters and such control persons of Underwriters
shall be designated in writing by J.P. Morgan Securities Inc. Any such separate
firm for the Company, its directors, its officers who sign the Registration
Statement and such control persons of the Company shall be designated in writing
by the Company. The Indemnifying Person shall not be liable for any settlement
of any proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the Indemnifying
Person agrees to indemnify any Indemnified Person from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an Indemnified Person shall have requested an
Indemnifying Person to reimburse the Indemnified Person for fees and expenses of
counsel as contemplated by the third sentence of this paragraph, the
Indemnifying Person agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (1) such settlement is
entered into more than 30 days after receipt by such Indemnifying Person of the
aforesaid request and (2) such Indemnifying Person shall not have reimbursed the
Indemnified Person in accordance with such request prior to the date of such
settlement. No Indemnifying Person shall, without the prior written consent of
the Indemnified Person, effect any
<PAGE>
-33-
settlement of any pending or threatened proceeding in respect of which any
Indemnified Person is or could have been a party and indemnity could have been
sought hereunder by such Indemnified Person, unless such settlement (x) includes
an unconditional release of such Indemnified Person, in form and substance
satisfactory to such Indemnified Person, from all liability on claims that are
the subject matter of such proceeding and (y) does not include any statement as
to an admission of fault, culpability or failure to act by or on behalf of any
Indemnified Person.
If the indemnification provided for in the first or second paragraph
of this Section 7 is unavailable to any extent to an Indemnified Person under
such paragraph in respect of any losses, claims, damages or liabilities referred
to therein, then each Indemnifying Person under such paragraph, in lieu of
indemnifying such Indemnified Person thereunder, shall contribute to the amount
paid or payable by such Indemnified Person as a result of such losses, claims,
damages or liabilities as follows: as between the Company on the one hand and
the Underwriters on the other (a) in such proportion as is appropriate to
reflect the aggregate relative benefits received by the Company and by the
Underwriters from the offering of the Shares or (b) if the allocation provided
by clause (a) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (a)
above but also the relative fault of the Company and of the Underwriters in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by the Company and the total underwriting discounts
and the commissions received by the Underwriters, in each case as set forth in
the table on the cover of the Prospectus, bear to the aggregate public offering
price of the Shares. The relative fault of the Company on the one hand and the
Underwriters on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
--------
allocation (even if the Underwriters
<PAGE>
-34-
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
Indemnified Person as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses incurred
by such Indemnified Person in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 7, in no
event shall an Underwriter be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages that such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 7 are several in proportion
to the respective number of Shares set forth opposite their names in Schedule I
----------
hereto, and not joint.
The indemnity and contribution agreements contained in this Section 7
are in addition to any liability which the Indemnifying Persons may otherwise
have to the Indemnified Persons referred to above.
The indemnity and contribution agreements contained in this Section 7
and the representations and warranties of the Company set forth in this
Agreement shall remain operative and in full force and effect regardless of (a)
any termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or any person controlling any Underwriter or by or on behalf of
the Company, its officers or directors or any person controlling the Company and
(c) acceptance of and payment for any of the Shares.
8. Notwithstanding anything herein contained, this Agreement (or the
obligations of the several Underwriters with respect to the Option Shares) may
be terminated in the absolute discretion of the Representatives, by notice given
to the Company, if after the execution and delivery of this Agreement and prior
to the Closing Date (or, in the case of Option Shares, prior to the applicable
Additional Closing Date) (a) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the Nasdaq National Market,
<PAGE>
-35-
the American Stock Exchange or the Philadelphia Stock Exchange, (b) trading of
any securities of the Company shall have been suspended on any exchange or in
any over-the-counter market, (c) a general moratorium on commercial banking
activities in the State of New York shall have been declared by either Federal
or New York State authorities, or (d) there shall have occurred any outbreak or
escalation of hostilities or any change in financial markets or any calamity or
crisis that, in the judgment of the Representatives, is material and adverse and
which, in the judgment of the Representatives, makes it impracticable to market
the Shares on the terms and in the manner contemplated in the Prospectus.
9. This Agreement shall become effective upon the later of
(a) execution and delivery hereof by the parties hereto and (b) release of
notification of the effectiveness of the Registration Statement (or, if
applicable, any post-effective amendment) by the Commission.
If, on the Closing Date or an Additional Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
aggregate number of Shares which it or they have agreed to purchase hereunder on
such date, and the aggregate number of Shares which such defaulting Underwriter
or Underwriters agreed but failed or refused to purchase is not more than one-
tenth of the aggregate number of Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Shares set forth opposite their respective names in Schedule I hereto bears to
----------
the aggregate number of Underwritten Shares set forth opposite the names of all
such non-defaulting Underwriters, or in such other proportions as the
Representatives may specify, to purchase the aggregate number of Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase on such date; provided, however, that in no event shall the aggregate
-------- -------
number of Shares that any Underwriter has agreed to purchase pursuant to Section
1 be increased pursuant to this Section 9 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If, on
the Closing Date or an Additional Closing Date, as the case may be, any
Underwriter or Underwriters shall fail or refuse to purchase the aggregate
number of Shares which it or they have agreed to purchase hereunder on such
date, and the number of Shares with respect to which such default occurs is more
than one-tenth of the aggregate number of Shares to be purchased on such date,
and arrangements satisfactory to the Representatives and the Company for the
purchase of the aggregate number of Shares are not made within 36 hours after
such default, this Agreement (or the obligations of the several Underwriters to
purchase Option Shares, as the case may be) shall terminate without liability on
the part of any non-defaulting
<PAGE>
-36-
Underwriter or the Company. In any such case, either the Representatives or the
Company shall have the right to postpone the Closing Date (or, in the case of
Option Shares, the applicable Additional Closing Date), but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
10. If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company agrees to reimburse the Underwriters or such Underwriters
as have so terminated this Agreement with respect to themselves, severally, for
all out-of-pocket expenses (including the fees and expenses of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. This Agreement shall inure to the benefit of and be binding upon
the Company, the Underwriters, any controlling persons referred to herein and
their respective successors, assigns, heirs and legal representatives. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person, firm or corporation any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. No purchaser of Shares from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.
12. Any action by the Underwriters hereunder may be taken by the
Representatives jointly or by J.P. Morgan Securities Inc. alone on behalf of the
Underwriters, and any such action taken by the Representatives jointly or by
J.P. Morgan Securities alone shall be binding upon the Underwriters and the
Representatives. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Underwriters shall be
given to the Representatives c/o J.P. Morgan Securities Inc., 60 Wall Street,
New York, New York 10260 (facsimile: (212) 648-5790), Attention: Syndicate
Department. Notices to the Company shall be given to it at National Media
Corporation, 1700 Walnut Street, Philadelphia, PA 19103 (facsimile: ( ) -
), Attention: [ ].
<PAGE>
-37-
13. This Agreement may be signed in counterparts, each of which shall
be an original and all of which together shall constitute one and the same
instrument. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to the conflicts
of laws provisions thereof.
If the foregoing is in accordance with your understanding, please sign
and return four counterparts hereof.
Very truly yours,
NATIONAL MEDIA CORPORATION
By: ____________________________________________
Name:
Title:
Accepted: [ ], 1996
J.P. MORGAN SECURITIES INC.
TUCKER ANTHONY INCORPORATED
Acting severally on behalf of
themselves and the several
Underwriters listed in
Schedule I hereto.
----------
By: J.P. MORGAN SECURITIES INC.
Acting on behalf of itself and
the several Underwriters listed
in Schedule I hereto.
--------
By: ___________________________
Name:
Title:
<PAGE>
SCHEDULE I
Number of Underwritten
Underwriter Shares To Be Purchased
- ----------- ----------------------
J.P. Morgan Securities Inc.
Tucker Anthony Incorporated ________________
Total . . . . . . . . . . . . . . . . ================
<PAGE>
SCHEDULE II
Subsidiaries
------------
<PAGE>
SCHEDULE III
Outstanding Securities Exercisable,
Exchangeable or Convertible for or
into Common Stock
-----------------------------------
<PAGE>
EXHIBIT 5
[LETTERHEAD OF KLEHR, HARRISON, HARVEY, BRANZBURG AND ELLERS]
July 3, 1996
(215) 568-6060
National Media Corporation
1700 Walnut Street
9th Floor
Philadelphia, PA 19103
Gentlemen:
As counsel to National Media Corporation, a Delaware corporation (the
"Company"), we have assisted in the preparation of the Company's Registration
Statement on Form S-3 (File No. 333-06007)(the Registration Statement as amended
at the time it became effective being referred to as the "Registration
Statement") filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), covering 2,300,000
shares of the Company's common stock, par value $.01 per share (the "Common
Stock"), comprised of (i) 2,000,000 shares of Common Stock to be sold by the
Company (the "Shares") to the underwriters for whom J.P. Morgan & Co. and Tucker
Anthony Incorporated are acting as representatives (collectively, the
"Underwriters") and (ii) up to 300,000 shares of Common Stock (the "Optional
Shares") which the Underwriters will have a right to purchase from the Company
to cover over-allotments, if any.
<PAGE>
National Media Corporation
July 3, 1996
Page 2
In connection therewith, we have examined the originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Company's
Certificate of Incorporation and Bylaws, as amended through the date hereof;
(ii) minutes and resolutions of the Company's Board of Directors and
stockholders; (iii) certificates issued by public officials; and (iv) such other
documents and corporate records relating to the Company and the issuance and
sale of the Shares and Optional Shares as we have deemed necessary as a basis
for the opinion hereinafter set forth.
In our examination of the foregoing documents, we have assumed: (i) the
genuineness of all signatures on originals and certified copies of documents;
and (ii) the authenticity of all documents submitted to us as originals as well
as the conformity to the originals of all documents submitted to us as
photostatic copies. As to any fact material to our opinion, we have relied, to
the extent we deem such reliance proper, upon representations of officers of the
Company.
Based upon the foregoing, we are of the opinion that the Shares and the
Optional Shares to be sold to the Underwriters, when issued and sold in
accordance with and in the manner described in the plan of distribution set
forth in the Registration Statement, will be duly authorized, validly issued,
fully paid and non assessable.
We are members of the Bar of the Supreme Court of Pennsylvania and do not
opine as to the laws of any jurisdiction other than Pennsylvania and the General
Corporation Law of the State of Delaware; provided, however, that no opinion is
hereby rendered as to the state securities laws of either the Commonwealth of
Pennsylvania or the State of Delaware. We hereby consent to the reference to
our firm in the Registration Statement under the prospectus caption "Legal
Matters" and to the inclusion of this opinion as an exhibit to the Registration
Statement. In giving such consent, we do not admit hereby that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act, or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ Klehr, Harrision, Harvey, Branzburg
and Ellers
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
---------------------------
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the "Agreement") is
made effective the 26th day of June, 1996, by and between NATIONAL MEDIA
CORPORATION ("National Media"), QUANTUM NORTH AMERICA, INC., formerly known as
MEDIA ARTS INTERNATIONAL, LTD. ("Media Arts"). QUANTUM INTERNATIONAL LIMITED
("Quantum"), POSITIVE RESPONSE TELEVISION, INC., ("PRT"), DIRECTAMERICA
CORPORATION ("DAC") and MERIDIAN BANK ("Bank"). National Media, Media Arts,
Quantum, PRT and DAC are herein collectively referred to as the "Borrowers" and
each individually as a "Borrower". National Media, Media Arts and Quantum are
sometimes herein collectively referred to as the "Original Borrowers."
BACKGROUND
----------
A. By a Note and Warrant Purchase Agreement dated October 19, 1994, by
and between the Original Borrowers, as sellers, and Safeguard Scientifics
(Delaware), Inc. ("Safeguard"), as purchaser (the "Note and Warrant Purchase
Agreement"), National Media and certain of its Subsidiaries ("Media
Consolidated") agreed to issue and sell to Safeguard, inter alia, their Secured
----- ----
Subordinated Notes due September 30, 1999, in the original principal amount of
Five Million Dollars ($5,000,000.00) (the "Secured Subordinated Notes").
B. By a Purchase Agreement dated April 20, 1995, by and between Safeguard
and others, as holders of the Subordinated Secured Notes, and Bank (the
"Purchase Agreement"), Bank agreed to purchase from the holders, inter alia, all
----- ----
their right, title and interest in, to and under the Secured Subordinated Notes,
the Note Security Documents and the Note Pledge Documents, subject to the
Barclays Lien.
C. By a certain Loan and Security Agreement dated November 28, 1995 by
and between the Original Borrowers, (as amended, supplemented, replaced and
modified from time to time the "Existing Loan Agreement"), Bank extended to the
Original Borrowers a revolving line of credit and a foreign exchange contract
line, secured by all assets of the Original Borrowers and subject to the terms
and conditions set forth therein.
D. National Media has acquired all of the stock of PRT and DAC.
E. At Borrowers' request, Bank has agreed, inter alia, to (i) increase
----- ----
the amount of the existing line of credit to Twenty Million Dollars
($20,000,000.00), (ii) add PRT and DAC as Borrowers hereunder, and (ii) amend
certain covenants of Borrowers hereunder, all of which Bank is willing to do
upon and subject to the terms and conditions of this Agreement.
F. Capitalized terms not otherwise defined herein will have the meanings
set forth therefor in Section 16 of this Agreement.
----------
-1-
<PAGE>
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, and of any extensions of credit now or hereafter made to or for the
benefit of Borrowers by Bank, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. CONFIRMATION OF BACKGROUND. Borrowers hereby jointly and severally ratify,
--------------------------
confirm and acknowledge that the statements contained in the foregoing
Background are true and complete in all respects and that the Indebtedness
Documents are valid, binding and in full force and effect as of the date hereof
and fully enforceable against the Original Borrowers and their assets in
accordance with the terms thereof.
2. GENERAL ACKNOWLEDGEMENTS. Borrowers hereby acknowledge and agree that:
------------------------
(a) Except as expressly provided herein, neither this Agreement nor
any other agreement entered in connection herewith or pursuant to the terms
hereof shall be deemed or construed to be a compromise, satisfaction,
reinstatement, accord and satisfaction, novation or release of any of the
Indebtedness Documents, or any rights or obligations thereunder, or a waiver by
Bank of any of its rights under the Indebtedness Documents or at law or in
equity;
(b) All liens, security interests, rights and remedies granted to
the Bank in the Indebtedness Documents are hereby renewed, confirmed and
continued, and shall also secure the performance by Borrowers of their
respective obligations hereunder; and
(c) No Borrower has any defense, set-off, counterclaim or challenge
against the payment of any sums owing under the Indebtedness Documents, or the
enforcement of any of the terms or conditions thereof.
3. THE LINE; THE FOREIGN EXCHANGE CONTRACT LINE; USE OF PROCEEDS.
-------------------------------------------------------------
3.1. Line of Credit. Bank will establish for Borrowers for and during the
--------------
period from the date hereof and until September 30, 1997 (the "Contract
Period"), subject to the terms and conditions hereof, a revolving line of credit
(the "Line") pursuant to which Bank will from time to time make loans or other
extensions of credit to Borrowers in an aggregate amount not exceeding at any
time the Line Amount. Borrowers may borrow, repay (without penalty or premium
except with respect to LIBOR Loans) and reborrow under the Line. The Line shall
be subject to all terms and conditions set forth in all of the Loan Documents
which terms and conditions are incorporated herein. Borrowers' obligation to
repay the loans and extensions of credit under the Line shall be evidenced by
Borrowers' amended and restated promissory note (the "Line Note") in the face
amount of Twenty Million Dollars ($20,000,000.00), which shall be in the form
attached hereto as Exhibit "A", with the blanks appropriately filled in. The
-----------
Line may be renewed, at Bank's discretion, based upon Bank's review of
Borrowers' annual financial statements for the fiscal year ending March 31, 1997
and such other information available to Bank and/or which Bank reasonably
requests from Borrowers.
-2-
<PAGE>
3.2. Use of Proceeds. Borrowers agree to use advances under the Line for
---------------
proper working capital purposes, short-term borrowings, the acquisition of the
stock of the Prestige Group and other acquisitions permitted under Section 8.7
-----------
hereof and permitted Capital Expenditures.
3.3. Method of Advances. On any Business Day, Borrowers may request an
------------------
advance under the Line by delivering to the bank officer designated by Bank no
later than 11:00 a.m. Philadelphia time on the Business Day such advance is
requested to be funded such documentation as Bank may from time to time
reasonably require. Subject to the terms and conditions of this Agreement, Bank
shall make the proceeds of a cash advance available to Borrowers by crediting
such proceeds to Borrowers' deposit account with Bank. Such request may be by
telephone, unless Bank has advised Borrowers in writing that written requests
are required. Bank may require prompt written confirmation of any telephone
request and additional back-up documentation, from time to time. Each request
for an advance under the Line shall be conclusively presumed to be made by a
person authorized by Borrowers to do so.
In addition to the foregoing, Borrowers authorize Bank, without further
authorization or notice, to make advances under the Line into Borrowers'
operating account(s) with Bank. Such advances will be in amounts sufficient to
honor checks drawn on such account, provided that (a) the aggregate of such
advances plus the then outstanding principal balance under the Line does not
exceed the Line Amount, and (b) no Event of Default has occurred and is
continuing. Bank reserves the right not to honor any checks drawn on such
account, if such honor would result in the outstanding principal balance of the
Line exceeding the Line Amount, or if an Event of Default has occurred and is
continuing. All advances made by Bank into such account shall be deemed to be
Commercial Rate Loans under the Line. Such account arrangements may be
terminated by Bank at any time upon five (5) days' written notice.
3.4. Letters of Credit. Bank will issue for the account of Borrowers
-----------------
merchandise and standby letters of credit in form and content reasonably
satisfactory to Bank, at its sole discretion, with a term not to exceed the
earlier to occur of (a) one hundred twenty (120) days (for merchandise letters
of credit), (b) twelve (12) months (for standby letters of credit), or (c) the
expiration date of the Contract Period of the Line. Notwithstanding the
foregoing, at no time shall the principal balance of the Line, plus the
aggregate face amount of all outstanding letters of credit issued under the Line
exceed the Line Amount. Bank will issue letters of credit with a term expiring
after the expiration date of the Contract Period if Borrowers deposit with Bank,
at the time of issuance, cash collateral in an amount equal to the face value of
such letters of credit, plus all fees which will accrue thereunder.
Borrowers will execute a letter of credit application and letter of credit
agreement, and such other documents as may be reasonably required by Bank in
connection with the issuance of letters of credit hereunder. The outstanding
face amount of all letters of credit issued by Bank pursuant hereto will reduce
Borrowers' ability to borrow under the Line as if such face amount were an
advance under the Line. In the event that Bank pays any sums due pursuant to
such letters of credit for any reason, such payment shall be deemed to be an
advance under the Line repayable by Borrowers pursuant to the terms hereof.
-3-
<PAGE>
In the event that the Line is terminated for any reason or demand is made
thereunder, Borrowers will deposit with Bank an amount equal to the face amount
of all letters of credit then outstanding which have been issued hereunder, plus
all fees related thereto or to accrue thereunder. Such funds will be held by
Bank as cash or cash equivalents collateral to secure Borrowers' obligations
hereunder.
3.5. Foreign Exchange Contracts. As requested by Borrowers, Bank will
--------------------------
issue and/or rollover for the account of Borrowers foreign currency spot
contracts and foreign currency forward contracts with an aggregate Foreign
Exchange Contract Risk to the Bank not to exceed Ten Million Dollars
($10,000,000.00) in form and content reasonably satisfactory to Bank, in its
sole discretion.
Borrowers will execute such documentation as requested by Bank in
connection with the issuance and/or rollover of any foreign currency contract,
including, without limitation, that certain International Foreign Exchange
Master Agreement (the "Foreign Exchange Agreement").
The Bank retains the right to reject, in its sole discretion, any request
by Borrowers for the issuance or rollover of any foreign currency contract which
Bank deems imprudent."
4. INTEREST RATE.
-------------
4.1. Interest on the Line. Interest will accrue on cash advances under
--------------------
the Line from date of advance until final payment thereof at one or more of the
following rates as selected by Borrowers from time to time:
(a) National Commercial Rate. The National Commercial Rate in effect
------------------------
from time to time (such interest rate to change immediately upon any change in
the National Commercial Rate); or
(b) LIBOR. By giving Notification, Borrowers may request to have a
-----
portion of the outstanding principal of the Line as hereinafter permitted accrue
interest at a rate equal to the LIBOR Rate as follows: (i) with respect to the
principal amount of any advance under the Line, from the date of such advance
until the end of the Rate Period specified in the Notification; and/or (ii) with
respect to the principal amount of any portion of the Line outstanding and
earring interest at a LIBOR Rate at the time of the Notification related to such
principal amount, from the expiration of the then current Rate Period related to
such principal amount until the end of the Rate Period specified in the
Notification; and/or (iii) with respect to all or any portion of the principal
amount of the Line outstanding and earning interest at the National Commercial
Rate at the time of Notification, from the date set forth in the Notification
until the end of the Rate Period specified in the Notification.
(c) Multiple Rates. Borrowers understand and agree that: (i) subject
--------------
to the provisions of this Agreement, the National Commercial Rate and the LIBOR
Rate may apply simultaneously to different parts of the outstanding principal
balance of the Line, (ii) the LIBOR Rate applicable to any portion of
outstanding principal of the Line may be different from the LIBOR Rate
applicable to any other portion of outstanding principal of the Line, (iii)
portions of the Line bearing
-4-
<PAGE>
interest at the LIBOR Rate must be in a minimum increment of Two Hundred Fifty
Thousand Dollars ($250,000.00) and multiples of Fifty Thousand Dollars
($50,000.00), (iv) as of any one time or from time to time, there will be no
more than eight (8) different rates of interest applicable to advances and loans
made under the Line (for example, seven (7) LIBOR Loans bearing different LIBOR
Rates and all remaining outstandings bearing interest at the National Commercial
Rate); and (v) Bank shall have the right to terminate any Rate Period and the
LIBOR Rate applicable thereto, prior to maturity of such Rate Period (without
any prepayment penalty payable by Borrower as a result of such termination), if
Bank determines in good faith (which determination shall be conclusive) that
continuance of such interest rate has been made unlawful by any law, statute,
rule or regulation, to which Bank may be subject, in which event the principal
to which such terminated Rate Period relates thereafter shall earn interest at
the National Commercial Rate.
4.2. Default Interest. Interest will accrue on the principal balance of
----------------
the Line after the occurrence and during the continuation of an Event of Default
or expiration of the Contract Period at a rate which is two percent (2%) in
excess of the applicable non-default rate otherwise set forth above for the
Line. Bank agrees to provide prior written notice to Borrowers of the accrual of
interest at the Default Rate.
4.3. Post Judgment Interest. Any judgment obtained for sums due hereunder
----------------------
or under the Loan Documents will accrue interest at the applicable default rate
set forth above until paid.
4.4. Calculation. Interest will be computed on the basis of a year of 360
-----------
days and paid for the actual number of days elapsed.
4.5. Limitation of Interest to Maximum Lawful Rate. In no event will the
---------------------------------------------
rate of interest payable hereunder exceed the maximum rate of interest permitted
to be charged by applicable law (including the choice of law rules) and any
interest paid in excess of the permitted rate will be refunded to Borrowers.
Such refund will be made by application of the excessive amount of interest paid
against any sums outstanding hereunder and will be applied in such order as Bank
may determine. If the excessive amount of interest paid exceeds the sums
outstanding, the portion exceeding the sums outstanding will be refunded in cash
by Bank. Any such crediting or refunding will not cure or waive any default by
Borrowers. Borrowers agree, however, that in determining whether or not any
interest payable hereunder exceeds the highest rate permitted by law, any non-
principal payment, including without limitation prepayment fees and late
charges, will be deemed to the extent permitted by law to be an expense, fee,
premium or penalty rather than interest.
5. PAYMENTS AND FEES.
-----------------
5.1. Interest Payments on the Line. Borrowers will pay interest on the
-----------------------------
principal balance of the Line as follows:
(a) for advances bearing interest based on the National Commercial
Rate, interest will be payable on the first day of each calendar month as billed
by Bank, and
-5-
<PAGE>
(b) for advances bearing interest based on the LIBOR Rate interest
will be payable at the end of the applicable Rate Period.
5.2. Principal Payments on the Line. Borrowers will pay the outstanding
------------------------------
principal balance of the Line, together with any accrued and unpaid interest
thereon, and any other sums due pursuant to the terms hereof, ON DEMAND after
the occurrence of an Event of Default or after expiration of the Contract
Period. Notwithstanding the foregoing, if the Line Amount is reduced as a result
of Borrowers' failure to consummate the Secondary Offering by or before December
31, 1996, Borrowers shall immediately repay to Bank any and all principal
outstanding under the Line in excess of the Line Amount.
5.3. Letter of Credit and Bankers Acceptances Fees. For each issuance or
---------------------------------------------
renewal of a merchandise letter of credit, Borrowers will pay to Bank an
issuance or renewal fee in an amount equal to one-quarter of one percent (1/4 of
1%) of the face amount of such merchandise letter of credit, payable coincident
with and as a condition of the issuance or renewal of such merchandise letter of
credit, together with a one and one-half percent (1 1/2 %) commission per annum
on any banker's acceptances arising out of such merchandise letters of credit,
payable coincident with and as a condition of this issuance of such banker's
acceptances. For each issuance or renewal of a standby letter of credit
hereunder, Borrowers will pay to Bank an issuance or renewal fee in an amount
equal to one and one-half percent (1 1/2%) per annum of the face amount of such
standby letter of credit, payable coincident with and as a condition of the
issuance or renewal of such standby letter of credit. In addition, Borrowers
shall pay such other fees and charges in connection with the negotiation or
cancellation of each merchandise and standby letter of credit and banker's
acceptances as may be customarily charged by Bank. Such fees shall be computed
on the basis of a year of 360 days for the actual number of days elapsed.
5.4. Foreign Exchange Contract Fees. Borrowers shall pay to Bank all fees
------------------------------
as offered by Bank in connection with the issuance or rollover of a foreign
currency contract.
5.5. Commitment Fee. Contemporaneously with the execution and delivery of
--------------
this Agreement, Borrowers shall pay to Bank a non-refundable commitment fee of
One Hundred Thousand Dollars ($100,000.00).
5.6. Usage Fee. So long as the Line is outstanding and has not been
---------
terminated, Borrowers shall unconditionally pay to Bank a fee equal to one-
quarter of one percent (1/4 of 1 %) per annum of the daily unused portion of the
Line (which shall be calculated as the difference between Line Amount (or such
greater amount if the maximum committed amount for the Line is ever increased),
minus the outstanding principal balance of cash advances under the Line at the
close of business on the date such calculation is made, plus the face amount of
all outstanding letters of credit and bankers acceptances) which fee shall be
computed by Bank on a quarterly basis in arrears and shall be due and payable
within thirty (30) days after the Borrowers' receipt of an invoice therefor. If
Borrowers fail to pay all or any part of the bill within the prescribed time
period, Bank will automatically charge Borrower's checking account(s) for any
unpaid balance.
-6-
<PAGE>
5.7. Late Charge. In the event that Borrowers fail to pay any principal
-----------
or interest due under the Line for a period of at least fifteen (15) days, in
addition to paying such sums, Borrowers will pay to Bank a late charge equal to
the greater of (a) five percent (5%), of such past due payment as compensation
for the expenses incident to such past due payment, or (b) Fifteen Dollars
($15.00).
5.8. Prepayment. Except as provided in Section 4.1(c)(v), Borrowers may
---------- -----------------
not prepay all or any part of any LIBOR Loan prior to the end of the applicable
Rate Period.
5.9. Payment Method. Borrowers irrevocably authorize Bank to debit all
--------------
payments required to be made by Borrowers hereunder or under the Line (for which
invoices have been delivered to Borrowers, whether by telecopier or otherwise),
on the date due, from any deposit account maintained by any Borrower with Bank.
Otherwise, Borrowers will be obligated to make such payments directly to Bank.
All payments are to be made in immediately available funds. If Bank accepts
payment in any other form, such payment shall not be deemed to have been made
until the funds comprising such payment have actually been received by or made
available to Bank.
5.10. Application of Payments. Absent the occurrence and continuation of
-----------------------
an Event of Default, any and all payments on account of the Line will be applied
first to outstanding principal, then to accrued and unpaid interest and other
sums due hereunder or under the Loan Documents. After the occurrence and during
the continuation of an Event of Default, Bank may apply payments on account to
the Line in such order as Bank, in its discretion, elects. If Borrowers make a
payment or payments and such payment or payments, or any part thereof, are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or are required to be repaid to a trustee, receiver, or any other person under
any bankruptcy act, state or federal law, common law or equitable cause, then to
the extent of such payment or payments, the obligations or part thereof
hereunder intended to be satisfied shall be revived and continued in full force
and effect as if said payment or payments had not been made.
5.11. Loan Account. Bank will open and maintain on its books a loan
------------
account (the "Loan Account") with respect to advances made, repayments,
prepayments, the computation and payment of interest and fees and the
computation and final payment of all other amounts due and sums paid to Bank
under this Agreement. Except in the case of manifest error in computation, the
Loan Account will be presumptive evidence as to the amount at any time due to
Bank from Borrower under this Agreement or the Note.
5.12. Indemnity; Loss of Margin. Borrowers will indemnify Bank against any
-------------------------
loss or expense which Bank sustains or incurs as a consequence of any prepayment
by Borrowers of a LIBOR Loan prior to the end of the applicable Rate Period. If
Bank sustains or incurs any such loss or expense it will from time to time
notify Borrowers in writing of the amount determined in good faith by the Bank
to be necessary to indemnify Bank for the loss or expense. Such amount will be
due and payable by Borrowers to Bank within sixty (60) days after presentation
by Bank of a statement setting forth a brief explanation of and Bank's
calculation of such amount, which statement shall be presumptively deemed
correct absent manifest error. Any amount payable to the Bank under this Section
will bear interest at the default rate payable under the Line from the due date
until paid, both before and after judgment.
-7-
<PAGE>
In the event that any present or future law, rule, regulation, treaty or
official directive or the interpretation or application thereof by any central
bank, monetary authority or governmental authority, or the compliance with any
guideline or request of any central bank, monetary authority or governmental
authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to any amounts payable
under this Agreement or the other Loan Documents by Borrowers or otherwise with
respect to the transactions contemplated under this Agreement or the other Loan
Documents (except for taxes on the overall net income of Bank imposed by the
United States of America or any political subdivision thereof); or
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit, capital maintenance, capital adequacy, or similar
requirement against assets held by, or deposits in or for the account of, or
loans or advances or commitment to make loans or advances by, or letters of
credit or banker's acceptances issued or commitment to issue letters of credit
by, or foreign exchange contracts issued or rollovered by the Bank; or
(c) imposes upon Bank any other condition with respect to advances
or extensions of credit or the commitment to make advances or extensions of
credit under this Agreement,
and the result of any of the foregoing is to increase the costs of Bank, reduce
the income receivable by or return on equity of Bank or impose any expense upon
Bank with respect to any advances or extensions of credit or commitments to make
advances or extensions of credit under this Agreement, Bank shall so notify
Borrower in writing. Borrowers agree to pay Bank the amount of such increase in
cost, reduction in income, reduced return on equity or capital, or additional
expense within sixty (60) days after presentation by Bank of a statement
concerning such increase in cost, reduction in income, reduced return on equity
or capital, or additional expense. Such statement shall set forth a brief
explanation of the amount and Bank's calculation of the amount (in determining
such amount the Bank may use any reasonable averaging and attribution methods),
which statement shall be presumptively deemed correct absent manifest error. If
the amount set forth in such statement is not paid within sixty (60) days after
such presentation of such statement, interest will be payable on the unpaid
amount at the default rate payable under the Line from the due date until paid,
both before and after judgment.
6. SECURITY; COLLECTION OF RECEIVABLES AND PROCEEDS OF COLLATERAL.
--------------------------------------------------------------------
6.1. Personal Property. As security for the full and timely payment and
-----------------
performance of all Bank Indebtedness, the Original Borrowers hereby confirm
their grant of a security interest in all the following as evidenced by the Note
Security Documents, as amended, the Note Pledge Documents, as amended, and the
Indebtedness Documents and each Borrower hereby grants to Bank a security
interest in all of the following:
(a) All of that Borrower's present and future accounts, contract
rights, chattel paper, instruments and documents and all other rights to the
payment of money whether or not yet
-8-
<PAGE>
earned, for services rendered or goods sold, consigned, leased or furnished by
that Borrower or otherwise, together with (i) all goods (including any returned,
rejected, repossessed or consigned goods), the sale, consignment, lease or other
furnishings of which shall be given or may give rise to any of the foregoing,
(ii) all of that Borrower's rights as a consignor, consignee, unpaid vendor or
other lienor in connection therewith, including stoppage in transit, set-off,
detinue, replevin and reclamation, (iii) all general intangibles related
thereto, (iv) all guaranties, mortgages, security interests, assignments, and
other encumbrances on real or personal property, leases and other agreements or
property securing or relating to any accounts, (v) choses-in-action, claims and
judgments, (vi) any return or unearned premiums, which may be due upon
cancellation of any insurance policies, and (vii) all products and proceeds of
any of the foregoing.
(b) All of that Borrower's present and future inventory (including
but not limited to goods held for sale or lease or furnished or to be furnished
under contracts for service, raw materials, work-in-process, finished goods and
goods used or consumed in that Borrower's business) whether owned, consigned or
held on consignment, together with all merchandise, component materials,
supplies, packing, packaging and shipping materials, and all returned, rejected
or repossessed goods sold, consigned, leased or otherwise furnished by that
Borrower and all products and proceeds of any of the foregoing.
(c) All of that Borrower's present and future general intangibles
(including but not limited to tax refunds and rebates, manufacturing and
processing rights, designs, patent rights and applications therefor, trademarks
and registration or applications therefor, tradenames, brand names, logos,
inventions, copyrights and all applications and registrations therefor),
licenses, permits, approvals, software and computer programs, license rights,
royalties, trade secrets, methods, processes, know-how, formulas, drawings,
specifications, descriptions, label designs, plans, blueprints, patterns and all
memoranda, notes and records with respect to any research and development, and
all products and proceeds of any of the foregoing.
(d) All of that Borrower's present and future machinery, equipment,
furniture, fixtures, motor vehicles, tools, dies, jigs, molds and other articles
of tangible personal property of every type together with all parts,
substitutions, accretions, accessions, attachments, accessories, additions,
components and replacements thereof, and all manuals of operation, maintenance
or repair, and all products and proceeds of any of the foregoing.
(e) All of that Borrower's present and future general ledger sheets,
files, records, customer lists, books of account, invoices, bills, certificates
or documents of ownership, bills of sale, business papers, correspondence,
credit files, tapes, cards, computer runs and all other data and data storage
systems whether in the possession of that Borrower or any service bureau.
(f) All letters of credit now existing or hereafter issued naming
that Borrower as a beneficiary or assigned to that Borrower, including the right
to receive payment thereunder, and all documents and records associated
therewith.
-9-
<PAGE>
(g) All of the stock of all Subsidiaries now owned or hereafter
acquired by that Borrower, which shares shall be freely assignable and
transferable to Bank, together with such stock pledge agreements and blank stock
powers with signatures guaranteed as Bank may require.
(h) All deposits, funds, instruments, documents, policies and
evidence and certificates of insurance, securities, chattel paper and other
assets of that Borrower or in which that Borrower has an interest and all
proceeds thereof, now or at any time hereafter on deposit with or in the
possession or control of Bank or owing by Bank to that Borrower or in transit by
mail or carrier to Bank or in the possession of any other Person acting on
Bank's behalf, without regard to whether Bank received the same in pledge, for
safekeeping, as agent for collection or otherwise, or whether Bank has
conditionally released the same, and in all assets of that Borrower in which
Bank now has or may at any time hereafter obtain a lien, mortgage, or security
interest for any reason.
6.2. General. The collateral described above in Section 6.1 and in the
------- -----------
Note Security Documents and the Note Pledge Documents is collectively referred
to herein as the "Collateral". The above-described security interests,
assignments, liens shall not be rendered void by the fact that no Bank
Indebtedness exists as of any particular date, but shall continue in full force
and effect until the Bank Indebtedness has been repaid, Bank has no agreement or
commitment outstanding pursuant to which Bank may extend credit to or on behalf
of Borrowers and Bank has executed termination statements or releases with
respect thereto. IT IS THE EXPRESS INTENT OF THE BORROWERS THAT ALL OF THE
COLLATERAL SHALL SECURE NOT ONLY THE OBLIGATIONS UNDER THE INDEBTEDNESS
DOCUMENTS, BUT ALSO ALL OTHER PRESENT AND FUTURE OBLIGATIONS OF BORROWER TO
BANK.
6.3. Collection of Receivables: Proceeds of Collateral.
-------------------------------------------------
(a) Accounts Receivable. Borrowers will collect their accounts
-------------------
receivable only in the ordinary course of business. Immediately upon receipt,
Borrowers will forward to Bank all accounts receivable collections of Borrowers
and all other checks, drafts and other monies received by Borrowers which are
proceeds of the Collateral. Upon request by Bank after the occurrence and during
the continuation of an Event of Default, Borrowers will notify all of its
account debtors to forward all accounts receivable collections owed to Borrowers
to a lockbox maintained by Bank and will forward all other checks, drafts and
monies received by Borrowers which are proceeds of the Collateral to such
lockbox. Borrowers will execute such lockbox agreements as may be required by
Bank and will pay to Bank all customary fees in connection with any lockbox
arrangement.
(b) Operating Account. All accounts receivable collections of
-----------------
Borrowers and all checks, drafts and other monies received by Borrowers which
are proceeds of the Collateral will be deposited in Borrowers' operating account
maintained at Bank (the "Operating Account").
(c) Collected Funds. The Operating Account will be cleared by Bank
---------------
daily on mutually agreed upon days as to collected funds, and such collected
funds will be applied to the principal balance of and accrued interest then due
and payable on the Line. Upon the occurrence and during the continuance of an
Event of Default, Bank may apply such collected funds to the Bank Indebtedness
in such order as it may elect.
-10-
<PAGE>
(d) Proceeds of Collateral. Borrowers agree that all monies, checks,
----------------------
notes, instruments, drafts or other payments relating to or constituting
proceeds of any accounts receivable or other Collateral of Borrowers which come
into the possession or under the control of Borrowers or any employees, agents
or other persons acting for or in concert with any Borrower, shall be received
and held in trust for Bank and such items shall be the sole and exclusive
property of Bank. Promptly upon receipt thereof, Borrowers and such other
persons shall remit the same or cause the same to be remitted, in kind, to Bank.
Borrowers shall deliver or cause to be delivered to Bank, with appropriate
endorsement and assignment to Bank with full recourse to Borrowers, all
instruments, notes and chattel paper constituting an account receivable or
proceeds thereof or other Collateral. Bank is granted a power of attorney by
Borrowers with full power of substitution to execute on behalf of Borrowers and
in Borrowers' name or to endorse Borrowers' name on any check, draft,
instrument, note or other item of payment or to take any other action or sign
any document in order to effectuate the foregoing. Such power of attorney being
coupled with an interest is irrevocable.
6.4. Release of Collateral. Bank hereby releases its security interest in
---------------------
and lien on a certain Certificate of Deposit in the face amount of One Million
Dollars ($1,000,000.00) as pledged to Bank pursuant to a certain Pledge
Agreement dated November 28, 1995.
7. REPRESENTATIONS AND WARRANTIES. Borrowers represent and warrant as follows:
------------------------------
7.1. Valid Organization, Good Standing and Qualification. Each Borrower is
---------------------------------------------------
a corporation duly incorporated, validly existing and in good standing or
subsisting under the laws of the state of its incorporation, as set forth on
Schedule 7.1, has full power and authority to execute, deliver and comply with
- ------------
the Loan Documents, and to carry on its business as it is now being conducted
and is duly licensed or qualified as a foreign corporation in good standing or
subsisting under the laws of each other jurisdiction in which the character or
location of the properties owned by it or the business transacted by it requires
such licensing or qualification, except where the failure to be so licensed or
qualified would not have a material adverse effect on the Collateral, assets,
business, operations or financial condition of any Borrower or the ability of
Borrowers to perform their obligations under the Loan Documents.
7.2. Licenses. Borrowers and their respective employees, servants and
--------
agents have all licenses, registrations, approvals and other authority as may be
necessary to enable them to own and operate its business and perform all
services and business which they have agreed to perform in any state,
municipality or other jurisdiction, except where the failure to do so would not
have a material adverse effect on the Collateral, assets, business, operations
or financial condition of any Borrower or the ability of Borrowers to perform
their obligations under the Loan Documents.
7.3. Subsidiaries. Except as set forth on Schedule 7.3 attached hereto, no
------------ ------------
Borrower owns any shares of stock or other equity interests in any Person,
directly or indirectly (by any Subsidiary or otherwise).
7.4. Financial Statements. Borrowers have furnished to Bank the audited
--------------------
consolidated financial statements of Borrowers and their Subsidiaries certified
without qualification by independent
-11-
<PAGE>
public accountants as of March 31, 1996 and all management and comment letters
from such accountants in connection therewith, and its internally prepared
interim financial statements as of April 30, 1996. Such financial statements of
Borrowers and their Subsidiaries (together with the related notes and comments),
are correct and complete, fairly present the financial condition and the assets
and liabilities of Borrowers and their Subsidiaries at such date, and have been
prepared in accordance with GAAP. With respect to the interim statements, such
statements are subject to year-end adjustment and any accompanying footnotes.
7.5. No Material Adverse Change in Financial Condition. There has been no
-------------------------------------------------
material adverse change in the financial condition of any Borrower since March
31, 1996.
7.6. Pending Litigation or Proceedings. Except as set forth on Schedule
--------------------------------- --------
7.6 attached hereto, there are no judgments outstanding or actions, suits or
- ---
proceedings pending or, to the best of Borrowers' knowledge, threatened against
or affecting any Borrower at law or in equity or before or by any federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign.
7.7. Due Authorization; No Legal Restrictions. The execution and delivery
----------------------------------------
by Borrowers of the Loan Documents, the consummation of the transactions
contemplated by the Loan Documents and the fulfillment and compliance with the
respective terms, conditions and provisions of the Loan Documents: (a) have been
duly authorized by all requisite corporate action of each Borrower, (b) will not
conflict with or result in a breach of, or constitute a default (or would, upon
the passage of time or the giving of notice or both, constitute a default)
under, any of the terms, conditions or provisions of any applicable statute,
law, rule, regulation or ordinance or any Borrower's Certificates or Articles of
Incorporation or By-Laws or any indenture, mortgage, loan or credit agreement or
instrument to which any Borrower is a party or by which any Borrower may be
bound or affected, or any judgment or order of any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, and (c) will not result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of the property or
assets of any Borrower under the terms or provisions of any such agreement or
instrument, except liens in favor of Bank.
7.8. Enforceability. The Loan Documents have been duly executed by
--------------
Borrowers and delivered to Bank and constitute legal, valid and binding
obligations of Borrowers enforceable in accordance with their terms, except as
enforceability may be limited by any bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, or other laws or equitable principles
affecting creditors' rights generally.
7.9. No Default Under Other Obligations, Orders or Governmental
----------------------------------------------------------
Regulations. No Borrower is in violation of its Certificate or Articles of
- -----------
Incorporation or in default in the performance or observance of any of its
material obligations, covenants or conditions contained in any indenture or
other agreement creating, evidencing or securing any Indebtedness or pursuant to
which any such Indebtedness is issued and no Borrower is in violation of or in
default under any other material agreement or instrument or any material
judgment, decree, order, statute, rule or governmental regulation, applicable to
it or by which its properties may be bound or affected.
-12-
<PAGE>
7.10. Governmental Consents. No consent, approval or authorization of or
---------------------
designation, declaration or filing with any governmental authority on the part
of any Borrower is required in connection with the execution, delivery or
performance by Borrowers of the Loan Documents or the consummation of the
transactions contemplated thereby.
7.11. Taxes. Borrowers have filed all tax returns which they are required
-----
to file and have paid, or made provision for the payment of, all taxes which
have or may have become due pursuant to such returns or pursuant to any
assessment received by either of them, except such taxes (other than real estate
taxes which must be paid regardless of challenge), if any, as are being
contested in good faith and as to which adequate reserves have been provided.
Such tax returns are complete and accurate in all material respects. No Borrower
knows of any proposed additional assessment or basis for any assessment of
additional taxes; however, Borrowers acknowledge that their tax returns for the
fiscal years ending March 31, 1989 through March 31, 1992 are currently under
examination by the Internal Revenue Service.
7.12. Title to Collateral. The Collateral is and will be owned by
-------------------
Borrowers free and clear of all liens and other encumbrances of any kind
(including liens or other encumbrances upon properties acquired or to be
acquired under conditional sales agreements or other title retention devices),
excepting only liens in favor of the Bank, the Barclays Lien and those liens and
encumbrances permitted under Section 8.9 below. Borrowers will defend the
-----------
Collateral against any claims of all persons or entities other than the Bank.
7.13. Addresses. During the past five (5) years, no Borrower has been
---------
known by any names (including tradenames) other than those set forth in Schedule
--------
7.13 attatched hereto and has not been located at any addresses other than those
- ----
set forth on Schedule 7.13 attached hereto. The portions of the Collateral which
-------------
are tangible property and Borrowers' books and records pertaining thereto will
at all times be located at the addresses set forth on Schedule 7.13; or such
-------------
other location determined by Borrowers after prior notice to Bank and delivery
to Bank of any items requested by Bank to maintain perfection and priority of
Bank's security interests and access to Borrowers' books and records. Schedule
--------
7.13 identifies the chief executive office of Borrowers.
- ----
7.14. Current Compliance. Borrowers are currently in compliance with all
------------------
of the terms and conditions of the Loan Documents.
7.15. Pension Plans. Except as disclosed on Schedule 7.15 hereto, (a) no
------------- -------------
Borrower has any obligations with respect to any employee pension benefit plan
("Plan") (as such term is defined in the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")), (b) no events, including, without limitation,
any "Reportable Event" or "Prohibited Transaction" (as those terms are defined
under ERISA), have occurred in connection with any Plan of any Borrower which
would constitute grounds for the termination of any such Plan by the Pension
Benefit Guaranty Corporation ("PBGC") or for the appointment by any United
States District Court of a trustee to administer any such Plan, (c) all of the
Borrowers' Plans meet with the minimum funding standards of Section 302 of
ERISA, and (d) no Borrower has any existing liability to the PBGC. No Borrower
is subject to or bound to make contributions to any "multi-employer plan" as
such term is defined in Section 4001(a)(3) of ERISA.
-13-
<PAGE>
7.16. Leases and Contracts. Borrowers have complied in all material
--------------------
respects with the provisions of all material leases, contracts or commitments of
any kind (such as employment agreements, collective bargaining agreements,
powers of attorney, distribution agreements, patent license agreements,
contracts for future purchase or delivery of goods or rendering of services,
bonus, pension and retirement plans or accrued vacation pay, insurance and
welfare agreements) to which it is a party and is not in default thereunder. No
other party is in default under any such leases, contracts or other commitments
and no event has occurred which, but for the giving of notice or the passage of
time or both, would constitute an event of default thereunder.
7.17. Intellectual Property. Borrowers own or possess the irrevocable
---------------------
right to use all of the patents, trademarks, service marks, trade names,
copyrights, licenses, franchises and permits and rights with respect to the
foregoing necessary to own and operate the Borrowers' properties and to carry on
their businesses as presently conducted and presently planned to be conducted
without conflict with the rights of others. Schedule 7.17 sets forth an accurate
-------------
list and description of each registered patent, trademark, service mark, trade
name and copyright owned or possessed by any Borrower.
7.18. Business Interruptions. Within five (5) years prior to the date
----------------------
hereof, neither the business, Collateral nor operations of any Borrower have
been materially and adversely affected in any way by any casualty, strike,
lockout, combination of workers, order of the United States of America, or any
state or local government, or any political subdivision or agency thereof,
directed against such Borrower. There are no pending or threatened labor
disputes, strikes, lockouts or similar occurrences or grievances against the
business being operated by Borrowers.
7.19. Accuracy of Representations and Warranties. No representation or
------------------------------------------
warranty by Borrowers contained herein or in any certificate or other document
furnished by Borrowers pursuant hereto or in connection herewith fails to
contain any statement of material fact necessary to make such representation or
warranty not misleading in light of the circumstances under which it was made.
There is no fact which Borrowers know or should know and has not disclosed to
Bank, which does or may materially and adversely affect Borrowers, or any of
their operations.
8. GENERAL COVENANTS. Except with the prior written consent of Bank which
-----------------
consent will not be unreasonably withheld or delayed, Borrowers will comply with
the following:
8.1. Payment of Principal, Interest and Other Amounts Due. Borrowers will
----------------------------------------------------
pay when due all Bank Indebtedness and all other amounts payable by them
hereunder.
8.2. Limitation on Sale and Leaseback. Borrowers will not enter into any
--------------------------------
arrangement whereby any of them will sell or transfer any real property or
improvements thereon or other fixed assets owned by any of them and then or
thereafter rent or lease as lessee such property, improvements or assets or any
part thereof, or other property which any Borrower shall intend to use for
substantially the same purposes as the property sold or transferred.
-14-
<PAGE>
8.3. Limitation on Indebtedness. No Borrower will have at any time
--------------------------
outstanding to any Person other than Bank, any Indebtedness for borrowed money
or Indebtedness under Capitalized Leases, or any outstanding letters of credit,
except:
(a) current accounts payable incurred in the ordinary course of
Borrowers' business, accrued expenses and other current items arising out of
transactions (other than borrowings) in the ordinary course of Borrowers'
business;
(b) existing Indebtedness for borrowed money and Capitalized Lease
Obligations described on Schedule 8.3;
------------
(c) intercompany Indebtedness permitted under Section 8.19 hereof;
------------
(d) the Barclays Loan;
(e) Indebtedness for purchase money financing and/or Capitalized
Leases not listed on Schedule 8.3 not to exceed at any time Seven Hundred Fifty
------------
Thousand Dollars ($750,000.00) in the aggregate; and
(f) Foreign currency forward contracts and foreign currency spot
contracts between Borrowers and Brown Brothers; provided that the aggregate
Gross Foreign Exchange Contract Risk of all such contracts whether issued or
rolled over by Brown Brothers shall not exceed Ten Million Dollars
($10,000,000.00).
Any of such existing permitted Indebtedness may not be refinanced or
replaced without the consent of the Bank.
8.4. Investments and Loans No Borrower will have or make any investments
---------------------
in all or a material portion of the capital stock or securities of any Person,
or any loans, advances or extensions of credit to any Person, except:
(a) Investments in direct or indirect obligations of, or obligations
unconditionally guaranteed by, the United States of America and maturing within
twelve (12) months from the date of acquisition;
(b) Investments in commercial paper of Bank or commercial paper
rated "Prime-1" by Moody's Investors Services or "A-1" by Standard & Poor's
Corporation, or with an equivalent rating by another rating agency of nationally
recognized standing, maturing within three hundred sixty-five (365) days from
the date of acquisition;
(c) Certificates of deposit maturing within twelve (12) months from
the date of acquisition issued by the Bank;
(d) Bona fide advances to employees and officers of Borrowers for
the purpose of paying travel and related expenses incurred for proper business
purposes of Borrowers; and
-15-
<PAGE>
(e) Investments and loans listed on Schedule 8.4 attached hereto.
------------
8.5. Guaranties. Except for guarantees of obligations of other Borrowers
-----------
or Subsidiaries incurred in the ordinary course of business and those listed on
Schedule 8.5 attached hereto, no Borrower will directly or indirectly guarantee,
- ------------
endorse (other than for collection or deposit in the ordinary course of
business), discount, sell with recourse or for less than the face value or agree
(contingently or otherwise) to purchase or repurchase or otherwise acquire, or
otherwise become directly or indirectly liable for, or agree (contingently or
otherwise) to supply or advance funds (whether by loan, stock purchase, capital
contribution or otherwise) in respect of, any Indebtedness, obligations or
liabilities of any Person.
8.6. Disposition of Assets. No Borrower will sell, lease, transfer or
---------------------
otherwise dispose of all, substantially all, or any material portion of its
property or assets, except for sales of inventory in the ordinary course for
fair consideration and the sale for fair consideration of obsolete equipment.
8.7. Merger; Consolidation; Business Acquisitions; Subsidiaries. Except
----------------------------------------------------------
for stock for stock acquisitions in an aggregate amount up to Ten Million
Dollars ($10,000,000.00) and stock and/or asset acquisitions for cash in an
aggregate amount up to One Million Five Hundred Thousand Dollars
($1,500,000.00), which result in no assumption by any Borrower of senior
Indebtedness, no Borrower will merge into or consolidate with any Person,
acquire any material portion of the stock, ownership interests, assets or
business of any Person, permit any Person to merge into it, or form any new
Subsidiaries. Notwithstanding the foregoing, Bank hereby consents to the
acquisition by National Media of 100% of the stock of Prestige Marketing
Limited, Prestige Marketing International Limited, Suzanne Paul Holdings Pty
Limited, Suzanne Paul (Australia) Pty Limited and Telemall Shopping Pty Limited
(the "Prestige Group") in exchange for cash, unsecured debt payable to
principals of the Prestige Group not to exceed Two Million Eight Hundred
Thousand Dollars ($2,800,000.00), in the aggregate, which debt is payable in
full by December 31, 1996, and stock of National Media, provided that (a) the
acquisition is completed substantially in accordance with the terms and
conditions of (i) a certain Acquisition Agreement dated May 29, 1996, by and
among National Media, Paul Meier, Susan Barnes and Prestige Marketing Holdings
Limited, and (ii) a certain Acquisition Agreement dated May 30, 1996 by and
among National Media, Paul Meier, Susan Barnes, Alan Meier and Tancot Pty
Limited, true and complete copies of which have been provided by Borrowers to
Bank, (b) within thirty (30) days of consummation of the acquisition, all
entities within the Prestige Group shall execute and deliver to Bank a consent
and joinder agreement, in form and content acceptable to Bank, pursuant to which
such entities shall agree to assume all obligations of the Borrowers hereunder
and grant to Bank a security interest in and lien upon all their assets, and (c)
copies of all documents evidencing the acquisition are provided to Bank.
8.8. Taxes; Claims for Labor and Materials. Borrowers will pay or cause to
-------------------------------------
be paid when due all taxes, assessments, governmental charges or levies imposed
upon them or their respective income, profits, payroll or any property belonging
to either of them, including without limitation all withholding taxes, and all
claims for labor, materials and supplies which, if unpaid, might become a lien
or charge upon any of their properties or assets; provided that Borrowers shall
not be required to pay any such tax (other than real estate taxes which must be
paid regardless of challenge), assessment, charge, levy or claim so long as the
validity thereof shall be contested in
-16-
<PAGE>
good faith by appropriate proceedings promptly initiated and diligently
conducted by them, and neither execution nor foreclosure sale or similar
proceedings shall have been commenced in respect thereof (or such proceedings
shall have been stayed pending the disposition of such contest of validity), and
they shall have set aside on their books, or at the request of Bank (after the
occurrence and during the continuation of an Event of Default) deposited with
Bank, adequate reserves with respect thereto. No Borrower will file or consent
to the filing of, any consolidated income tax return with any Person other than
a Subsidiary or the other Borrower.
8.9. Liens. No Borrower will create, incur or permit to exist any
-----
mortgage, pledge, encumbrance, lien, security interest or charge of any kind
(including liens or charges upon properties acquired or to be acquired under
conditional sales agreements or other title retention devices) on its property
or assets, whether now owned or hereafter acquired, or upon any income, profits
or proceeds therefrom, except:
(a) Security interests and mortgages held by Bank;
(b) Liens incurred or deposits made in the ordinary course of
business (i) in connection with worker's compensation, unemployment insurance,
social security and other like laws or (ii) to secure the performance of
statutory obligations, not incurred in connection with either (A) the
borrowing of money or (B) the deferred purchase price of goods or inventory;
(c) Encumbrances consisting of zoning restrictions, easements,
restrictions on the use of real property or minor irregularities of title
thereto, none of which impairs the use of such property by Borrowers in the
operation of their business;
(d) The Barclays Lien; or
(e) Liens and security interests listed on Schedule 8.9 attached
------------
hereto.
No Borrower shall enter into any agreement with any other Person which
shall prohibit the Borrowers from granting, creating or suffering to exist, or
otherwise restrict in any way (whether by covenant, by identifying such event as
a default under such agreement or otherwise) the ability of the Borrowers to
grant, create or suffer to exist, any lien, security interest or other charge or
encumbrance upon or with respect to any of its assets in favor of the Bank.
No Borrower will apply for or obtain any letters of credit for the payment
of or to secure the payment for any inventory or other assets to be acquired by
Borrowers, except letters of credit issued by Bank hereunder.
8.10. Existence: Approvals; Qualification; Business Operations;
---------------------------------------------------------
Compliance with Laws. Each Borrower (a) will obtain, preserve and keep in full
- --------------------
force and effect its separate corporate existence and all rights, licenses,
registrations and franchises necessary to the proper conduct of its business or
affairs except where the failure to be so licensed or qualified would not have a
material adverse effect on the Collateral, assets, business, operations or
financial condition of any Borrower or the ability of Borrowers to perform their
obligations under the Loan Documents; (b) will qualify
-17-
<PAGE>
and remain qualified as a foreign corporation in each jurisdiction in which the
character or location of the properties owned by it or the business transacted
by it requires such qualification except where the failure to obtain or maintain
such qualification would not have a material adverse effect on the Collateral,
assets, business, operations or financial condition of Borrower or the ability
of Borrower to perform its obligations under the Loan Documents; (c) will
continue to operate its business as presently operated; and (d) will comply with
the requirements of all applicable laws and all rules, regulations (including
environmental regulations) and orders of regulatory agencies and authorities
having jurisdiction over it.
8.11. Maintenance of Properties, Intellectual Property. Each Borrower
------------------------------------------------
will maintain, preserve, protect and keep or cause to be maintained, preserved,
protected and kept its real and personal property used or useful in the conduct
of its business in good working order and condition, reasonable wear and tear
excepted, and will pay and discharge when due the cost of repairs to and
maintenance of the same.
With respect to any and all trademarks, registrations, copyrights,
patents, patent rights and applications for any of the foregoing necessary to
the operation of Borrowers' business, each Borrower shall maintain and protect
the same and shall take and assert any and all remedies available to that
Borrower to prevent any other Person from infringing upon or claiming any
interest in any such trademarks, registrations, copyrights, patents, patent
rights or application for any of the foregoing.
Borrowers will notify Bank promptly of (a) the filing of any patent or
trademark application, whether domestic or foreign, by any Borrower; (b) the
grant of any patent or trademark, whether domestic or foreign, to any Borrower;
or (c) any Borrower's intent to abandon a patent or trademark.
Borrowers will, if requested by Bank, (i) execute and deliver to Bank
assignments, financing statements, patent mortgages or such other documents, in
form and substance reasonably acceptable to Bank, necessary to perfect and
maintain Bank's security interest in all existing and future patents, patent
applications, trademarks, trademark applications, and other general intangibles
owned by Borrowers; (ii) furnish Bank with evidence satisfactory to Bank, in its
sole discretion, that all actions necessary to maintain and protect each
trademark and patent owned by Borrowers or their respective employees have been
taken in a timely manner; and (iii) execute and deliver to Bank an agreement
permitting Bank to exercise all of Borrowers' rights in, to and under any patent
or trademark owned by any Borrower or any of its employees.
8.12. Insurance. Borrowers will carry adequate insurance issued by an
---------
insurer acceptable to Bank, in amounts acceptable to Bank (at least adequate to
comply with any co-insurance provisions) and against all such liability and
hazards as are usually carried by entities engaged in the same or a similar
business similarly situated or as may be required by Bank, and in addition, will
carry business interruption insurance in such amounts as may be required by
Bank. In the case of insurance on any of the Collateral Borrowers shall carry
insurance in an amount equal to the greater of (a) eighty percent (80%) of the
full insurable value thereof, or (b) one hundred percent (100%) maximum
availability under the Line, and cause Bank to be named as insured mortgagee
with respect to all real property, loss payee (with a lender's loss payable
endorsement) with respect to all personal
-18-
<PAGE>
property, and additional insured with respect to all liability insurance, as its
interests may appear with thirty (30) days' notice to be given Bank by the
insurance carrier prior to cancellation or material modification of such
insurance coverage.
Borrowers shall cause to be delivered to Bank the insurance policies
therefor or in the alternative, evidence of insurance and at least thirty (30)
business days prior to the expiration of any such insurance, additional policies
or duplicates thereof or in the alternative, evidence of insurance evidencing
the renewal of such insurance and payment of the premiums therefor. Borrowers
shall direct all insurers that in the event of any loss thereunder or the
cancellation of any insurance policy, the insurers shall make payments for such
loss and pay all return or unearned premiums directly to Bank and not to
Borrowers and Bank jointly.
In the event of any loss, Borrowers will give Bank immediate notice
thereof and Bank may make proof of loss whether the same is done by Borrowers.
Bank is granted a power of attorney by Borrowers with full power of substitution
to file any proof of loss in Borrowers' or Bank's name, to endorse Borrowers'
name on any check, draft or other instrument evidencing insurance proceeds, and
to take any action or sign any document to pursue any insurance loss claim. Such
power being coupled with an interest is irrevocable.
In the event of any loss, Bank, at its option, may (a) retain and apply
all or any part of the insurance proceeds to reduce, in such order and amounts
as Bank may elect, the Bank Indebtedness, or (b) disburse all or any part of
such insurance proceeds to or for the benefit of Borrowers for the purpose of
repairing or replacing Collateral after receiving proof satisfactory to Bank of
such repair or replacement, in either case without waiving or impairing the Bank
Indebtedness or any provision of this Agreement; provided, however, that for any
-------- -------
loss of Five Hundred Thousand Dollars ($500,000.00) or less or losses in any
twelve (12) month consecutive monthly period aggregating One Million Five
Hundred Thousand Dollars ($1,500,000.00) or less, Borrower shall have the right
to receive and utilize the proceeds therefor without Bank's consent, absent the
existence of an Event of Default. Any deficiency thereon shall be paid by
Borrowers to Bank upon demand. Borrowers shall not take out any insurance
without having Bank named as loss payee or additional insured thereon. Borrowers
shall bear the full risk of loss from any loss of any nature whatsoever with
respect to the Collateral.
Notwithstanding the foregoing, in the event that any Borrower suffers a
casualty loss in excess of Five Hundred Thousand Dollars ($500,000.00) or losses
in any twelve (12) consecutive month period aggregating in excess of One Million
Five Hundred Thousand Dollars ($1,500,000.00) and desires to use the proceeds of
its casualty loss insurance to repair or replace damaged equipment or inventory
which was Collateral hereunder, Bank will permit Borrowers to utilize the
proceeds of such insurance solely to purchase such replacement equipment and
inventory or to repair such equipment, provided that: (i) Borrowers confirm to
Bank in writing that they intend to continue their business operations and have
business interruption insurance in effect providing for the payment of proceeds
in amounts acceptable to Bank, (ii) Borrowers submit to Bank their business plan
for operations after such casualty loss, which plan must be in form and content
satisfactory to Bank, (iii) Bank will hold such insurance proceeds and will
disburse such proceeds upon receipt by Bank of evidence satisfactory to Bank
that such proceeds will be used to purchase equipment and inventory
-19-
<PAGE>
as required above, (iv) disbursement of proceeds will be in compliance with such
procedures as Bank may require, e.g. checks payable to the equipment vendor or
inventory supplier, (v) no Event of Default, or event which with the giving of
notice or passage of time, or both, would constitute an Event of Default has
occurred, and (vi) such loss does not occur within four (4) months of the
contract termination date of the Line set forth herein.
8.13. Inspections; Examinations. After the occurrence and during the
-------------------------
continuation of an Event of Default, all accountants and auditors employed by
Borrowers at any time to exhibit and deliver to Bank copies of any and all of
Borrowers' financial statements, trial balances or other accounting records of
any sort in the accountant's or auditor's possession and copies of all reports
submitted to Borrowers by such accountants or auditors, including management
letters, "comment" letters and audit reports, and to disclose to Bank any
information they may have concerning Borrower's financial status and business
operations. Borrowers further authorize all federal, state and municipal
authorities to furnish to Bank copies of reports or examinations relating to
Borrowers, whether made by Borrowers or otherwise.
The officers of Bank, or such Persons as any of them may designate, may
visit and inspect any of the properties of Borrowers, examine (either by Bank's
employees or by independent accountants) any of the Collateral or other assets
of Borrowers, including the books of account of Borrowers, and discuss the
affairs, finances and accounts of Borrowers with their respective officers at
such times as Bank may desire.
Bank may conduct upon reasonable notice and during normal business hours
two (2), and Borrowers will fully cooperate with, field examinations of the
inventory, accounts receivable and business affairs of Borrowers per year. The
Bank may conduct additional field examinations in any year if the Bank provides
Borrowers with reasonable notice. Borrowers shall pay Bank One Thousand Two
Hundred Fifty Dollars ($1,250.00) for each field examination. If an Event of
Default has occurred and is continuing, Borrowers will reimburse Bank for all
costs, expenses and charges as may be required by Bank in connection with all
field examinations.
8.14. Default Under Other Indebtedness. No Borrower will permit any of
--------------------------------
its Indebtedness for borrowed money or Capitalized Leases to be in default. If
any Indebtedness for borrowed money or Capitalized Leases of any Borrower is
declared or becomes due and payable before its expressed maturity by reason of
default or otherwise or to the knowledge of Borrowers, the holder of any such
Indebtedness shall have the right (or upon the giving of notice or the passage
of time, or both, shall have the right) to declare such Indebtedness to be so
due and payable, Borrowers will immediately give Bank written notice of such
declaration, acceleration or right of declaration.
8.15. Pension Plans. Borrowers shall (a) keep in full force and effect
-------------
any and all Plans which are presently in existence or may, from time to time,
come into existence under ERISA, unless such Plans can be terminated without
material liability to Borrowers in connection with such termination (as
distinguished from any continuing funding obligation); (b) make contributions to
all of Borrowers' Plans in a timely manner and in a sufficient amount to comply
with the requirements of ERISA; (c) comply with all material requirements of
ERISA which relate to such Plans so as to
-20-
<PAGE>
preclude the occurrence of any Reportable Event, Prohibited Transaction or
material "accumulated funding deficiency" as such term is defined in ERISA; and
(d) notify Bank immediately upon receipt by Borrowers of any notice of the
institution of any proceeding or other action which may result in the
termination of any Plan and deliver to Bank, promptly after the filing or
receipt thereof, copies of all reports or notices which Borrowers file or
receive under ERISA with or from the Internal Revenue Service, the PBGC, or the
U.S. Department of Labor.
8.16. Bank of Account. Borrowers will maintain Bank as their primary
---------------
domestic bank of account and CoreStates Asset Management as one of its primary
investment manager, unless otherwise agreed by Bank in writing.
8.17. Maintenance of Management. Borrowers will cause their businesses
-------------------------
to be continuously managed by their present management or such other persons
(serving in such management positions) as may be reasonably satisfactory to
Bank. National Media will (a) notify Bank promptly in writing (i) of any change
in its board of directors or principal executive officers, or (ii) if David
Carman is no longer an officer of Quantum or if either Paul Meier or Alan Meier
is no longer an officer of the Prestige Group, and (b) will provide Bank with a
copy of any material amendment to its Articles of Incorporation or By-Laws,
prior to adoption. National Media shall not make any amendment to its Articles
of Incorporation or By-Laws without the prior written consent of Bank.
8.18. Capital Stock: Dividends. Except in accordance with existing
------------------------
employee benefit plans, no Borrower will redeem, repurchase or otherwise make
any payment or distribution to acquire any of its capital stock. No Borrower
will pay dividends or make other distributions on account of its capital stock,
except for dividends or distributions to another Borrower.
8.19. Transactions with Affiliates. No Borrower shall enter into or
----------------------------
conduct any transaction with any Affiliate except on terms that would be usual
and customary in a similar transaction between Persons not affiliated with each
other and except as disclosed to Bank. Except in the ordinary course of business
and unless prohibited herein, no Borrower will make any loans or extensions of
credit to any of its Affiliates, shareholders, directors or officers, except for
the existing loans described in Schedule 8.19 attached hereto. Each Borrower
-------------
will cause all of its Indebtedness at any time owed to its Affiliates,
shareholders, directors and officers to be subordinated in all respects to all
present and future Bank Indebtedness and will not make any payments thereon
other than in the ordinary course of business, except as approved by Bank in
writing.
8.20. Restriction on Stock Transfer. Except for stock for stock
-----------------------------
acquisitions permitted under Section 8.7 hereof, none of Media Arts, Quantum,
-----------
PRT or DAC shall directly or indirectly issue, transfer, sell or otherwise
dispose of, or part with control of, or permit the transfer of, any shares of
its capital stock.
8.21. Name or Address Change. No Borrower shall change its name or
----------------------
address except upon thirty (30) days prior written notice to Bank and delivery
to Bank of any items requested by
-21-
<PAGE>
Bank to maintain perfection and priority of Bank's security interests and
access to that Borrower's books and records.
8.22. Notices. Borrowers will promptly notify Bank of (a) any action or
-------
proceeding brought against any Borrower wherein such action or proceeding would,
if determined adversely to any Borrower result in liability of that Borrower in
excess of Two Hundred Fifty Thousand Dollars ($250,000.00) individually, or One
Million Dollars ($1,000,000.00) in the aggregate, (b) the occurrence of any
Event of Default, (c) any fact, condition or event which, with the giving of
notice or the passage of time or both, could become an Event of Default, (d) the
failure of any Borrower to observe any of its undertakings under the Loan
Documents, or (e) any material adverse change in the assets, business,
operations or financial condition of any Borrower.
8.23. Additional Documents and Future Actions. Borrowers will, at their
---------------------------------------
sole cost, take such actions and provide Bank from time to time with such
agreements, financing statements and additional instruments, documents or
information as the Bank may in its discretion deem necessary or advisable to
perfect, protect, maintain or enforce the security interests in the Collateral,
to permit Bank to protect or enforce its interest in the Collateral, or to carry
out the terms of the Loan Documents. If Borrowers fail to take any action
reasonably requested by Bank or after the occurrence and during the continuation
of an Event of Default, Borrowers hereby authorize and appoint Bank as their
attorney-in-fact, with full power of substitution, to take such actions as Bank
may deem advisable to protect the Collateral and its interests thereon and its
rights hereunder, to execute on Borrowers' behalf and file at Borrowers' expense
financing statements, and amendments thereto, in those public offices deemed
necessary or appropriate by Bank to establish, maintain and protect a
continuously perfected security interest in the Collateral, and to execute on
Borrowers' behalf such other documents and notices as Bank may deem advisable to
protect the Collateral and its interests therein and its rights hereunder. Such
power being coupled with an interest is irrevocable. Borrowers irrevocably
authorize the filing of a carbon, photographic or other copy of this Agreement,
or of a financing statement, as a financing statement and agrees that such
filing is sufficient as a financing statement.
8.24. Accounts Receivable. Unless Bank notifies Borrowers in writing that
-------------------
it dispenses with any one or more of the following requirements, Borrowers will
(a) immediately notify Bank if any of its accounts arise out of contracts with
the United States or any department, agency or instrumentality thereof, and
execute any instruments and take any steps required by Bank in order that all
monies due and to become due under such contract shall be assigned to Bank and
notice thereof given to the Government under the Federal Assignment of Claims
Act; and (b) deliver to Bank, with appropriate endorsement or assignment, any
instrument or chattel paper representing an account or contract right. Any
permission granted to Borrowers by Bank to omit any of the requirements of this
Section 8.24 may be revoked by Bank at any time.
- ------------
Borrowers will, if requested by Bank (a) give Bank assignments, in form
acceptable to Bank, of specific accounts or groups of accounts and monies due
and to become due under specific contracts and specific general intangibles; (b)
furnish to Bank a copy, with such duplicate copies as Bank may request, of the
invoice applicable to each account specifically assigned to Bank or arising out
of a contract right, bearing a statement that such account has been assigned to
Bank and such
-22-
<PAGE>
additional statements as Bank may require; (c) mark its records evidencing its
accounts in a manner satisfactory to Bank so as to show which accounts have been
assigned to Bank; (d) furnish to Bank satisfactory evidence of the shipment and
receipt of any goods specified by Bank and the performance of any services or
obligations covered by accounts or contracts in which Bank has a security
interest; (e) join with Bank in executing a financing statement, notice,
affidavit or similar instrument, in form satisfactory to Bank, and such
continuation statements and other instruments as Bank may from time to time
request and pay the cost of filing the same in any public office deemed
advisable by Bank; (f) give Bank such financial statements, reports,
certificates, lists of purchasers (showing names, addresses, and amounts owing)
and other data concerning its accounts, contracts, collections, inventory,
general intangibles and other matters as Bank may from time to time specify; (g)
after the occurrence and during the continuation of an Event of Default,
segregate cash proceeds of Collateral so that they may be identified readily,
and deliver the same to the Bank at such time or times and in such manner and
form as the Bank may direct; (h) after the occurrence and during the
continuation of an Event of Default, furnish such witnesses as may be necessary
to establish legal proof of the Collateral or records relating to the
Collateral; and (i) use their best efforts to obtain from any owner,
encumbrancer or other person having an interest in the property where any
Collateral is located, written consent to Bank's removal of the Collateral
therefrom, without liability on the part of the Bank to such owner, encumbrancer
or other person, or from any such owner, encumbrancer or other person such
waivers of any interest in the Collateral as the Bank may require.
8.25. Material Adverse Contracts. No Borrower will become or be a party
--------------------------
to any contract or agreement which has a materially adverse impact on Borrowers'
ability to perform under this Agreement or any other agreement with Bank to
which any Borrower is a party.
8.26. Restrictions on Use of Proceeds. No Borrower will carry or purchase
-------------------------------
with the proceeds of the Line any "margin security" within the meaning of
Regulations U, G, T or X of the Board of Governors of the Federal Reserve
System.
9. FINANCIAL COVENANTS. Except with the prior written consent of Bank,
-------------------
Borrowers will comply with the following:
9.1. Tangible Net Worth. Borrowers shall maintain Tangible Net Worth of
------------------
not less than $35,000,000.00 as of the end of each fiscal quarter of Borrower;
provided, however, that upon consummation of the Secondary Offering, Borrowers
shall maintain Tangible Net Worth of not less than $55,000,000.00 as of the date
of such consummation and as of the end of each fiscal quarter of Borrower
thereafter.
9.2. Working Capital. Borrowers shall maintain Working Capital of not
---------------
less than $25,000,000.00 as of the end of each fiscal quarter of Borrowers;
provided, however, that upon consummation of the Secondary Offering, Borrowers
shall maintain Working Capital of not less than $40,000,000.00 as of the date of
such consummation and as of the end of each fiscal quarter of Borrower
thereafter.
9.3. Indebtedness to Tangible Net Worth Ratio. Borrowers shall maintain
----------------------------------------
a ratio of Indebtedness to Tangible Net Worth of not more than 2.25 to 1.0 as of
the end of each fiscal quarter
-23-
<PAGE>
of Borrowers; provided, however, that upon consummation of the Secondary
Offering, Borrowers shall maintain a ratio of Indebtedness to Tangible Net Worth
of not more than 1.50 to 1.0 as of the date of such consummation and as of the
end of each fiscal quarter of Borrower thereafter. If the Secondary Offering is
not consummated by December 31, 1996, Borrowers shall maintain a ratio of
Indebtedness to Tangible Net Worth of not more than 2.00 to 1.0 as of March 31,
1997 and as of the end of each fiscal quarter of Borrowers thereafter.
9.4 Capital Expenditures. Borrowers shall not cause, suffer or permit
--------------------
Borrowers' aggregate annual Capital Expenditures to exceed $6,000,000.00 for the
fiscal year ending March 31, 1997.
9.5. Indebtedness to EBITDA. Borrowers shall maintain a ratio of
----------------------
Indebtedness to EBITDA of not more than (a) 3.5 to 1.0 as of the end of each
fiscal quarter of Borrowers, commencing with the fiscal quarter ending March 31,
1996, or (b) 2.75 to 1.0 as of the end of each fiscal quarter of Borrowers,
commencing with the fiscal quarter ending March 31, 1997, all as determined on a
rolling four (4) quarters basis.
9.6. Working Capital Ratio. Borrowers shall maintain a Working Capital
---------------------
Ratio of not less than 2.0 to 1.0 as of the end of each fiscal quarter of
Borrowers.
9.7. Changes to Financial Covenants. The Bank may condition extension of
------------------------------
the Line after the Contract Period upon revision of the foregoing financial
covenants, including without limitation revisions for periods after September
30, 1997, as Bank in its sole discretion may require.
10. ACCOUNTING RECORDS, REPORTS AND FINANCIAL STATEMENTS. Borrowers will
----------------------------------------------------
maintain books of record and account in which full, correct and current entries
in accordance with GAAP will be made of all of its dealings, business and
affairs, and Borrowers will deliver to Bank the following (all in form and
content acceptable to Bank):
10.1. Annual Statements. As soon as available and in any event within
-----------------
five (5) Business Days after filing with the SEC:
(a) the audited consolidated and consolidating income and retained
earnings statements of Borrowers and their Subsidiaries for such fiscal year,
(b) the audited consolidated and consolidating balance sheet of
Borrowers and their Subsidiaries as at the end of such fiscal year, and
(c) the audited consolidated and consolidating statement of cash
flow of Borrowers and their Subsidiaries for such fiscal year, and
(d) the 10-K report of Borrowers and their Subsidiaries for such
fiscal year,
setting forth in comparative form the corresponding figures as at the end of the
previous fiscal year, all in reasonable detail, including all supporting
schedules and comments. The foregoing statements
-24-
<PAGE>
and balance sheets shall be prepared in accordance with GAAP and shall be
audited by independent certified public accountants of recognized standing
acceptable to Bank in the reasonable exercise of its discretion (the
"Accountants") with respect to which such Accountants shall deliver their
unqualified opinion.
10.2. Quarterly 10-Q Statements. As soon as available and in any event
-------------------------
within five (5) Business Days after filing with the SEC the 10-Q report of
Borrowers and their Subsidiaries for such fiscal quarter.
10.3. Monthly Statements. As soon as available and in any event within
------------------
forty (40) days after the end of each calendar month:
(a) the consolidated and consolidating income and retained earnings
statements of Borrowers and their Subsidiaries for such month, and
(b) the consolidated and consolidating balance sheet of Borrowers
and their Subsidiaries as of the end of such month.
10.4. Accounts Receivable Agings. Within fifty (50) days of the end of
--------------------------
each fiscal quarter, statements of Borrowers' domestic accounts receivable and
any aging thereof, certified as to accuracy by the chief financial officer of
Borrowers.
10.5. Audit Reports. Promptly upon receipt thereof, one copy of each
-------------
other report submitted to Borrowers, by the independent accountants primarily
engaged by Borrowers to prepare the audited financial statements of Borrowers
pursuant to Section 10.1 hereof, including management letters, "comment"
------------
letters, in connection with any annual, interim or special audit report made by
them of the books of Borrowers.
10.6. Reports to Governmental Agencies and Other Creditors. With
----------------------------------------------------
reasonable promptness, copies of all such financial reports, statements and
returns which Borrowers shall file with any federal or state department,
commission, board, bureau, agency or instrumentality, including, without
limitation, the SEC, and any report or statement delivered by Borrowers to any
supplier or other creditor in connection with any payment restructuring.
10.7. Requested Information. With reasonable promptness, all such other
---------------------
data and information in respect of the condition, operation and affairs of
Borrowers as Bank may reasonably request from time to time.
10.8. Compliance Certificates. Within fifty (50) days of the end of each
-----------------------
fiscal quarter of Borrowers, a certificate of the chief financial officer of
Borrowers: (a) stating that Borrowers have observed, performed and complied with
each and every undertaking contained herein, (b) setting forth the information
and computations (in sufficient detail) required in order to establish whether
Borrowers were operating in compliance with the financial covenants in Section 9
---------
of this Agreement, and (c) certifying that as of the date of such certification,
there does not exist any Event of Default
-25-
<PAGE>
or any occurrence or state of affairs which with the giving of notice, passage
of time or both would constitute an Event of Default. Such certificate will be
in the form of Exhibit "B" attached hereto.
-----------
10.9. Litigation Summaries. Within fifty (50) days of the end of each
--------------------
fiscal quarter of Borrowers, a summary of all Borrowers' pending and threatened
litigation.
11. ENVIRONMENTAL REPRESENTATIONS AND COVENANTS.
-------------------------------------------
11.1. Representations. Borrowers represent to Bank as follows: (a) the
---------------
Environmental Affiliates are in material compliance with all Environmental
Requirements and no Borrower has any knowledge of any circumstances which may
prevent or interfere with such compliance in the future; (b) the Environmental
Affiliates have all material licenses, permits, approvals and authorizations
required under applicable Environmental Requirements; (c) there are no pending
or, to the best of their knowledge, threatened claims against any of the
Environmental Affiliates or any of their assets related to the failure to comply
with any Environmental Requirements, or any facts or circumstances which could
give rise to such a claim; (d) to the best of their knowledge, no facility or
property now or previously owned, operated or leased by any Environmental
Affiliate is an Environmental Cleanup Site; (e) other than in the ordinary
course of their business and in compliance with applicable law, no Environmental
Affiliate has treated, stored, transported, handled or disposed of Special
Materials at or adjacent to any Environmental Cleanup Site; (f) there are no
liens or claims for cost reimbursement outstanding or, to the best of their
knowledge, threatened against any Environmental Affiliate or any of their
assets, or, to the best of their knowledge, any facts or circumstances which
could give rise to such a lien or claim; and (g) to the best of their knowledge,
there are no facts or circumstances which, under the provisions of any
Environmental Requirements, could restrict the use, occupancy or transferability
of any of the Collateral or any of the facilities owned, leased or operated by
any Environmental Affiliate.
11.2. Real Property. Borrowers represent and warrant to Bank that, to the
-------------
best of their knowledge, there are no Special Materials presently located on or,
to the best of their knowledge, near any real property owned, leased or operated
by any Environmental Affiliate (collectively, "Real Property") except for
Special Materials which are and have at all times been treated, stored,
transported, handled and disposed of in compliance with all Environmental
Requirements. Borrowers represent to Bank that the Real Property is not now
being used nor, to the best of Borrowers' knowledge, has it ever been used in
the past for activities involving Special Materials, including but not limited
to the use, generation, collection, storage, treatment, or disposal of any
Special Materials except for Special Materials which are and have at all times
been treated, stored, transported, handled and disposed of in compliance with
all Environmental Requirements. Without limiting the generality of the
foregoing, the Real Property is not being used nor, to the best of Borrowers'
knowledge, has it ever been used in the past for a landfill, surface impoundment
or other area for the treatment, storage or disposal of solid waste (including
solid waste such as sludge).
11.3. Covenant Regarding Compliance. Borrowers shall take or cause all
-----------------------------
Environmental Affiliates to take, at Borrowers' and such Environmental
Affiliate's sole expense, such actions as may be necessary to comply with all
Environmental Requirements, as hereinafter defined. If any Environmental
Affiliate shall fail to take such action, Bank may make advances or payments
towards
-26-
<PAGE>
performance or satisfaction of the same but shall be under no obligation to do
so. All sums so advanced or paid, including all sums advanced or paid by Bank in
connection with any judicial or administrative investigation or proceeding
relating thereto, including, without limitation, attorney's fees, fines, or
other penalty payments, shall be at once repayable by Borrowers and all sums so
advanced or paid shall become a part of the Bank Indebtedness.
The Environmental Affiliates will maintain all licenses, permits,
approvals and authorizations required under applicable Environmental
Requirements. In connection with off-site treatment, storage, handling,
transportation or disposal of Special Materials, the Environmental Affiliates
will conduct such activities only at facilities and with carriers who operate in
compliance with all Environmental Requirements and will obtain certificates of
compliance or disposal from all contractors retained in connection with such
activities.
11.4. Notices. In the event any Borrower becomes aware of any past,
-------
present or future facts or circumstances which have given rise or could give
rise to a claim against any Environmental Affiliate related to a failure to
comply with any Environmental Requirements, Borrowers will promptly give Bank
notice thereof, together with a written statement of an officer of Borrowers
setting forth the details thereof and the action with respect thereto taken or
proposed to be taken by the Environmental Affiliates.
11.5. Indemnity. Borrowers agree to indemnify, defend and hold harmless
---------
Bank, its parents, subsidiaries, successors and assigns, and any officer,
director, shareholder, employee, Affiliate or agent of Bank, for all loss,
liability, damage, cost and expenses, including, without limitation, attorney's
fees and disbursements (including the reasonable allocated cost of in-house
counsel and staff) arising from or related to (a) the release of any Special
Materials at any facility at any time owned, leased or operated by Borrowers or
any of their Subsidiaries, (b) the release of any Special Materials treated,
stored, transported, handled, generated or disposed of by or on behalf of
Borrowers or any of their Subsidiaries at any third party owned site, (c) any
claim against any Environmental Affiliate that they have failed to comply with
all Environmental Requirements, and (d) the breach by Borrowers of any
representation or covenant in this Section 11.
----------
11.6. Testing. After the occurrence and during the continuation of an
-------
Event of Default, Bank shall have the right from time to time to designate such
persons ("Environmental Consultants") as Bank may select to visit, inspect,
examine and test all properties owned, leased or operated by and all products
and wastes generated, treated, stored, transported, handled or disposed of by or
on behalf of any Environmental Affiliate, for the purpose of investigating
compliance with Environmental Requirements, any actual or potential claims
related thereto, and any condition which could result in potential liability,
cost or expenses to the Bank. Borrowers will permit, and will cause all
Environmental Affiliates to permit, such Environmental Consultants to have
access to all of such properties, products and wastes and all books, records and
reports related to compliance by the Environmental Affiliates with all
Environmental Requirements. Borrowers will supply, and will cause all
Environmental Affiliates to supply, Bank or the Environmental Consultants with
all information, records, correspondence, audits, reviews and materials related
to compliance by the Environmental Affiliates with all Environmental
Requirements and will make available to Bank or
-27-
<PAGE>
the Environmental Consultants appropriate personnel employed by or consultants
retained by the Environmental Affiliates having knowledge of such matters.
The cost of such visits, inspections, examination and tests shall be borne
by the Borrowers. In the event Bank pays such costs, such sums shall be at once
repayable by Borrowers and all sums so advanced or paid by Bank shall become
part of the Bank Indebtedness. Notwithstanding the foregoing, the Bank shall
have no obligation to perform any tests, examinations or inspections or to
monitor the Environmental Affiliates' compliance with all Environmental
Requirements.
11.7. Survival. The representations and covenants of Borrowers contained
--------
in this Section 11, including without limitation the indemnification obligation
----------
of Borrowers, shall survive the occurrence of any event whatsoever, including
the payment of the Bank Indebtedness or any investigation by or knowledge of
Bank.
11.8. Definitions. For purposes of the foregoing:
-----------
(a) "Environmental Cleanup Site" shall mean any location which is
listed or proposed for listing on the National Priorities List, on CERCLIS or on
any similar state list of sites requiring investigation or cleanup, or which is
the subject of any pending or threatened action, suit, proceeding or
investigation related to or arising from any alleged violation of any
Environmental Requirements.
(b) "Environmental Requirements" means any and all applicable
federal, state or local laws, statutes, ordinances, regulations or standards,
administrative or court orders or decrees, common law doctrines or private
agreements, relating to (i) pollution or protection of the environment and
natural resources, (ii) exposure of employees or other persons to Special
Materials, (iii) protection of the public health and welfare from the effects of
Special Materials and their products, by-products, wastes, emissions, discharges
or releases, and (iv) regulation, licensing, approval or authorization of the
manufacture, generation, use, formulation, packaging, labeling, transporting,
distributing, handling, storing or disposing of any Special Materials.
(c) "Special Materials" means any and all materials which, under
Environmental Requirements, require special handling in use, generation,
collection, storage, treatment or disposal, or payment of costs associated with
responding to the lawful directives of any court or agency of competent
jurisdiction. Special Materials shall include, without limitation: (i) any
flammable substance, explosive, radioactive material, hazardous material,
hazardous waste, toxic substance, solid waste, pollutant, contaminant or any
related material, raw material, substance, product or by product of any
substance specified in or regulated or otherwise affected by any Environmental
Requirements (including but not limited to any "hazardous substance" as defined
in the Comprehensive Environmental Response, Compensation and Liability Act of
1980 as amended or any similar state or local law), (ii) any toxic chemical or
other substance from or related to industrial, commercial or institutional
activities, and (iii) asbestos, gasoline, diesel fuel, motor oil, waste and used
oil, heating oil and other petroleum products or compounds, polycholorinated
biphenyls, radon, urea formaldehyde and lead-containing materials.
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<PAGE>
12. CONDITIONS OF CLOSING. The obligation of Bank to make available the Line
---------------------
is subject to the performance by Borrowers of all of their agreements to be
performed hereunder and to the following further conditions (any of which may be
waived by Bank):
12.1. Loan Documents. Borrowers and all other required persons and
---------------
entities will have executed and delivered to Bank the Loan Documents.
12.2. Representations and Warranties. All representations and warranties
------------------------------
of Borrowers set forth in the Loan Documents will be true at and as of the date
hereof.
12.3. No Default. No condition or event shall exist or have occurred
----------
which would constitute an Event of Default hereunder (or would, upon the giving
of notice or the passage of time or both, constitute such an Event of Default).
12.4. Proceedings and Documents. All proceedings taken by Borrowers in
-------------------------
connection with the transactions contemplated by this Agreement and all
documents incident to such transactions shall be satisfactory in form and
substance to Bank and Bank's counsel, and Bank shall have received all documents
or other evidence which it reasonably may request in connection with such
proceedings and transactions. Borrowers shall have delivered to Bank a
certificate, in form and substance satisfactory to Bank, dated the date hereof
and signed on behalf of the Borrowers by an officer of Borrowers, certifying (a)
true copies of the Articles of Incorporation and bylaws of the Borrowers in
effect on such date, (b) true copies of all corporate actions taken by Borrowers
relative to the Loan Documents, and (c) the names, true signatures and
incumbency of the officers of the Borrowers authorized to execute and deliver
this Agreement and the other Loan Documents. Bank may conclusively rely on such
certificate unless and until a later certificate revising the prior certificate
has been received by Bank.
12.5. Certification for Phoenix Location. Bank shall have received the
----------------------------------
certification, in the form attached hereto as Exhibit "C", of Borrowers
regarding the status of the lease for the Borrowers' Phoenix location.
12.6. Delivery of Other Documents. The following documents shall have
---------------------------
been delivered by or on behalf of Borrowers to Bank:
(a) Good Standing and Tax Lien Certificates. A good standing
---------------------------------------
subsistence certificate certifying to the good standing subsistence and
corporate status of each Borrower, good standing/foreign qualification
certificates from all other jurisdictions in which each Borrower is required to
be qualified to do business, and tax lien certificates for that Borrower from
each jurisdiction in which that Borrower is required to be qualified to do
business.
(b) Authorization Documents. Evidence of authorization of
-----------------------
Borrowers' execution and full performance of this Agreement, the Loan Documents
and all other documents and actions required hereunder.
(c) Insurance. Evidence of the insurance coverage required under
---------
Section 8.12.
- ------------
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<PAGE>
(d) Opinion of Counsel. An opinion of counsel for Borrowers in form
------------------
and content satisfactory to Bank.
(e) Lien Search. Copies of record searches (including UCC searches
-----------
and judgments, suits, tax and other lien searches) confirming that Bank has a
first priority security interest in the Collateral, except as otherwise provided
in this Agreement, acceptable to Bank.
(f) No Material Adverse Change. Evidence satisfactory to the Bank
--------------------------
that no material adverse change has occurred with respect to the Borrowers since
March 31, 1996.
(g) Licenses and Approvals. Copies of all licenses, approvals,
----------------------
consents, authorizations and filings of Borrowers, required or necessary for the
operation by Borrowers of their business.
(h) Other Documents. Such other documents as may be required to be
---------------
submitted to Bank by the terms hereof or of any Loan Document.
13. CERTAIN CONDITIONS TO SUBSEQUENT ADVANCES. Without limiting Bank's
-----------------------------------------
discretion to make advances under the Line subsequent to the date hereof,
subsequent advances shall be conditioned upon the following conditions and each
request by Borrowers for an advance shall constitute a representation by
Borrowers to Bank that each condition has been met or satisfied:
13.1. Representations and Warranties. All representations and warranties
------------------------------
of Borrowers contained herein, other than those set forth in Sections 7.4, 7.5
-----------------
and 7.6 or in the Loan Documents, shall be true at and as of the date of such
- -------
advance as if made on such date, and each request for an advance shall
constitute reaffirmation by Borrowers that such representations and warranties
are then true.
13.2. No Default. No condition or event shall exist or have occurred at
----------
or as of the date of such advance which would constitute an Event of Default
hereunder (or would, upon the giving of notice or the passage of time or both,
constitute such an Event of Default).
13.3. Other Requirements. Bank shall have received all certificates,
------------------
authorizations, affidavits, schedules and other documents which are provided for
hereunder or under the Loan Documents, or which Bank may reasonably request.
14. DEFAULT AND REMEDIES.
--------------------
14.1. Events of Default. The occurrence of any one or more of the
-----------------
following events shall constitute an Event or Events of Default hereunder:
(a) The failure of Borrowers to pay any amount of principal or
interest on the Line Note, Secured Subordinated Notes or any fee or other sums
payable hereunder, or any other Bank Indebtedness within three (3) Business Days
of the date on which such payment is due, whether
-30-
<PAGE>
on demand, at the stated maturity or due date thereof, or by reason of any
requirement for the prepayment thereof, by acceleration or otherwise;
(b) The failure of Borrowers to duly perform or observe any
obligation, covenant or agreement on their part contained herein or in any other
Loan Document or any Secured Subordinated Note Document not otherwise
specifically constituting an Event of Default under this Section 14.1 and such
------------
failure continues unremedied for a period of thirty (30) days after the earlier
of (i) notice from Bank to Borrowers of the existence of such failure, or (ii)
any officer or principal of any Borrower knows or should have known of the
existence of such failure, provided that, in the event such failure is incapable
of remedy or consists of a default of any of the financial covenants in Section
-------
9, or was wilfully caused or permitted by a Borrower, Borrowers shall not be
- -
entitled to any notice or grace hereunder;
(c) The failure of any Borrower to pay any Indebtedness for borrowed
money due to any third Person in an amount in excess of Two Hundred Fifty
Thousand Dollars ($250,000.00) or the existence of any other event of default
under any loan agreement, security agreement, mortgage or other agreement
pertaining to any such Indebtedness binding any Borrower, after the expiration
of any notice and/or grace periods permitted in such documents;
(d) The failure of any Borrower to pay or perform any other
obligation to Bank under any other agreement or note or otherwise arising,
whether or not related to this Agreement or any other Indebtedness Documents,
after the expiration of any notice and/or grace periods permitted in such
documents;
(e) The adjudication of any Borrower as a bankrupt or insolvent, or
the entry of an Order for Relief against any Borrower or the entry of an order
appointing a receiver or trustee for any Borrower of any of its property or
approving a petition seeking reorganization or other similar relief under the
bankruptcy or other similar laws of the United States or any state or any other
competent jurisdiction;
(f) A proceeding under any bankruptcy, reorganization, arrangement
of debt, insolvency, readjustment of debt or receivership law is filed by or
(unless dismissed within 90 days) against any Borrower or any Borrower makes an
assignment for the benefit of creditors, or any Borrower takes any action to
authorize any of the foregoing;
(g) The suspension of the operation of any Borrower's present
business, or any Borrower becoming unable to meet its debts as they mature, or
the admission in writing by any Borrower to such effect, or any Borrower calling
any meeting of all or any material portion of its creditors for the purpose of
debt restructure;
(h) All or any part of the Collateral or the assets of any Borrower
are attached, seized, subjected to a writ or distress warrant, or levied upon,
or come within the possession or control of any receiver, trustee, custodian or
assignee for the benefit of creditors;
-31-
<PAGE>
(i) The entry of a final judgment for the payment of money against
any Borrower which, within thirty (30) days after such entry, shall not have
been discharged or execution thereof stayed pending appeal or shall not have
been discharged within thirty (30) days after the expiration of any such stay;
(j) Any representation or warranty of Borrowers in any of the
Indebtedness Documents is discovered to be untrue in any material respect or any
statement, certificate or data furnished by Borrowers pursuant hereto is
discovered to be untrue in any material respect as of the date as of which the
facts therein set forth are stated or certified;
(k) A Borrower voluntarily or involuntarily dissolves or is
dissolved, terminates or is terminated;
(l) Any Borrower is enjoined, restrained, or in any way prevented by
the order of any court or any administrative or regulatory agency, the effect of
which order restricts any Borrower from conducting all or any material part of
its business;
(m) A material and adverse change occurs in any of any Borrower's
operations, management or financial condition or in the value of the Collateral;
(n) Any uninsured damage to, or loss, theft, or destruction of, any
of the Collateral occurs in an amount in excess of Five Hundred Thousand Dollars
($500,000.00);
(o) Any strike, lockout, labor dispute, embargo, condemnation, act
of God or public enemy, or other casualty loss occurs resulting in the cessation
or substantial curtailment of production or other revenue producing activities
at any facility of any Borrower for more than thirty (30) consecutive days;
(p) Any change in the stock ownership of any Subsidiary, any
issuance of stock, debentures, warrants or other securities of any Borrower
which would cause a breach of Section 8.20 or any pledge of the stock of any
------------
Borrower other than National Media;
(q) The validity or enforceability of this Agreement, or any of the
Loan Documents, is contested by a Borrower; any stockholder of a Borrower; or
any Borrower denies that it has any or any further liability or obligation
hereunder or thereunder; or
All time periods for notice, grace and cure provided in this Section 14.1
------------
shall run concurrently with any notice, grace or cure periods provided for
Borrowers' benefit under any of the Loan Documents or any of the Secured
Subordinated Note Documents.
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<PAGE>
14.2. Remedies. At the option of the Bank upon the occurrence and during
--------
the continuance of an Event of Default, or at any time thereafter:
(a) The entire unpaid principal of the Line, the Secured
Subordinated Notes, all other Bank Indebtedness, or any part thereof, all
interest accrued thereon, all fees due hereunder and all other obligations of
Borrowers to Bank hereunder or under any other agreement, note or otherwise
arising will become immediately due and payable without any further demand or
notice. Bank agrees to provide written notice to Borrowers of its acceleration
of the Bank Indebtedness pursuant to this provision;
(b) The Line will immediately terminate and the Borrowers will
receive no further extensions of credit thereunder;
(c) Bank may increase the interest rate on the Line and the Secured
Subordinated Note to the applicable default rate set forth herein, without
notice (except as specifically required hereunder);
(d) Bank may enter the premises occupied by any Borrower and take
possession of the Collateral and any records relating thereto; and/or
(e) Bank may exercise each and every right and remedy granted to it
under the Loan Documents, under the Uniform Commercial Code and under any other
applicable law or at equity.
If an Event of Default occurs under Section 14.1(e) or (f), all Bank
--------------- ---
Indebtedness shall become immediately due and payable.
14.3. Sale or Other Disposition of Collateral. The sale, lease or other
---------------------------------------
disposition of the Collateral, or any part thereof, by Bank after an Event of
Default may be for cash, credit or any combination thereof, and Bank may
purchase all or any part of the Collateral at public or, if permitted by law,
private sale, and in lieu of actual payment of such purchase price, may set-off
the amount of such purchase price against the Bank Indebtedness then owing. Any
sales of the Collateral may be adjourned from time to time with or without
notice. The Bank may cause the Collateral to remain on Borrowers' premises or
otherwise or to be removed and stored at premises owned by other persons, at
Borrowers' expense, pending sale or other disposition of the Collateral.
Borrowers, at Bank's request, shall assemble the Collateral consisting of
inventory and tangible assets and make such assets available to Bank at a place
to be designated by Bank. Bank shall have the right to conduct such sales on
Borrowers' premises, at Borrowers' expense, or elsewhere, on such occasion or
occasions as Bank may see fit. Any notice required to be given by Bank of a
sale, lease or other disposition or other intended action by Bank with respect
to any of the Collateral which is deposited in the United States mail, postage
prepaid and duly addressed to Borrowers at the address specified in Section 15.1
------------
below, at least five (5) business days prior to such proposed action, shall
constitute fair and reasonable notice to Borrowers of any such action. The net
proceeds realized by Bank upon any such sale or other disposition, after
deduction for the expenses of retaking, holding, storing, transporting,
preparing for sale, selling or otherwise disposing of the Collateral incurred by
Bank
-33-
<PAGE>
in connection therewith and all other costs and expenses related thereto
including attorney fees, shall be applied in such order as Bank, in its sole
discretion, elects, toward satisfaction of the Bank Indebtedness. Bank shall
account to Borrowers for any surplus realized upon such sale or other
disposition, and Borrowers shall remain liable for any deficiency. The
commencement of any action, legal or equitable, or the rendering of any judgment
or decree for any deficiency shall not affect Bank's security interest in the
Collateral. Borrowers agree that Bank has no obligation to preserve rights to
the Collateral against any other parties. Bank is hereby granted a license or
other right to use, after an Event of Default, without charge, Borrowers'
labels, general intangibles, intellectual property, equipment, real estate,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale and selling any inventory or other Collateral and
Borrowers' rights under all contracts, licenses, approvals, permits, leases and
franchise agreements shall inure to Bank's benefit. Bank shall be under no
obligation to marshall any assets in favor of Borrowers or any other party or
against or in payment of any or all of the Bank Indebtedness.
14.4. Actions with Respect to Accounts. Borrowers hereby irrevocably
--------------------------------
make, constitute and appoint Bank (and any of Bank's designated officers,
employees or agents) as their true and lawful attorney-in-fact, with full power
of substitution, with power to sign its name and to take any of the following
actions, in its name or the name of Bank, as Bank may determine, without notice
to Borrowers and at Borrowers' expense:
(a) Verify the validity and amount of or any other matter relating
to the Collateral by mail, telephone, telecopy or otherwise;
(b) Notify all account debtors that Borrowers' accounts have been
assigned to Bank and that Bank has a security interest therein, provided that
such notification shall only be given prior to the occurrence of an Event of
Default if notice is required to protect or perfect the Bank's security
interests in the Collateral;
(c) Upon the occurrence and during the continuation of an Event of
Default direct all account debtors to make payment of all Borrowers' accounts
directly to Bank and forward invoices directly to such account debtors;
(d) Upon the occurrence and during continuation of an Event of
Default take control in any manner of any cash or non-cash items of payment or
proceeds of such accounts;
(e) Upon the occurrence and during continuation of an Event of
Default notify the United States Postal Service to change the address for
delivery of mail addressed to any Borrower to such address as Bank may
designate;
(f) Upon the occurrence and during continuation of an Event of
Default have access to any lockbox or postal boxes into which Borrowers' mail is
deposited and receive, open and dispose of all mail addressed to any Borrower
(any sums received pursuant to the exercise of the
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<PAGE>
rights provided in Sections 14.4(a) through (f) above may, at Bank's option, be
----------------------------
deposited in the cash collateral account provided for herein);
(g) Upon the occurrence and during continuation of an Event of
Default take control in any manner of any rejected, returned, stopped in transit
or repossessed goods relating to any accounts;
(h) Upon the occurrence and during continuation of an Event of
Default, enforce payment of and collect any accounts, by legal proceedings or
otherwise, and for such purpose Bank may:
(i) Demand payment of any accounts or direct any account
debtors to make payment of accounts directly to Bank;
(ii) Receive and collect all monies due or to become due to any
Borrower;
(iii) Exercise all of Borrowers' rights and remedies with
respect to the collection of accounts;
(iv) Settle, adjust, compromise, extend, renew, discharge or
release the accounts;
(v) Sell or assign the accounts on such terms, for such amount
and at such times as Bank deems advisable;
(vi) Prepare, file and sign Borrowers' name or names on any
Proof of Claim or similar document in any proceeding filed under federal or
state bankruptcy, insolvency, reorganization or other similar law as to any
account debtor;
(vii) Prepare, file and sign Borrowers' name or names on any
Notice of Lien, Claim of Mechanic's Lien, Assignment or Satisfaction of Lien or
Mechanic's Lien or similar document in connection with the Collateral;
(viii) Endorse the name of any Borrower upon any chattel papers,
documents, instruments, invoices, freight bills, bills of lading or similar
documents or agreements relating to the accounts or goods pertaining thereto or
upon any checks or other media of payment or evidences of a security interest
that may come into Bank's possession;
(ix) Sign the name of any Borrower to verifications of accounts
and notices thereof sent by account debtors to Borrowers; or
(x) Take all other actions necessary or desirable to protect
Borrowers' or Bank's interest in the accounts.
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<PAGE>
Borrowers ratify and approve all acts of said attorneys and agrees that said
attorneys shall not be liable for any acts of commission or omission, nor for
any error of judgment or mistake of fact or law, except willful misconduct.
This power, being coupled with an interest, is irrevocable. Borrowers agree to
assist the Bank in the collection and enforcement of its accounts and not to
hinder, delay or impede the Bank in its collection or enforcement of said
accounts.
14.5. Set-Off. Without limiting the rights of Bank under applicable law,
-------
Bank has and may exercise a right of set-off, a lien against and a security
interest in all property of Borrowers now or at any time in Bank's possession in
any capacity whatsoever, including but not limited to any balance of any
deposit, trust or agency account, or any other bank account with Bank, as
security for all Bank Indebtedness. At any time and from time to time following
the occurrence of an Event of Default, or an event which with the giving of
notice or passage of time or both would constitute an Event of Default, Bank may
without notice or demand, set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by Bank to or for the credit of Borrowers against
any or all of the Bank Indebtedness and the Borrowers' obligations under the
Loan Documents. If any bank account of any Borrower with Bank is attached or
otherwise liened or levied upon by any third party, Bank need not await the
running of any applicable grace period hereunder, but Bank shall have and be
deemed to have the immediate right of set-off and may apply the funds or amount
thus set-off against Borrowers obligations to the Bank.
14.6. Delay or Omission Not Waiver. Neither the failure nor any delay on
----------------------------
the part of Bank to exercise any right, remedy, power or privilege under the
Loan Documents upon the occurrence of any Event of Default or otherwise shall
operate as a waiver thereof or impair any such right, remedy, power or
privilege. No waiver of any Event of Default shall affect any later Event of
Default or shall impair any rights of Bank. No single, partial or full exercise
of any rights, remedies, powers and privileges by the Bank shall preclude
further or other exercise thereof. No course of dealing between Bank and
Borrowers shall operate as or be deemed to constitute a waiver of Bank's rights
under the Loan Documents or affect the duties or obligations of Borrowers.
14.7. Remedies Cumulative; Consents. The rights, remedies, powers and
-----------------------------
privileges provided for herein shall not be deemed exclusive, but shall be
cumulative and shall be in addition to all other rights, remedies, powers and
privileges in Bank's favor at law or in equity. Whenever the Bank's consent or
approval is required or permitted, such consent or approval shall be at the sole
and absolute discretion of Bank.
14.8. Certain Fees, Costs, Expenses and Expenditures. Borrowers agree to
----------------------------------------------
pay on demand all costs and expenses of Bank, including without limitation:
(a) all costs and expenses in connection with the preparation,
review, negotiation, execution and delivery of the Indebtedness Documents, and
the other documents to be delivered in connection therewith, or any amendments,
extensions and increases to any of the foregoing (including, without limitation,
reasonable attorney's fees and expenses, and the cost of appraisals and
reappraisals of Collateral performed after the occurrence or during the
continuation of an Event of
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<PAGE>
Default), and the cost of periodic lien searches and tax clearance certificates,
as Bank deems advisable;
(b) all losses, costs and expenses in connection with the
enforcement, protection and preservation of the Bank's rights or remedies under
the Indebtedness Documents, or any other agreement relating to any Bank
Indebtedness, or in connection with legal advice relating to the rights or
responsibilities of Bank (including without limitation court costs, attorney's
fees and expenses of accountants and appraisers); and
(c) any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of the Indebtedness
Documents, and all liabilities to which Bank may become subject as the result of
delay in paying or omission to pay such taxes.
In the event Borrowers shall fail after written notice form the Bank to
pay taxes, insurance, assessments, costs or expenses which it is required to pay
hereunder, or fails to keep the Collateral free from security interests or lien
(except as expressly permitted herein), or fails to maintain or repair the
Collateral as required hereby, or otherwise breaches any obligations under the
Indebtedness Documents, Bank in its discretion, may make expenditures for such
purposes and the amount so expended (including reasonable attorney's fees and
expenses, filing fees and other charges) shall be payable by Borrowers on demand
and shall constitute part of the Bank Indebtedness. Nothing contained in this
provision shall preclude the Bank from taking any immediate action it deems
necessary to preserve and protect its interest in the Collateral. Borrowers
agree to pay the costs and expenses incurred by the Bank associated with any
such immediate action.
With respect to any amount required to be paid by Borrowers under this
Section, in the event Borrowers fail to pay such amount on demand, Borrowers
shall also pay to Bank interest thereon at the default rate set forth in Section
-------
4.2 for the Line. Borrowers' obligations under this Section shall survive
- ---
termination of this Agreement.
14.9. Time is of the Essence. Time is of the essence in Borrowers'
----------------------
performance of its obligations under the Loan Documents.
14.10. Acknowledgement of Confession of Judgment Provisions. BORROWERS
----------------------------------------------------
ACKNOWLEDGE AND AGREE THAT THE NOTE AND THE LOAN DOCUMENTS CONTAIN PROVISIONS
WHEREBY BANK MAY ENTER JUDGMENT BY CONFESSION AGAINST BORROWERS. BEING FULLY
AWARE OF THEIR RIGHTS TO PRIOR NOTICE AND HEARING ON THE QUESTION OF THE
VALIDITY OF ANY CLAIMS THAT MAY BE ASSERTED AGAINST THEM BY BANK UNDER THE NOTE
AND LOAN DOCUMENTS, BEFORE JUDGMENT CAN BE ENTERED, BORROWERS HEREBY WAIVE THESE
RIGHTS AND AGREE AND CONSENT TO BANK ENTERING JUDGMENT AGAINST BORROWERS BY
CONFESSION. ANY PROVISION IN A CONFESSION OF JUDGMENT IN ANY OF THE LOAN
DOCUMENTS FOR AN ATTORNEY'S COLLECTION COMMISSION SHALL IN NO WAY LIMIT
BORROWERS' LIABILITY TO REIMBURSE BANK FOR ALL LEGAL FEES ACTUALLY INCURRED BY
BANK, EVEN IF SUCH FEES ARE IN EXCESS OF THE
-37-
<PAGE>
ATTORNEY'S COLLECTION COMMISSION PROVIDED FOR IN SUCH CONFESSION OF JUDGMENT.
15. COMMUNICATIONS AND NOTICES.
--------------------------
15.1. Communications and Notices. All notices, requests and other
--------------------------
communications made or given in connection with the Loan Documents shall be in
writing and, unless receipt is stated herein to be required, shall be deemed to
have been validly given if delivered personally to the individual or division or
department to whose attention notices to a party are to be addressed, or by
private carrier, or registered or certified mail, return receipt requested, or
by telecopy with the original forwarded by first-class mail, in all cases, with
charges prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:
To Borrowers:
National Media Corporation
1700 Market Street
Philadelphia, PA 19103
Attention: James Gallagher, Chief Financial Officer
Telecopy Number: (215) 772-5038
With a copy to:
Klehr, Harrison, Harvey, Branzburg, & Ellers
1401 Walnut Street
Philadelphia, PA 19102
Attention: Richard Roisman, Esquire
Telecopy Number: (215) 568-6603
To Bank:
Meridian Bank
Great Valley Corporate Center, Suite 200
55 Valley Stream Parkway
Malvern, PA 19355
Attention: Ash R. Lilani, Banking Officer
Telecopy Number: (610) 251-5929
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With a copy to:
Lesser & Kaplin, P.C.
350 Sentry Parkway, Building 640
Blue Bell, Pennsylvania 19422
Attention: Sara Lee Keller-Smith, Esquire
Telecopy Number: (610) 828-1555/0461
16. DEFINITIONS. The following words and phrases as used in capitalized form
-----------
in this Agreement, whether in the singular or plural, shall have the meanings
indicated:
16.1. "Accounting Terms". As used in this Agreement, or any certificate,
-----------------
report or other document made or delivered pursuant to this Agreement,
accounting terms not defined elsewhere in this Agreement shall have the
respective meanings given to them under GAAP.
16.2. "Affiliate", as to any Person, means each other Person that
----------
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Person in question.
16.3. "Bank Indebtedness" shall mean all obligations and Indebtedness of
------------------
Borrowers to Bank, whether now or hereafter owing or existing, including,
without limitation, all obligations under the Indebtedness Documents, all
Foreign Exchange Contract Risk incurred by Bank for the benefit of Borrowers,
all obligations to reimburse Bank for payments made by Bank pursuant to any
letter of credit issued for the account or benefit of Borrowers by Bank all
other obligations or undertakings now or hereafter made by or for the benefit of
Borrowers to or for the benefit of Bank under any other agreement, promissory
note or undertaking now existing or hereafter entered into by Borrowers with
Bank, including, without limitation, all obligations of Borrowers to Bank under
any guaranty or surety agreement and all obligations of Borrowers to immediately
pay to Bank the amount of any overdraft on any deposit account maintained with
Bank, together with all interest and other sums payable in connection with any
of the foregoing.
16.4. "Barclays Lien" means those certain security interests, liens and
--------------
pledges given by Quantum and the foreign Subsidiaries of National Media, Media
Arts and Quantum to Barclays Bank PLC to secure the Barclays Loan.
16.5. "Barclays Loan" means that certain overdraft line extended by
--------------
Barclays Bank PLC to Quantum in an aggregate amount not to exceed One Million
Dollars ($1,000,000.00).
16.6. "Business Day" means any day except a Saturday, Sunday or other day
-------------
on which commercial banks in Philadelphia, Pennsylvania are authorized by law to
close.
16.7. "Capital Expenditures" means any expenditure that would be
---------------------
classified as a capital expenditure on a statement of cash flow of Borrowers
prepared in accordance with GAAP.
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16.8. "Capitalized Leases" means all lease obligations which have been
--------------------
or should be, in accordance with GAAP, capitalized on the books of the lessee.
16.9. "Capitalized Lease Obligations" means all amounts payable with
-------------------------------
respect to a Capitalized Lease.
16.10. "Commercial Rate Loans" means loans and advances extended by Bank
-----------------------
to Borrowers under the Line bearing interest at the National Commercial Rate.
16.11. "Corporation" means a corporation, partnership, trust,
-------------
unincorporated organization, association or joint stock company.
16.12. "Current Assets" at a particular date means the aggregate amount
----------------
of all assets of Borrowers which would be classified as current assets on a
balance sheet at such date, in accordance with GAAP.
16.13. "Current Liabilities" at a particular date means the liabilities
---------------------
(including tax and other proper accruals) of Borrowers which would be included
as current liabilities on a balance sheet of Borrowers at such date, in
accordance with GAAP.
16.14. "EBITDA" for any period, means earnings of Borrowers for such
--------
period, plus the aggregate amounts deducted in determining such earnings in
respect of (i) interest payable on Indebtedness of Borrowers for such period,
(ii) income taxes for period, and (iii) depreciation and amortization for such
period, each determined in accordance with GAAP.
16.15. "Environmental Affiliate" means Borrowers and any other Person for
-------------------------
whom Borrowers at any time has any liability (contingent or otherwise) with
respect to any claims arising out of the failure of Borrowers or such Person to
comply with all applicable Environmental Requirements.
16.16. "Event of Default" means each of the events specified in
------------------
Section 14.1.
- -------------
16.17. "Foreign Exchange Agreement" means that certain International
----------------------------
Foreign Exchange Master Agreement dated April 19, 1996 by and between Borrowers
and CoreStates Bank, N.A.
16.18. "Foreign Exchange Contract Risk" means, as to any issuer, as
--------------------------------
follows:
(a) a twenty percent (20%) market risk reserve of the total
dollar value of all outstanding foreign currency forward contracts between that
issuer and Borrowers; provided that the Gross Foreign Exchange Contract Risk
shall not exceed Fifty Million Dollars ($50,000,000.00) at any time, and
(b) a one hundred percent (100%) delivery risk reserve for the
total dollar value of each foreign currency forward contracts or foreign
currency spot contracts; provided that the issuer's delivery risk on any one
forward or spot contract shall not exceed Ten Million Dollars
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($10,000,000.00) and all issuers will not deliver on any one day forward and/or
spot contracts with an aggregate value in excess of Ten Million Dollars
($10,000,000.00).
16.19. "GAAP" means generally accepted accounting principles in the
------
United States of America, in effect from time to time, consistently applied and
maintained.
16.20. "Gross Foreign Exchange Contract Risk" means the total dollar
--------------------------------------
value of all outstanding foreign currency contracts between all issuers and
Borrowers.
16.21. "Indebtedness", as applied to a Person, means:
--------------
(a) all items (except items of capital stock or of surplus) which
in accordance with GAAP would be included in determining total liabilities as
shown on the liability side of a balance sheet of such Person as at the date as
of which Indebtedness is to be determined;
(b) to the extent not included in the foregoing, all
indebtedness, obligations, and liabilities secured by any mortgage, pledge,
lien, conditional sale or other title retention agreement or other security
interest to which any property or asset owned or held by such Person is subject,
whether or not the indebtedness, obligations or liabilities secured thereby
shall have been assumed by such Person; and
(c) to the extent not included in the foregoing, all
indebtedness, obligations and liabilities of others which such Person has
directly or indirectly guaranteed, endorsed (other than for collection or
deposit in the ordinary course of business), sold with recourse, or agreed
(contingently or otherwise) to purchase or repurchase or otherwise acquire or in
respect of which such Person has agreed to supply or advance funds (whether by
way of loan, stock purchase, capital contribution or otherwise) or otherwise to
become directly or indirectly liable.
16.22. "Indebtedness Documents" means all the Loan Documents, all Secured
------------------------
Subordinated Note Documents and the Foreign Exchange Agreement.
16.23. "LIBOR Loans" means loans and advances extended by Bank to
-------------
Borrowers under the Line bearing interest at the LIBOR Rate.
16.24. "LIBOR Rate" means for any day during each Rate Period the per
------------
annum rate of interest (computed on a basis of a year of 360 days and actual
days elapsed) determined by Bank by adding (a) the per annum rate of interest
estimated in good faith by Bank in accordance with its usual procedures (which
determination shall be conclusive) to be the average of the rate per annum for
deposits, in an amount of U.S. Dollars comparable to the amount of principal
relating to such Rate Period and having maturities comparable to such Rate
Period, offered to major money center banks in the London interbank market at or
about 11:00 a.m., London time, two London business days prior to such Rate
Period, and (b) one and one-quarter percent (1 1/4 %). In the event that the
LIBOR Rate is unavailable or cannot be ascertained, Bank shall have the right to
designate the LIBOR Rate on such basis as it shall reasonably determine.
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<PAGE>
16.25. "Line Amount" shall mean Twenty Million Dollars ($20,000,000.00);
-------------
provided however, that if Borrowers fail to consummate the Secondary Offering on
or before December 31, 1996, the Line Amount shall automatically reduce to
Fifteen Million Dollars ($15,000,000.00).
16.26. "Loan Documents" means this Agreement, the Existing Loan
----------------
Agreement, the Line Note, and all other documents, executed or delivered by
Borrowers pursuant to this Agreement or the Existing Loan Agreement, as they may
be amended from time to time.
16.27. "Media Consolidated" shall have the meaning set forth in
--------------------
Paragraph A of the Background.
- -----------
16.28. "National Commercial Rate" means a floating annual rate of
--------------------------
interest that is designated from time to time by the Bank as the National
Commercial Rate and is used by the Bank as a reference base with respect to
different interest rates charged to borrowers. The Bank's determination and
designation from time to time of the National Commercial Rate shall not in any
way preclude the Bank from making loans to other borrowers at a rate which is
higher or lower than or different from the National Commercial Rate.
16.29. "Note and Purchase Agreement" shall have the meaning set forth in
-----------------------------
Paragraph A of the Background.
- -----------
16.30. "Note Pledge Documents" means those certain Pledge Agreements
-----------------------
dated October 19, 1994 given by National Media and Media Arts to Safeguard, as
assigned to Bank pursuant to the Purchase Agreement, together with all blank
stock powers, original stock certificates and any other documents and agreements
executed and/or delivered in connection with any of the foregoing, as the same
may be amended from time to time.
16.31. "Note Security Documents" means those certain Security Agreements
-------------------------
and Trademark Security Agreements dated October 19, 1994 given by National Media
and Media Arts to Safeguard and that certain Copyright Collateral Assignment and
Agreement dated October 19, 1994 given by Media Arts to Safeguard, all as
assigned to Bank pursuant to the Purchase Agreement, together with all UCC-1
financing statements, UCC-3 assignment statements and any other documents and
agreements executed and/or delivered in connection with any of the foregoing, as
the same may be amended from time to time.
16.32. "Notification" means telephonic notice (which shall be
--------------
irrevocable) by Borrowers to Bank that Borrowers have requested that LIBOR Rate
or the Certificate Rate shall apply to some portion of the principal amount of
the Line in accordance with the provisions of Section 3.1 hereof, which notice
-----------
shall be given no later than 10:00 a.m. Philadelphia time, on the day which at
least two (2) Business Days prior to the day (for LIBOR Loans) or the day (for
Certificate Rate Loans) (which shall be a day on which Bank is open for
business) on which such election is to become effective, which notice shall
specify (a) which interest rate option is selected; (b) the principal amount of
the Line to be subject to such rate(s); (c) whether such amount is a new
advance, a renewal of a previous request of such rate, a conversion from one
interest rate to another, or a combination
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<PAGE>
thereof; (d) the Rate Period(s) (if required) selected; and (e) the date on
which such request is to become effective.
16.33. "Person" means an individual, a Corporation or a government or any
--------
agency or subdivision thereof, or any other entity.
16.34. "Prestige Group" shall have the meaning set forth in Section 8.7
---------------- -----------
hereof.
16.35. "Purchase Agreement" shall have the meaning set forth in
--------------------
Paragraph C of the Background.
- -----------
16.36. "Rate Period" means for any portion of principal of the Line for
-------------
which Borrowers elect the LIBOR Rate, the period of time for which such rate
shall apply to such principal portion. Rate Periods for principal earning
interest at the LIBOR Rate shall be for periods of 30, 60 or 90 days, and for no
other lengths of time, provided that, no Rate Period may end after the Contract
Period.
16.37. "Safeguard" shall have the meaning set forth in Paragraph A of the
----------- ----------
Background.
16.38. "Secondary Offering" means a certain proposed public offering for
--------------------
sale by National Media of its stock to occur between the date of this Agreement
and December 31, 1996, pursuant to which National Media will attempt to raise at
least Twenty Million Dollars ($20,000,000.00) of additional capital.
16.39. "Secured Subordinated Notes Documents" means the Note and
--------------------------------------
Purchase Agreement, the Secured Subordinated Notes, the Note Security Documents,
the Note Pledge Agreements and any other documents and agreements executed
and/or delivered in connection with any of the foregoing, as the same may be
amended from time to time.
16.40. "Secured Subordinated Notes" shall have the meaning set forth in
----------------------------
Paragraph A of the Background.
- -----------
16.41. "Subsidiary" means a Corporation (a) which is organized under the
------------
laws of the United States or any State thereof, or any other county or
jurisdiction, (b) which conducts substantially all of its business and has
substantially all of its assets within the United States, and (c) of which more
than fifty percent (50%) of its outstanding voting stock of every class (or
other voting equity interest) is owned by Borrowers or one or more of their
Subsidiaries.
16.42. "Tangible Net Worth", as applied to Borrowers means the remainder
--------------------
after deducting from the sum of all assets (net of reserve for uncollectible
accounts, depreciation, amortization, obsolescence and the like) properly
appearing on a balance sheet of Borrowers prepared in accordance with GAAP, the
following:
(a) all Indebtedness of Borrowers; and
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<PAGE>
(b) to the extent reflected as an asset in such balance sheet,
(i) the book amount of all assets which would be treated as intangibles under
GAAP, including without limitation such items as organizational costs (as
currently reflected on Borrowers' financial statements), goodwill, trademarks,
trade names, service marks, brand names, franchises, copyrights, patents,
licenses and rights with respect to the foregoing, and specifically excluding
leasehold improvements and unamortized debt discount and expense, (ii) all
deferred charges (excluding deferred charges related to show production, media,
telemarketing and income taxes), (iii) any write-up in the book value of any
asset resulting from a re-evaluation thereof subsequent to the acquisition
thereof (except write-ups to actual value specifically approved by Bank),
(iv) the amount, if any, at which securities (other than Indebtedness in good
standing) of any Person which is not readily marketable appear on the asset side
of such balance sheet, (v) the amount, if any, at which inventories or
securities appearing on the asset side of such balance sheet exceed the lower of
cost or current market value thereof or the price at which such Person has
agreed to sell such inventories or securities on an aggregate basis, (vi) the
book amount of any asset which is subject to pledge, lien, encumbrance or charge
(including any escrow or similar deposit) to secure the payment of any
obligation or indemnity to the extent that the amount of such obligation or
indemnity does not constitute Indebtedness of Borrowers or to the extent that
the amount of such obligation or indemnity cannot be ascertained and (vii) loans
and notes payable due to Borrowers from Affiliates, directors or officers of
Borrowers.
16.43. "Working Capital" as applied to Borrowers means the amount, as of
-----------------
the date of determination thereof, equal to the difference between the aggregate
Current Assets and the aggregate Current Liabilities (including without
limitation all accrued dividends) of any Person, determined in accordance with
GAAP.
16.44. "Working Capital Ratio" as applied to Borrowers means the ratio,
-----------------------
as of the date of determination thereof, of (a) the sum of (i) cash, plus
(ii) accounts receivables, plus (iii) inventory, plus (iv) prepaid media, over
(b) the sum of (i) the Bank Indebtedness (excluding any of Bank's Foreign
Exchange Contract Risk) then outstanding, plus (ii) twenty percent (20%) of the
Bank's committed Foreign Exchange Contract Risk."
17. WAIVERS.
--------
17.1. Waivers. In connection with any proceedings under the Indebtedness
-------
Documents, including without limitation any action by Bank in replevin,
foreclosure or other court process or in connection with any other action
related to the Indebtedness Documents or the transactions contemplated
hereunder, Borrowers waive:
(a) all procedural errors, defects and imperfections in such
proceedings;
(b) all benefits under any present or future laws exempting any
property, real or personal, or any part of any proceeds thereof from attachment,
levy or sale under execution, or providing for any stay of execution to be
issued on any judgment recovered under any of the Indebtedness Documents or in
any replevin or foreclosure proceeding, or otherwise providing for any
valuation, appraisal or exemption;
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<PAGE>
(c) all rights to inquisition on any real estate, which real
estate may be levied upon pursuant to a judgment obtained under any of the
Indebtedness Documents and sold upon any writ of execution issued thereon in
whole or in part, in any order desired by Bank;
(d) presentment for payment, demand, notice of demand, notice of
nonpayment, protest and notice of protest of any of the Indebtedness Documents,
including the Note;
(e) any requirement for bonds, security or sureties required by
statute, court rule or otherwise;
(f) any demand for possession of Collateral prior to commencement
of any suit; and
(g) all rights to claim or recover attorney's fees and costs in
the event that Borrowers are successful in any action to remove, suspend or
enforce a judgment entered by confession.
17.2. Forbearance. Bank may release, compromise, forbear with respect
-----------
to, waive, suspend, extend or renew any of the terms of the Loan Documents,
without notice to Borrowers.
17.3. Limitation on Liability. Borrowers shall be responsible for and
-----------------------
Bank is hereby released from any claim or liability in connection with:
(a) Safekeeping any Collateral;
(b) Any loss or damage to any Collateral;
(c) Any diminution in value of the Collateral; or
(d) Any act or default of another Person.
Bank shall only be liable for any act or omission on its part constituting
wilful misconduct. In the event that Bank breaches its required standard of
conduct, Borrowers agrees that their liability shall be only for direct damages
suffered and shall not extend to consequential or incidental damages. In the
event Borrowers bring suit against Bank in connection with the transactions
contemplated hereunder and Bank is found not to be liable, Borrowers will
indemnify and hold Bank harmless from all costs and expenses, including
attorney's fees, incurred by Bank in connection with such suit. This Agreement
is not intended to obligate Bank to take any action with respect to the
Collateral or to incur expenses or perform any obligation or duty of Borrowers.
18. SUBMISSION TO JURISDICTION.
--------------------------
18.1. Submission to Jurisdiction. Borrowers hereby consent to the
--------------------------
exclusive jurisdiction of any state or federal court located within the
Commonwealth of Pennsylvania, and irrevocably
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<PAGE>
agrees that, subject to the Bank's election, all actions or proceedings relating
to the Indebtedness Documents or the transactions contemplated hereunder shall
be litigated in such courts, and Borrowers waive any objection which they may
have based on lack of personal jurisdiction, improper venue or forum non
---------
conveniens to the conduct of any proceeding in any such court and waives
- ----------
personal service of any and all process upon them, and consents that all such
service of process be made by mail or messenger directed to them at the address
set forth in Section 15.1. Borrowers hereby irrevocably appoint Marshall
------------
Fleisher as their agent for the purpose of accepting service of any process
within the Commonwealth of Pennsylvania. Nothing contained in this Section 18.1
------------
shall affect the right of Bank to serve legal process in any other manner
permitted by law or affect the right of Bank to bring any action or proceeding
against Borrowers or their property in the courts of any other jurisdiction.
19. MISCELLANEOUS.
-------------
19.1. Brokers. The transaction contemplated hereunder was brought about
-------
and entered into by Bank and Borrowers acting as principals and without any
brokers, agents or finders being the effective procuring cause hereof. Borrowers
represent to Bank that Borrowers have not committed Bank to the payment of any
brokerage fee or commission in connection with this transaction. Whether any
such claim is made against Bank by any broker, finder or agent or any other
Person, Borrowers agree to indemnify, defend and hold Bank harmless against any
such claim, at Borrowers' own cost and expense, including Bank's attorneys'
fees. Borrowers further agree that until any such claim or demand is adjudicated
in Bank's favor, the amount claimed and/or demanded shall be deemed part of the
Bank Indebtedness secured by the Collateral.
19.2. Use of Bank's Name. No Borrower shall use Bank's name or the name of
------------------
any of Bank's Affiliates in connection with any of its business or activities
except as may otherwise be required by the rules and regulations of the
Securities and Exchange Commission or any like regulatory body and except as may
be required in its dealings with any governmental agency.
19.3. No Joint Venture. Nothing contained herein is intended to permit or
----------------
authorize Borrowers to make any contract on behalf of Bank, nor shall this
Agreement be construed as creating a partnership, joint venture or making Bank
an investor in Borrowers.
19.4. Survival. All covenants, agreements, representations and warranties
--------
made by Borrowers in the Loan Documents or made by or on its behalf in
connection with the transactions contemplated here shall be true at all times
this Agreement is in effect and shall survive the execution and delivery of the
Loan Documents, any investigation at any time made by Bank or on its behalf and
the making by Bank of the loans or advances to Borrowers. All statements
contained in any certificate, statement or other document delivered by or on
behalf of Borrowers pursuant hereto or in connection with the transactions
contemplated hereunder shall be deemed representations and warranties by
Borrowers.
19.5. No Assignment by Borrower. No Borrower may assign any of its rights
-------------------------
hereunder without the prior written consent of Bank, and Bank shall not be
required to lend hereunder except to Borrowers as they presently exist.
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<PAGE>
19.6. Assignment or Sale by Bank. Bank may sell, assign or participate all
--------------------------
or a portion of its interest in the Indebtedness Documents and in connection
therewith may make available to any prospective purchaser, assignee or
participant any information relative to Borrowers in its possession.
19.7. Binding Effect. This Agreement and all rights and powers granted
--------------
hereby will bind and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.
19.8. Severability. The provisions of this Agreement and all other
------------
Indebtedness Documents are deemed to be severable, and the invalidity or
unenforceability of any provision shall not affect or impair the remaining
provisions which shall continue in full force and effect.
19.9. No Third Party Beneficiaries. The rights and benefits of this
----------------------------
Agreement and the Indebtedness Documents shall not inure to the benefit of any
third party.
19.10. Modifications. No modification of this Agreement or any of the
-------------
Indebtedness Documents shall be binding or enforceable unless in writing and
signed by or on behalf of the party against whom enforcement is sought.
19.11. Holidays. If the day provided herein for the payment of any amount
--------
or the taking of any action falls on a Saturday, Sunday or public holiday at the
place for payment or action, then the due date for such payment or action will
be the next succeeding Business Day.
19.12. Law Governing. This Agreement has been made, executed and delivered
-------------
in the Commonwealth of Pennsylvania and will be construed in accordance with and
governed by the laws of such Commonwealth.
19.13. Integration. The Indebtedness Documents shall be construed as
-----------
integrated and complementary of each other, and as augmenting and not
restricting Bank's rights, powers, remedies and security. The Indebtedness
Documents contain the entire understanding of the parties thereto with respect
to the matters contained therein and supersede all prior agreements and
understandings between the parties with respect to the subject matter thereof
and do not require parol or extrinsic evidence in order to reflect the intent of
the parties. In the event of any inconsistency between the terms of this
Agreement and the terms of the other Indebtedness Documents, the terms of this
Agreement shall prevail.
19.14. Exhibits and Schedules. All exhibits and schedules attached hereto
----------------------
are hereby made a part of this Agreement.
19.15. Headings. The headings of the Articles, Sections, paragraphs and
--------
clauses of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part of this Agreement.
19.16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
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19.17. Joint and Several Liability. If there is more than one Borrower,
---------------------------
all agreements, conditions, covenants and provisions of the Loan Documents shall
be the joint and several obligation of each Borrower.
19.18. Restatement. This Agreement amends and restates, but does not
-----------
satisfy or repay, the obligations of the Borrowers as set forth in the Existing
Loan Agreement. All references in the Indebtedness Documents to the "Loan
Agreement" are hereby deemed to refer to this Agreement.
19.19. Waiver of Right to Trial by Jury. BORROWERS AND BANK WAIVE ANY
--------------------------------
RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
(a) ARISING UNDER ANY OF THE INDEBTEDNESS DOCUMENTS OR (b) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF BORROWERS OR BANK WITH RESPECT
TO ANY OF THE INDEBTEDNESS DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR
THERETO, IN EACH CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWERS AND BANK AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY
PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS
SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF BORROWERS AND BANK
TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. BORROWERS ACKNOWLEDGE THAT THEY
HAVE HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT
THEY FULLY UNDERSTAND THEIR TERMS, CONTENT AND EFFECT, AND THAT THEY VOLUNTARILY
AND KNOWINGLY AGREE TO THE TERMS OF THIS SECTION.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
NATIONAL MEDIA CORPORATION
By: /s/ Constantinos I. Costalas
-------------------------------------------------
Constantinos I. Costalas, Vice Chairman
(CORPORATE SEAL)
QUANTUM NORTH AMERICA, INC.
By: /s/ John J. Sullivan
-------------------------------------------------
John J. Sullivan, Vice President
(CORPORATE SEAL)
QUANTUM INTERNATIONAL LIMITED
By: /s/ John J. Sullivan
-------------------------------------------------
John J. Sullivan, Treasurer
(CORPORATE SEAL)
POSITIVE RESPONSE TELEVISION, INC.
By: /s/ Constantinos I. Costalas
-------------------------------------------------
Constantinos I. Costalas, Vice President
(CORPORATE SEAL)
DIRECTAMERICA CORPORATION
By: /s/ Constantinos I. Costalas
-------------------------------------------------
Constantinos I. Costalas, Vice President
(CORPORATE SEAL)
MERIDIAN BANK
By: /s/ Ash R. Lilani
-------------------------------------------------
Ash R. Lilani, Banking Officer
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<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED NOTE
-------------------------
Philadelphia, Pennsylvania
Dated: June 26, 1996
$20,000,000.00
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the undersigned
(jointly and severally, "Borrower"), hereby promise to pay to the order of
MERIDIAN BANK ("Bank"), after the occurrence of an Event of Default or after
expiration of the Contract Period, the principal sum of Twenty Million Dollars
($20,000,000.00), or such greater or lesser principal amount as may be
outstanding from time to time under the line of credit established by Bank for
the benefit of Borrower pursuant to the terms of that certain Amended and
Restated Loan and Security Agreement of even date herewith between Borrower and
Bank (such Amended and Restated Loan and Security Agreement, as the same may be
further amended, supplemented or restated from time to time, being the "Loan
Agreement"), together with interest thereon, upon the following terms:
1. Line Note. This Note is the "Line Note" as defined in the Loan
---------
Agreement and, as such, shall be construed in accordance with all terms and
conditions thereof. Capitalized terms not defined herein shall have such meaning
as provided in the Loan Agreement. This Note is entitled to all the rights and
remedies provided in the Loan Agreement and the Loan Documents and is secured by
all Collateral as described therein.
2. Interest Rate. Interest on the unpaid principal balance hereof will
-------------
accrue from the date of advance until final payment thereof at the applicable
rate per annum as provided for in the Loan Agreement.
3. Default Interest. Interest will accrue on the outstanding principal
----------------
amount hereof following the occurrence and during the continuation of an Event
of Default, demand for the payment hereof or the expiration of the Contract
Period until paid at the Default Rate as provided for in the Loan Agreement.
Bank agrees to provide Borrower with prior written notice of the accrual of
interest at the Default Rate.
4. Post Judgment Interest. Any judgment obtained for sums due hereunder or
----------------------
under the Loan Documents will accrue interest at the Default Rate until paid.
5. Computation. Interest will be computed on the basis of a year of three
-----------
hundred sixty (360) days and paid for the actual number of days elapsed.
6. Interest Payments. Interest which accrues on the outstanding principal
-----------------
balance hereof:
(a) for advances bearing interest based on the National Commercial
Rate, interest will be payable on the first day of each calendar month as billed
by Bank, and
-1-
<PAGE>
(b) for advances bearing interest based on the LIBOR Rate, interest
will be payable at the end of the applicable Rate Period.
7. Place of Payment. Principal and interest hereunder shall be payable as
----------------
provided in the Loan Agreement, or at such other place as Bank, from time to
time, may designate in writing.
8. Default; Remedies. Upon the occurrence and during the continuation of
-----------------
an Event of Default or upon demand as provided above, Bank, at its option and
without notice to Borrower (except as may be required in the Loan Agreement),
may declare immediately due and payable the entire unpaid balance of principal
and all other sums due by Borrower hereunder or under the Loan Documents,
together with interest accrued thereon at the applicable rate specified above.
Payment thereof may be enforced and recovered in whole or in part at any time
and from time to time by one or more of the remedies provided to Bank in this
Note or in the Loan Documents or as otherwise provided at law or in equity, all
of which remedies are cumulative and concurrent.
9. Waivers. Borrower and all endorsers, jointly and severally, waive
-------
presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
the payment of this Note, except for such notices, if any, as are expressly
required to be delivered by Bank to Borrower under the Loan Agreement.
10. Miscellaneous. If any provisions of this Note shall be held invalid or
-------------
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. This Note has been delivered in and shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the law of conflicts. This Note shall be binding upon Borrower
and upon Borrower's successors and assigns and shall benefit Bank and its
successors and assigns. The prompt and faithful performance of all of
Borrower's obligations hereunder, including without limitation, time of payment,
is of the essence of this Note.
11. Joint and Several Liability. If there is more than one Borrower
---------------------------
executing this Note, all agreements, conditions, covenants and provisions of
this Note shall be the joint and several obligation of each Borrower.
12. Confession of Judgment. BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY
----------------------
ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF
PENNSYLVANIA, OR IN ANY OTHER JURISDICTION WHICH PERMITS THE ENTRY OF JUDGMENT
BY CONFESSION, TO APPEAR FOR BORROWER AT ANY TIME AFTER DEMAND HEREUNDER AS
PROVIDED ABOVE OR AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER THE LOAN
AGREEMENT IN ANY ACTION BROUGHT AGAINST BORROWER ON THIS NOTE OR THE LOAN
DOCUMENTS AT THE SUIT OF BANK, WITH OR WITHOUT COMPLAINT OR DECLARATION FILED,
WITHOUT STAY OF EXECUTION, AS OF ANY TERM OR TIME, AND THEREIN TO CONFESS OR
ENTER JUDGMENT AGAINST BORROWER FOR THE ENTIRE UNPAID OUTSTANDING PRINCIPAL
AMOUNT OF THIS NOTE AND ALL OTHER SUMS TO BE PAID BY BORROWER TO OR ON BEHALF OF
BANK PURSUANT TO THE TERMS HEREOF OR OF THE LOAN DOCUMENTS AND ALL ARREARAGES OF
INTEREST THEREON, TOGETHER WITH ALL COSTS AND OTHER
-2-
<PAGE>
EXPENSES AND AN ATTORNEY'S COLLECTION COMMISSION OF FIFTEEN PERCENT (15%) OF THE
AGGREGATE AMOUNT OF THE FOREGOING SUMS, BUT IN NO EVENT LESS THAN $5,000.00; AND
FOR SO DOING THIS NOTE OR A COPY HEREOF VERIFIED BY AFFIDAVIT SHALL BE A
SUFFICIENT WARRANT.
THE AUTHORITY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY
ANY EXERCISE THEREOF BUT SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL
PAYMENT IN FULL OF ALL THE AMOUNTS DUE HEREUNDER. BORROWER ACKNOWLEDGES THAT IT
HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION WITH THE EXECUTION AND DELIVERY OF
THIS NOTE AND THAT IT KNOWINGLY WAIVES ITS RIGHT TO BE HEARD PRIOR TO THE ENTRY
OF SUCH JUDGMENT AND UNDERSTANDS THAT, UPON SUCH ENTRY, SUCH JUDGMENT SHALL
BECOME A LIEN ON ALL REAL PROPERTY OF BORROWER IN THE COUNTY WHERE SUCH JUDGMENT
IS ENTERED.
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
NATIONAL MEDIA CORPORATION
(CORPORATE SEAL)
By: /s/ Constantinos I. Costalas
---------------------------------------------
Constantinos I. Costalas,
Vice Chairman
QUANTUM NORTH AMERICA, INC.
(CORPORATE SEAL)
By: /s/ John J. Sullivan
--------------------------------------------
John J. Sullivan, Vice President
QUANTUM INTERNATIONAL LIMITED
(CORPORATE SEAL)
By: /s/ John J. Sullivan
---------------------------------------------
John J. Sullivan, Treasurer
(SIGNATURES CONTINUED ON NEXT PAGE)
-3-
<PAGE>
(SIGNATURES CONTINUED FROM PREVIOUS PAGE)
POSITIVE RESPONSE TELEVISION
(CORPORATE SEAL)
By: /s/ Constantinos I. Costalas
--------------------------------------------
Constantinos I. Costalas, Vice President
DIRECTAMERICA CORPORATION
(CORPORATE SEAL)
By: /s/ Constantinos I. Costalas
---------------------------------------------
Contantinos I. Costalas, Vice President
-4-
<PAGE>
EXHIBIT 10.3
SECURITIES PLEDGE AGREEMENT
---------------------------
THIS SECURITIES PLEDGE AGREEMENT (the "Pledge") is made this 26th day of
June, 1996, by NATIONAL MEDIA CORPORATION, (the "Pledgor") for benefit of
MERIDIAN BANK (the "Bank"). Pledgor, intending to be legally bound, agrees as
follows:
1. DEFINITIONS. For purposes of this Pledge,
-----------
1.1 "Bank Indebtedness" shall mean all obligations and indebtedness
-------------------
of Pledgor to Bank, whether now or hereafter owing or existing, including,
without limitation, all obligations under the Loan Documents, all obligations of
Pledgor to reimburse Bank for payments made by Bank at any time or from time to
time for the preservation and/or protection of the Collateral, all other
obligations or undertakings now or hereafter made by or for the benefit of
Pledgor to or for the benefit of Bank under any other agreement, promissory note
or undertaking now existing or hereafter entered into by Pledgor with Bank,
including, without limitation, all obligations of Pledgor to Bank under any
guaranty or surety agreement and all obligations of Pledgor to immediately pay
to Bank the amount of any overdraft on any deposit account maintained with Bank,
together with all interest and other sums payable in connection with any of the
foregoing.
1.2 "Code" shall mean the Uniform Commercial Code as adopted by the
------
Commonwealth of Pennsylvania, as the same may be amended from time to time.
1.3 "Collateral" shall mean (i) the Stock, and (ii) all dividends,
------------
cash, securities and property issued, paid, declared and/or distributed in
connection with the Stock, or any portion thereof, and (iii) all cash,
securities and other property paid, issued and/or distributed to or for the
benefit of Pledgor in exchange, redemption or substitution for the Stock, or any
portion thereof, and (iv) all other cash, securities and property paid, issued
and/or distributed to or for the benefit of Pledgor as a consequence of
Pledgor's ownership of the Stock, or any portion thereof, and (v) all proceeds
of the foregoing.
1.4 "Event of Default" shall mean any and all events described in
------------------
Section 8 below.
- ---------
1.5 "issuer", "proceeds" and "security" shall have the meanings given
-------- ---------- ----------
such terms in the Code.
1.6 "Loan Agreement" shall mean that certain Amended and Restated
----------------
Loan and Security Agreement of even date herewith by and between Pledgor,
Quantum North America, Inc., Quantum International Limited, Positive Response
Television, Inc. DirectAmerica Corporation and Bank.
1.7 "Loan Documents" shall mean all agreements, documents and/or
----------------
instruments evidencing the Bank Indebtedness and all agreements, documents and
instruments collateral thereto, together with all amendments, replacements,
increases, renewals and modifications of any of the foregoing, including without
limitation this Pledge and the Loan Agreement.
<PAGE>
1.8 "Stock" shall mean all those securities more specifically
-------
described on Schedule 1.8 attached hereto and made a part hereof.
------------
2. SECURITY INTEREST. Pledgor hereby pledges and grants to Bank a security
-----------------
interest in and a lien on the Collateral.
3. EFFECT OF GRANT. The pledge of Collateral granted to Bank by Pledgor
---------------
hereunder shall not be rendered void by the fact that no Bank Indebtedness
exists as of a particular date, but shall continue in full force and effect
until all Bank Indebtedness have been paid in full, Bank has no agreement or
commitment outstanding pursuant to which Bank may extend credit to or on behalf
of Pledgor and Bank has executed and delivered termination statements and/or
releases and has delivered the Collateral to Pledgor.
4. OBLIGATIONS SECURED. The Collateral and the continuing security
-------------------
interest granted therein shall secure all Bank Indebtedness. IT IS THE EXPRESS
INTENTION OF PLEDGOR THAT THE COLLATERAL SHALL SECURE ALL PLEDGOR'S EXISTING AND
FUTURE OBLIGATIONS UNDER THE LOAN DOCUMENTS OR OTHERWISE.
5. DELIVERY. All original certificates and instruments representing or
--------
evidencing the Collateral, or any portion thereof, shall be delivered to and
held by or on behalf of Bank pursuant hereto and shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignments in blank, all in form and substance satisfactory to Bank
and with guaranteed signatures.
6. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and
------------------------------
warrants as follows, which representations and warranties shall be true and
correct as of the date hereof, at the time of the creation of any Bank
Indebtedness and until the Bank Indebtedness has been paid in full:
6.1 Due Authorization and Issuance. The Stock and any other
------------------------------
Collateral consisting of securities have been duly authorized and issued to or
for the benefit of Pledgor by the respective issuer and are outstanding, fully
paid and non-assessable.
6.2 Accuracy of Representations and Warranties. No representation or
------------------------------------------
warranty by Pledgor contained herein or in any certificate or other document
furnished by Pledgor pursuant hereto or in connection herewith fails to contain
any statement of material fact necessary to make such representation or warranty
not misleading in light of the circumstances under which it was made. There is
no fact which Pledgor knows or should know and has not disclosed to Bank, which
does or may materially and adversely affect Pledgor, or the Collateral, or any
portion thereof.
7. COVENANTS. Pledgor covenants and agrees that until the Obligations
---------
have been paid in full, Pledgor shall:
-2-
<PAGE>
7.1 Sale of Collateral. Not sell, lease, transfer, assign or
------------------
otherwise dispose of the Collateral, or any portion thereof, without the prior
written consent of Bank which will not be unreasonably withheld.
7.2 Creation of Liens. Not create, incur or permit to exist any
-----------------
mortgage, pledge, encumbrance, lien, security interest or change of any kind on
the Collateral, or any portion thereof, except as contemplated hereby.
8. EVENTS OF DEFAULT. The occurrence of any one or more of the following
-----------------
events shall constitute an Event of Default hereunder:
8.1 The occurrence of any event of default or default under any of
the Loan Documents after expiration of any applicable notice and/or grace period
permitted in such documents.
8.2 The failure of Pledgor to pay any amount of principal or interest
on the Bank Indebtedness on the date on which such payment is due, whether on
demand, at the stated maturity, or due date thereof, or by reason of any
requirement for prepayment thereof, by acceleration or otherwise.
8.3 The failure of Pledgor to duly perform or observe any obligation,
covenant or agreement on its part contained herein.
8.4 Any representation or warranty of Pledgor herein is discovered to
be untrue in any material respect or any statement, certificate or data
furnished by Pledgor pursuant hereto is discovered to be untrue in any material
respect as of the date as of which the facts therein set forth are stated or
certified.
9. RIGHTS OF PLEDGOR AND BANK.
---------------------------
9.1 Before Event of Default. Prior to the occurrence and during the
-----------------------
continuance of an Event of Default:
(a) Voting. Pledgor shall be entitled to exercise any and all
-------
voting and other consensual rights arising under the Collateral, or any portion
thereof, for any purpose not inconsistent with the terms of any of the Loan
Documents.
(b) Dividends; Distributions. Unless Bank otherwise requests in
------------------------
writing, Pledgor shall be entitled to receive and retain any and all dividends,
distributions and interest, declared, distributed or paid, with respect to the
Collateral, or any portion thereof, provided, however, that any and all
(i) dividends, distributions and interest paid or payable other than in cash;
(ii) instruments and other property received, receivable or otherwise
distributed with respect to, or in exchange for, the Collateral, or any portion
thereof; (iii) dividends and other distributions paid or payable in cash with
respect to the Collateral, or any portion thereof, in connection with (1) a
partial or total liquidation or dissolution, or (2) a reduction of capital,
capital surplus or paid-in-
-3-
<PAGE>
surplus; and (iv) cash paid, payable or otherwise distributed in respect of
principal, or redemption of, or in exchange for, the Collateral, or any portion
thereof; shall be forthwith delivered to Bank to hold as Collateral and shall,
if received by Pledgor, be (x) received in trust for the benefit of Bank, (y)
segregated from all other property or funds of Pledgor, and (z) forthwith
delivered to Bank as Collateral in the same form as so received (with any
necessary documents, endorsements or assignments in blank with guaranteed
signature(s)).
9.2 After Event of Default. Upon the occurrence of an Event of
----------------------
Default and at all times thereafter:
(a) Voting. All rights of Pledgor to (i) exercise voting and
------
other consensual rights which Pledgor would otherwise be entitled to exercise,
pursuant to Section 9.1(a), and (ii) receive dividends and interest payments
--------------
which Pledgor would otherwise be authorized to receive and retain, pursuant to
Section 9.1(b), shall cease, and all such rights shall thereupon become
- --------------
absolutely vested in Bank. Bank shall thereafter have the sole and absolute
right to exercise all voting and other consensual rights, and to receive and
hold as Collateral all such dividends and interest payments, without any further
notice to, or consent of, Pledgor.
(b) Dividends Held In Trust. All dividends and interest
-----------------------
payments which are received by Pledgor contrary to the provisions of Section
-------
9.2(a)(ii) shall be (i) received in trust for the benefit of Bank, (ii) shall
- ----------
be segregated from other property or funds of Pledgor and (iii) forthwith
delivered to the Bank as Collateral in the same form as received (with any
necessary documents, endorsements or assignments in blank with guaranteed
signatures).
(c) Sale of Collateral. Bank may exercise in respect of the
------------------
Collateral and in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party upon
default under the Code. Bank may also, without notice, except as specified
below, sell the Collateral, or any part thereof, in one or more blocks at public
or private sale, at any exchange or otherwise or for future delivery, and at
such price or prices and upon such other terms as Bank may deem commercially
reasonable. Pledgor agrees that, to the extent notice of sale shall be required
by law, five (5) days notice to Pledgor of the time and place of any public sale
or private sale is to be made shall constitute reasonable notification. Bank
shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given. Bank may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.
(d) Application of Proceeds. Any cash held by Bank as Collateral
-----------------------
and all cash proceeds received by Bank in respect of any sale of, collection
from, or other realization upon the Collateral, or any portion thereof, may, in
the discretion of Bank, be held by Bank as Collateral for, and/or then or at any
time thereafter applied (after payment of any amounts payable to Bank pursuant
to Section 13) in whole or in part by Bank against all or any part of the Bank
----------
Indebtedness, in such order as Bank shall elect. Any surplus of such cash or
cash proceeds held by Bank and remaining after payment in full of all Bank
Indebtedness shall be paid to Pledgor or to whomsoever may be lawfully entitled
to receive such surplus.
-4-
<PAGE>
9.3 Bank's Rights. At any time and from time to time, Bank shall
-------------
have the right, in its discretion and without notice to Pledgor, to transfer to
or to register in the name of Bank, or any of Bank's nominees, the Collateral,
or any portion thereof, provided, however, that Pledgor shall continue to be the
beneficial owner of any Collateral transferred to or registered in the name of
Bank, or Bank's nominees, prior to the occurrence of an Event of Default. In
addition, Bank shall have the right at any time to exchange certificates or
instruments representing or evidencing the Collateral, or any portion thereof,
for certificates or instruments of smaller or larger denominations.
10. REASONABLE CARE. Bank shall be deemed to have exercised reasonable
---------------
care in the custody and preservation of the Collateral in its possession if the
Collateral is accorded treatment substantially equal to that which Bank accords
its own property.
11. DELAY OR OMISSION NOT WAIVER. Neither the failure nor any delay on
----------------------------
the part of Bank to exercise any right, remedy, power or privilege under this
Pledge upon the occurrence of any Event of Default or otherwise shall operate as
a waiver thereof or impair any such right, remedy, power or privilege. No waiver
of any Event of Default shall affect any later Event of Default or shall impair
any rights of Bank. No single, partial or full exercise of any rights, remedies,
powers and privileges by the Bank shall preclude further or other exercise
thereof. No course of dealing between Bank and Pledgor shall operate as or be
deemed to constitute a waiver of Bank's rights under this Pledge or affect the
duties or obligations of Pledgor.
12. REMEDIES CUMULATIVE; CONSENTS. The rights, remedies, powers and
-----------------------------
privileges provided for herein shall not be deemed exclusive, but shall be
cumulative and shall be in addition to all other rights, remedies, powers and
privileges in Bank's favor at law or in equity. Whenever the Bank's consent or
approval is required or permitted, such consent or approval shall be at the sole
and absolute discretion of Bank.
13. CERTAIN FEES, COSTS, EXPENSES AND EXPENDITURES. Pledgor agrees to pay
----------------------------------------------
on demand all costs and expenses of Bank, including without limitation:
13.1 all costs and expenses in connection with the preparation,
review, negotiation, execution, delivery and administration of this Pledge, and
the other documents to be delivered in connection therewith, or any amendments,
extensions and increases to any of the foregoing (including, without limitation,
reasonable attorney's fees and expenses, and the cost of appraisals and
reappraisals of Collateral), and the cost of periodic lien searches and tax
clearance certificates, as Bank deems advisable;
13.2 all losses, costs and expenses in connection with the
enforcement, protection and preservation of the Bank's rights or remedies under
this Pledge, or any other agreement relating to any Bank Indebtedness, or in
connection with legal advice relating to the rights or responsibilities of Bank
(including without limitation court costs, reasonable attorney's fees and
expenses of accountants and appraisers); and
-5-
<PAGE>
13.3 any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Pledge, and all
liabilities to which Bank may become subject as the result of delay in paying or
omission to pay such taxes.
In the event Pledgor shall fail to pay taxes, assessments, costs or
expenses which it is required to pay hereunder, or fails to keep the Collateral
free from security interests or lien (except as expressly permitted herein), or
otherwise breaches any obligations under this Pledge, Bank in its discretion,
may make expenditures for such purposes and the amount so expended (including
reasonable attorney's fees and expenses, filing fees and other charges) shall be
payable by Pledgor on demand and shall constitute part of the Bank Indebtedness.
In the event any action at law or in equity in connection with the Loan
Documents, the Bank Indebtedness or matters collateral thereto is terminated
adverse to Pledgor, Pledgor will pay all attorneys' fees and legal costs
incurred by Bank in connection with such actions.
With respect to any amount required to be paid by Pledgor under this
Section, in the event Pledgor fails to pay such amount on demand, Pledgor shall
also pay to Bank interest thereon at the Default Rate. Pledgor's obligations
under this Section shall survive termination of this Pledge.
14. TIME IS OF THE ESSENCE. Time is of the essence in Pledgor's
----------------------
performance of Pledgor's obligations under the Loan Documents.
15. COMMUNICATIONS AND NOTICES. All notices, requests and other
--------------------------
communications made or given in connection with this Pledge shall be given in
accordance with the notice provisions of the Loan Agreement.
16. MISCELLANEOUS PROVISIONS.
-------------------------
16.1 Severability. The provisions of this Pledge and all other Loan
------------
Documents are deemed to be severable, and the invalidity or unenforceability of
any provision shall not affect or impair the remaining provisions which shall
continue in full force and effect.
16.2 Headings. The headings of the Articles, Sections, paragraphs
--------
and clauses of this Pledge are inserted for convenience only and shall not be
deemed to constitute a part of this Pledge.
16.3 Binding Effect. This Pledge and all rights and powers granted
--------------
hereby will bind and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.
16.4 Amendment. No modification of this Pledge or any of the Loan
---------
Documents shall be binding or enforceable unless in writing and signed by or on
behalf of the party against whom enforcement is sought.
-6-
<PAGE>
16.5 Governing Law. This Pledge has been made, executed and
-------------
delivered in the Commonwealth of Pennsylvania and will be construed in
accordance with and governed by the laws of such Commonwealth.
16.6 No Third Party Beneficiaries. The rights and benefits of this
----------------------------
Pledge and the Loan Documents shall not inure to the benefit of any third party.
16.7 Exhibits and Schedules. All exhibits and schedules attached
----------------------
hereto are hereby made a part of this Pledge.
16.8 Counterparts. This Pledge may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Pledge by signing any
such counterpart.
16.9 No Joint Venture. Nothing contained herein is intended to
----------------
permit or authorize Pledgor to make any contract on behalf of Bank, nor shall
this Pledge be construed as creating a partnership, joint venture or making Bank
an investor in Pledgor.
17. WAIVER OF RIGHT TO TRIAL BY JURY. PLEDGOR AND BANK WAIVE ANY RIGHT TO
--------------------------------
TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER
THIS PLEDGE OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO HEREIN OR DELIVERED
IN CONNECTION HEREWITH, OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF PLEDGE WITH RESPECT TO THIS PLEDGE OR ANY OTHER
DOCUMENT OR INSTRUMENT REFERRED TO HEREIN OR DELIVERED IN CONNECTION HEREWITH,
OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE. PLEDGOR AND BANK AGREE AND CONSENT THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY, AND THAT ANY PARTY TO THIS PLEDGE MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF
PLEDGOR AND BANK TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, Pledgor has executed this Pledge as of the day and year
first above written.
NATIONAL MEDIA CORPORATION
[CORPORATE SEAL]
By:/s/ Constantinos I. Costalas
---------------------------------------
Constantinos I. Costalas, Vice Chairman
-7-
<PAGE>
Bank hereby joins in this Pledge for the sole purpose of ratifying and
confirming its consent to the provisions contained in Section 17 above.
----------
MERIDIAN BANK
By:/s/ Ash R. Lilani
------------------------------
Ash R. Lilani, Banking Officer
-8-
<PAGE>
DESCRIPTION OF PLEDGED SECURITIES
---------------------------------
No. Shares/
Certificate No. Face Value Issuer Record Owner
----------------- ---------- ------ ------------
Positive Response National Media
3 $.01 par Television, Inc. Corporation
DirectAmerica National Media
1 $.01 par Corporation Corporation
SCHEDULE 1.8
------------
TO
SECURITIES PLEDGE AGREEMENT
-9-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts," "Sum-
mary Historical and Pro Forma Financial and Other Data," and "Selected Finan-
cial and Operating Data" and to the use of our report dated May 13, 1996 (ex-
cept for Note 19, as to which the date is May 30, 1996) in Amendment No. 1 to
the Registration Statement on Form S-3 (No. 333-06007) and related Prospectus
of National Media Corporation for the registration of 2,300,000 shares of its
common stock.
We also consent to the incorporation by reference therein of our report dated
May 13, 1996 (except for Note 19, as to which the date is May 30, 1996) with
respect to the financial statements and schedule of National Media Corporation
for the years ended March 31, 1996, 1995, and 1994 included in the Annual Re-
port (Form 10-K) for 1996 filed with the Securities and Exchange Commission.
Ernst & Young LLP
Philadelphia, Pennsylvania
July 2, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated December 12, 1995, with respect to the combined finan-
cial statements of DirectAmerica Corporation and California Production Group,
Inc. included in Amendment No. 1 to the Registration Statement on Form S-3 (No.
333-06007) and related Prospectus of National Media Corporation for the regis-
tration of 2,300,000 shares of its common stock.
Ernst & Young LLP
Philadelphia, Pennsylvania
July 2, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS'
We consent to the use in this prospectus and Registration Statement No. 333-
06007 (Amendment No. 1) of National Media Corporation on Form S-3 of our report
dated March 25, 1996 appearing in the prospectus and Registration Statement and
to the reference to us under the heading "Experts" in the prospectus and Regis-
tration Statement.
Deloitte & Touche LLP
Los Angeles, California
July 2, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 24, 1996, with respect to the financial statements
of Prestige Marketing Limited included in Amendment No. 1 to the Registration
Statement on Form S-3 (No. 333-06007) and related Prospectus of National Media
Corporation for the registration of 2,300,000 shares of its common stock.
Ernst & Young
Auckland, New Zealand
July 2, 1996
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 24, 1996, with respect to the financial statements
of Prestige Marketing International Limited included in Amendment No. 1 to the
Registration Statement on Form S-3 (No. 333-06007) and related Prospectus of
National Media Corporation for the registration of 2,300,000 shares of its
common stock.
Ernst & Young
Auckland, New Zealand
July 2, 1996
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 7, 1996, with respect to the special purpose com-
bined financial statements of Suzanne Paul Holdings Pty, Limited Group included
in Amendment No. 1 to the Registration Statement on Form S-3 (No. 333-06007)
and related prospectus of National Media Corporation for the registration of
2,300,000 shares of its common stock.
Ernst & Young
Sydney, Australia July 2, 1996
