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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended MARCH 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to ________________________
Commission file number 1-6715
NATIONAL MEDIA CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-2658741
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1700 WALNUT STREET, PHILADELPHIA, PA 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-772-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
COMMON STOCK, PAR VALUE NEW YORK STOCK EXCHANGE
$.01 PER SHARE PHILADELPHIA STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the Registrant's voting stock held by non-
affiliates of the Registrant as of May 31, 1996 was approximately $321,613,371.*
There were 19,612,008 issued and outstanding shares of the Registrant's
common stock, par value $.01 per share, at May 31, 1996. In addition, there
were 686,710 shares of treasury stock as of such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for its 1996 annual
meeting of stockholders are incorporated by reference into Parts III and IV of
this Annual Report on Form 10-K.
*Calculated by excluding all shares that may be deemed to be beneficially owned
by executive officers and directors of the Registrant, without conceding that
all such persons are "affiliates" of the Registrant for purposes of the federal
securities laws, but including the shares beneficially owned by others listed on
the "Security Ownership of Certain Beneficial Owners" table included in
Registrant's proxy statement. Based upon a market value per share of $18.625,
which was the closing price of the Company's Common Stock on the New York Stock
Exchange on May 31, 1996.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report may be deemed to contain "forward-looking" statements. The Company
desires to take advantage of the new "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of such safe harbor with
respect to all of such forward-looking statements. Examples of forward-looking
statements include, but are not limited to (a) projections of revenues, income
or loss, earnings or loss per share, capital expenditures, growth prospects,
dividends, 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 products, or estimates or predictions of actions by
customers, suppliers, competitors or regulating authorities, (c) statements of
future economic performance and (d) statements of assumptions underlying other
statements and statements about the Company or its business.
The Company's ability to predict projected results or to predict the effect of
any legislation or other pending events on the Company's operating results is
inherently uncertain. Therefore, the Company wishes to caution each reader of
this report to carefully consider specific factors, including competition for
products, customers and media access; the risks of doing business abroad; the
uncertainty of developing or obtaining rights to new products that will be
accepted by the market; the limited market life of the Company's products; the
effects of government regulations and other factors discussed herein, because
such factors in some cases have affected, and in the future (together with other
factors) could affect, the ability of the Company to achieve its projected
results and may cause actual results to differ materially from those expressed
herein.
PART I
ITEM 1. BUSINESS
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 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
permitting 30-minute blocks of television advertising. The deregulation of the
cable television industry and the resulting proliferation of cable channels
increased the available media time and led to the growth of the United States
infomercial industry. Producers of infomercials combined direct response
marketing 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
consumer protection agencies led to greater regulation of the industry and to
the development of the National Infomercial Marketing Association as a self-
regulatory organization. By the early 1990s, infomercials and home shopping
cable channels had become a more accepted forum for obtaining information about
products and services and making purchases from home. As the infomercial
industry has matured, the variety of products marketed through infomercials has
steadily
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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
Europe 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, commencing
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 traditional
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
marketing. Through direct response transactional television programming and
integrated consumer marketing techniques, the Company is pursuing a business
strategy focusing on: (i) expanding 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
position as a worldwide leader in infomercial programming. Through its existing
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 the number of media
outlets it utilizes in new and existing markets through strategic acquisitions
and through 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 satellite transponder to be
utilized by the Company 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
Programs. 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
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new markets. While the Company incurs certain initial and ongoing costs in
connection with adapting a product and infomercial for specific markets, the
primary expenses 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
programs 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
Marketing Services. National Media seeks to be the low-cost provider in the
infomercial industry. The Company has created a state of the art order
fulfillment 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
advantages of purchased block media time, multi-country coverage and fully-
integrated 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
categories. 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
Television, Inc. ("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
business, a well-known brand name in the outdoor category. Additionally, in
order to develop new products, the Company works closely with certain consumer
product companies such as (i) Blue Coral, Inc. and the Media Group (Durable
Products) 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
support and
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assume inventory responsibility, thereby reducing the Company's financial 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 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 internationally. Typically, infomercials are first aired
internationally by the Company in its European markets. While the majority of
the Company's infomercials aired internationally have historically originated
from its United States operations, 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 approximately 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 marketing 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 Company
also obtains the rights to sell products which have already been developed,
manufactured and marketed through infomercials produced by other companies. 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 worldwide 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 receive 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
production 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 companies 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 receive fees based upon sales of the product.
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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
networks and targeted broadcast stations. If a show achieves acceptable results
in the market tests, it is generally aired on a rapidly increasing schedule on
cable 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
programs 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
associated products in the world. As of March 31, 1996, the Company's library
included over 100 infomercials and products. The Company believes that this
library 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,
including Argentina, Australia, Austria, the Benelux countries, Brazil, Canada,
Denmark, Ecuador, most 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 Company has current plans to open new markets in South
Africa, mainland China, India and Indonesia by calendar year end 1997.
At present, the Company utilizes approximately 1000 hours of cable and broadcast
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 believes that a
large and productive inventory of media time is necessary to maintain a
competitive advantage and allows the Company to maximize the revenue-producing
potential from its library of infomercials. Historically, approximately 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 Network,
The New Inspirational Network, Product Information Network, SCIFI Channel, 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.
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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-
minute spots. The Company also purchases 60 and 120-second spots where
economically 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 fiscal 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 network 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
believes 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 excess time reduces some of the risk associated with large purchases of
media time.
As discussed above, the Company purchases a significant amount of its media time
from cable television and satellite networks. These cable television and
satellite networks assemble programming for transmission to multiple and local
cable system operators. These operators may not be required to carry all 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, and because of cable legislation in the United
States, these operators will begin to charge the Company to continue
broadcasting the Company's infomercials or limit the amount of time available to
the Company. The Company is dependent on having access to media time to
televise its infomercials on cable networks, satellite networks, network
affiliates and local stations.
International. Internationally, the Company's infomercials are aired on one or
more of three technologies in its market territories: (i) satellite
transmission 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 Company 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 contracts with pan-European satellite channels such as
Eurosport, Flextech (Starstream) and The NBC Super Channel. The Company
recently extended through February 1999 its agreement with Eurosport, the
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 programming
continuously for a specified period of time and is guaranteed a specified amount
of satellite television hours per month. Under some of these arrangements, the
Company has rights
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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 programming can be seen in the Middle East, Asia and in
virtually every country in Europe, and its products are available for purchase
in approximately 60 countries. 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
relationships 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
product categories in an effort to reduce its dependence on third party
manufacturers. 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. Additionally, the Company employs a technical/engineering firm in
Hong Kong to coordinate 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
Company 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
customers 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
parties 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
promote, "cross-sell" and "up-sell" complementary and/or additional products
relating to the product for which the inquiry is received. Such sales efforts
are orchestrated by the Company's marketing personnel who script the sales
approaches 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
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pursuant to which ValueVision agreed to provide telemarketing services to the
Company for a minimum of one million telephone calls a year over a three year
period. In addition, 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,
products 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
uncommon.
ORDER FULFILLMENT
The Company's North American order fulfillment center is located in Phoenix,
Arizona. Activities at this facility include receiving merchandise from
manufacturers, 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 primarily uses bulk shippers to deliver products to customers in the
United States. In certain instances, the manufacturer of the product ships
orders directly 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 continues
to strive to become the leading low cost provider of infomercial marketing
services. The Company believes that, among other things, its receiving,
warehousing, processing and shipping methods and billing systems give it a
competitive 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, order
fulfillment, distribution and customer service functions of its business through
independent agents, each of which is responsible for a particular territory.
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 primarily 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 conditions and standards
prescribed and monitored by the Company. In many international 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
improve 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.
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The Company generally offers an unconditional 30-day money back return policy to
purchasers of any of its products. In addition, products are generally covered
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 9.2%, 14.3% and
11.7%, respectively. International sales carry a higher average return 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 instances 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
capitalize on its ability to create product awareness and to act as a media
marketing 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.
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
consideration of the television advertising for the product funded by the
Company. In fiscal 1996, 1995 and 1994, non-infomercial distribution channels
accounted 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
order 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
Company believes that the product exposure created by the Company's
transactional television programming enables the Company and its strategic
partners to utilize traditional retail distribution channels without incurring
any of the additional 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.
9
<PAGE>
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 previous
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
fishing lure, Bruce Jenner's Super Step Stair Climber and the Minimax Exercise
System, Tony Little's Target Training System video tapes and Regal Ware Royal
Diamond 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
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
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PRODUCT CATEGORY PRODUCT OFFERINGS FISCAL YEAR FIRST AIRED
- ----------------------------- -------------------------- -----------------------
<S> <C> <C>
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 dependent,
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
significant domestic revenues in the first 6 months following initial airing of
the product's infomercial. Internationally, however, products typically generate
revenues more evenly over a longer period due, in part, to the introduction of
such products into new markets each year. To illustrate an infomercial's life
cycle, the Company derived fiscal 1996 net infomercial revenue 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 introduced 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.
Average 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, returns
and allowances may reduce the amount of sales realized from the fulfillment 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 product
companies and retailers which have
11
<PAGE>
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 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.
MANAGEMENT INFORMATION SYSTEMS
The Company's computer system features programs which allow the Company to
manage 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 adequate. However, in order to facilitate growth and to integrate
fully its international operations, the Company is in the process of enhancing
its computer systems related to all phases of its operations. The Company
expended approximately $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'
Attorneys General and other state and local consumer protection and health
agencies. The statutes, rules and regulations applicable to the Company's
operations, and to various products marketed by it, are numerous, complex and
subject to change.
As a result of prior settlements with the FTC, the Company has agreed to two
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 Company, Positive Response and Mr. Levey have submitted 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 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 information regarding two 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 concerning the 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 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 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.
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
12
<PAGE>
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 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 programming
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 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
physical 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
enable 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
material adverse effect on the Company's financial condition or results of
operations.
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 trademark
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 defined its trademark rights.
RECENT DEVELOPMENTS
On May 17, 1996, the Company acquired Positive Response. Positive Response
was a publicly traded direct marketing company and producer of infomercials.
Its net revenues for the year ended December 31, 1995 were approximately $63.4
million. The Company's acquisition of Positive 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.
In late May 1996, the Company executed definitive agreements to acquire
Prestige Marketing Limited and Prestige Marketing International Limited
(collectively, "Prestige") and Suzanne Paul Holdings Pty Limited and its two
direct response television marketing subsidiaries (collectively, "Suzanne
Paul"). The acquisitions are expected to be consummated in early July 1996.
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 $18.8 million and net income of $3.4
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 will extend the reach of the
Company's programming firmly into the New Zealand, Australian and Southeast
Asian marketplaces. The acquisitions will immediately expand the Company's
presence in nine countries and add three countries to the Company's geographic
reach.
The aggregate consideration to be paid by the Company for Prestige and Suzanne
Paul will be 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 will also fund approximately
$4.6 million in dividends payable 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.
13
<PAGE>
ITEM 2. PROPERTIES
The Company leases office space for its principal executive offices in
Philadelphia, 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
proportional 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,
effective 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
negotiating a new lease for office space in another building in center city
Philadelphia.
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.
ITEM 3. LEGAL PROCEEDINGS
LACHANCE AND EFRON AND COHEN CLASS ACTIONS.
In July and December 1994, stockholders filed purported class action lawsuits in
federal court against the Company and certain of its former officers and
directors in connection 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 $1.125 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 purported class action suit was filed in the United States
District for the Central District of California against Positive Response and
its principal executive 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 behalf of all persons who purchased Positive Response common stock
during the period from January 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. Positive Response moved
to dismiss the amended complaint and the amended complaint was dismissed in late
July 1995. The plaintiffs were granted 60 days leave to file another amended
complaint to allow them an attempt to state valid claims against Positive
Response. On
14
<PAGE>
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 December 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 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 independent legal
counsel has issued an opinion to the Company that the product marketed by the
Company does not infringe upon Precise's patent. Management believes that the
outcome of this litigation will not have a material adverse effect on the
Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended March 31, 1996.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange and the
Philadelphia Stock Exchange under the symbol "NM".
15
<PAGE>
The following table sets forth the quarterly high and low last sales prices
and dividends declared for the last two fiscal years. The Company's common stock
has been traded on the New York Stock Exchange since September 14, 1990.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
--------------------------------- -------------------------------
Cash Cash
Dividends Dividends
Quarter Ended High Low Declared High Low Declared
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30......... 9/7/8/ 7/1/8/ ---- 9/7/8/ 3/7/8/ ----
September 30.... 14/1/2/ 9/3/8/ ---- 5/1/4/ 3/1/4/ ----
December 31..... 21 13/3/4/ ---- 5/7/8/ 3/1/2/ ----
March 31........ 21/1/2/ 15 ---- 8/1/8/ 4/1/2/ ----
- ---------------------------------------------------------------------------------------
</TABLE>
The number of record holders of the Company's common stock on May 31, 1996
was approximately 847. The Company is currently restricted in its ability to
pay dividends under the terms of the documentation of its principal debt
financing as more fully described in note 5 to the consolidated financial
statements as well as by the terms of the Company's Series B Convertible
Preferred Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------------
(In thousands, except per share amounts)
1996 1995 1994 1993 1992
-------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues............................ $292,607 $176,167 $172,602 $141,997 $102,218
Income (loss) from continuing operations
before income taxes.................... 20,104 (372) (8,699) 6,335 (6,788)
Income (loss) from continuing operations 16,579 (672) (8,699) 6,259 (7,023)
Net income (loss)....................... 16,579 (672) (8,699) 6,259 (4,854)
-------- -------- -------- -------- --------
Income (loss) per common share:
Income (loss) from continuing operations
Primary............................... $ .74 $ (.05) $ (.72) $ .48 $ (.64)
Fully-diluted......................... .71 (.05) (.72) .48 (.64)
Net income (loss)
Primary............................... .74 (.05) (.72) .48 (.44)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Fully-diluted......................... .71 (.05) (.72) .48 (.44)
Cash dividends.......................... --- --- --- --- ---
-------- -------- -------- -------- --------
Weighted average number of shares
Primary............................... 23,176 14,024 12,078 13,046 11,087
Fully-diluted......................... 23,288 14,024 12,078 13,046 11,087
-------- -------- -------- -------- --------
Balance Sheet Information:
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
-------- -------- -------- -------- --------
</TABLE>
17
<PAGE>
ITEM 7. 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
dependent 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
products 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-
integrated provider of consumer product marketing services. International
expansion has resulted in an increasing percentage of the Company's revenues
being generated from the international infomercial marketplace. As the Company
enters new markets overseas, it is able to air shows 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>
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<PAGE>
Comparison of Fiscal 1996 with Fiscal 1995
- ------------------------------------------
NET REVENUES
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. 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 from certain of such new infomercials, principally
sales of the Company's Ab-Roller Plus product, and the continued sales from
infomercials originated in prior years. The increase in the absolute number of
new shows in fiscal 1996 was the result of the revitalization of the Company's
marketing department and the increase in working capital. In fiscal 1995, new
infomercial production 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 historically 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. 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 operations 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 increased 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 Phillippines 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 airing of its Ab-Roller Plus infomercial in international
markets.
OPERATING COSTS
Total operating costs and expenses were $272.5 million in fiscal 1996 as
compared 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. 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 revenues over the prior
year. The ratio
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<PAGE>
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
international media purchases to net revenues was offset by a slight increase in
the ratio domestically.
Direct Costs. Direct costs consist of the cost of materials, freight,
infomercial production, 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
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
expansion. 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
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)
associated with the Company's $5.0 million term loan obtained in October 1994.
INCOME TAXES
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
utilization of net operating loss carryforwards. The Company's effective tax
rate is expected to increase in fiscal 1997 because the benefit from remaining
available net operating loss carryforwards, which relate primarily to employee
stock options, will be recorded directly to shareholders' equity, if realized.
NET INCOME (LOSS)
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.
20
<PAGE>
Comparison of Fiscal 1995 with Fiscal 1994
- ------------------------------------------
NET REVENUES
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. 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 primarily 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
introduced 6 new infomercials in fiscal 1995 as compared to 17 in fiscal 1994.
Domestic net revenues were also unfavorably impacted by a change in the
Company's sales mix toward higher priced products, which have historically
experienced a higher return rate. Returns as a percentage of gross revenues
increased 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
royalty arrangements with manufacturers, the Company believes it has provided
itself with a more stable and steady stream of royalty revenue with limited
associated 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. 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 currency 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 countries 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.
OPERATING COSTS
Total operating costs and expenses were $176.5 million for fiscal 1995 as
compared to $181.3 million in fiscal 1994, a decrease of $4.8 million or 2.6%.
Media Purchases. 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. Internationally, the ratio of media purchases to net revenues further
benefited from
21
<PAGE>
increased availability of lower cost time while the ratio domestically was
favorably impacted by an effective mix of media time utilized to air Company
products and media time sold.
Direct Costs. 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 revenues 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 in freight, telemarketing and
commission costs. The reduction in non-infomercial direct costs was due to the
Company's decision to receive royalties for certain products in lieu of full
sales participation in retail.
Internationally, direct costs as a percentage of net revenues increased
approximately 4.2 percentage points, primarily due to increased freight,
fulfillment and processing costs as a result of the Company's expansion into new
countries, especially Japan. These costs are typically higher upon initial
entrance into a market.
SELLING, GENERAL AND ADMINISTRATIVE
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 customer.
As a result of staff reductions made in late fiscal 1994 and early fiscal
1995, the Company reduced its domestic personnel costs by $1.8 million.
SEVERANCE EXPENSE FOR FORMER CHAIRMAN AND CHIEF EXECUTIVE OFFICER
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 consolidated financial statements of
the Company herein for further discussion.
UNUSUAL CHARGES
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. Such matters are discussed in 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 million
for certain legal settlements. In addition, the Company recognized additional
expenses during the period including: $1.1 million in legal fees associated with
the aforementioned settlements and class action lawsuits; $1.0 million related
to the relocation of the Company's fulfillment center to Phoenix, Arizona; $1.3
million in costs associated with the terminated tender offer and agreement of
merger with ValueVision; $725,000 in severance related to personnel reductions;
$591,000 in costs associated with two aborted stock offerings; and $200,000 in
other costs.
22
<PAGE>
INTEREST EXPENSE
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
associated with the Company's $5.0 million term loan obtained in October 1994
and higher interest rates during fiscal 1995.
NET INCOME (LOSS)
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 million.
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
principally due to increases in accounts receivable and inventory associated
with the Company's increased sales volume and with the Company's domestic and
international 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
exposure 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 has the ability to change prices in a timely manner in order to react to
major currency fluctuations; thus reducing the risk associated with local
currency movements.
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
worldwide 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 $7.5 million revolving credit facility, of which $5.0 million
is available for working capital and general corporate purposes and all of which
is available for issuances of letters of credit. The Company has received
preliminary approval from its bank to increase its revolving line of credit to
$15 million. 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 available
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
exercise of stock options and warrants and the repayment of existing loans by
certain 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.
23
<PAGE>
The Company intends to continue to pursue acquisition and expansion
opportunities 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
delivered to the former shareholders of Positive Response within 18 months upon
the realization of certain assets, and the repayment by the Company of
approximately $1.0 million of outstanding debt of Positive Response. In May
1996, the Company announced agreements to acquire Prestige and Suzanne Paul. The
aggregate consideration to be paid by the Company for Prestige and Suzanne Paul
will be approximately $4.2 million in cash, $2.8 million in a note payable
maturing on December 5, 1996 and 787,879 shares of Common Stock. Upon
consummation of these acquisitions, the Company will also fund a dividend of
approximately $4.6 million payable 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. These acquisitions are expected to be completed by early July 1996 and are
expected to be funded by the Company's revolving credit facility.
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------------------
FISCAL 1996 QUARTERS ENDED
1996 FISCAL YEAR JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
---------------- ------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Dollars in thousands, except per share
- --------------------------------------
data
----
Net revenues............................ $65,045 $ 57,608 $68,353 $101,601
Operating costs and expenses
Media purchases....................... 20,683 17,272 19,602 28,961
Direct costs.......................... 33,983 29,664 34,378 53,173
Selling, general and administrative... 7,029 6,695 8,318 11,730
Interest expense........................ 240 233 246 296
------- -------- ------- --------
Total operating costs and expenses.... 61,935 53,864 62,544 94,160
------- -------- ------- --------
Income before income taxes.............. 3,110 3,744 5,809 7,441
------- -------- ------- --------
Net income.............................. $ 2,602 $ 3,145 $ 4,932 $ 5,900
======= ======== ======= ========
Net income per share
Primary............................... $ .13 $ .15 $ .21 $ .24
Fully-diluted......................... .13 .14 .20 .24
<CAPTION>
-------------------------------------------------------
FISCAL 1995 QUARTERS ENDED
1995 FISCAL YEAR JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
---------------- ------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Dollars in thousands, except per share
- --------------------------------------
data
----
Net revenues............................ $40,397 $ 38,535 $41,254 $ 55,981
Operating costs and expenses
Media purchases....................... 13,018 11,584 11,754 15,605
Direct costs.......................... 21,348 21,290 23,219 31,748
Selling, general and administrative... 5,073 4,785 4,673 6,235
Severance to former Chairman and Chief
Executive Officer..................... 2,650
Unusual charges......................... 335 241 1,192 1,100
Interest expense........................ 124 105 181 279
------- -------- ------- --------
Total operating costs and expenses.... 39,898 40,655 41,019 54,967
------- -------- ------- --------
Income (loss) before income taxes....... 499 (2,120) 235 1,014
------- -------- ------- --------
Net income (loss)....................... $ 471 ($2,092) $ 235 $ 714
======= ======== ======= ========
Net income (loss) per share
Primary............................... $ .03 $ (.15) $ .02 $ .04
Fully-diluted......................... .03 (.15) .02 .04
</TABLE>
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
26
<PAGE>
PART III
The information called for by Items 10, 11, 12 and 13 is hereby incorporated by
reference from the Company's definitive proxy statement for its 1996 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
The following is a list of the consolidated financial statements of the
Company and its subsidiaries and supplementary data submitted in a separate
section of this report.
- Report of Independent Auditors.
- Consolidated Balance Sheets - March 31, 1996 and 1995.
- Consolidated Statements of Operations - Years ended March 31, 1996, 1995,
and 1994.
- Consolidated Statements of Shareholders' Equity - Years ended March 31,
1996, 1995, and 1994.
- Consolidated Statements of Cash Flows - Years ended March 31, 1996, 1995,
and 1994.
- Notes to Consolidated Financial Statements
The following is a list of the schedules filed as part of this Form 10-K.
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(b) Reports on Form 8-K filed in the fourth quarter of 1996:
Form 8-K dated January 17, 1996
-------------------------------
Item 5. Other Events - Announcement by the Company of its entrance
into an Agreement and Plan of Merger and Reorganization concerning
the acquisition of Positive Response.
Form 8-K dated May 17, 1996
---------------------------
Item 2. Acquisition or Disposition of Assets - Announcement by the
Company of the following: its acquisition of Positive Response and
entrance into five (5) year employment agreements with two key
executives of Positive Response.
Item 5. Other Events - Announcement by the Company of its entrance
into separate Acquisition Agreements pursuant to which the Company
will acquire, subject to certain regulatory notifications, (i) all of
the outstanding capital stock of Prestige Marketing International
Limited and Prestige Marketing Limited
28
<PAGE>
and (ii) all of the outstanding capital stock of Suzanne Paul
Holdings Pty Limited and its subsidiaries.
The required financial statements of Positive Response were filed
as part of this report on Form 8-K; however, it was impracticable
for the Company to provide the required pro forma financial
information relating to the merger at the time of filing of this
report. The Company undertook to file such information as an
amendment to the Form 8-K as soon as practical after the date
thereof, but in no event later than sixty (60) days from the date
by which the report on Form 8-K was required to be filed.
(c) Index to Exhibits
Exhibit No.
- -----------
2.1/14/ Agreement and Plan of Merger and Reorganization, dated as of
October 24, 1995, by and among the Registrant, DA Acquisition
Corp., DirectAmerica Corporation, California Production Group,
Inc. and other parties thereto (Exhibit 2.1)
2.2(a)/15/ Agreement and Plan of Merger and Reorganization, dated as of
January 17, 1996 and amended as of April 4, 1996, by and among
the Registrant, PRT Acquisition Corp. and Positive Response
Television, Inc. (Exhibit 2.1)
2.2(b)/15/ Escrow Agreement, dated as of May 17, 1996, by and among the
Registrant, Positive Response Television, Inc., the Shareholders'
Representative and the Escrow Agent (Exhibit 2.2)
3.1/1/ Certificate of Incorporation (Exhibit 3(a))
3.2(a)/2/ By-laws (Exhibit 4.1)
3.2(b)/3/ Amendment to By-laws dated February 1992 (Exhibit 3(b)(1))
3.2(c)/6/ Amendment to By-laws dated April 1995 (Exhibit 3.2(c))
4.1/1/ Specimen copy of stock certificate for shares of Common Stock of
the Registrant (Exhibit 4(a))
4.2/6/ Specimen copy of stock certificate for shares of Series B
Convertible Preferred Stock of the Registrant (Exhibit 4.2)
4.3(a)/5/ Rights Agreement dated as of January 3, 1994 (Exhibit 4.2)
4.3(b)/5/ Amendment No. 1 to Rights Agreement, dated as of March 6, 1994
(Exhibit 4.2(a))
29
<PAGE>
4.3(c)/6/ Amendment No. 2 to Rights Agreement, dated as of September 26,
1994 (Exhibit 4.3(b))
4.3(d)/6/ Amendment No. 3 to Rights Agreement, dated as of September 30,
1994 (Exhibit 4.3(c))
4.3(e)/6/ Amendment No. 4 to Rights Agreement, dated as of November 30,
1994 (Exhibit 4.3(d))
4.4/6/ Certificate of Designation of Series B Convertible Preferred
Stock (Exhibit 4.4)
4.5/20/ Director's Stock Grant Plan (Exhibit 4.1)
4.6/10/ Form of Warrant to Purchase Common Stock of the Registrant, dated
November 24, 1995, issued to Value Vision International, Inc.
concerning an aggregate of 500,000 shares at an exercise price of
$8.865 per share (Exhibit 4.1)
4.7/10/ Form of Warrant to Purchase Common Stock of the Registrant, dated
November 24, 1995, issued to various persons concerning an
aggregate of 500,000 shares at an exercise price of $10.00 per
share (Exhibit 4.2)
10.1/19/ Amended and Restated 1991 Stock Option Plan (Exhibit A)
10.2/4/ 401(k) Plan Document (Exhibit 10(a)(4))
10.3/19/ 1995 Management Incentive Plan (Exhibit B)
10.4/3/ Lease for 1700 Walnut Street, Philadelphia, PA (Exhibit 10(d)(5))
10.5/16/ Letter Agreement between the Registrant, John J. Turchi, Jr.
and Mergren Associated dated April 13, 1995 (Exhibit 10.4)
10.6/5/ Employment Agreement between the Registrant and John J.
Sullivan dated as of June 1, 1994 (Exhibit 10.16(b))
10.7(a)/7/ Employment Agreement between the Registrant and David
Carman dated as of June 1, 1993 (Exhibit 10.3)
10.7(b)/7/ Employment Agreement between Quantum International Limited
and David Carman dated as of June 1, 1993 (Exhibit 10.4)
10.7(c)/9/ Letter Agreement between the Registrant and David J. Carman
dated July 17, 1995 (Exhibit 10.1)
10.7(d)/9/ Amendment to the Employment Agreement between the Registrant and
David J. Carman dated as of October 1, 1994 (Exhibit 10.2)
10.7(e)/9/ Amendment to the Employment Agreement between Quantum
International Limited and David J. Carman dated as of October 1,
1994 (Exhibit 10.3)
30
<PAGE>
10.8/5/ Employment Agreement between the Registrant and James
Jernigan dated as of June 1, 1994 (Exhibit 10.20)
10.9/7/ Lease for 7822 S. 46th Street; Phoenix, AZ (Exhibit 10.1)
10.10(a)/6/ Nonnegotiable Consolidated, Amended and Restated Promissory Note
between the Registrant and Kevin Harrington dated March 23, 1995
(Exhibit 10.24(a))
10.10(b)/6/ Letter Agreement between the Registrant and Kevin
Harrington dated March 23, 1995 (Exhibit 10.24(b))
10.11/18/ Settlement Agreement and Full and Mutual Release between
the Registrant and Abraham J. Salaman dated August 1, 1994
(Exhibit 10)
10.12/17/ Employment Agreement between the Registrant and Mark P.
Hershhorn dated August 26, 1995 (Exhibit 10)
10.13/11/ Securities Purchase Agreement between the Registrant and, the
persons executing, or causing to be executed the signature
page dated September 30, 1994 (Exhibit 10(a))
10.14/6/ Amendment to Securities Purchase Agreement dated as of
December 19, 1994 (Exhibit 10.27(b))
10.15/11/ Note and Warrant Purchase Agreement between the Registrant,
Media Arts International, Ltd., Quantum International Limited
and Safeguard Scientifics (Delaware), Inc. dated October 19,
1994 (Exhibit 10(b))
10.16/12/ Securities Purchase Agreement between the Registrant and,
the persons executing, or causing to be executed, the
signature page thereof dated as of November 30, 1994 (Exhibit
10)
10.17/13/ Agreement between the Registrant, Buckeye Communications,
Inc. and Mark Hershhorn dated August 26, 1994 (Exhibit 99a)
10.18/8/ Marketing, Distribution and Service Mark Agreement between
the Registrant, Media Arts International, Ltd., and Positive
Response Television, Inc. (Exhibit 10.3)
10.19/8/ Employment Agreement between the Registrant and Brian McAdams
dated as of September 27, 1995 (Exhibit 10.1)
10.20/8/ Employment Agreement between the Registrant and Constantinos I.
Costalas dated as of September 27, 1995 (Exhibit 10.2)
10.21/16/ Settlement Agreement among the Registrant, ValueVision
International, Inc., John J. Turchi, Jr., Robert J. Johander
and Mark A. Payne dated April 13, 1995 (Exhibit 10.1)
31
<PAGE>
10.22/16/ Telemarketing, Production and Post-Production Agreement between
the Registrant and ValueVision International, Inc., dated
April 13, 1995 (Exhibit 10.2)
10.23/16/ Joint Venture Agreement between the Registrant and
ValueVision International, Inc., dated April 13, 1995
(Exhibit 10.3)
10.24/6/ Stipulation and Agreement of Compromise and Settlement regarding
National Media Securities Litigation (Exhibit 10.37)
10.25/6/ Registration Rights Agreement dated as of December 19, 1994 by
and among National Media Corporation and the persons whose
signatures appear on the signature page thereof (Exhibit
10.38)
10.26/9/ Modification Agreement between the Registrant, Media Arts
International, Ltd., Quantum International Limited, Safeguard
Scientifics (Delaware), Inc. and Meridian Bank dated as of
April 20, 1995 (Exhibit 10.4)
10.27/14/ Employment Agreement, dated as of October 24, 1995, by and between
DirectAmerica Corporation and John W. Kirby (Exhibit 10.1)
10.28/14/ Employment Agreement, dated as of October 24, 1995, by and between
DirectAmerica Corporation and Bruce D. Goodman (Exhibit 10.2)
10.29/14/ DirectAmerica Corporation Employee Bonus Plan (Exhibit 10.3)
10.30/10/ Loan and Security Agreement, dated November 28, 1995, by and
between the Registrant, certain of its subsidiaries and Meridian
Bank (Exhibit 10.1)
10.31/10/ Allonge, dated November 28, 1995, by the Registrant and certain of
its subsidiaries for the benefit of Meridian Bank (Exhibit 10.2)
10.32/15/ Employment Agreement, dated as of May 17, 1996, by and between
Positive Response Television, Inc. the Registrant and Michael
Levey (Exhibit 99.1)
10.33/15/ Employment Agreement, dated as of May 17, 1996, by and between
Positive Response Television, Inc. the Registrant and Lisa
Vann Levey (Exhibit 99.2)
11.1 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
32
<PAGE>
27.1 Financial Data Schedule
__________________________
/1/ Incorporated by reference to Registrant's Registration Statement
on Form S-1 (Reg. No. 33-26778) filed January 31, 1989.
/2/ Incorporated by reference to Registrant's Registration Statement
on Form S-3 (Reg. No. 33-35301) filed June 8, 1990.
/3/ Incorporated by reference to Registrant's Annual Report on Form
10-K for fiscal year ended March 31, 1992 filed June 26, 1992.
/4/ Incorporated by reference to Registrant's Annual Report on Form
10-K for fiscal year ended March 31, 1991 filed June 20, 1991.
/5/ Incorporated by reference to Registrant's Annual Report on Form
10-K for fiscal year ended March 31, 1994 filed July 14, 1994.
/6/ Incorporated by reference to Registrant's Annual Report on Form
10-K for fiscal year ended March 31, 1995 filed June 29, 1995.
/7/ Incorporated by reference to Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1993 filed November 12,
1993.
/8/ Incorporated by reference to Registrant's Quarterly Report on Form
10-Q for the period ended December 31, 1994 filed February 14,
1995.
/9/ Incorporated by reference to Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1995 filed August 14, 1995.
/10/ Incorporated by reference to Registrant's Quarterly Report on
Form 10-Q for the period ended December 31, 1995 filed February
15, 1996.
/11/ Incorporated by reference to Registrant's Report on Form 8-K dated
October 5, 1994.
/12/ Incorporated by reference to Registrant's Report on Form 8-K dated
December 8, 1994.
/13/ Incorporated by reference to Registrant's Report on Form 8-K dated
January 13, 1995.
/14/ Incorporated by reference to Registrant's Report on Form 8-K
dated October 19, 1995.
/15/ Incorporated by reference to Registrant's Report on Form 8-K dated
May 17, 1996.
/16/ Incorporated by reference to Registrant's Report on Form 8-K dated
April 13, 1995.
/17/ Incorporated by reference to Registrant's Report on Form 8-K dated
August 26, 1994.
33
<PAGE>
/18/ Incorporated by reference to Registrant's Report on Form 8-K dated
July 19, 1994.
/19/ Incorporated by reference to Registrant's Proxy Statement in
connection with annual meeting of Stockholders held on February
22, 1995.
/20/ Incorporated by reference to Registrant's Report on Form S-8
filed October 19, 1995.
34
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A)(1) AND (2), (C) AND (D)
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED MARCH 31, 1996
NATIONAL MEDIA CORPORATION
PHILADELPHIA, PA
35
<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. Our audits also included the financial
statement schedule included in the index at item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Philadelphia, Pennsylvania
May 13, 1996, except for Note 19,
as to which the date is May 30, 1996
36
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES
AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
-----------------
MARCH 31
1996 1995
-------- -------
<S> <C> <C>
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.
37
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES
AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED MARCH 31
1996 1995 1994
----------- ---------- ----------
<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 $ .74 $ (.05) $ (.72)
=========== ========== ==========
Fully-diluted $ .71 $ (.05) $ (.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.
38
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
-------------------------
YEAR ENDED MARCH 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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.
39
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------
YEAR ENDED MARCH 31
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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.
40
<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.
41
<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
conversion 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
42
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
total of $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>
-----------------
YEAR 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
common 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.
43
<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.
44
<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 approximately 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.
45
<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>
----------------------
YEAR 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>
46
<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.
47
<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
48
<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 were 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.
49
<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
50
<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.
51
<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
aggregate 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
outstanding at the effective time of the Merger, have been deposited into an
escrow account and will be deliverable, if at all within 18 months, only
52
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
upon the 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
behalf of all persons who purchased PRTV Common Stock during the period from
January 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' entitlement to legal relief. On October 31, 1995, PRTV again moved
to dismiss plaintiffs' entire action. Management does not believe that the
disposition of this matter will have a material adverse effect on the Company's
financial condition.
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 and its two direct response
television marketing subsidiaries (collectively "Suzanne Paul"). These
acquisitions are subject to certain regulatory notifications and are expected 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 additional
$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 Prestige
and Suzanne Paul. The acquisitions will be accounted for as purchases. Upon
consummation of such acquisitions, the Company will also fund approximately
$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 data):
<TABLE>
<S> <C>
Net revenues $374,889
Net income $ 16,024
Primary income per share $ .64
Fully diluted income per share $ .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.
53
<PAGE>
SCHEDULE VIII
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
Balance at Charged to
beginning of costs and Charged to Balance at end
Description period expenses other accounts Deductions of period
----------- ------------ ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1996:
- -------------------------
Allowance for doubtful
accounts.................. $1,954 $ 1,194 $ 1,021/(1)/ $2,127
====== ======= ======= ======
Reserve for refunds.......... $3,371 $29,705 $27,987/(2)/ $5,089
====== ======= ======= ======
Year ended March 31, 1995:
- -------------------------
Allowance for doubtful
accounts.................. $ 906 $ 1,300 $ 252/(1)/ $1,954
====== ======= ======= ======
Reserve for refunds.......... $3,193 $29,423 $29,245/(2)/ $3,371
====== ======= ======= ======
Year ended March 31, 1994:
- -------------------------
Allowance for doubtful
accounts.................. $ 581 $ 742 $ 417/(1)/ $ 906
====== ======= ======= ======
Reserve for refunds.......... $2,310 $22,205 $21,322/(2)/ $3,193
====== ======= ======= ======
</TABLE>
__________________________
(1) Uncollectible accounts written off, net of recoveries.
(2) Refunds on products sold.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL MEDIA CORPORATION
Date: June 14, 1996 /s/ Mark P. Hershhorn
-----------------------------------------------
Mark P. Hershhorn
President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: June 14, 1996 /s/ James M. Gallagher
------------------------------------------------
James M. Gallagher
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: June 14, 1996 /s/ Brian McAdams
------------------------------------------------
Brian McAdams
Chairman of the Board, Chairman of the
Executive Committee and Director
Date: June 14, 1996 /s/ David J. Carman
------------------------------------------------
David J. Carman
Executive Vice President of the Company,
President and Chief Executive Officer of Quantum
International, Ltd. and Director
Date: June 14, 1996 /s/ Charles L. Andes
------------------------------------------------
Charles L. Andes
Director
55
<PAGE>
Date: June 14, 1996 /s/ Constantinos I. Costalas
------------------------------------------------
Constantinos I. Costalas, Vice Chairman of
the Board, Director
Date: June 14, 1996 /s/ Michael J. Emmi
------------------------------------------------
Michael J. Emmi
Director
Date: June 14, 1996 /s/ Frederick S. Hammer
------------------------------------------------
Frederick S. Hammer
Director
Date: June 14, 1996 /s/ Jon W. Yoskin II
------------------------------------------------
Jon W. Yoskin II
Director
Date: June 14, 1996 /s/ Ira M. Lubert
------------------------------------------------
Ira M. Lubert
Director
Date: June 14, 1996 /s/ Albert R. Dowden
------------------------------------------------
Albert R. Dowden
Director
Date: June 14, 1996 /s/ William M. Goldstein
------------------------------------------------
William M. Goldstein
Director
56
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO.
- -----------
11.1 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 11.1
STATEMENT RE:
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1996 1995 1994
---------- ---------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
Primary:
Average common shares outstanding 15,363 14,024 12,078
Assumed conversion of preferred stock 2,248 0 0
Assumed conversion of stock options and warrants (2) 5,565 0 0
--------- -------- --------
Total shares 23,176 14,024 12,078
========= ======== ========
Net income (loss) $ 16,579 $ (672) $ (8,699)
Adjustments to net income:
Reduction of interest expense (net of tax)
related to assumed retirement of debt 398 0 0
Increase in interest income (net of tax) from
assumed investment of excess proceeds in
short-term paper 172 0 0
--------- -------- --------
Adjusted net income $ 17,149 $ (672) $ (8,699)
========= ======== ========
Per share earnings:
Net income (loss) $ .74 $ (.05) $ (.72)
========= ======== ========
Fully Diluted:
Average common shares outstanding 15,363 14,024 12,078
Assumed conversion of preferred stock 2,248 0 0
Assumed conversion of stock options and warrants (3) 5,677 0 0
--------- -------- --------
Total shares 23,288 14,024 12,078
========= ======== ========
Net income (loss) $ 16,579 $ (672) $ (8,699)
Adjustments to net income:
Reduction of interest expenses (net of tax)
related to assumed retirement of debt 0 0 0
Increase in interest income (net of tax) from assumed
investment of excess proceeds in short-term paper 0 0 0
--------- -------- --------
Adjusted net income $ 16,579 $ (672) $ (8,699)
========= ======== ========
Per share earnings:
Net income (loss) $ .71 $ (.05)(1) $ (.72)(1)
========= ======== ========
</TABLE>
(1) This calculation is submitted in accordance with the requirements of
Regulation S-K although not required by APB opinion No. 15 because it
results in dilution of less than 3%.
(2) For fiscal years 1996 and 1995, based on the if converted method and the
average market price. For fiscal year 1994, based on the treasury stock
method using the average market price.
(3) For fiscal years 1996 and 1995, based on the if converted method and the
period-end market price, if higher than the average market price. For
fiscal year 1994, based on the treasury stock method using the period-end
market price, if higher than the average market price.
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
<TABLE>
<CAPTION>
State or Jurisdiction
Company of Incorporation
------- ---------------------
<S> <C>
Quantum North America, Inc. Delaware
National Media Marketing Corp. Delaware
National Media Holdings, Inc. Delaware
Quantum Marketing International, Inc. Delaware
NPA Realty Corp. New York
National Media Media Corp. Delaware
Multi-Media Distribution Ctr. Delaware
Quantum International Ltd. United Kingdom
Business Publications, Inc. Delaware
Quantum International Japan Company Ltd. Japan
Quantum International UK Ltd. New Zealand
Quantum Marketing Mexico Mexico
DirectAmerica Corporation Delaware
Positive Response Television, Inc. Delaware
Dignity Prestige SDN BHD Malaysia
Quantum Productions AG Switzerland
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-53252, Form S-3 No. 33-34303, Form S-3 No. 33-35301, Form S-3
No. 33-41916, Form S-3 No. 33-82618, Form S-3 No. 33-63841, Form S-8 No. 33-
34304, Form S-8 No. 33-60969 and Form S-8 No. 33-63537) of National Media
Corporation and in the related Prospectuses of our report dated May 13,
1996 (except for Note 19, as to which the date is May 30, 1996), with respect to
the consolidated financial statements and schedule of National Media Corporation
included in this Annual Report (Form 10-K) for the year ended March 31, 1996.
Ernst & Young LLP
Philadelphia, Pennsylvania
June 13, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000070412
<NAME> NATIONAL MEDIA CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 18,405
<SECURITIES> 0
<RECEIVABLES> 34,178
<ALLOWANCES> (2,127)
<INVENTORY> 22,605
<CURRENT-ASSETS> 92,384
<PP&E> 13,393
<DEPRECIATION> (6,439)
<TOTAL-ASSETS> 116,548
<CURRENT-LIABILITIES> 53,662
<BONDS> 0
0
1
<COMMON> 182
<OTHER-SE> 56,279
<TOTAL-LIABILITY-AND-EQUITY> 116,548
<SALES> 292,607
<TOTAL-REVENUES> 292,607
<CGS> 237,716
<TOTAL-COSTS> 271,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,015
<INCOME-PRETAX> 20,104
<INCOME-TAX> 3,525
<INCOME-CONTINUING> 16,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,579
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.71
</TABLE>
