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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended March 31, 1997
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
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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.)
Eleven Penn Center, Suite 1100, 1835 Market Street, Philadelphia, PA 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-988-4600
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 $.01 per share New York Stock Exchange
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. [X]
The aggregate market value of the Registrant's voting stock held by non-
affiliates of the Registrant as of May 30, 1997 was approximately $177,134,940.
There were approximately 24,965,534 issued and outstanding shares of the
Registrant's common stock, par value $.01 per share, at May 30, 1997. In
addition, there were 707,311 shares of treasury stock as of such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for its 1997 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 $7.375,
which was the closing price of the Company's Common Stock on the New York Stock
Exchange on May 30, 1997.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Report contains "forward-looking" statements regarding potential future
events and developments affecting the business of the Company. Such
statements relate to, among other things, (i) competition for customers for
its products and services; (ii) the uncertainty of developing or obtaining
rights to new products that will be accepted by the market and the timing of
the introduction of new products into the market; (iii) the limited market
life of the Company's products; and (iv) other statements about the Company or
the direct response industry.
The Company's ability to predict results or the effect of any pending
events on the Company's operating results is inherently subject to various
risks and uncertainties, 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; and the effects of
government regulations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 370 million households
in 70 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 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 the primary distributor of innovative consumer
products in the international marketplace.
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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) increasing the effective utilization and leveraging
of its global presence, (ii) continuing to develop and market innovative
consumer products to enhance its library of infomercial programs and (iii)
engineering the most efficient business model for the conduct of its worldwide
direct response business.
Leveraging Global Presence. The Company is continuing its efforts to expand
its position as a worldwide leader in infomercial programming. Through its
existing media access and order fulfillment operations, the Company has the
ability to deliver infomercial programming and products to over 370 million
households worldwide. The Company intends to continue to explore new ways to
effectively utilize and leverage this worldwide distribution, reach and
capability, possibly, by offering such capability to other consumer
distributors; by entering into alliances with companies that need or desire to
reach the worldwide households that the Company's programming reaches; and by
taking advantage of the product/brand awareness created by its programming in
other methods of consumer distribution, etc. In addition, the Company intends
to more aggressively utilize its assets such as its customer lists in order to
realize the true value thereof.
Develop and Market Innovative Products to Enhance Library of Infomercial
Programs. The Company continually seeks out innovative consumer products
which it can market and distribute profitably. The Company has 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 relationships with third parties.
The Company believes that its large library of infomercial programs, together
with its extensive international operations and experience in product
sourcing, telemarketing, order fulfillment and customer service, gives it a
significant competitive advantage over others desiring to enter its existing
or new markets. While the Company incurs certain initial and ongoing costs in
connection with adapting a product and infomercial for specific markets, the
primary expenses are incurred when the product/infomercial is first developed
for its initial target market. Thus, as the Company decides to introduce a
product into additional markets, it can do so quickly, efficiently and
relatively inexpensively.
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.
Engineering the Most Efficient Business Model for the Company. The Company
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 international media partnerships, 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 lower its
costs and engineer a business model which is the most efficient for a
worldwide direct response business.
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
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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. During the evaluation phase of product development, the
Company evaluates the suitability of the product for television demonstration
and explanation as well as the anticipated perceived value of the product to
consumers, determines whether an adequate and timely supply of the product can
be obtained and analyzes whether the estimated profitability of the product
satisfies the Company's criteria.
In order to develop or acquire the rights to distribute or market new
products, the Company sometimes works with consumer product companies. A
clear advantage of these relationships is that the Company's partner typically
will provide research and development support, 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 markets outside of North America. In fiscal 1997,
the Company introduced 14 new products for non-domestic infomercial markets.
The Company reviews its infomercial library on an ongoing basis to select
those products which it believes will be successful in Europe and/or Asia
and/or its other international markets. 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. As competition in the international marketplace
has increased, the Company has begun introducing domestically originated
products internationally on a much more rapid basis. While the majority of
the programs aired internationally have historically come from the Company's
United States operating companies, the Company also airs shows and distributes
products of other independent domestic infomercial companies. The Company
brought approximately 47 new products to market globally 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 cost of
producing an infomercial generally ranges from $175,000 to $350,000. 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. While in the past, the Company generally aired each successful
infomercial domestically for 4 to 10 months or more, after which the potential
existed for additional international airings which may have ranged from 12 to
24 months, or longer in some instances, the Company has begun introducing
products internationally soon after, or simultaneously with, its domestic
introduction of the products.
The Company believes that it has the largest library of infomercials and
associated products in the world. The Company's library includes 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 370 million households in 70 countries worldwide,
including Argentina, Australia, Austria, Belarus, the Benelux countries,
Brazil, China, Denmark, Ecuador, most Eastern European countries, Finland,
France, Germany, Greece, Ireland, Italy, Japan, Mexico, most Middle Eastern
countries, New Zealand, Norway, Peru, Portugal, Russia, Spain, most South
American countries, Sweden, Switzerland, Taiwan, Turkey, Ukraine and the
United Kingdom.
In peak periods, the Company utilizes upwards of 1000 hours of cable and
broadcast television time per week in the United States and upwards 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.
Historically, approximately one-half of the Company's cable air time in the
United States and a majority 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. More
recently, the Company effectuated a reduction in the United States market to
the point where approximately one-quarter of its time is pursuant to longer
term 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 two 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: CNBC, Discovery, E!, The Family Channel, FX, Home Team Sports, The
Learning Channel, Lifetime Television, The Nashville Network, The New
Inspirational Network, Product Information Network, SCIFI, TV Food Network and
USA Network. The Company believes that at least one of the above networks is
carried by every local cable system carrier throughout the United States.
In addition to domestic air time purchased on cable networks, the Company also
purchases broadcast television time from network affiliates and independent
stations. Broadcast television time segments are purchased primarily in 30-
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
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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 1997 in the United States, approximately 52%
(in dollar terms) of the media time purchased by the Company came from cable
television and approximately 48% came from network affiliates and independent
television. 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.
Larger multiple system operators in the United States now sell air time which
was previously left unutilized, or "dark." The Company believes that this may
create an opportunity to lower its cost of air time as well as obtain
additional air time in desired markets. The Company generally has the right
to sell any media time it may have the right to use. During fiscal 1997, 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 can reduce 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 air 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 infomercials which
are available for immediate introduction into such new market, together with
its general industry experience, gives it a 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. 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 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 70 countries. The Company's long-term media
contracts in Europe expire at various dates through 2010. The Company
expects that it will face increases in costs associated with the renewal of
certain of its media contracts, which increases may or may not have a material
adverse effect on the Company. The Company intends to strategically pursue
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
monitors the availability of supplies of products and adjusts the air time of
an infomercial for a product which cannot be adequately supplied.
Additionally, the Company uses the services of 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.
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In general, before the Company takes any sizeable inventory position in a
product, the Company test markets the product. The Company then purchases
additional inventory for roll-out of the product. Sometimes,
due to issues of timing and payment relating to sourcing, the Company does
take an inventory position in a product before testing is completed.
In-Bound Telemarketing
The Company strives to create a problem-free fulfillment process for its
customers. This process consists of in-bound telemarketing, order fulfillment
and customer services. 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, in most
cases, 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 Australia and
New Zealand, the Company operates its own in-bound telemarketing. 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 upsell 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.
The majority of customer payments in the United States are made by credit
cards 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 delivery
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 and
assembling product for later delivery, packaging and shipping of products and
processing of customer returns. The Company's Phoenix 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.
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. In New Zealand and Australia, the Company performs these functions
internally. 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. In some countries, consumers who order products in response to an
infomercial pick up their product at a central warehouse facility.
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Customer Service
An important aspect of the Company's marketing strategy is to maintain and
improve the quality of customer service. Domestically, 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. Outside
of the United States and Canada, customer service is generally provided on a
contract basis through third parties whose operations are monitored by the
Company. The Company's New Zealand and Australian subsidiaries perform these
functions internally.
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 for defective products. 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 1997,
1996 and 1995 was 10.3%, 9.2% and 14.3%, 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 where there is no answer at the attempted
delivery site and where 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 its ability 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, specialty retailers
and wholesale clubs. During fiscal 1994, the Company began entering into
agreements with 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 1997, 1996 and
1995, non-infomercial distribution channels accounted for 6.6%, 3.3% and 6.2%,
respectively, of the Company's net revenues. The increase in fiscal 1997 over
fiscal 1996 was primarily due to the increase in royalties related to the sale
of the Ab Roller Plus product in the retail marketplace.
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 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. In New Zealand,
Australia and parts of Asia, the Company operates small retail locations of
its own.
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Products
The Company markets consumer products in a variety of categories. In fiscal
1997, the Company offered a total of over 150 products to consumers in one or
more geographic markets worldwide, of which, on a revenue basis, approximately
80% were products sold through the Company's infomercials and approximately
20% 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 1997, approximately 62 were products first introduced by the Company
in fiscal 1997 and approximately 91 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 Ab Roller Plus, Auri car
polish, Perfect Smile, the Fitness Strider, 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 Company's five most successful products in each of fiscal 1997, 1996 and
1995 accounted for approximately 41.2%, 46.0% and 54.0%, 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 reduces somewhat 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 1997 net
infomercial revenue as follows: approximately 22% from products introduced
during fiscal 1997, approximately 66% from products introduced during fiscal
1996 and 1995 and approximately 12% from products introduced prior to fiscal
1995.
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, 1997
and 1996 were approximately $12.0 million and $13.7 million, respectively.
Average monthly backlog orders for fiscal 1997 were approximately $11.6
million as compared to $8.5 million in fiscal 1996. 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 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 magazines, newspapers, direct mail advertising and
catalogs.
-9-
<PAGE>
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
in need of improvement and it is currently in the process of doing so,
including discussions regarding the outsourcing of this function. In order to
facilitate growth and to integrate fully its international operations, the
Company is enhancing its computer systems related to all phases of its
operations. The Company expended approximately $3.1 million for this project
in fiscal 1997. The Company is considering proposals submitted by several
national service providers to outsource its management information systems
function.
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, 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
consent orders. Prior to the Company's May 1996 acquisition of Positive
Response Television, Inc. ("PRTV"), PRTV 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, PRTV and Mr. Levey to submit
compliance reports to the FTC staff. The Company, PRTV 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 PRTV, both the Company and PRTV 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 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 PRTV. The Company responded to such
request. The FTC later advised the Company that it believed the Company had
violated one of the consent orders by allegedly failing to substantiate
certain claims made in one of its infomercials which was aired by the Company
between 1993 and 1995. The Company provided information to the FTC to
demonstrate substantiation. If the Company's substantiation is deemed to be
insufficient by the FTC, the FTC has a variety of enforcement mechanisms
available to it, including, but not limited to, monetary penalties. While no
assurances can be given, the Company does not believe that any remedies to
which it may become subject will have a material adverse effect on the
Company's results of operations or financial condition.
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 business 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 1995 United
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<PAGE>
States Supreme Court decision held that Congress can legislate such a change.
Thus far, 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, 1997, the Company had approximately 450 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 and vigorously defend
its trademark rights in its products and programs.
Item 2. Properties
The Company currently leases approximately 25,200 square feet of office space
pursuant to an eleven-year lease for its principal executive offices in
Philadelphia, Pennsylvania. The lease, which commenced in December 1996,
provides for annual rent payments of $479,000 in years one through five, and
$568,000 in years 6 through 11. Pursuant to the terms of such lease, the
Company's rent is abated until November 1, 1997.
On May 1, 1997, the Company began leasing approximately 23,000 square feet in
Los Angeles, California for its new production facility and offices. The
lease is for 126 months and requires payments at varying rates from $520,000
in year one to $662,000 in the final year.
The Company 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 $565,000 for fiscal year 1998 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)254,905 ($404,662 as of March 31, 1997) for fiscal year
1998 and (Pounds)269,436 ($427,730 as of March 31, 1997) 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, 1997, the Company paid a basic service charge of
(Pounds)67,449 ($107,075 as of March 31, 1997).
As a result of the purchase of Prestige Marketing, the Company now leases an
office building, warehouse, and showroom facility in Auckland, New Zealand.
The lease, which commenced on April 1, 1996, runs for ten years and currently
requires annual payments of NZ$296,000 per year ($205,000 as of March 31,
1997). In addition, Suzanne Paul Ltd. has entered into a three year lease,
beginning in August 1997, for its primary offices and warehouse in New South
Wales, Australia. The lease requires annual payments of AUS$571,000 ($450,500
as of March 31, 1997). This amount includes AUS$78,000 ($61,500 as of March
31, 1997) per year for general area charges and maintenance.
-11-
<PAGE>
Item 3. Legal Proceedings
NATIONAL MEDIA LITIGATION
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 PRTV, an independent infomercial producer at the time, 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 Company common stock to the class. 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 International, 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, parties 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. The Telemarketing
Agreement obligated ValueVision to provide to the Company over a three-year
period inbound telephone call-taking services at rates more favorable than
those then being paid by the Company. The Telemarketing Agreement also
obligated ValueVision to provide to the Company certain production and post-
production services.
As additional consideration for the services to be provided by
ValueVision under the Telemarketing Agreement, the Company granted to
ValueVision ten (10) year 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 provision of the Warrants). This
price was based on a premium over the average 20-day market value prior to the
date of settlement. The Warrants were scheduled to vest with respect to an
equal number of shares on each of the thirteen-month, 2-year and 3-year
anniversaries of the effective date (November 24, 1995), provided that
ValueVision satisfied certain conditions. In November 1996, the parties
entered into an amendment to the Telemarketing Agreement pursuant to which
ValueVision was no longer obligated to provide in-bound Telemarketing Services
and is required to pay $1.3 million for the right to have the Warrants vest.
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
outside the United States and Canada before pursuing such opportunities by
itself or with certain third parties. ValueVision granted the Company similar
rights with respect to infomercial opportunities ValueVision may have outside
of the United States and Canada.
In connection with the matters discussed above, the Company (1)
reimbursed its former Chairman, John Turchi, $50,000 for certain legal costs,
(2) paid substantially all amounts due to the former Chairman under the
Consulting Agreement described in Note 9 to the Company's consolidated
financial statements, and (3) paid $220,000 in connection with the exercise of
the Company's early termination option for its then principal offices which
were located in a building owned by a company controlled by Mr. Turchi.
The issuance of the Warrants to ValueVision required the prior consent of
the holders of the promissory notes issued pursuant to the Note and Warrant
Purchase Agreement as discussed in Note 5 to the Company's consolidated
financial statements. As an inducement to the noteholders to permit the
issuance of the Warrants, the Company issued to the noteholders warrants (the
"Waiver Warrants") to purchase
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<PAGE>
500,000 shares of the Company's common stock at a price of $10.00 per share.
These warrants expired unexercised on November 28, 1996.
Shareholders' Class Actions
In 1994, class action lawsuits were filed in Federal Court and Delaware
Chancery Court against the Company and certain of its present and former
officers and directors in connection with an aborted merger transaction with
ValueVision. The Company and other parties to the litigation entered into
agreements to settle these actions. These agreements provided for cash
payments of approximately $1,500,000 to the class, 75% of which were paid by
the Company's insurer. The consummation of the settlements received Federal
court approval during fiscal year 1996.
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 initial US 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 initial US
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 issued an opinion to the Company that the product marketed by the
Company does not infringe Precise's initial US patent. A second US patent was
issued to Precise on November 26, 1996 for its exercise device. Precise
amended its pleading to include additional claims based on such new patent.
Upon the issuance of the new patent, the Company terminated active marketing
of the Ab Roller Plus product in the US.
The Company has recently been involved in active negotiations with the
other parties to the action to settle this matter prior to trial. It is not
yet certain whether such negotations will result in a mutually agreeable
settlement. The Company believes that it has made adequate provision for this
matter.
Fitness Flyer Litigation
In February 1997, the Company filed suit in a Los Angeles, California
state court against Guthy Renker Corporation ("Guthy Renker") in connection
with a joint venture between Guthy Renker and the Company concerning the
marketing of a fitness product. Guthy Renker also filed actions against the
Company in California Federal and state court concerning the same
circumstances. In early March 1997, the parties reached a settlement of these
actions pursuant to which the Company retained its rights to market a
competing product that it had developed and gave up the right to sell the
original fitness product.
WWOR Litigation
In March 1997, WWOR-TV filed a breach of contract action in the United
States District Court for New Jersey against one of the Company's operating
subsidiaries alleging that the subsidiary wrongfully terminated a contract for
the purchase of media time, seeking in excess of $1,000,000 in compensatory
damages. The Company is contesting the action and believes it has meritorious
defenses to the plaintiff's claims for damages.
-13-
<PAGE>
PRTV LITIGATION
PRTV Shareholders' California Class Action
On May 1, 1995, prior to the acquisition of PRTV by the Company, 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 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 sought unspecified compensatory damages and other
equitable relief. 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 plaintiff's entitlement to legal
relief. The Company reached an agreement in principle to settle this action in
fiscal year 1997 which provides for the payment of $550,000 to the class, 66%
of which is to be paid by PRTV's insurance carrier. The Company recorded a
charge of $187,000 during fiscal year 1997 in connection with this matter.
Such settlement is contingent upon court approval.
Edmark Industries Litigation
In February 1996, prior to the acquisition of PRTV by the Company,
Edmark Industries ("Edmark"), a supplier of the Super Slicer kitchen product,
filed suit in the U.S. District Court for the Southern District of Texas
against PRTV and the retail distributor of the product, alleging certain
breach of contract, false advertising and copyright infringement claims in
connection with the marketing of such product. Pursuant to PRTV's agreement
with the retail distributor, PRTV defended such distributor and such
distributor's retail customers in connection with this suit. In November 1996,
the Court provided injunctive relief to the plaintiff on the issues of
copyright infringement and false advertising. The action was settled in April
1997 upon the payment by the Company, on behalf of PRTV, of $200,000, in cash,
at closing, a $200,000 note payable on June 30, 1997, the issuance of a note
requiring the payment of $50,000 per month for 24 months beginning July 31,
1997, with interest at 8%, and certain other nonmaterial matters. The Company
recorded a charge of $2,656,000 during the fourth quarter of fiscal year 1997
in connection with this matter.
Suntiger
In late March 1997, Suntiger, Inc. ("Suntiger"), a distributor of
sunglasses, filed suit against PRTV and certain other parties alleging patent
infringement. PRTV is indemnified by third parties in connection with this
action.
Blublocker Litigation
In September 1995, prior to the acquisition of PRTV by the Company, suit
was filed by Blublocker Corp., a distributor of sunglasses, against PRTV,
alleging unfair competition and false advertising relating to a PRTV product
campaign. In April 1997, the suit was settled by the parties with PRTV
agreeing to pay $400,000 to Blublocker Corp. The Company recorded this charge
in the fourth quarter of fiscal year 1997.
Other Matters
The Company, in the normal course of business, is a party to litigation
relating to trademark and copyright infringement, product liability, contract-
related disputes, and other actions. It is the Company's policy to vigorously
defend all such claims and enforce its rights in these areas. The Company
does not
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<PAGE>
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
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, 1997.
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<PAGE>
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".
The following table sets forth the quarterly high and low last sales
prices as reported on the New York Stock Exchange 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 Fiscal
1997 1996
------------------------------- ----------------------------
Cash Cash
Dividends Dividends
Quarter Ended High Low Declared High Low Declared
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30............... 20 5/8 16 ---- 9 7/8 7 1/8 ----
September 30.......... 18 14 5/8 ---- 14 1/2 9 3/8 ----
December 31........... 15 3/8 5 3/4 ---- 21 13 3/4 ----
March 31.............. 10 1/8 6 1/2 ---- 21 1/2 15 ----
- -------------------------------------------------------------------------------------
</TABLE>
The number of record holders of the Company's common stock on May 30,
1997 was approximately 860. The Company is currently restricted in its ability
to pay dividends under the terms of its principal debt financing as more fully
described in Note 5 to the consolidated financial statements.
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<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
--------------------------------------------------
(In thousands, except per share amounts)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues.............................. $358,179 $292,607 $176,167 $172,602 $141,997
(Loss) income before income taxes......... (43,794) 20,104 (372) (8,699) 6,335
Net (loss) income......................... (45,691) 16,579 (672) (8,699) 6,259
-------- -------- -------- -------- --------
Net (loss) income per common share:
Primary.................................. (2.07) .74 (.05) (.72) .48
Fully-diluted............................ (2.07) .71 (.05) (.72) .48
Cash dividends............................ --- --- --- --- ---
-------- -------- -------- -------- --------
Weighted average number of shares
Primary.................................. 22,072 23,176 14,024 12,078 13,046
Fully-diluted............................ 22,072 23,288 14,024 12,078 13,046
-------- -------- -------- -------- --------
Balance Sheet Information:
Working capital........................... $19,768 $38,722 $22,081 $1,377 $7,995
Total assets.............................. 165,632 116,548 64,143 47,475 46,771
Short-term debt/(1)/...................... 17,901 876 184 4,770 2,917
Long-term debt/(2)/....................... 959 4,054 3,613 448 1,090
Shareholders' equity...................... 88,560 56,462 26,625 10,571 17,630
-------- -------- -------- -------- --------
</TABLE>
(1) Net of loan discount of $768 as of March 31, 1997.
(2) Net of loan discount of $1,251 and $1,650 as of March 31, 1996 and
March 31, 1995, respectively.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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. Domestically, the Company has
historically been dependent on a limited number of successful products to
generate a significant portion of its net revenue. The Company's strategies for
future periods are being designed to reduce the risk associated with relying on
a limited number of successful products for a disproportionate amount of its
revenues and tailoring the Company's domestic operations to more efficiently
deal with the cyclical nature of the Company's domestic business. These include
the more effective utilization and leveraging of its global presence, the
continued development and marketing of innovative products to enhance its
library of infomercial programs, and engineering the most efficient business
model for the Company's future operations. International expansion has resulted
in an increasing amount of the Company's revenues being generated from the
international infomercial marketplace. As the Company enters new markets
overseas, it is able to air the shows from its existing library, prolonging the
life of products and related productions, thus reducing its dependence on new
products and new show productions. The Company takes advantage of product
awareness created by its infomercials and also extends the sales life of its
products through non-infomercial distribution channels. These include retail
arrangements and agreements with the Company's strategic partners who supply new
products and retail distribution channels.
Results of Operations
The operating results for certain of the Company's operating subsidiaries,
namely PRTV, Prestige Marketing Limited and Prestige Marketing International
Limited (collectively, "Prestige") and Suzanne Paul Holdings Pty Limited and its
subsidiaries (collectively, "Suzanne Paul") are included in the Company's
current period results from the date of each respective acquisition during
fiscal 1997.
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,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0%
Operating costs and expenses:
Media purchases 36.6 29.6 29.5
Direct costs 55.0 51.7 55.4
Selling, general and administrative 19.5 11.5 13.4
Severance expense for former executive
officers 0.7 --- 1.5
Interest expense 0.4 0.3 0.4
--- --- ---
Total operating costs and expenses 112.2 93.1 100.2
(Loss) income before income taxes (12.2) 6.9 (0.2)
------ --- -----
Net (loss) income (12.8)% 5.7% (0.4)%
====== === =====
</TABLE>
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<PAGE>
Comparison of Fiscal 1997 with Fiscal 1996
Net Revenues
Net revenues were $358.2 million in fiscal 1997 as compared to $292.6 million in
fiscal 1996, an increase of $65.6 million or 22.4%. This increase was primarily
a result of an increase in net revenues generated from the acquisitions in July
1996 of Prestige and Suzanne Paul which operate in New Zealand and Australia
(approximately $39.7 million) and an increase in core market net revenues.
Core market revenues, which consist of net revenues in the United States,
Western Europe and Japan were $295.4 million in fiscal 1997 as compared to
$280.8 million in fiscal 1996, an increase of $14.6 million or 5.2%. The
increase was primarily a result of an increase in domestic net revenues which
more than offset a decline in Japanese net revenues. Sales of the Ab Roller Plus
product represented approximately 30.8% of core market revenues in fiscal 1997.
Domestic net revenues in fiscal 1997 were $188.5 million as compared to $141.6
million in fiscal 1996, an increase of $46.9 million or 33.1%. This increase was
primarily a result of 1) the acquisition in May 1996 of PRTV, which generated
$35.7 million in net revenues and 2) retail royalties which were $16.3 million
in fiscal 1997 versus $5.6 million in fiscal 1996. These royalties were
principally generated from sales of the Ab Roller Plus product into the retail
marketplace. The Ab Roller Plus product represented approximately 41.9% of
domestic net revenues in fiscal 1997. Domestically, the Company aired new
infomercials during the latter part of fiscal 1997 which did not perform as
anticipated, especially in the fourth quarter, which had a negative impact on
revenue generation. Additionally, domestic net revenues were unfavorably
impacted by an increase in the average infomercial return rate as a percentage
of gross revenues from 6.4% in fiscal 1996 to 9.9% in fiscal 1997 which resulted
primarily from sales of higher-priced products in the current year which
historically have higher return rates. The Company's Japanese revenues declined
due to increased competition from traditional programming and other infomercial
competitors; the fact that Japanese airtime was not obtained in the quantity or
speed anticipated; and the effect of currency fluctuations. Japanese revenues in
fiscal 1997 decreased approximately 30.3% as compared to fiscal 1996. This
included a 19.9% decline on a local currency basis. Japanese revenues were $11.6
million in the fourth quarter of fiscal 1997 as compared to $22.2 million in the
fourth quarter of fiscal 1996, a decrease of 47.9%. On a local currency basis,
Japanese fiscal 1997 fourth quarter revenues decreased by 40.4%. This trend
continued in the first quarter of fiscal 1998. European revenues remained
relatively constant from fiscal 1996 to fiscal 1997.
Emerging market revenues, which consist of net revenues in non-Japanese
countries in the Pacific Rim (including New Zealand and Australia), Eastern
Europe, the Middle East, Canada, Africa and Latin America, were $62.7 million in
fiscal 1997 as compared to $11.8 million in fiscal 1996, an increase of $50.9
million or 430%. Approximately $39.7 million of the increase was generated from
the Prestige and Suzanne Paul acquisitions. The remaining increase was
principally a result of ongoing expansion of the Company's operations into new
marketplaces.
Operating Costs
Total operating costs and expenses were $402.0 million in fiscal 1997 as
compared to $272.5 million in fiscal 1996, an increase of $129.5 million or
47.5%.
Media Purchases. Media purchases were $131.1 million (net of $22.0 million in
media sales) in fiscal 1997 as compared to $86.5 million (net of $13.8 million
in media sales) in fiscal 1996, an increase of $44.6 million or 51.6%,
principally as a result of growth in revenues, higher U.S. media costs and the
acquisitions completed in fiscal 1997. The ratio of media purchases to net
revenues increased substantially from 29.6% in fiscal 1996 to 36.6% in fiscal
1997. This was primarily due to higher U.S. media costs; a higher percentage of
the current year's net revenues being earned in the domestic marketplace where
media costs are typically higher; the acquisitions of PRTV and Nancy Langston &
Associates, Inc. ("Nancy Langston") which added significant blocks of media time
which could not be sold or used profitably during the 1996 pre-holiday period;
the inability of the Company to deliver effective new shows on a timely basis
and higher
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<PAGE>
European media costs, primarily associated with the Eurosport satellite
contract. In addition to the impact of the Eurosport contract, the Company's
European operations were also negatively affected by a change in product mix to
products with a lower average selling price, higher production costs and
currency fluctuations. Fourth quarter domestic media management was negatively
impacted by: a decline in the success rate of current year infomercials; loss of
Fitness Flyer and Fitness Strider product airings due to litigation which was
taking place during key fitness product sales months of January and February;
increased domestic cancellation and return rates due to the aforementioned
litigation and manufacturing/sourcing difficulties related to certain products;
the lack of successful new shows; and the effect of the Company airing lead
generation type shows, which typically have a higher advertising to sales ratio.
Direct Costs. Direct costs consist of the cost of materials, freight,
infomercial production, commissions and royalties, order fulfillment, in-bound
telemarketing, credit card authorization, warehousing and profit participation
payments. Direct costs were $197.0 million in fiscal 1997 as compared to $151.2
million in fiscal 1996, an increase of $45.8 million or 30.3%. This increase was
primarily a result of increased revenues and higher domestic direct costs in the
second half of fiscal 1997. As a percentage of net revenues, direct costs were
55.0% in fiscal 1997 and 51.7% in fiscal 1996. Domestically, direct costs as a
percentage of net revenues increased by 3.6 percentage points primarily due to
an increased provision for obsolete stock and a substantial increase in
production expense during fiscal 1997. This was a result of a decline in the
effectiveness of the Company's new shows which generated lower than expected
revenues and profit margins, especially in the fourth quarter of fiscal 1997. Of
the 19 new or revised shows aired during the fourth quarter and late third
quarter of fiscal 1997, 16 did not perform up to expectations. In addition, the
lower domestic sales volume and higher backlog in the second half of fiscal 1997
resulted in an increase in domestic fulfillment costs. Telemarketing expenses
also increased in the second half of fiscal 1997 as a result of new show formats
being tested such as lead generation shows which require longer and more
complicated telemarketing scripts and, therefore, higher telemarketing costs per
inquiry. On an annual basis, these increases were partially offset by the
favorable impact of retail royalties earned in fiscal 1997. These retail
royalties carry very low cost of sales. Internationally, direct costs as a
percentage of net revenues increased approximately 3.3 percentage points,
primarily due to higher product costs in Europe and Asia resulting from a change
in product mix; increased provisions for obsolete stock, especially in the
fourth quarter of fiscal 1997; and increased production expense resulting from
an increase in the number of countries for which show customization was
required. The increased provision for obsolete stock, especially in the Asian
markets, was a result of the decline in revenues experienced in the latter
portion of fiscal 1997. Lower sales volume levels and higher inventory levels in
Japan, particularly in the fourth quarter had a negative impact on certain
minimum fulfillment and warehousing costs.
Selling, General and Administrative. Selling, general and administrative
expenses were $69.8 million in fiscal 1997 as compared to $33.8 million in
fiscal 1996, an increase of $36.0 million or 106.7%, primarily due to increases
in compensation expense, legal fees and legal settlements, bad debt expense and
amortization of goodwill. Compensation expense increased primarily to support
the Company's continued global expansion. Current year acquisitions accounted
for approximately 52.0% of the current year compensation expense increase. Legal
expenses were $4.0 million and legal settlements were $9.3 million in fiscal
1997 as compared to $1.8 million and $0.1 million in fiscal 1996, respectively.
The fourth quarter of fiscal 1997 included $2.6 million of legal fees and $9.3
million of legal settlements or reserves for legal settlements. This included
significant amounts of PRTV legal fees and legal settlements related to matters
prior to the Company's acquisition of PRTV. The fourth quarter also included
legal fees incurred in connection with the Fitness Flyer litigation. Bad debt
expense was $5.7 million in fiscal 1997 as compared to $1.2 million in fiscal
1996 and included approximately $3.8 million in the fourth quarter of fiscal
year 1997, including a substantial portion related to the write-off of two
specific customer accounts. Amortization of goodwill increased primarily due to
the current year acquisitions of PRTV, Prestige, Suzanne Paul and Nancy
Langston.
-20-
<PAGE>
Selling, general and administrative expenses as a percentage of net revenues
increased from 11.5% in fiscal 1996 to 19.5% in fiscal 1997. Selling, general
and administrative expenses as a percentage of net revenues were 44.9% in the
fourth quarter of fiscal 1997 as compared to 11.5% in the fourth quarter of
fiscal 1996. This increase was primarily a result of the aforementioned fourth
quarter items and the 22.9% decrease in fourth quarter net revenues from fiscal
1997 to fiscal 1996.
Severance Expense. In fiscal year 1997, the Company recorded severance expense
related to discontinuance of employment of five executive officers. Total
severance charges related to these officers are $2,500,000 and include salary,
insurance, and other benefits.
Interest Expense. Interest expense was approximately $1.5 million in fiscal
1997 as compared to $1.0 million in fiscal 1996, an increase of $527,000. This
increase was primarily due to an increase in the Company's average outstanding
indebtedness from approximately $4.2 million in fiscal 1996 to approximately
$10.0 million in fiscal 1997.
Income Taxes
The Company recorded income tax expense of approximately $1.9 million for fiscal
1997 resulting from tax liabilities relating to its profitable Asian and South
Pacific operations. Income tax benefits have been recorded in fiscal 1997 on
domestic losses and fully reserved until realized. These benefits will be
recorded when realized, reducing the effective tax rate on future domestic
earnings. Income tax benefits have been recorded on European losses without
being reserved. This compares to approximately $3.5 million of income tax
expense recorded for fiscal 1996, a 17.5% effective tax rate.
Net Loss
The Company had a net loss of $45.7 million in fiscal 1997 as compared to net
income of $16.6 million in fiscal 1996. This variance was primarily a result of
losses incurred by its PRTV subsidiary and charges related to the following:
excess and/or obsolete inventory; write-downs of production costs; legal fees;
legal settlements; severance; and increased media costs.
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. The Company introduced 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. Fiscal 1995 new infomercial
production was adversely affected by the aborted ValueVision tender offer, as
described in note 11 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 revenue 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
-21-
<PAGE>
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 air
time in Japan and the Company's entrance into new countries such as Malaysia,
New Zealand, Australia and the Philippines in fiscal 1996. The Company is able
to leverage its existing infomercial library so that foreign net revenues are
not dependent on any one or a few products. In fiscal 1996, the Company
generated no sales from the airing of its Ab Roller Plus infomercial in the
international market.
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 revenue over the prior
year. The ratio of media purchases to net revenues remained relatively stable at
29.6% in fiscal 1996 as compared to 29.5% in fiscal 1995. A slight decrease in
the ratio of international media purchases to net revenues was offset by a
slight increase in the ratio domestically.
Direct Costs. 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 during the
year. 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 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 $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.
-22-
<PAGE>
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. As a result of the utilization
of all of the Company's available net operating loss carryforwards for financial
reporting purposes in fiscal 1996, the Company's effective tax rate is expected
to increase in fiscal 1997.
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.
Liquidity and Capital Resources
The Company's working capital was $19.8 million at March 31, 1997 compared to
working capital of $38.7 million at March 31, 1996, a decrease of $18.9 million.
The Company met its current year cash needs primarily through its cash flow from
financing activities and existing cash balances. Operating activities for the
fiscal year ended March 31, 1997 resulted in a use of cash of $45.6 million. The
Company's cash flow from operations in fiscal 1997 was adversely affected by the
loss incurred by PRTV; the significant increase in production expenditures
during the year (approximately $21 million in fiscal 1997 as compared to $9
million in fiscal 1996); higher cost of media (advertising to sales ratio was
36.6% in fiscal 1997 as compared to 29.6% in fiscal 1996); and increased
selling, general and administrative expenses.
Consolidated inventories increased $8.3 million, or 36.8%, primarily as a result
of the Prestige, Suzanne Paul and PRTV acquisitions which contributed $5.1
million and $0.8 million, respectively. Excluding acquisitions, international
inventories increased by $4.2 million as a result of continued expansion into
new markets and distribution channels (retail) and as a result of lower than
anticipated revenue levels, especially in the Asian marketplace. Domestic
inventories decreased $1.8 million, primarily as a result of a decrease in sales
volume and increased inventory reserves in fiscal 1997 as compared to fiscal
1996. Consolidated accounts receivable increased by $8.1 million, or 25.4%,
primarily as a result of the Prestige, Suzanne Paul and PRTV acquisitions, which
contributed $11.5 million and $2.9 million, respectively. Excluding
acquisitions, international accounts receivable decreased by $3.2 million, or
21.7%, principally due to the 45.3% decrease in Asian revenues in the month of
March 1997 as compared to the month of March 1996. Domestic accounts receivable,
excluding acquisitions, declined $3.2 million, or 18.2%, due principally to the
54.8% decrease in revenues in the month of March 1997 as compared to the month
of March 1996. This was partially offset by an increase in the installment
receivable balance due to a higher percentage of multi-pay products being aired
in the latter part of fiscal 1997 as compared to fiscal 1996.
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 monitors exchange rate movements
and will protect short term cash flows through the use of options and/or forward
contracts when appropriate. The Company has 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. Currently, the
Company's two major foreign currencies are the German deutsch mark and the
Japanese yen, each of which has been subject to significant recent fluctuations.
During fiscal 1997, the Company completed its acquisition of PRTV in a stock for
stock transaction, which resulted in the issuance of 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 PRTV on or before November 1997 upon the
realization of certain assets. In addition, the Company repaid approximately
$1.0 million of outstanding debt of PRTV. Also, the Company acquired two direct
response marketing companies, Prestige and Suzanne Paul. The aggregate
consideration paid by the Company for Prestige and Suzanne Paul was
approximately $4.2 million in cash, $2.8 million in a note payable due (and
subsequently paid on) December 5, 1996 and 787,879 shares of the Company's
common stock. Upon consummation of these acquisitions, the Company also funded a
dividend of approximately $4.6 million to the former shareholders of Suzanne
Paul. These
-23-
<PAGE>
cash amounts were funded by borrowings under the Company's revolving credit
facility. Included in the Prestige and Suzanne Paul acquisition agreements were
provisions concerning the future payment of additional purchase price, up to an
aggregate of an additional $5.0 million in the Company's common stock, valued at
then present market prices, in 1997 and 1998, contingent upon the levels of net
income achieved in those years by Prestige and Suzanne Paul. The Company is
currently in negotiations with the principals of these entities regarding an
amendment to the acquisition agreements which would accelerate the $5.0 million
contingent purchase price amount and revise certain other provisions of the
agreements.
On August 6, 1996, the Company completed a public offering of an additional 2.0
million shares of its common stock with net proceeds to the Company of
approximately $28.9 million. The Company used the net proceeds to retire
approximately $13.5 million of indebtedness incurred with the acquisitions of
PRTV, Prestige and Suzanne Paul and Nancy Langston, as well as a $1.0 million
paydown of long-term debt. The Company used the remaining proceeds to provide
for the acquisition and retention of media access contracts and for general
corporate purposes, including working capital requirements and expenditures
related to the acquisitions.
During the fourth quarter of fiscal 1997, the Company's cash flow was negatively
impacted by the buildup of a backlog created by manufacturing/sourcing
difficulties for certain products, its inability to air one of its infomercials
due to then pending litigation and the unavailability of inventory, the increase
of product offerings with multi-pay arrangements, increasing domestic
cancellation and return rates and the decline in Asian net revenues.
The Company is currently pursuing a business strategy which concentrates on
targeted expansion and cost reduction and has taken the following steps to
rebuild its business including:
- Restructuring PRTV to focus more on effectively utilizing Mike
Levey's on-air talents. Operations have now been reduced and
refocused with a potential annualized saving in excess of $3.0
million.
- Curtailing long-term or unprofitable media contracts which will
result in a savings of at least $4.0 million on an annualized
basis.
- Pursuing internet and alternative delivery systems, as well as
continuity products, in order to further limit the cyclical nature
of the business.
- Reengineering the corporate structure and reducing the workforce.
- Considering outsourcing management of the Company's information
technology systems.
- Pursuing a strategy to reduce the cost and increase the efficiency
of order fulfillment.
On March 31, 1997, the Company had a total of $13.0 million in outstanding bank
debt and $1.1 million in outstanding letters of credit under its $20.0 million
revolving line of credit (the "Line"). The Line has an expiration date of
September 30, 1997. At June 27, 1997, the Line was being fully utilized.
Interest accrues on the Line at the bank's national commercial rate and is
payable monthly. On a quarterly basis, the Company must be in compliance with
various financial covenants including tangible net worth and working capital
minimums, various financial ratios and capital expenditure limits. At March 31,
1997, the Company was, and at present is, in technical default of various
financial covenants for which the bank has not granted a waiver. The Company
also has an outstanding term loan with the bank in an approximate amount of $3.2
million, net of an $768,000 discount. The term loan is payable in annual
installments of $1.0 million due December 1, 1997 and 1998 with the remaining
balance due September 30, 1999. The term loan also includes the covenants listed
above. As a result of the covenant defaults, the long-term portion of the term
loan has been classified as current at
-24-
<PAGE>
March 31, 1997. The Line and term loan are secured by a lien on substantially
all the assets of the Company and its subsidiaries. Such lien on certain non-
domestic assets of the Company is subordinate to a lien held by Barclays Bank
PLC. At present, the Company has an overdraft line of approximately $1.0 million
with Barclays of which approximately $550,000 is outstanding in early July 1997.
The Company's cash position continues to tighten as a result of the losses being
incurred in early fiscal 1998, the continued downturn in both Japanese and
domestic revenues, the inability of the Company to obtain additional borrowings
and payment of recently negotiated legal settlements. The Company expects to
report losses for the first quarter of fiscal 1998 and expects to incur losses
in the second quarter of fiscal 1998. The Company's inability to refinance its
existing debt or obtain additional debt or equity financing may have a further
material adverse effect on the Company's operating results and financial
condition.
The Company continues to negotiate with its principal lenders regarding an
extension of the Line, as well as exploring additional sources of financing with
other financial institutions; however, there can be no assurance that the Line
will be extended or a replacement lender located. In addition, the Company has
retained Lehman Brothers, as a financial advisor, to assist it in continuing
discussions regarding potential strategic partnerships and other matters with
several interested parties.
The Company faced significant difficulty during the latter half of its 1997
fiscal year and while these difficulties are expected to continue throughout the
first half of fiscal 1998, management of the Company believes that cash flow
from operations in fiscal 1998 will benefit from the aforementioned strategy.
Management will continue to identify and implement additional cost reduction
measures. The Company's ability to continue as a going concern is dependent on
its ability to implement the plans and actions described above, to return the
Company to profitability, and to improve its liquidity and/or obtain additional
capital through new debt financings or equity investments. No assurance can be
given that any of these actions will be successful. In addition, issuance of
additional equity would have a dilutive effect upon existing shareholders.
-25-
<PAGE>
Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Fiscal 1997 Quarters Ended
----------------------------------------------------------
1997 Fiscal Year June 30 September 30 December 31 March 31
---------------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Dollars in thousands, except per share
data
Net revenues............................... $109,300 $99,656 $70,842 $ 78,381
Operating costs and expenses
Media purchases......................... 37,576 34,060 28,112 31,388
Direct costs............................ 53,241 45,557 38,934 59,240
Selling, general and administrative..... 11,128 11,997 11,486 35,212
Severance Expense....................... 1,100 1,400
Interest expense........................... 305 408 414 415
------- ------- ------- --------
Total operating costs and expenses...... 102,250 92,022 80,046 127,655
------- ------- ------- --------
(Loss) income before income taxes.......... 7,050 7,634 (9,204) (49,274)
------- ------- ------- --------
Net (loss) income.......................... $ 4,550 $ 4,994 $(5,984) $(49,251)
======= ======= ======= ========
Net (loss) income per share
Primary................................... $ .18 $ .18 $ (.24) $ (2.08)
Fully-diluted............................. $ .18 $ .18 $ (.24) $ (2.08)
</TABLE>
<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
</TABLE>
-26-
<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
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 1997 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.
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, 1997 and 1996.
- Consolidated Statements of Operations - Years ended March 31, 1997,
1996, and 1995.
- Consolidated Statements of Shareholders' Equity - Years ended March 31,
1997, 1996, and 1995.
- Consolidated Statements of Cash Flows - Years ended March 31, 1997,
1996, and 1995.
- 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 1997:
Form 8-K dated February 19, 1997
--------------------------------
Item 5. Other Events - Announcement by the Company of the
commencement of legal action against Guthy-Renker Corporation
("Guthy-Renker") alleging that Guthy-Renker had failed to supply
"Fitness Flyer" exercise units to the Company in accordance with
the terms of an agreement entered into by the companies.
-27-
<PAGE>
(c) Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
10.1 Agreement, dated April 24, 1997, between Mark P. Hershhorn and
the Company.
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
</TABLE>
- --------------------------
-28-
<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, 1997
NATIONAL MEDIA CORPORATION
PHILADELPHIA, PA
-29-
<PAGE>
National Media Corporation
Consolidated Financial Statements
Years ended March 31, 1997 and 1996
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................................ 31
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................... 32
Consolidated Statements of Operations..................................... 34
Consolidated Statements of Shareholders' Equity........................... 35
Consolidated Statements of Cash Flows..................................... 37
Notes to Consolidated Financial Statements................................ 39
</TABLE>
30
<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, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. 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
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Media Corporation at March 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1997, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss of
$45,691,000 and experienced negative cash flows from operations for the year
ended March 31, 1997 and is party to significant pending litigation. In
addition, the Company has not complied with certain covenants of its loan
agreements. These conditions have impaired the Company's liquidity and may cause
it to be unable to meet its obligations as they become due. These conditions
raise substantial doubt as to the Company's ability to continue as a going
concern. Management's plans regarding these conditions are discussed in Note 1.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the possible outcome of
these uncertainties.
Ernst & Young LLP
Philadelphia, Pennsylvania
July 14, 1997
31
<PAGE>
National Media Corporation
Consolidated Balance Sheets
(In thousands, except number of shares
and per share amounts)
<TABLE>
<CAPTION>
March 31
1997 1996
----------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,058 $ 18,405
Accounts receivable, net 40,179 32,051
Inventories, net 30,919 22,605
Prepaid media 3,563 4,271
Prepaid show production 6,765 5,469
Deferred costs 3,318 4,102
Prepaid expenses and other current assets 2,505 2,339
Deferred income taxes 2,591 3,142
----------------------
Total current assets 93,898 92,384
Property and equipment, net 14,182 6,954
Excess of cost over net assets of acquired
businesses and other intangible assets,
less accumulated amortization of
$9,472 and $2,548 50,732 15,078
Other assets 6,820 2,132
----------------------
Total assets $165,632 $116,548
======================
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
March 31
1997 1996
-----------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 21,810 $ 20,412
Accrued expenses 30,830 26,510
Deferred revenue 686 1,771
Income taxes payable 552 1,344
Deferred income taxes 2,351 2,749
Current portion of long-term debt and
capital lease obligations 17,901 876
-----------------------
Total current liabilities 74,130 53,662
Long-term debt and capital lease obligations 959 4,054
Deferred income taxes 240 393
Other liabilities 1,743 1,977
Shareholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding
95,000 and 136,375 shares Series B convertible
preferred stock (liquidation preference of $3,800) 1 1
Common stock, $.01 par value; authorized
75,000,000 shares; issued and outstanding
24,752,792 and 18,177,292 shares 248 182
Additional paid-in capital 127,764 48,135
Retained earnings (29,122) 16,569
-----------------------
98,891 64,887
Treasury stock, 707,311 and 686,710 common shares,
at cost (4,244) (3,791)
Notes receivable, directors, officers, employees,
consultants, and others - (473)
Foreign currency translation adjustment (6,087) (4,161)
-----------------------
Total shareholders' equity 88,560 56,462
-----------------------
Total liabilities and shareholders' equity $165,632 $116,548
=======================
</TABLE>
See accompanying notes.
33
<PAGE>
National Media Corporation
Consolidated Statements of Operations
(In thousands, except number of shares
and per share amounts)
<TABLE>
<CAPTION>
Year ended March 31
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Revenues:
Product sales $ 337,508 $ 285,676 $ 168,689
Retail royalties 16,337 5,597 5,303
Sales commissions and other revenues 4,334 1,334 2,175
------------------------------------------
Net revenues 358,179 292,607 176,167
Operating costs and expenses:
Media purchases 131,136 86,518 51,961
Direct costs 196,972 151,198 97,605
Selling, general, and administrative 69,823 33,772 23,634
Severance expense for former
Executive Officers 2,500 - 2,650
Interest expense 1,542 1,015 689
------------------------------------------
Total operating costs and expenses 401,973 272,503 176,539
------------------------------------------
(Loss) income before income taxes (43,794) 20,104 (372)
Income taxes 1,897 3,525 300
------------------------------------------
Net (loss) income $ (45,691) $ 16,579 $ (672)
==========================================
Net (loss) income per common and common
equivalent share:
Primary $ (2.07) $ .74 $ (.05)
==========================================
Fully-diluted $ (2.07) $ .71 $ (.05)
==========================================
Weighted average number of common and
common equivalent shares outstanding:
Primary 22,071,700 23,175,900 14,023,800
==========================================
Fully-diluted 22,071,700 23,287,600 14,023,800
==========================================
</TABLE>
See accompanying notes.
34
<PAGE>
National Media Corporation
Consolidated Statements of Shareholders' Equity
(In thousands, except number of shares)
<TABLE>
<CAPTION>
Year ended March 31
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Preferred stock:
Beginning balance $ 1 $ 3 $ -
Conversion to common stock
(41,375 and 119,421 shares) - (2) -
Issuance of investment units - - 3
--------------------------------
Ending balance 1 1 3
Common stock:
Beginning balance 182 149 144
Conversion of preferred stock
(413,750 and 1,194,210 shares) 4 12 -
Exercise of stock options
(1,215,099; 1,219,099; and
41,500 shares) 12 12 -
Exercise of warrants (162,552 and
198,985 shares) 2 2 -
Issuance of shares for
acquisitions (2,651,239 and
554,456 shares) 27 6 -
Issuance of shares in secondary
offering (2,000,000 shares) 20 - -
Issuance of shares for 1996
management bonus (102,860 shares) 1 - -
Issuance of shares to settle
litigation (0; 106,000; and 500,000
shares) - 1 5
Stock grant (30,000; 25,000; and 0
shares) - - -
--------------------------------
Ending balance 248 182 149
Additional paid-in capital:
Beginning balance 48,135 31,877 19,026
Conversion of preferred stock (4) (11) -
Exercise of stock options 7,016 5,123 242
Exercise of warrants 790 1,033 -
Issuance of shares for
acquisitions 41,191 6,994 -
Issuance of shares in secondary
offering, net of costs 28,734 - -
Issuance of shares for 1996
management bonus 1,707 - -
Issuance of shares to settle
litigation - 724 1,726
Stock grant 542 344 -
Tax (cost) benefit from exercise of
stock options (347) 2,051 -
Issuance of warrants in
connection with term loan - - 1,800
Issuance of investment units - - 9,083
--------------------------------
Ending balance 127,764 48,135 31,877
</TABLE>
35
<PAGE>
National Media Corporation
Consolidated Statements of Shareholders' Equity (continued)
(In thousands, except number of shares)
<TABLE>
<CAPTION>
Year ended March 31
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Retained earnings:
Beginning balance $ 16,569 $ (10) $ 662
Net (loss) income (45,691) 16,579 (672)
----------------------------------
Ending balance (29,122) 16,569 (10)
Treasury stock:
Beginning balance (3,791) (3,791) (3,791)
Issuance of shares for 401(k)
match (4,619 shares) 29 - -
Repurchase of treasury shares
(25,220 shares) (482) - -
----------------------------------
Ending balance (4,244) (3,791) (3,791)
Notes receivable:
Beginning balance (473) (1,868) (4,504)
Collection of notes receivable 473 2,483 2,636
Exercise of stock options - (1,088) -
----------------------------------
Ending balance - (473) (1,868)
Foreign currency translation adjustment:
Beginning balance (4,161) 265 (966)
Translation adjustment for the year (1,926) (4,426) 1,231
----------------------------------
Ending balance (6,087) (4,161) 265
----------------------------------
Total shareholders' equity $ 88,560 $ 56,462 $ 26,625
==================================
</TABLE>
See accompanying notes.
36
<PAGE>
National Media Corporation
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income $ (45,691) $ 16,579 $ (672)
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization 9,966 2,099 1,650
Amortization of loan discount 484 399 150
Provision for deferred rent expense 328 384 402
Tax benefit from exercise of
stock options (347) 2,051 -
Decrease (increase) in:
Accounts receivable, net 1,721 (18,242) 1,139
Inventories (3,057) (8,591) (3,987)
Prepaid cable and advertising costs 1,374 (3,936) (370)
Deferred costs 4,233 (2,282) 402
Other current assets 855 (1,060) (395)
Increase (decrease) in:
Accounts payable (2,358) 8,569 (415)
Accrued expenses (6,007) 9,505 4,713
Deferred revenue (1,583) 1,236 (1,456)
Income taxes payable (3,405) 1,044 300
Notes payable 1,400 - -
Other (3,480) (2,225) 440
----------------------------------
Net cash (used in) provided by
operating activities (45,567) 5,530 1,901
Cash flows from investing activities
Additions to property and equipment (8,439) (3,923) (832)
Investment in common stock (1,250) - -
Cost of companies acquired, net of cash
acquired (1,236) (897) -
----------------------------------
Net cash used in investing activities (10,925) (4,820) (832)
Cash flows from financing activities
Proceeds from revolving line of credit 22,400 - 5,000
Principal payments on revolving line of
credit, long-term debt, and capital
lease obligations (15,493) (166) (4,771)
Net proceeds from issuance of common
stock 28,754 - -
Exercise of stock options and warrants 7,820 5,085 242
Payments received on notes receivable 473 2,483 492
Net proceeds from issuance of
investment units - - 9,415
----------------------------------
Net cash provided by financing
activities 43,954 7,402 10,378
</TABLE>
37
<PAGE>
National Media Corporation
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended March 31
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Effect of exchange rate changes on cash
and cash equivalents $ (1,809) $(3,174) $ 425
---------------------------------
Net (decrease) increase in cash and
cash equivalents (14,347) 4,938 11,872
Cash and cash equivalents at beginning
of year 18,405 13,467 1,595
---------------------------------
Cash and cash equivalents at end of year $ 4,058 $18,405 $13,467
=================================
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest $ 774 $ 528 $ 546
=================================
Taxes on income $ 5,105 $ 430 $ -
=================================
Supplemental schedule of noncash
investing and financing activities
Common stock issued for acquisitions $ 41,218 $ 7,000 $ -
=================================
Note payable and other liabilities used
to finance acquisitions $ 3,190 $ 1,496 $ -
=================================
Common stock issued upon exercise of
stock options for notes receivable $ - $ 1,088 $ -
=================================
Common stock issued for 1996 management
bonus, 401(k) match, and directors'
stock grant $ 2,279 $ - $ -
=================================
Issuance of stock to settle litigation $ - $ 725 $ 1,700
=================================
Settlement of severance expense with
note receivable $ - $ - $ 1,700
=================================
</TABLE>
See accompanying notes.
38
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements
March 31, 1997
1. Basis of Presentation, Description of Business and Summary of Significant
Accounting Policies
a. Basis of Presentation
The Company incurred a net loss of $45,691,000 and experienced negative cash
flows during the year ended March 31, 1997 primarily as a result of reduced
sales volume in its key market areas and due to losses generated by its PRTV
operations. In addition, the Company's revolving credit facility will expire on
September 30, 1997 and negotiations with the principal lender are ongoing. The
Company is technically in default of several loan covenants. Waivers for these
violations have not been granted. There can be no assurance that the credit
facility will be extended, however, management believes that another lender
would provide financing if the current lender does not extend the facility,
although no such lender has committed to do so.
As described in Note 2, the Company purchased PRTV on May 17, 1996. Significant
operating losses were contributed by PRTV, primarily due to several legal
matters including the Edmark matter described in Note 11, and writedowns of show
production costs, inventory and receivables.
The Company is currently evaluating its strategic options, including
implementation of plans to reduce operating expenses, identifying a strategic
partner or sale of the business. Additionally, the negotiations with the
Company's primary lender are ongoing and management believes short-term
financing will be obtained. The Company is currently pursuing a business
strategy which concentrates on targeted expansion and cost reduction and has
taken the following steps to rebuild its business including:
- Restructuring PRTV to focus more on effectively utilizing the
creative resources of PRTV and its president. PRTV has been
restructured and its operations and work force reduced.
- Curtailing long-term or unprofitable media contracts.
- Pursuing internet and alternative delivery systems, as well as
continuity products, in order to further limit the cyclical nature
of the business.
- Reengineering the corporate structure and reducing the workforce.
- Considering outsourcing management of the Company's information
technology systems.
- Pursuing a strategy to reduce the cost and increase the efficiency
of order fulfillment.
The consolidated financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company's ability to continue
as a going concern is dependent upon its ability to successfully implement the
plans and actions described above and return to profitability and improve its
liquidity. Due to the uncertainties described above, there can be no assurance
that the Company will achieve its goals nor is there any assurance that the
Company will be able to extend or replace its existing credit facility, or
return its PRTV and non-PRTV operations to profitability. These factors, among
others, raise substantial doubt about the ability of the Company to continue as
a going concern for a reasonable period of time. Management of the Company
believes that its plans to deal with the issues described above will be
successful and that sufficient cash flow will be generated to meet its
obligations as they become due, however, no such assurance can be given.
Accordingly, the financial statements do not include any adjustments relating to
the recoverability of recorded assets, or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
b. Description of Business
National Media Corporation (the "Company") is principally engaged in the direct
marketing of consumer products through television media. The Company currently
brings infomercial programming to 70 countries.
c. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of National Media
Corporation and its wholly-owned subsidiaries which include Quantum North
America, Inc., Positive Response Television, Inc. ("PRTV"), DirectAmerica
Corporation, Quantum International Limited, Quantum Far East Ltd., Quantum
International Japan Company Ltd., Prestige Marketing Limited, Suzanne Paul Pty
Limited and Nancy Langston & Associates, Inc. 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. Estimates are routinely made for inventory
obsolescence, goodwill, sales returns and allowances, allowances for bad debt,
show production amortization and contingencies. 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 of the customer's receipt of
the merchandise. The Company provides an allowance, 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 purchased
to be cash equivalents.
39
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Accounts Receivable
The allowance for doubtful accounts was $6,907,000 and $2,127,000 at March 31,
1997 and 1996, 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.
The reserve for obsolete inventory was $11,739,000 and $1,558,000 at March 31,
1997 and 1996, respectively.
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, generally 3 to 7 years.
Excess of Cost Over Net Assets Acquired and Other Intangible Assets
Excess of cost over net assets of acquired businesses ("goodwill") is being
amortized by the straight-line method over 10 to 40 years. Other intangible
assets are being amortized by the straight-line method over 2 to 5 years.
Amortization expense for excess of cost over net assets acquired and other
intangible assets was $6,924,000, $629,000, and $336,000 for the years ended
March 31, 1997, 1996, and 1995, respectively, and is included in selling,
general, and administrative expenses. The recoverability of goodwill is
evaluated annually by an analysis of operating results for each operating unit,
significant events or changes in the business environment, synergies with other
operating units, and, if necessary, independant appraisals.
40
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Show Production Costs
Costs related to the production of the Company's direct response televised
advertising programs are capitalized and amortized over the estimated useful
life of the production, generally from 12 to 24 months. The estimated useful
life of each production is regularly evaluated and adjusted as sales response
becomes available. Show production expense was $21,406,000, $8,630,000, and
$6,077,000 for the years ended March 31, 1997, 1996, and 1995, respectively.
Production expense for 1997, 1996, and 1995 included $10,811,000, $1,900,000,
and $1,100,000, respectively, for amounts written down related to unsuccessful
shows for which sales response did not meet initial expectations.
Deferred Revenue and Costs
Deferred revenue consists of funds received by the Company for items ordered,
but not shipped and product sales subject to a free trial period. 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
average number of common shares and dilutive common equivalent shares (stock
options, warrants, and preferred stock) outstanding using the "if converted
method." For 1996, net income used to compute primary earnings per share equals
net income, plus after-tax interest expense incurred on outstanding long-term
debt and after-tax interest 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
41
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Per Share Amounts (continued)
of 20% of the Company's outstanding common stock. For 1997 and 1995, 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.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128 (FAS 128), Earnings per Share, which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options, warrants, and convertible securities will be
excluded. The impact of FAS 128 will initially be computed for the first quarter
of fiscal year 1998.
Foreign Currency Translation
Results of operations for the Company's foreign subsidiaries are translated
using 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.
Resulting translation adjustments are recorded as a component of shareholders'
equity.
Stock Option Plans
The Company accounts for stock options in accordance with Accounting Principles
Board ("APB") Opinion 25, Accounting for Stock Issued to Employees, and its
related interpretations. No compensation expense is recognized for options
granted under the Company's option plans which have an exercise price equal to
the market price on the date of the grant. The Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS 123), as of the fiscal year ended
March 31, 1997 (see Note 7).
42
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Reclassifications
Certain prior-year amounts have been reclassified to conform to current
presentation.
2. Acquisitions
Fiscal 1997 Acquisitions
On May 17, 1996, the Company acquired all of the issued and outstanding capital
stock of PRTV, a publicly traded direct marketing company and producer of
infomercials, for 1,836,773 shares (of which 211,146 shares have been deposited
into an escrow account for possible future delivery to PRTV shareholders) of the
Company's common stock valued at $25.9 million. The acquisition was accounted
for as a purchase and is included in the Company's financial statements from the
date of acquisition. A total of $39.1 million in assets were acquired and
included excess of cost over acquired assets of approximately $18.6 million, and
is being amortized over 20 years.
On July 2, 1996, the Company also acquired two direct response marketing
companies, Prestige Marketing Limited and Prestige Marketing International
Limited (collectively, "Prestige") and Suzanne Paul Holdings Pty Limited and its
operating subsidiaries (collectively, "Suzanne Paul"). The aggregate
consideration paid by the Company for Prestige and Suzanne Paul was
approximately $4.2 million in cash, $2.8 million in a note payable due and paid
on December 5, 1996, and 787,879 shares of the Company's common stock valued at
$14.7 million. Upon consummation of these acquisitions, the Company also funded
a dividend of approximately $4.6 million to the former shareholders of Suzanne
Paul. In addition, the Company may be required to issue up to an aggregate of an
additional $5.0 million in the Company's common stock, valued at the then
present market prices, in 1997 and 1998, contingent upon the levels of net
income achieved in those years by Prestige and Suzanne Paul. The Company is
currently in negotiations with the principals of these entities regarding an
amendment to the acquisition agreements which would accelerate the $5.0 million
contingent purchase price amount and revise certain other provisions of the
agreements. The acquisition is being accounted for as a purchase and is included
in the Company's financial statements from the date of acquisition. A total of
$33.8 million in assets were acquired and included excess cost over acquired
assets of approximately $18.7 million, which is being amortized over 20 years.
43
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
2. Acquisitions (continued)
Fiscal 1997 Acquisitions (continued)
On August 7, 1996, the Company acquired all of the issued and outstanding
capital stock of Nancy Langston & Associates, Inc. ("Langston"), a media agency.
The aggregate consideration paid by the Company was 26,587 shares of the
Company's common stock valued at $500,000, and a $390,000 promissory note
payable in equal installments over 2 years which began on September 1, 1996. A
total of $904,600 in assets were acquired and included excess costs over
acquired assets of approximately $880,000, which is being amortized over 10
years.
Fiscal 1996 Acquisitions
On October 25, 1995, the Company acquired all of the issued and outstanding
capital stock of DirectAmerica Corporation and California Production Group, Inc.
(collectively, "DirectAmerica") for 554,456 shares of the Company's common stock
valued at $7 million. The acquisition was accounted for as a purchase and is
included in the Company's financial statements from the date of acquisition. A
total of $8.5 million in assets were acquired and included excess cost over
acquired assets of $7.8 million, which is being amortized over 20 years.
On October 16, 1995, the Company acquired the assets related to the "Flying
Lure" product from United Brands International Corp. and Langer Technologies,
Inc. The purchase price of $1.9 million included $1 million cash payment 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 million 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 assets acquired, principally the brand
name and product rights, noncompete and product development talent, were
approximately $2.5 million. These amounts are included in excess cost over net
assets of acquired businesses and other intangible assets and are being
amortized over 20 years.
44
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
2. Acquisitions (continued)
Pro Forma Information
The purchase price allocations for PRTV, Prestige, Suzanne Paul, and Langston
are based on management's estimates of the fair value of assets acquired and
liabilities assumed. The final allocations may differ from these estimates. Had
the DirectAmerica, PRTV, Prestige, Suzanne Paul, and Langston acquisitions been
made at April 1, 1995, pro forma unaudited condensed results from operations for
the year ended March 31, 1997 and 1996 would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
Year ended March 31
1997 1996
-----------------------
<S> <C> <C>
Net revenues $ 372,694 $ 374,889
Net (loss) income $ (45,468) $ 16,024
Primary (loss) income per share $ (2.14) $ .64
Fully diluted (loss) income per share $ (2.14) $ .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.
3. Accrued Expenses
Accrued expenses include the following (in thousands):
<TABLE>
<CAPTION>
March 31
1997 1996
------------------
<S> <C> <C>
Allowance for product refunds and returns $ 4,771 $ 5,089
Accrual for legal settlements 7,512 573
Accrual for management bonus - 4,212
</TABLE>
45
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
4. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31
1997 1996
-----------------------
<S> <C> <C>
Furniture, fixtures, and office equipment $ 20,745 $ 11,877
Leasehold improvements 1,931 1,074
Equipment under capital leases 923 442
-----------------------
23,599 13,393
Less accumulated depreciation and amortization (9,417) (6,439)
-----------------------
Total $ 14,182 $ 6,954
=======================
</TABLE>
Depreciation and amortization expense for property and equipment, including
equipment under capital lease, was $3,042,000, $1,470,000, and $1,314,000 for
the years ended March 31, 1997, 1996, and 1995, respectively.
5. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
March 31
1997 1996
---------------------
<S> <C> <C>
Credit facility $ 13,000 $ -
Term loan, net of discount 3,232 3,749
Notes payable 2,326 900
Obligations under capital leases 302 281
----------------------
18,860 4,930
Less current portion 17,901 876
----------------------
Long-term portion $ 959 $ 4,054
======================
</TABLE>
The Company believes the carrying value of long-term debt and capital lease
obligations approximates fair value.
In October 1994, the Company obtained a $5,000,000 five-year secured term loan
from 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
46
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt and Capital Lease Obligations (continued)
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 analysis, the Company
valued the Loan Warrants at $1,800,000. The corresponding 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 unchanged. 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 installments of $1,000,000 which commenced
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 to $20,000,000 in June 1996, is available until
September 30, 1997 at which time its continuation will be considered. On a
quarterly basis, the Company must be in compliance with various financial
covenants including tangible net worth and working capital minimums, various
financial ratios, and capital expenditure limits. At March 31, 1997, the Company
was in default of certain of these financial covenants for which the bank has
not granted a waiver. As a result, the long-term portion of the term loan has
been classified as current at March 31, 1997. At June 27, 1997, the Line was
fully utilized. Interest on cash advances under the Line was accrued at varying
rates throughout the year based, at the Company's option, on the bank's national
commercial rate or the London Interbank Offering Rate (LIBOR) plus 1.25%.
Currently, interest on cash advances under the line is only available at the
bank's national commercial rate. The agreement requires the Company to pay an
annual fee of .25% on the unused portion of the Line and maintain an average
quarterly compensating balance of $2,500,000 subject to a .25% deficiency fee.
There were borrowings of $13,000,000 outstanding under this facility, and
$1,092,000 of the Line was used for the issuance of letters of credit as of
March 31, 1997.
The term loan and the Line are secured by a lien on all of the inventory,
receivables, trademarks, tradenames, service marks, copyrights and all other
assets of the Company and its subsidiaries. Such lien on certain nondomestic
assets of the Company is subordinate to a lien held by Barclays Bank PLC. At
present, the Company has an overdraft line with Barclays in the amount of
approximately $1,000,000. Under its agreements with Barclays, the Company is
subject to certain restrictions in respect to the repayment of intercompany
loans.
47
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt and Capital Lease Obligations (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>
1998 $ 18,496 $ 171
1999 680 139
2000 150 -
-----------------------------
19,326 310
Less: Interest portion - 8
Loan discount 768 -
-----------------------------
Total $ 18,558 $ 302
=============================
</TABLE>
6. Capital Transactions
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 announces 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 exercise price of the
right. In the event that the Company is acquired in a merger or other business
combination, or 50% or more of the Company's assets or earning power is sold,
proper provision will be made so that each holder of a right will thereafter
have the right to receive, upon exercise at the then-current exercise price of
the right, common stock of the acquiring or surviving company having a value
equal to two times the exercise price of the right. Any rights that are, or
were, under certain circumstances, beneficially owned by such a 15% owner will
immediately become null and void.
48
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
6. Capital Transactions (continued)
Stock Purchase Rights (continued)
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.
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 below. At March
31, 1997, there were 95,000 shares outstanding.
Each share of preferred stock is valued at $40.00 per share for conversion
purposes and is presently convertible at the option of the holder into shares of
common stock at a price of $4.00 per share of common stock (subject to
adjustment). 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 directors, 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,
originally had the right to elect two directors; the holders of the common
stock, voting as a class, had the right to elect the remaining directors. The
preferred stockholders' right to elect two directors has since terminated.
At March 31, 1997, there were 9,542,500 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
contributions under the Company's 401(k) plan. The Company would receive
proceeds of approximately $68,923,000 upon exercise of all options and warrants
currently outstanding. In addition, based on the stock price of $6.50 per share
at June 30, 1997, the Company would receive proceeds of approximately
$25,634,000 upon exercise of all currently outstanding options and warrants with
an exercise price below the market price of the stock.
49
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
6. Capital Transactions (continued)
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
consisted of one share of preferred stock, par value $.01 per share, of the
Company 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
exercisable at a price of $4.80 per share of common stock, except for those
applicable to 3,546 Units which are exercisable at a price of $5.74 per share of
common stock. At March 31, 1997, 229,750 warrants to acquire 2,757,000 shares of
the Company's common stock were outstanding and exercisable, and expire between
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.
Public Offering
On August 6, 1996, the Company completed a public offering of an additional
2,000,000 shares of its common stock with net proceeds to the Company of
approximately $28.9 million. If these shares had been outstanding for the entire
years ended March 31, 1997 and 1996 and the DirectAmerica, PRTV, Prestige,
Suzanne Paul, and Langston acquisitions had been made at the beginning of these
periods, primary loss and fully-diluted loss per share would have been $(1.96)
for the year ended March 31, 1997. For the year ended March 31, 1996, primary
income per share would have been $.62, and fully-diluted income per share would
have been $.60.
50
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
7. Stock Options
The Company has various stock option plans, which are described below. The
Company applies the provisions of APB Opinion 25, and related interpretations in
accounting for its plans. Accordingly, no compensation has been recognized in
the financial statements for the options issued under such plans as all options
are granted at an exercise price equal to or related to the market price of the
Company's Common Stock at the date of grant. Had compensation cost for the
Company's stock-option plans been determined using fair values at the grant
dates for awards under those plans as defined by SFAS No. 123, the Company's net
(loss) income and net (loss) income per share would have changed to the pro
forma amounts shown below:
<TABLE>
<CAPTION>
Year ended March 31,
(in thousands, except per share data) 1997 1996
----------------------
<S> <C> <C>
Pro forma net (loss) income $(56,323) $15,929
Pro forma (loss) income per share:
Primary $ (2.55) $ .71
Fully-diluted $ (2.55) $ .68
</TABLE>
Option valuation models use highly subjective assumptions to determine fair
value of traded options with no vesting or trading restrictions. Because options
granted under the Company's Stock Option Plans have vesting requirements and
cannot be traded, and because changes in the assumptions can materially affect
the fair value estimate, in management's opinion, the existing valuation models
do not necessarily provide a reliable measure of the fair value of its employee
stock options.
For purposes of determining the pro forma disclosures, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model, with the following weighted-average assumptions used for both
fiscal 1997 and fiscal 1996: dividend yield of 0%; expected volatility of 51.8%;
risk-free interest rates of 6.10%; and expected lives of 5 years. In accordance
with the transition provisions of SFAS No. 123, the pro forma disclosures
presented above reflect the statement's application only to
51
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
7. Stock Options (continued)
option grants and stock awards dated on or after April 1, 1995. Therefore,
because option grants and awards generally vest over several years and
additional awards are expected to be made in the future, the pro forma results
should not be considered to be representative of the effects on reported results
for future years.
Under the above-mentioned stock option plans, as amended, a maximum of 8,065,000
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. All employees of the Company, 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
entered 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 1,532,000 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
inducement to the execution of an employment or other agreement.
Options granted vest over a period ranging from the date of grant up to a
maximum of five years. Options may be exercised up to a maximum of 10 years from
date of grant. The weighted-average remaining contractual life of all
outstanding options at March 31, 1997 is 8 years (8.5 years for options with an
exercise price less that $10.00, and 7.5 years for options with an exercise
price greater that $10.00).
In fiscal 1997, 1,129,000 stock options originally issued to Company employees
at an exercise price of $16.375 were canceled and 564,500 stock options with an
exercise price of $8.325 were issued.
Subsequent to year end the Company employed certain executive officers whose
contracts, which are currently under negotiation, contain provisions for the
issuance of up to 850,000 non-Plan options.
52
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
7. Stock Options (continued)
<TABLE>
<CAPTION>
Shares Under Weighted
Option Average
-------------------------
<S> <C> <C>
Outstanding at April 1, 1994 2,079,840 $ 5.28
Granted 1,165,590 5.58
Exercised (41,500) 5.84
Expired and canceled (295,834) 5.47
-------------------------
Outstanding at March 31, 1995 2,908,096 5.06
Granted 350,000 12.99
Exercised (1,219,099) 4.22
Expired and canceled (116,665) 5.82
-------------------------
Outstanding at March 31, 1996 1,922,332 6.90
Granted 3,921,250 15.18
Exercised (1,215,099) 5.78
Expired and canceled (1,543,979) 16.40
-------------------------
Outstanding at March 31, 1997 3,084,504 $13.11
=========================
Exercisable at March 31, 1997 1,213,591 $12.19
=========================
Non-exercisable at March 31, 1997 1,870,913 $13.70
=========================
Shares available for future grant at
March 31, 1997 620,530
==============
Shares available for future grant at
March 31, 1996 26,681
==============
</TABLE>
Of the outstanding options, 1,037,833 have exercise prices ranging from $4.25 to
$10.00 with a weighted average price of $7.26, and 2,046,671 have exercise
prices ranging from $10.01 to $20.00 with a weighted average price of $16.07.
The weighted average fair value of options granted during fiscal year 1997 and
1996 was $7.59 and $7.68, respectively.
53
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
Federal State Foreign Total
----------------------------------------
1997
- ----
<S> <C> <C> <C> <C>
Current $ - $ - $1,897 $ 1,897
Deferred 1,201 - (1,201) 0
----------------------------------------
Provision for income taxes $1,201 $ - $ 696 $ 1,897
========================================
1996
- ----
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
========================================
1995
- ----
Current $ - $ 100 $ 200 $ 300
Deferred (495) - 495 -
----------------------------------------
Provision for income taxes $ (495) $ 100 $ 695 $ 300
========================================
</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
deductible for income tax purposes but do not affect net income.
Pretax income (loss) was taxed under the following jurisdictions (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
United States $(44,794) $15,525 $(1,530)
Foreign 1,000 4,579 1,158
--------------------------------
Total $(43,794) $20,104 $ (372)
================================
</TABLE>
54
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
March 31
1997 1996
--------------------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 14,371 $ 4,883
Alternative minimum tax credit
carryforward 835 724
Investment tax credit carryforward 66 66
Accrued vacation and severance pay 901 207
Inventory and accounts receivable
reserves 7,162 2,416
Reserve for legal settlements 2,811 572
Other 730 559
--------------------
Total deferred tax assets 26,876 9,427
Valuation allowance (23,171) (5,321)
--------------------
Deferred tax assets 3,705 4,106
Deferred tax liabilities:
Prepaid media and other costs 769 1,282
Tax over book depreciation 240 393
Deferred production costs 703 731
Deferred sales 1,898 1,700
Other 95 -
--------------------
Total deferred tax liabilities 3,705 4,106
--------------------
Net deferred tax asset $ - $ -
====================
</TABLE>
The increase in the valuation allowance relates to the increase in U.S. net
operating loss carryforwards and other deferred tax assets from March 31, 1996
to March 31, 1997.
55
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
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
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Tax (benefit) expense at statutory rate $(15,328) $ 7,036 $(126)
Tax effect of:
U.S. net operating loss not benefited 14,449 - 126
Utilization of net operating loss
carryforward - (4,367) -
Foreign income taxes in excess of
U.S. federal statutory rate 97 980 200
State and local income taxes - 268 100
Nondeductible items 2,679 301 -
Other - (693) -
------------------------------------
Income tax expense $ 1,897 $ 3,525 $ 300
====================================
</TABLE>
At March 31, 1997, 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 $ 32,123 2009 to 2012
Foreign net operating loss 3,182 unlimited
Alternative minimum tax credit 835 unlimited
Investment tax credit 66 1998 to 2001
</TABLE>
A portion of the U.S. net operating loss carryforward is related to the exercise
of employee stock options. If that portion of the loss carryforward related to
the exercise of stock options is realized, the resulting tax benefit will be
recorded directly to shareholders' equity. For financial reporting purposes, a
valuation allowance has been recognized to offset the deferred tax assets
related to the entire U.S. net operating loss carryforward because utilization
of net operating loss carryforwards cannot be reasonably assumed.
56
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
Due to certain collateral requirements in the Company's credit facilities (as
discussed in Note 5), the majority of earnings from its foreign subsidiaries
have been deemed distributed for tax purposes. All appropriate U.S. federal and
state income taxes have been provided thereon. Foreign withholding taxes on
actual distributions of these earnings would be immaterial.
9. Severance to Former Executive Officers
In September 1994, the then-Chairman of the Board and Chief Executive Officer of
the Company resigned. In connection with his resignation, he and the Company
executed 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 11, 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
former 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)
accelerated 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 was eligible to participate in the 1991 Option Plan until 90
days after the termination of his services as a consultant. Subsequently, as
part of the ValueVision settlement described in Note 11, substantially all
amounts due under the consulting agreement were paid.
In fiscal year 1997, the Company recorded severance expense related to
discontinuance of employment of five executive officers. Total severance charges
related to these officers are $2,500,000 and include salary, insurance, and
other benefits.
57
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies
The Company rents warehouses, retail stores, and office space under various
operating leases which expire through December 2013 including leases with
related parties as described in Note 13. Future minimum lease payments
(exclusive of real estate taxes and other operating expenditures) as of
March 31, 1997 under noncancelable 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>
1998 $ 3,033
1999 3,566
2000 3,345
2001 2,831
2002 2,148
Thereafter 19,034
----------
$33,957
==========
</TABLE>
Rent expense under various operating leases aggregated $4,233,000, $2,335,000,
and $2,119,100 in 1997, 1996, and 1995, respectively. Subleased building space
rental income aggregated $106,300, $85,300, and $140,500 for 1997, 1996, and
1995, respectively.
During fiscal year 1997, the Company expended $131,136,000 on media purchases, a
portion of which were made under long-term agreements. The largest domestic
agreement runs through December 1998 and requires a fixed monthly payment of
approximately $1.8 million per month. 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 various dates over the next 3 years. In addition, the
Company has a contract to lease a transponder which continues through the year
2010. Total commitments under these media contracts are: $33,662,000 in 1998;
$27,153,000 in 1999; $3,407,000 in 2000; $2,987,000 in 2001 and 2002; and
$23,895,000 thereafter.
58
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
11. Litigation and Regulatory Matters
National Media Litigation
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 PRTV, an independent infomercial producer at the time, 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 the
Company's common stock to the class. 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
International, 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, parties
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. The Telemarketing Agreement obligated ValueVision to
provide to the Company over a three-year period in-bound telephone call-taking
services at rates more favorable than those currently being paid by the Company.
The Telemarketing Agreement also obligated ValueVision to provide to the Company
certain production and post-production services.
As additional consideration for the services to be provided by ValueVision under
the Telemarketing Agreement, the Company granted to ValueVision ten (10) year
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 provision of the Warrants). This price was based on a premium
over the average 20-day market value prior to the date of settlement. The
Warrants were scheduled to vest with respect to an equal number of shares on
each of the thirteen-month, 2-year and 3-year anniversaries of the effective
date (November 24, 1995), provided that ValueVision satisfied certain
59
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
11. Litigation and Regulatory Matters (continued)
Terminated Tender Offer and Merger Agreement with ValueVision
International, Inc. (continued)
conditions. The Warrants will expire on the tenth anniversary of the effective
date. During fiscal year 1997, the parties entered into an amendment to the
Telemarketing Agreement pursuant to which ValueVision was no longer obligated to
provide in-bound Telemarketing Services and is required to pay $1.3 million for
the Warrants.
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
outside the United States and Canada before pursuing such opportunities by
itself or with certain third parties. ValueVision granted the Company similar
rights with respect to infomercial opportunities ValueVision may have outside of
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 9, and (3) paid $220,000 in connection with the exercise of the Company's
early termination option described in Note 13.
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
discussed in Note 5. As an inducement to the noteholders to permit the issuance
of the Warrants, the Company issued to the noteholders warrants (the "Waiver
Warrants") to purchase 500,000 shares of the Company's common stock at a price
of $10.00 per share. These warrants expired unexercised on November 28, 1996.
60
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
11. Litigation and Regulatory Matters (continued)
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 initial US patent for an exercise device. The
suit claims that a product marketed by the Company, the Ab Roller Plus, pursuant
to a license granted by a third party violates Precise's initial US 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 initial US patent. A second US patent was issued to
Precise on November 26, 1996 for its exercise device. Precise amended its
pleading to include additional claims based on such new patent. Upon the
issuance of the new patent, the Company terminated active marketing of the Ab
Roller Plus product in the US.
The Company has recently been involved in active negotiations with the
other parties to the action to settle this matter prior to trial. It is not
yet certain whether such negotations will result in a mutually agreeable
settlement. The Company believes that it has made adequate provision for this
matter.
61
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
11. Litigation and Regulatory Matters (continued)
Fitness Flyer Litigation
In February 1997, the Company filed suit in a Los Angeles, California state
court against Guthy Renker Corporation in connection with a joint venture
between Guthy Renker and the Company concerning the marketing of a fitness
product. Guthy Renker also filed actions against the Company in California
federal and state court concerning the same circumstances. In early March 1997,
the parties reached a settlement of these actions pursuant to which the Company
retained its rights to market a competing product that it had developed, and
gave up the right to sell the original fitness product.
Shareholders' Class Actions
In 1994, class action lawsuits were filed in federal court and Delaware Chancery
Court against the Company and certain of its present and former officers and
directors in connection with an aborted merger transaction with ValueVision. The
Company and other parties to the litigation entered into agreements to settle
these actions. These agreements provided for cash payments of approximately
$1,500,000 to the class, 75% of which were paid by the Company's insurer. The
Company recorded a charge of $375,000 during fiscal year 1995 for its portion of
the settlement. The consummation of the settlements received Federal court
approval during fiscal year 1996.
WWOR Litigation
In March 1997, WWOR-TV filed a breach of contract action in the United States
District Court for New Jersey against one of the Company's operating
subsidiaries alleging that the subsidiary wrongfully terminated a contract for
the purchase of media time, seeking in excess of $1,000,000 in compensatory
damages. The Company is contesting the action and believes it has meritorious
defenses to the plaintiff's claims for damages.
PRTV Litigation
PRTV Shareholders' California Class Action
On May 1, 1995, prior to the acquisition of PRTV by the Company, 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 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 sought unspecified compensatory damages and other equitable relief. 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 plaintiff's entitlement to legal relief. The Company reached an
agreement in principle to settle this action in fiscal year 1997 which provides
for the payment of $550,000 to the class, 66% of which is to be paid by PRTV's
insurance carrier. The Company recorded a charge of $187,000 during fiscal year
1997 in connection with this matter. Such settlement is contingent upon court
approval.
62
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
11. Litigation and Regulatory Matters (continued)
Edmark Industries Litigation
In February 1996, prior to the acquisition of PRTV by the Company, Edmark
Industries ("Edmark"), a supplier of the Super Slicer kitchen product, filed
suit in the U.S. District Court for the Southern District of Texas against PRTV
and the retail distributor of the product, alleging certain breach of contract,
false advertising, and copyright infringement claims in connection with the
marketing of such product. Pursuant to PRTV's agreement with the retail
distributor, PRTV defended such distributor and such distributor's retail
customers in connection with this suit. In November 1996, the Court provided
injunctive relief to the plaintiff on the issues of copyright infringement and
false advertising. The action was settled in April 1997 upon the payment by the
Company, on behalf of PRTV, of $200,000, a $200,000 note payable on June 30,
1997, the issuance of a note requiring the payment of $50,000 per month for 24
months beginning July 31, 1997, with interest at 8%, and certain other
nonmaterial matters. The Company recorded a charge of $2,656,000 during the
fourth quarter of fiscal year 1997 in connection with this matter.
Blublocker Litigation
In September 1995, prior to the acquisition of PRTV by the Company, suit was
filed by Blublocker Corp., a distributor of sunglasses, against PRTV alleging
unfair competition and false advertising relating to a PRTV product campaign. In
April 1997, the suit was settled by the parties with PRTV agreeing to pay
$400,000 to Blublocker Corp. The Company recorded this charge in the fourth
quarter of fiscal year 1997 in connection with this matter.
Suntiger
In late March 1997, Suntiger, Inc. ("Suntiger"), a distributor of sunglasses,
filed suit against PRTV and certain other parties alleging patent infringement.
PRTV is indemnified by third parties in connection with this action.
Other Matters
The Company, in the normal course of business, is a party to litigation relating
to trademark and copyright infringement, product liability, contract-related
disputes, and other actions. It is the Company's policy to vigorously defend 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 financial
condition.
63
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
12. Retirement Plan
All of the Company's U.S. full-time employees may participate in a 401(k)
defined contribution plan. The Company matches employee contributions at levels
that depend on the return on equity of the Company each year. Expense recognized
for the plan was $22,000, $110,000, and $40,000 for the years ended March 31,
1997, 1996, and 1995, respectively.
13. Related Party Transactions
The Company leased 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 and
paid a lump sum of $376,000 in fiscal 1997.
The Company also leases an office building and retail store owned by an officer
of the Company which expire on March 31, 2006. Rental expense is $18,000 per
month.
Included in accounts receivable is approximately $427,000 in notes receivable
from certain officers of the Company.
64
<PAGE>
National Media Corporation
Notes to Consolidated Financial Statements (continued)
14. Segment and Geographic Information
The Company operates in one industry segment and is engaged in the direct
marketing of products principally through television. Information as to the
Company's operations by geographic area, is set forth below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------
Revenues from unaffiliated customers:
<S> <C> <C> <C>
U.S. and Canada $188,524 $141,642 $ 95,714
Europe 58,977 56,406 50,513
Asia 71,017 94,559 29,940
South Pacific 39,661 - -
-----------------------------------
Total $358,179 $292,607 $176,167
===================================
Operating (loss) income:
U.S. and Canada $(33,446) $ 4,080 $ 1,800
Europe (7,661) 5,384 2,008
Asia 5,668 15,728 3,062
South Pacific 5,995 - -
Unallocated corporate expenses (12,808) (4,073) (6,553)
-----------------------------------
Total $(42,252) $ 21,119 $ 317
===================================
Identifiable assets:
U.S. and Canada $ 83,185 $ 73,051 $ 28,191
Europe 25,925 19,106 27,779
Asia 16,956 24,391 8,173
South Pacific 39,566 - -
-----------------------------------
Total $165,632 $116,548 $ 64,143
===================================
</TABLE>
Operating income is net income before interest and income taxes.
65
<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: July 14, 1997
/s/ Robert N. Verratti
------------------------
Robert N. Verratti
President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: July 14, 1997 /s/ Paul R. Brazina
---------------------
Paul R. Brazina
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: July 14, 1997 /s/ Robert N. Verratti
-----------------------
Robert N. Verratti
President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: July 14, 1997 /s/ Constantinos I. Costalas
------------------------------
Constantinos I. Costalas
Vice Chairman of the Board, Director
Date: July 14, 1997 /s/ Albert R. Dowden
----------------------
Albert R. Dowden
Director
Date:
---------------------
Michael J. Emmi
Director
Date: July 14, 1997 /s/ William M. Goldstein
--------------------------
William M. Goldstein
Director
Date: July 14, 1997 /s/ Frederick S. Hammer
-------------------------
Frederick S. Hammer
Chairman of the Board, Director
Date:
-------------------------
Robert E. Keith, Jr.
Director
Date: July 14, 1997 /s/ Ira M. Lubert
-------------------
Ira M. Lubert
Director
Date: July 14, 1997 /s/ Brian McAdams
-------------------
Brian McAdams
Director
Date: July 14, 1997 /s/ Warren V. Musser
----------------------
Warren V. Musser
Director
Date: July 14, 1997 /s/ Jon W. Yoskin II
----------------------
Jon W. Yoskin II
Director
<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, 1997
- -------------------------
Allowance for doubtful accounts.. $2,127 $ 5,698 $1,877/(3)/ $ 2,795/(1)/ $6,907
====== ======= ====== ======= ======
Reserve for refunds.............. $5,089 $41,309 $2,295/(3)/ $43,922/(2)/ $4,771
====== ======= ====== ======= ======
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 $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 $3,371
====== ======= ====== ======= ======
</TABLE>
--------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Refunds on products sold.
(3) Acquired through acquisitions.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
10.1 Agreement, dated April 24, 1997, between Mark P. Hershhorn and
the Company.
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
</TABLE>
<PAGE>
EXHIBIT 10.1
A G R E E M E N T
This Agreement is made the 24th day of April, 1997, between National
Media Corporation, a Delaware corporation (the "Company"), and Mark P.
Hershhorn (the "Executive").
The purpose of this Agreement is to set forth the terms of the
separation of Mark P. Hershhorn as an employee of the Company pursuant to an
Employment Agreement between the Company and Executive dated August 26, 1994,
as amended (the "Contract"). This Agreement constitutes, inter alia, 60 days'
----- ----
prior written notice of termination pursuant to Section 2 of the Contract,
effective April 24, 1997, and, accordingly, Executive's employment by the
Company will terminate on June 23, 1997 (the "Termination Date").
The parties, intending to be legally bound, agree as follows:
1. Services. Executive shall promptly vacate his office and
--------
remove all personal belongings from the Company's premises, and return to the
Company all Company property in his possession or under his control.
Notwithstanding the continuation of his status as an employee until the
Termination Date, (a) Executive is not expected to perform any services for
the Company or any subsidiary, (b) Executive shall not enter any premises of
the Company or act in any way on behalf of the Company, all his authority
being revoked upon the execution and delivery of this Agreement, and (c)
Executive shall incur no charges for the account of or for which he will seek
reimbursement from the Company after April 24, 1997.
2. Compensation Before and After the Termination Date. The
--------------------------------------------------
Company will continue to pay to Executive compensation at Executive's current
Base Rate of $550,000 per annum, until the Termination Date and shall continue
to do so, as contemplated by Paragraph 9(d)(1)(i) of the Contract, from the
Termination Date through June 22, 1999, which is two years after the
Termination Date, subject to applicable withholding taxes and other legally
required deductions and subject to the provisions of Paragraph 9(d)(1)(i) of
the Contract. If during such period Executive accepts employment he might not
otherwise accept under Paragraph 12(a)(1) of the Contract, he will promptly
notify the Company of such employment and provide the Company with information
about compensation to be received in connection with such activity, so that
the appropriate offsets contemplated by Paragraph 9(d)(1)(i) can be made.
3. Benefits After the Termination Date. Pursuant to the
-----------------------------------
provisions of Paragraph 9(d)(1)(ii) of the Contract, the Company shall
maintain in full force and effect, for the period through August 30, 1998, all
employee benefit plans and programs for Executive's benefit, except option
plans and Company bonus plans. It is hereby agreed that Executive shall not
be entitled to any payment pursuant to the 1995 Management Incentive Plan of
the Company in respect of the years ended March 31, 1997 or 1998.
4. Expense Reimbursement. Executive has delivered to the Company
---------------------
each credit card supplied to him for his use in the conduct of the Company's
business, and will incur no charges on such credit cards after the date
hereof. The Company will process and pay in the ordinary course any business
expenses submitted by the Executive which were incurred on or before April 24,
1997.
5. Automobile Allowance, Insurance, and Club Dues. The Company
----------------------------------------------
will include in Executive's compensation payments solely through the
Termination Date the $800.00 per month automobile
-1-
<PAGE>
allowance provided for in the Contract, pay premiums on the life insurance
policy held by Executive's Life Insurance Trust for periods prior to the
Termination Date (and the Company shall seek no refunds for premiums paid
thereon to date), and pay club dues for periods prior to the Termination Date.
To the extent that Executive desires to continue any such insurance coverage
or club membership subsequent to the Termination Date, it shall be Executive's
responsibility to pay any such premiums or dues which are due to be paid prior
to or following the Termination Date to the extent that they relate to any
period after the Termination Date.
6. The Contract. Except to the extent modified in Sections 1
------------
through 5 of this Agreement, the Contract will remain in full force and effect
as it may apply to the Company and to Executive as an employee terminated
under Paragraph 9(c) of the Contract; and Executive's obligations under
Paragraph 12, "Restrictive Covenant," are specifically confirmed.
7. Payments in Lieu. In settlement of disagreements between the
----------------
parties as to their rights and obligations under the Contract, including but
not limited to Executive's right to outplacement services, the Company will
pay to Executive, promptly after the right to revoke an acceptance of this
Agreement terminates, as provided in Paragraph 10 hereof, the sum of $25,000.
The Company intends to make withholding and deductions in respect of this
payment at the same rates as have been in effect in the case of Executive's
compensation under the Contract.
8. Directorships and Officerships. Executive hereby confirms his
------------------------------
resignation as an officer and as a director of the Company, and of each
subsidiary and affiliate of the Company of which he is currently serving as a
director or officer, effective at the close of business on April 24, 1997.
9. Releases.
--------
a. In consideration of the payment and arrangements in this
Agreement, Executive, for himself and on behalf of each of his heirs,
executors, administrators, legal representatives and assigns, does hereby
remise, release and forever discharge the Company, and each and every of the
predecessors, successors, parents, subsidiaries, affiliates, assigns,
directors, officers, shareholders, employees or agents of the Company, both
current and former (the "Company Released Parties"), of and from every claim,
demand, right of action or cause of action whatsoever, and from all debts,
obligations, costs (including but not limited to attorney's fees), expenses,
damages, losses and liabilities whatsoever, whether known or unknown, that
Executive ever had, now has, or hereafter may have against the Company
Released Parties arising out of or relating to any matter, thing, or event
occurring up to and including the date of this Agreement, relating to the
Contract or to Executive's employment by the Company and its subsidiaries, or
to his separation or to his status as a director and officer, including claims
arising under the Age Discrimination in Employment Act, Pennsylvania Human
Relations Act, and any other federal, state or local statute, ordinance, rule,
regulation or common-law principle. Notwithstanding the foregoing, nothing in
this section is intended to diminish any right that Executive may have as a
former officer or director under any provisions in the Company's Certificate
of Incorporation, Bylaws or in the Contract, providing indemnification to
Executive (including, to the extent there provided but not otherwise, the
payment of legal counsel fees and/or costs and expenses incurred in connection
therewith). If, notwithstanding the foregoing, Executive makes any claim
against the Company or any of its subsidiaries that are finally determined to
be with respect to the matters covered by this paragraph, the Company shall be
entitled to forfeit Executive's right to any further payment hereunder or
under the Contract.
b. In consideration of the arrangements in this Agreement,
the Company, for itself and on behalf of its successors and assigns does
hereby remise, release and forever discharge Executive and his heirs,
executors, administrators, and legal representatives (hereinafter "the
Executive Released
-2-
<PAGE>
Parties"), of and from every claim, demand, right of action or cause of action
whatsoever, and from all debts, obligations, costs (including but not limited
to attorney's fees), expenses, damages, losses and liabilities whatsoever,
whether known or unknown, that the Company ever had, now has, or hereafter may
have against the Executive Released Parties arising out of or relating to any
matter, thing, or event occurring up to and including the date of this
Agreement, relating to the Contract or to Executive's employment by the
Company and its subsidiaries, or to his separation or to his status as a
director and officer, including claims arising under any federal, state or
local statute, ordinance, rule, regulation or common-law principle.
10. Time Allowed to Review this Agreement. In compliance with the
-------------------------------------
Older Workers Benefit Protection Act ("OWBPA"), Executive has twenty-one (21)
days to consider this Agreement prior to signing the Agreement and is hereby
advised to consult an attorney prior to signing the Agreement. In addition,
Executive will have the right to revoke or cancel the Agreement within seven
(7) days after Executive signs the Agreement by submitting written notice of
revocation to Brian Sisko, Esq., National Media Corporation, Eleven Penn
Center, Suite 1100, 1835 Market Street, Philadelphia, PA, 19103. If Executive
signs the Agreement and does not revoke the Agreement, the Agreement will
become binding, irrevocable, and enforceable at the expiration of such seven
(7) day revocation period, and any rights which Executive may have under any
applicable statute will be waived. Executive is not obligated to sign this
Agreement, and refusal to do so will not jeopardize Executive's right to any
benefits to which he is already entitled.
11. Confidentiality; Cooperation. a. Neither the Company nor
----------------------------
Executive will issue any press release or publish any public document or make
any public statement relating to or connected with or arising out of any
matters relating to his employment by the Company or its termination or any
matters contained in this Agreement without the prior written consent of the
other as to its contents and the manner of its presentation and publication,
except as, after consultation with counsel, either party may conclude
disclosure is required by law or regulation. In response to any inquiry as to
the status of the Executive or his termination from the Company, neither the
Company nor the Executive shall respond other than as provided for in any
previously agreed to press release or other public statement, provided,
however, that the Company may confirm to third parties upon the request of
Executive the dates of Executive's employment at the Company, his titles
and/or compensation. Except as set out in this paragraph the existence and
contents of this Agreement shall remain entirely confidential, except that
each party may disclose it to the Internal Revenue Service and to their
respective professional advisers.
b. Subsequent to the Termination Date, the Executive will
consult and cooperate with the Company, to the extent reasonably requested by
the Company, without further compensation, in respect of (A) any litigation or
claims now pending or subsequently commenced or made against the Company which
relate to the period during which the Executive was employed by the Company
and with respect to which the Executive had knowledge or involvement, and (B)
the resolution of existing or former business relationships of the Company in
which the Executive had direct involvement, on behalf of the Company, during
the period he was employed by the Company; provided, however, that (a) the
-------- -------
Company shall provide Executive with reasonable notice of any request for
consultation or assistance; (b) such consultation or assistance will be given
at such time or times as are reasonably convenient to both the Company and
Executive and so as to not unduly interfere with any business activity or
employment of Executive; (c) the Company shall advance or reimburse to
Executive any out-of-pocket costs incurred by him in rendering such
consultation or assistance; and (d) the Executive shall be entitled to such
exoneration and indemnification with respect to such matters as is referred to
in the penultimate sentence of Section 9a. hereof.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the date first above written.
NATIONAL MEDIA CORPORATION
By:__________________________
Authorized Officer
__________________________
Mark P. Hershhorn
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS
<TABLE>
<CAPTION>
(In thousands, except per share data)
Twelve Months Ended
March 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Primary
Average common shares outstanding 22,072 15,363
Assumed conversion of preferred stock 0 2,248
Net effect of common stock equivalents (2)(3) 0 5,565
------------ ------------
Total shares 22,072 23,176
============ ============
Net (loss) income $(45,691) $16,579
Adjustments to net (loss) income:
Reduction of interest expense (net of tax)
related to assumed retired debt 0 398
Increase in interest income (net of tax) from
assumed investment of excess proceeds in
short-term paper 0 172
------------ ------------
Adjusted net (loss) income $(45,691) $17,149
============ ============
Per share (loss) earnings:
Net (loss) income $(2.07) $ .74
Fully Diluted
Average common shares outstanding 22,072 15,363
Assumed conversion of preferred stock 0 2,248
Net effect of common stock equivalents (2)(4) 0 5,677
------------ ------------
Total shares 22,072 23,288
============ ============
Net (loss) income $(45,691) $16,579
Adjustments to net (loss) income:
Reduction of interest expense (net of tax)
related to assumed retired debt 0 0
Increase in interest income (net of tax) from
assumed investment of excess proceeds in
short-term paper 0 0
------------ ------------
Adjusted net (loss) income $(45,691) $16,579
============ ============
Per share (loss) earnings:
Net (loss) income (1) $(2.07) $ .71
============ ============
</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) Common stock equivalents include the effect of the exercise of stock options
and warrants.
(3) Based on common stock equivalents using the if converted method and average
market price.
(4) Based on common stock equivalents using the if converted method and the
period-end market price, if higher than the average market price.
<PAGE>
EXHIBIT 21.1
Subsidiaries of National Media Corporation
<TABLE>
<CAPTION>
Company State of Jurisdiction of Incorporation
------- --------------------------------------
<S> <C>
Quantum North America, Inc. Delaware
National Media Marketing Corporation Delaware
National Media Holdings, Inc. Delaware
Quantum Marketing International, Inc. Delaware
Nancy Langston & Associates, Inc. Delaware
NPA Realty Corp. New York
National Media Media Corp. Delaware
Multi-Media Distribution Center, Inc. Delaware
Quantum International Limited United Kingdom
Business Publications, Inc. Delaware
Quantum International Japan Company Ltd. Japan
Quantum Marketing Mexico S.A. de C.V. Mexico
DirectAmerica Corporation Delaware
Positive Response Television, Inc. Delaware
Positive Response Seminars, Inc. California
Positive Response Media, Inc. California
Positive Response Telemarketing, Inc. California
PRDISC, Inc. California
Dignity Prestige Sdn Bhd Malaysia
Quantum Productions AG Switzerland
Prestige Marketing Limited New Zealand
Prestige Marketing International Limited New Zealand
Suzanne Paul Holdings Pty Limited Australia
Suzanne Paul (Australia) Pty Limited Australia
Telemall Shopping Pty Ltd. Australia
Quantum Far East Ltd. New Zealand
Quantum Polska Sp. Z.o.o. Poland
Quantum Asia Hong Kong
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-06007, Form S-8 No. 333-08323, 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 July 14, 1997, 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, 1997.
Ernst & Young LLP
Philadelphia, Pennsylvania
July 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,058
<SECURITIES> 0
<RECEIVABLES> 47,086
<ALLOWANCES> (6,907)
<INVENTORY> 30,919
<CURRENT-ASSETS> 93,898
<PP&E> 14,182
<DEPRECIATION> 3,042
<TOTAL-ASSETS> 165,632
<CURRENT-LIABILITIES> 74,130
<BONDS> 0
0
1
<COMMON> 248
<OTHER-SE> 88,311
<TOTAL-LIABILITY-AND-EQUITY> 165,632
<SALES> 358,179
<TOTAL-REVENUES> 358,179
<CGS> 328,108
<TOTAL-COSTS> 400,431
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,542
<INCOME-PRETAX> (43,794)
<INCOME-TAX> 1,897
<INCOME-CONTINUING> (45,691)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,691)
<EPS-PRIMARY> (2.07)
<EPS-DILUTED> (2.07)
</TABLE>
