<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10-Q/A
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from___________
to______________________ .
Commission file number 1-6715
NATIONAL MEDIA CORPORATION
--------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-2658741
- -----------------------------------------------------------------------------
(State or Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Eleven Penn Center, 1835 Market Street, Suite 1100, Philadelphia, PA 19103
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (215) 988-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
There were 26,212,716 issued and outstanding shares of the registrant's
common stock, par value $.01 per share, at October 31, 1997. In addition, there
were 705,280 shares of treasury stock as of such date.
<PAGE>
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
INDEX
PAGE
-----
Facing Sheet........................................................... 1
Index.................................................................. 2
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at
September 30, 1997 and March 31, 1997................ 3
Condensed Consolidated Statements of Operations
Three months ended September 30, 1997 and
September 30, 1996................................... 4
Condensed Consolidated Statements of Operations
Six months ended September 30, 1997 and
September 30, 1996................................... 5
Condensed Consolidated Statements of Cash Flows
Six months ended September 30, 1997 and
September 30, 1996................................... 6
Notes to Condensed Consolidated Financial
Statements........................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 12
Part II. Other Information
Item 1. Legal Proceedings...................................... 19
Item 2. Changes in Securities and Use of Proceeds.............. 19
Item 6. Exhibits and Reports on Form 8-K....................... 19
Signatures............................................................. 21
2
<PAGE>
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
------------- ----------------
(UNAUDITED) (SEE NOTE BELOW)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 21,727 $ 4,058
Accounts receivable, net.................................................... 27,796 40,179
Inventories, net............................................................ 27,917 30,919
Prepaid media............................................................... 3,016 3,563
Prepaid show production..................................................... 5,095 6,765
Deferred costs.............................................................. 3,762 3,318
Prepaid expenses and other current assets................................... 2,474 2,505
Deferred income taxes....................................................... 2,628 2,591
--------- ---------
Total current assets...................................................... 94,415 93,898
Property and equipment, net................................................... 13,830 14,182
Excess of cost over net assets of acquired businesses and other intangible
assets, net.................................................................. 54,193 50,732
Other assets.................................................................. 2,712 6,820
--------- ---------
Total assets.............................................................. $ 165,150 $ 165,632
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 17,149 $ 21,810
Accrued expenses............................................................ 25,415 30,830
Deferred revenue............................................................ 1,244 686
Income taxes payable........................................................ 339 552
Deferred income taxes....................................................... 2,351 2,351
Current portion of long-term debt and capital lease obligations............. 23,655 17,901
--------- ---------
Total current liabilities................................................. 70,153 74,130
Long-term debt and capital lease obligations.................................. 3,744 959
Deferred income taxes......................................................... 240 240
Other liabilities............................................................. 3,633 1,743
Shareholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares; issued 91,250
and 95,000 shares Series B convertible preferred stock, respectively; and 1 1
20,000 and 0 shares Series C convertible preferred stock, respectively..... -- --
Common stock, $.01 par value; authorized 75,000,000 shares; issued 26,162,716
and 24,752,792 shares, respectively........................................ 262 248
Additional paid-in capital.................................................. 155,097 127,764
Retained earnings........................................................... (56,469) (29,122)
--------- ---------
-
98,891 98,891
Treasury stock, 707,311 shares, at cost..................................... (4,244) (4,244)
Note receivable, officer.................................................... (139) --
Foreign currency translation adjustment..................................... (7,128) (6,087)
--------- ---------
Total shareholders' equity................................................ 87,380 88,560
--------- ---------
Total liabilities and shareholders' equity................................ $ 165,150 $ 165,632
--------- ---------
--------- ---------
</TABLE>
Note: The balance sheet at March 31, 1997 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
<PAGE>
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
---------- ---------
<S> <C> <C>
Revenues:
Product sales............................................................................ $ 53,756 $ 89,742
Retail royalties......................................................................... -- 8,578
Sales commissions and other revenues..................................................... 807 1,336
---------- ---------
Net revenues........................................................................... 54,563 99,656
Operating costs and expenses:
Media purchases.......................................................................... 17,582 34,060
Direct costs............................................................................. 36,887 45,557
Selling, general and administrative...................................................... 13,681 11,997
Interest expense......................................................................... 764 408
---------- ---------
Total operating costs and expenses..................................................... 68,914 92,022
---------- ---------
(Loss) income before income taxes.......................................................... (14,351) 7,634
Income taxes............................................................................... 7 2,640
---------- ---------
Net (loss) income.......................................................................... $ (14,358) $ 4,994
---------- ---------
---------- ---------
Net (loss) income per common and common equivalent share:
Primary.................................................................................. $ (.57) $ 0.18
---------- ---------
---------- ---------
Fully-diluted............................................................................ $ (.57) $ 0.18
---------- ---------
---------- ---------
Weighted average number of common and common equivalent shares outstanding:
Primary.................................................................................. 25,156 28,422
---------- ---------
---------- ---------
Fully-diluted............................................................................ 25,156 28,422
---------- ---------
---------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
<S> <C> <C>
1997 1996
---------- ----------
Revenues:
Product sales........................................................................... $ 119,777 $ 192,664
Retail royalties........................................................................ -- 13,765
Sales commissions and other revenues.................................................... 1,941 2,527
---------- ----------
Net revenues.......................................................................... 121,718 208,956
Operating costs and expenses:
Media purchases......................................................................... 40,800 71,636
Direct costs............................................................................ 78,115 98,798
Selling, general and administrative..................................................... 28,450 23,125
Interest expense........................................................................ 1,389 713
---------- ----------
Total operating costs and expenses.................................................... 148,754 194,272
---------- ----------
(Loss) income before income taxes......................................................... (27,036) 14,684
Income taxes.............................................................................. 311 5,140
---------- ----------
Net (loss) income......................................................................... $ (27,347) $ 9,544
---------- ----------
---------- ----------
Net (loss) income per common and common equivalent share:
Primary................................................................................. $ (1.11) $ 0.36
---------- ----------
---------- ----------
Fully-diluted........................................................................... $ (1.11) $ 0.36
---------- ----------
---------- ----------
Weighted average number of common and common equivalent shares outstanding:
Primary................................................................................. 24,652 26,887
---------- ----------
---------- ----------
Fully-diluted........................................................................... 24,652 26,887
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
<S> <C> <C>
1997 1996
---------- ---------
Cash flows from operating activities:
Net (loss) income......................................................................... $ (27,347) $ 9,544
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization........................................................... 3,515 1,960
Tax benefit from exercise of stock options.............................................. -- 2,262
Amortization of loan discount........................................................... 209 258
Changes in operating assets and liabilities, net of effects from acquisitions........... 6,885 (26,458)
Other................................................................................... 5,070 (4,077)
---------- ---------
Net cash used in operating activities....................................................... (11,668) (16,511)
Cash flows from investing activities:
Additions to property and equipment....................................................... (1,356) (3,163)
Investment in common stock................................................................ -- (1,250)
Proceeds from sale of common stock investment............................................. 1,025 --
Cost of companies acquired, net of cash acquired.......................................... -- (630)
---------- ---------
Net cash used in investing activities....................................................... (331) (5,043)
Cash flows from financing activities:
Net proceeds from issuance of preferred stock............................................. 19,813 --
Proceeds from borrowings.................................................................. 8,759 9,400
Payments on long-term debt, notes payable and capital lease obligations................... (956) (11,241)
Exercise of stock options and warrants.................................................... 1,602 5,998
Net proceeds from issuance of common stock................................................ -- 28,891
---------- ---------
Net cash provided by financing activities................................................... 29,218 33,048
Effect of exchange rate changes on cash and cash equivalents................................ 450 (333)
----------- ---------
Net increase in cash and cash equivalents................................................... 17,669 11,161
Cash and cash equivalents at beginning of period............................................ 4,058 18,405
----------- ----------
Cash and cash equivalents at end of period.................................................. $ 21,727 $ 29,566
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 1997
1. Basis Of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the
year ending March 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended March 31, 1997, as
amended by Form 10-K/A.
Certain prior-year amounts have been reclassified to conform to current
presentation.
2. Per Share Amounts
Net 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".
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted for
annual and quarterly periods ending after December 15, 1997. At that time,
the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods presented.
Under the new requirements for calculating primary earnings per share
(referred to as Basic EPS under SFAS No. 128), the dilutive effect of
stock options will be excluded. Earnings per share was not impacted for
the quarter ended September 30, 1997 and the new guidance is not expected
to have a material impact on the Company's current and prior full year
earnings per share. The impact of SFAS No. 128 would result in an increase
in primary earnings per share of approximately $0.04 for the three months
ended September 30, 1996, and $0.10 per share for the six months ended
September 30, 1996; and would have immaterial impact on fully diluted
earnings per share for these periods.
3. Income Taxes
The Company recorded minimal income tax expense for the three months ended
September 30, 1997 and $.3 million for six months ended September 30,
1997, due to tax liabilities relating to its Asian and South Pacific
operations. Income tax benefits on domestic and European losses have been
fully reserved until realized. This compares to income tax expense of $2.6
million for the three months ended September 30, 1996 and $5.1 million for
the six months ended September 30, 1996.
4. Contingent Matters
NATIONAL MEDIA LITIGATION
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
7
<PAGE>
competition and other intellectual property claims. Such claims related to
an alleged infringement of Precise's initial US patent for an exercise
device. The suit claimed that a product marketed by the Company pursuant
to a license granted by a third party violated Precise's initial US
patent. The suit sought an injunction and treble damages.
On July 16, 1997, the Company and certain of the other defendants to the
action entered into a settlement agreement with the plaintiffs. The
Company recorded a charge of approximately $6.0 million in the fourth
quarter of fiscal 1997 in connection with this matter.
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. At this
stage, the Company cannot predict the outcome of this matter; however,
even if plaintiffs were to succeed on all of their claims, the Company
does not believe that such result would have a material adverse impact on
the Company's financial condition or results of operations.
Parkin
In early October 1997, John Parkin, an on air personality appearing in
certain of the Company's infomercials, brought an action for injunctive
relief and unspecified damages in the United States District Court for the
Eastern District of Pennsylvania, alleging principally breach of contract
and intellectual property based claims. Following court hearings,
plaintiff's claims for injunctive relief were dismissed. While at this
stage it is not possible to predict the outcome of this matter, the
Company believes that any resolution of this matter will not have a
material adverse effect on the Company's results of operations or
financial condition.
PRTV LITIGATION
PRTV Shareholders' California Class Action
On May 1, 1995, prior to the acquisition of Positive Response Television,
Inc. ("PRTV") by the Company in May 1996, 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 has been paid by PRTV's insurance carrier. The
Company recorded a charge of $187,000 during fiscal 1997 in connection
with this matter. Such settlement is contingent upon final court approval.
Suntiger
In late March 1997, Suntiger, Inc., a distributor of sunglasses, filed
suit against PRTV and certain other parties in the United States District
Court for the Eastern District of Virginia alleging patent infringement.
The Company has reached a settlement with the plaintiffs involving a
going-forward business relationship that will have no material adverse
impact upon the Company's financial condition or results of operations.
REGULATORY MATTERS
As a result of prior settlements with the Federal Trade Commission
("FTC"), the Company has agreed to two consent orders. Prior to the
Company's May 1996 acquisition of PRTV, PRTV and its Chief Executive
Officer,
8
<PAGE>
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 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. 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 it no longer airs in the United States. The Company, which is now
indemnified against any damages sustained as a result of any action taken
by the FTC in connection with such infomercial, has 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, especially given the indemnification protection available to
it, any remedies to which it may become subject will have a material
adverse effect on the Company's results of operations or financial
condition.
In addition, in Spring 1997, in accordance with applicable regulations,
the Company notified the Consumer Product Safety Commission ("CPSC") of
breakages which were occurring in its Fitness Strider product. The Company
also notified the CPSC of its replacement of certain parts of the product
with upgraded components. The CPSC reviewed the Company's testing results
in order to assess the adequacy of the Company's upgraded components. The
CPSC also undertook its own testing of the product and, on November 5,
1997, informed the Company that the CPSC compliance staff had made a
preliminary determination that the product and the upgraded components
present a substantial product hazard, as defined under applicable law. The
Company and the staff are discussing voluntary action to address the
CPSC's concerns, including replacement of the affected components. At
present, management of the Company does not anticipate that any action
agreed upon, or action required by the CPSC, will have any material adverse
impact on the Company's financial condition or results of operations. The
Company has also been contacted by Australian consumer protection
regulatory authorities regarding the safety and fitness of the Fitness
Strider product. At this point, the Company cannot predict whether
the outcome of these matters regarding the Fitness Strider will have a
material adverse impact upon the Company's financial condition or results
of operations.
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. Except as disclosed herein, the Company does not believe any of
these other miscellaneous actions, either individually or in the
aggregate, will have a material adverse effect on the Company's results of
operations or financial condition.
5. Debt
In June, 1996, the Company increased its revolving line of credit (the
"Line") from $5,000,000 to $20,000,000. The Line was available pursuant to
its terms until September 30, 1997. In September 1997, the Company and its
principal lender (the "Bank") signed a Loan Modification Agreement (the
"Agreement"). The Agreement limited the maximum outstanding amount of cash
advances under the Line to $19,000,000 less the amount of permitted
outstanding letters of credit; the maximum amount of outstanding standby
letters of credit to an additional $475,000; the maximum amount of
outstanding commercial letters of credit to $5,000,000 and the maximum
amount of cash advances combined with the maximum amount of standby
letters of credit, in the aggregate, to $19,475,000. In addition, the Line
was extended until December 31, 1998, and the payment terms of the $4.0
million Term Loan were revised as follows: $50,000 per month on the first
day of each month from December 1997 through March 1998; $800,000 on April
1, 1998; and $1,000,000 on each of December 1, 1998, 1999 and 2000. The
Agreement increased the interest rates on the Line from prime to prime
plus 3%, and the rate on the Term Loan from prime plus .5% to prime plus
3%. Interest is payable at the rate of prime plus 1.5% on the first day of
each month through May 31, 1998. The remaining 1.5% will be accrued and
repaid in seven equal installments starting June 1, 1998. As of and after
June 1, 1998 interest is payable monthly at the rate of prime plus 3.0%.
The Agreement includes a provision for an interest rate increase of 1.0%
during any period during which the Company fails to be in compliance with
certain financial covenants, including tangible net worth and working
9
<PAGE>
capital minimums and other financial ratios. The Company is also required
to pay a loan restructuring fee of $304,000, payable in equal installments
over 16 months starting September 18, 1997, the date of the Agreement. On
a monthly basis, the Company must compute a borrowing base (as defined in
the Agreement) which must be greater than the outstanding amount of debt
owed under the Agreement, and submit certain financial information. In
addition, the Company is subject to certain restrictions including payment
of dividends, and must be in compliance with various financial covenants,
including tangible net worth and working capital minimums and other
financial ratios on a quarterly basis through December 31, 1997 and on a
continuous basis during the remaining term of the Agreement. As of
September 30, 1997, the Company is in compliance with these requirements.
The Term Loan and the Line are secured by a lien on substantially all the
assets of the Company except a lien on the assets pledged in connection
with the ASB Bank credit facility and the subordination of a lien on
approximately $1.0 million of certain non-domestic assets pledged to
Barclays Bank PLC. At September 30, 1997, the Company had outstanding cash
advances of $19,000,000 and $475,000 in a stand-by letter of credit under
the Line.
In connection with the above Agreement, the Company granted to the Bank
warrants to acquire 125,000 shares of the Company's common stock at a
price of $5 3/16 per share, the market price of the Company's common stock
as of the date of the grant. These warrants have a term of 5 years and
contain standard antidilution provisions. The Company is currently having
an independent valuation prepared concerning these warrants. The value
accorded the warrants will be accounted for as a loan discount which will
be amortized over the remaining term of the Line (15 months) at the date
of the Agreement and included in interest expense.
In July 1997, the Bank notified the Company that its foreign currency line
under the credit facility had been reduced to cover only the current
outstanding amount of the Company's forward contracts of $6.0 million. As
part of the Agreement, the Company and the Bank agreed that, thereafter
the Bank would not extend any new, or rollover any existing, forward
contract under such facility, effectively terminating the facility on a
rolloff basis. The Company had no borrowings outstanding under its $1.0
million overdraft line with Barclays Bank PLC as of September 30, 1997.
In July 1997, the Company obtained a credit facility from ASB Bank through
its Prestige Marketing Limited subsidiary (collectively with Prestige
Marketing International Limited, "Prestige") consisting of a working
capital facility (overdraft and letter of credit) of $1.0 million New
Zealand dollars (approximately $.7 million US dollars) and a short term
loan of $4.3 million New Zealand dollars (approximately $2.8 million US
dollars). At September 30, 1997, the Company had no amounts outstanding
under the working capital facility and $4.3 million New Zealand dollars
under the short term loan. The working capital facility is due on demand,
bears interest at the ASB Bank Banking Business Rate (BBBR rate) plus 1%
payable monthly, and expires on February 15, 1998. The short term loan
bears interest at the BBBR rate plus 2% and matures on January 24, 1998.
Under the facility, Prestige is subject to certain financial covenants
including tangible net worth and working capital minimums and various
financial ratios and the Company is limited in its ability to obtain
future financing from Prestige.
The Company's remaining debt consists of a note payable to Edmark
Industries in the amount of $1,050,000 (original amount of $1,400,000)
relating to the settlement of a legal case in fiscal year 1997. Payment
terms are $50,000 per month plus 8% interest. The remaining debt of $1.1
million relates to capital leases and two notes payable in connection with
various prior year acquisitions.
6. Equity Financing
On September 18, 1997, the Company sold to two institutional investors
(the "Series C Investors") 20,000 shares of its Series C Convertible
Preferred Stock, $.01 par value per share (the "Series C Preferred Stock")
with a face value of $1,000 per share for an aggregate purchase price of
$20.0 million. The Series C Preferred Stock has a four year term and is
automatically converted into the Company's common stock at maturity. Each
share of Series C Preferred Stock is convertible at the holder's option
into such number of shares of the Company's common stock, as is determined
by dividing the face value ($1,000) of the Series C Preferred Stock (plus
a 6% per annum premium accrued as of the conversion date) by (i) if the
conversion occurs on or before March 17, 1998, a conversion price equal to
$6.06 per share (subject to adjustment), or (ii) in the case of conversion
after March 18, 1998, a conversion price equal to the lower of $6.06 per
share and the lowest daily volume weighted average sale price during the
five days immediately prior to such conversion. The $6.06 conversion price
was based on 120% of the volume
10
<PAGE>
weighted average sales price on the date of issuance of the Series C
Preferred Stock. If converted at September 30, 1997, the Series C
Preferred Stock would be convertible into approximately 3,300,330 shares
of common stock. Depending on market conditions at the time of conversion,
the number of shares issuable could prove to be significantly greater in
the event of a decrease in the trading price of the Company's common
stock. In connection with the issuance of the Series C Preferred Stock,
the Company issued warrants (the "Series C Warrants") to purchase an
aggregate of 989,413 shares of the Company's common stock to the Series C
Investors. The Series C Warrants are exercisable until September 17, 2002
at an exercise price of $6.82 per share of the Company's common stock
(subject to adjustment). The exercise price of $6.82 per share represents
135% of the volume weighted average price at the date of issuance of the
Series C Preferred Stock. The Series C Preferred Stock carries a 6% annual
premium payable in cash or common stock, at the Company's option, at the
time of conversion. The premium is being recorded as a deemed dividend
from the date of issuance to the date of conversion, solely for the
purpose of calculating earnings per share. During the three months ended
September 30, 1997 the Company recognized approximately $43,000 as a
deemed dividend.
Except under limited circumstances, no holder of the Series C Preferred
Stock and Series C Warrants is entitled to convert or exercise such
securities to the extent that the shares to be received by such holder
upon such conversion or exercise would cause such holder to beneficially
own more than 4.9% of the Company's common stock.
The Series C Preferred Stock carries no voting power except as otherwise
provided by Delaware General Corporation Law. Its liquidation preference
is equal to the face amount ($1,000 per share) plus any accrued premiums,
and it ranks prior to the Company's common stock and Series A Junior
Participating Preferred Stock and junior to the Company's Series B
Convertible Preferred Stock.
The Company has reserved 10.0 million shares of common stock for issuance
in connection with the conversion of the Series C Preferred Stock and
exercise of the Series C Warrants.
7. Subsequent Events
Subsequent to September 30, 1997, the Company and its President and Chief
Executive Officer reached agreement in principle concerning certain terms
of his employment, which agreements are currently being reduced to
writing. The agreement provides for the issuance of options to acquire
750,000 shares of the Company's common stock with an initial exercise
price of $4.75. During the three month period ended September 30, 1997,
the Company recorded approximately $25,000 in compensation expense related
to these options. In addition, the agreement provides that, upon the
occurrence of certain triggering events (such as a sale or merger of the
Company, or significant investment) to be defined in the written agreement
being prepared, the executive can realize a reduction of up to an
aggregate of $3.0 million in the exercise price of his options. This
charge will be recognized from the date of the agreement through June 30,
1998. The ultimate aggregate non-cash charge, if any, will be determined
based upon whether a triggering event occurs by June 30, 1998, the
expiration date for that provision of the agreement, and the market price
or sale price of the Company's common stock upon the occurrence of a
triggering event.
11
<PAGE>
CAUTIONARY STATEMENT FOR 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."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
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 revenues. The Company's strategies for future periods are 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 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. 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 Company's operating results for the six months ended September 30,
1996 include the operating results of certain of the Company's operating
subsidiaries, namely Positive Response Television, Inc. ("PRTV") from May 17,
1996 (date of acquisition) to September 30, 1996, and Prestige and Suzanne
Paul Holdings Pty Limited and its operating subsidiaries (collectively
"Prestige") from July 2, 1996 (date of acquisitions) to September 30, 1996.
12
<PAGE>
The following table sets forth the operating data of the Company as a
percentage of net revenues for the periods indicated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Statement of Operations Data:
Net Revenues.................................................................... 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Media purchases............................................................... 32.2% 34.2% 33.5% 34.3%
Direct costs.................................................................. 67.6% 45.7% 64.2% 47.3%
Selling, general and administrative........................................... 25.1% 12.0% 23.4% 11.1%
Interest expense.............................................................. 1.4% 0.4% 1.1% 0.3%
--------- --------- --------- ---------
Total operating costs and expenses......................................... 126.3% 92.3% 122.2% 93.0%
Income before income taxes...................................................... (26.3%) 7.7% (22.2%) 7.0%
Income taxes.................................................................... 0.0% 2.7% 0.3% 2.4%
--------- --------- --------- ---------
Net income...................................................................... (26.3%) 5.0% (22.5%) 4.6%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Three months ended September 30, 1997 compared to September 30, 1996
NET REVENUES
Net revenues were $54.6 million for the three months ended September 30,
1997 as compared to $99.7 million for the three months ended September 30, 1996,
a decrease of $45.1 million or 45.2%.
Domestic net revenues for the three months ended September 30, 1997 were
$15.6 million as compared to $52.7 million for the three months ended
September 30, 1996, a decrease of $37.1 million or 70.4%. This decrease was a
result of the lack of continuing significant revenue streams relating to
products being distributed during the prior quarter and the Company's
inability to fully realize the benefits of two new shows which tested
successfully during the current period. Due to manufacturing/sourcing
difficulties, these shows did not contribute significantly to revenues until
very late in the quarter ended September 30, 1997. In addition, the quarter
ended September 30, 1996 included strong revenues relating to the Ab Roller
Plus, especially revenues relating to retail and print sales. The Ab Roller
Plus accounted for approximately 46% of domestic net revenues in the three
months ended September 30, 1996; including approximately $8.6 million of
retail royalties. Approximately 44% of net revenues for the three months
ended September 30, 1997 were generated by sales of the Company's Great North
American Slim Down product. Current period domestic net revenues were also
unfavorably impacted by an increased return rate, relating principally to the
Company's Great North American Slim Down product.
International net revenues for the three months ended September 30, 1997
were $39.0 million as compared to $47.0 million for the three months ended
September 30, 1996, a decrease of $8.0 million or 17.0%. The majority of this
decrease was due to the approximate 52% decline in revenues earned in the Asian
marketplace, of which approximately 8% was due to currency devaluation. The
Company believes that this decline was the result of increased competition from
traditional programming and other infomercial competitors and the fact that
additional Japanese airtime was not obtained in the quantity or as quickly as
anticipated. In addition, the Company's Asian revenues were negatively impacted
by the economic downturn being experienced throughout that region. The Company's
South Pacific revenues and operating results were negatively impacted in the
three months ended September 30, 1997 due to significant returns associated with
its Fitness Strider product. All of these factors are expected to have a
continuing impact on third quarter revenues in these regions.
13
<PAGE>
OPERATING COSTS
Total operating costs and expenses were $69.5 million for the three months
ended September 30, 1997 as compared to $92.0 million for the three months ended
September 30, 1996, a decrease of $22.5 million or 24.5%. This decline was due
principally to the 45.2% decline in net revenues.
MEDIA PURCHASES
Media purchases were $17.6 million (net of $.5 million in media sales) for
the three months ended September 30, 1997 as compared to $34.1 million (net of
$2.1 million in media sales) for the three months ended September 30, 1996, a
decrease of $16.5 million or 48.4%. This decrease was directly related to the
45.2% decline in net revenues. The ratio of media purchases to net revenues
improved to 32.2% for the three months ended September 30, 1997 from 34.2% for
the three months ended September 30, 1996. A higher domestic ratio in the
current quarter was offset by the favorable impact of a higher percentage of
revenues being earned in the international marketplace in which media rates are
generally more favorable. Recent trends indicate an increase in international
media rates due to increased competition and a trend towards minimum guarantees
of media purchases.
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 $36.9 million for the three months ended September
30, 1997 as compared to $45.6 million for the three months ended September 30,
1996, a decrease of $8.7 million or 19.1%, primarily related to the decrease in
net revenues. As a percentage of net revenues, direct costs were 67.6% for the
three months ended September 30, 1997 and 45.7% for the three months ended
September 30, 1996. Direct costs as a percentage of net revenues increased in
both the domestic and international marketplace. Domestically, the ratio was
unfavorably impacted by the 70.4% decrease in net revenues. The lower volume,
coupled with certain fixed costs associated with the Company's fulfillment
operations and a significant increase in the domestic return rate, negatively
impacted the ratio. The three months ended September 30, 1996 benefited from
retail royalties ($0 for September 30, 1997 as compared to $8.6 million
for September 30, 1996) which carry minimal direct costs. Internationally, a
change in product mix, higher licensee and other non-infomercial type revenues
(which carry higher direct costs), and increased show customization costs
adversely affected the ratio. In Japan, fulfillment and warehousing costs
increased as a percentage of revenues as a result of the lower sales volume and
higher inventory levels, respectively.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $13.7 million for the
three months ended September 30, 1997 as compared to $12.0 million for the three
months ended September 30, 1996, an increase of $1.7 million or 14.2%. The
increase was primarily a result of higher professional fees, including $400,000
paid to a management/financial consulting firm retained at the request of the
Bank, whose services were completed as of September 30, 1997, increased
depreciation primarily associated with the Company's new MIS system and higher
occupancy expense, primarily due to the Company's new California office.
Selling, general and administrative expenses as a percentage of net revenues
increased from 12.0% for the three months ended September 30, 1996 to 25.1% for
the three months ended September 30, 1997 due to the aforementioned cost
increases combined with the 45.2% decrease in net revenues.
INTEREST EXPENSE
Interest expense was approximately $.8 million for the three months ended
September 30, 1997 compared to $.4 million for the three months ended
September 30, 1996, an increase of $.4 million. This increase was due to an
increase in the Company's average outstanding indebtedness from approximately
$10.8 million during the second quarter of fiscal 1997 to approximately $27.0
million during the second quarter of fiscal 1998.
14
<PAGE>
INCOME TAXES
The Company recorded minimal income tax expense for the three months ended
September 30, 1997 resulting from tax liabilities generated on its Asian and
South Pacific profits. Income tax benefits have not been recorded during the
current quarter on domestic and European losses. These benefits will be recorded
when realized, reducing the effective tax rate on future domestic and European
earnings. This compares to approximately $2.6 million of income tax expense
recorded for the second quarter of fiscal 1997, a 34.5% effective tax rate.
NET INCOME
The Company incurred a net loss of $14.4 million for the three months ended
September 30, 1997 compared to net income of $5.0 million for the three months
ended September 30, 1996.
Six months ended September 30, 1997 compared to September 30, 1996
NET REVENUES
Net revenues were $121.7 million for the six months ended September 30, 1997
as compared to $209.0 million for the six months ended September 30, 1996, a
decrease of $87.3 million or 41.7%.
Domestic net revenues for the six months ended September 30, 1997 were $42.2
million as compared to $128.3 million for the six months ended September 30,
1996, a decrease of $86.1 million or 67.1%. This decrease was due primarily to
the Ab Roller Plus performing strongly in the six months ended September 30,
1996 on television and in print and retail. The Ab Roller Plus accounted for
approximately 62% of domestic net revenues in the six months ended September 30,
1996. Approximately 45% of the net revenues for the six months ended
September 30, 1997 were generated by sales of the Company's Great North
American Slim Down product. The decrease in net revenues was also due to the
Company's inability to roll out enough new successful shows during the period
to match the success of the Company's Ab Roller Plus show during the same
period in the prior fiscal year. The shows planned to be rolled out were
delayed due to show production delays, to product manufacturing/sourcing
difficulties, and to the Company's tight cash position which affected, among
other things, inventory purchasing and media acquisition. Certain new shows
began to be aired late in the second quarter of fiscal 1998, and minimally
impacted net revenues for the six month period. Current period domestic net
revenues were also unfavorably impacted by an increased return rate.
International net revenues for the six months ended September 30, 1997 were
$79.5 million as compared to $80.7 million for the six months ended September
30, 1996, a decrease of $1.2 million or 1.5%. The current year included six
months of revenues from the Prestige and Suzanne Paul acquisitions compared to
approximately three months in the prior year; as well as a 13.3% increase in
European net revenues due to expansion in Eastern Europe. These increases offset
the approximate 42.2% decline in revenues generated in the Asian marketplace.
This decline is a result of increased competition from traditional programming
and other infomercial competitors and the fact that additional Japanese airtime
was not obtained in the quantity or as quickly as anticipated. In addition, the
Company's Asian revenues were negatively impacted by the recent economic
downturn in that region. This is expected to continue to have an adverse impact
in the coming quarter in this region.
OPERATING COSTS
Total operating costs and expenses were $149.3 million for the six months
ended September 30, 1997 as compared to $194.3 million for the six months ended
September 30, 1996, a decrease of $45.0 million or 23.1%. This is due to the
41.7% decline in net revenues.
MEDIA PURCHASES
Media purchases were $40.8 million (net of $1.0 million in media sales) for
the six months ended September 30, 1997 as compared to $71.6 million (net of
$3.5 million in media sales) for the six months ended September 30, 1996, a
decrease of $30.8 million or 43.0%. This decrease was directly related to the
41.7% decline in net revenues. The ratio of media purchases to net revenues
improved slightly to 33.5% for the six months ended September 30, 1997 as
15
<PAGE>
compared to 34.3% for the six months ended September 30, 1996. A higher domestic
ratio in the current six months resulted mainly from the absence of retail
royalties compared to the same period of fiscal 1997. Retail royalties carry no
direct media costs and therefore produce a more favorable ratio. This increase
was offset by the favorable impact of a higher percentage of revenues being
earned in the international marketplace in which media rates are generally more
favorable.
DIRECT COSTS
Direct costs were $78.1 million for the six months ended September 30, 1997
as compared to $98.8 million for the six months ended September 30, 1996, a
decrease of $20.7 million or 20.9%, primarily related to the decrease in net
revenues. As a percentage of net revenues, direct costs were 64.2% for the six
months ended September 30, 1997 and 47.3% for the six months ended September 30,
1996. Direct costs as a percentage of net revenues increased in both the
domestic and international marketplace. Domestically, the ratio was unfavorably
impacted by the 67.1% decrease in net revenues. The lower volume, coupled with
certain fixed costs associated with the Company's fulfillment operations and a
significant increase in the domestic return rate, negatively impacted the ratio.
The six months ended September 30, 1996 benefited from retail royalties ($0 for
September 30, 1997 as compared to $13.8 million for September 30, 1996)
which carry minimal direct costs. Internationally, a change in product mix,
higher licensee and other non-infomercial type revenues which carry higher
direct costs, and increased show customization costs adversely affected the
ratio. In Japan, fulfillment and warehousing costs increased as a percentage of
revenues as a result of the lower sales volume and higher inventory levels,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $28.5 million for the six
months ended September 30, 1997 as compared to $23.1 million for the six months
ended September 30, 1996, an increase of $5.4 million or 23.0%. In excess of
$2.5 million of the increase relates to selling, general and administrative
expenses associated with the operations of Prestige which was acquired in July
of 1996 resulting in three months of expense in the six month period of fiscal
year 1997 compared to the six months during the current fiscal year. In
addition, the current period includes $1.5 million of goodwill amortization, as
compared to only $1.0 million in the prior period. The increase is due to the
current year containing a full six months of expense compared to partial expense
during the prior six months period in which the Company purchased PRTV and
Prestige. The remainder of the increase was primarily a result of higher
professional fees, increased depreciation expense primarily associated with the
Company's new MIS system, and higher occupancy expense. Selling, general and
administrative expenses as a percentage of net revenues increased from 11.1% for
the six months ended September 30, 1996 to 23.4% for the six months ended
September 30, 1997 due to the aforementioned cost increases combined with the
41.7% decrease in net revenues.
INTEREST EXPENSE
Interest expense was approximately $1.4 million for the six months ended
September 30, 1997 compared to $.7 million for the six months ended September
30, 1996, an increase of $.7 million. This increase was due to an increase in
the Company's average outstanding indebtedness from approximately $8.3 million
during the six months ended September 30, 1996 to approximately $24.8 million
during the six months ended September 30, 1997.
INCOME TAXES
The Company recorded income tax expense of approximately $.3 million for the
six months ended September 30, 1997 resulting from tax liabilities generated on
its Asian and South Pacific profits. Income tax benefits have not been recorded
during the current period on domestic and European losses. These benefits will
be recorded when realized, reducing the effective tax rate on future domestic
and European earnings. This compares to approximately $5.1 million of income tax
expense recorded for the six months ended September 30, 1996, a 35.0% effective
tax rate.
16
<PAGE>
NET INCOME
The Company incurred a net loss of $27.3 million for the six months ended
September 30, 1997 compared to net income of $9.4 million for the six months
ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $24.3 million at September 30, 1997
compared to working capital of $19.8 million at March 31, 1997, an increase
of $4.5 million. The Company met its current period cash needs primarily
through its cash flow from borrowings, liquidation of accounts receivable and
inventory and an equity infusion of $20.0 million which occurred late in the
second quarter. Operating activities for the six months ended September 30,
1997 resulted in a use of cash of $11.7 million. The Company's cash flow from
operations in the six months ended September 30, 1997 was adversely affected
by the net loss of approximately $27.3 million.
Consolidated accounts receivable decreased by $12.4 million, or 30.8%,
primarily due to the decrease in domestic accounts receivable. This decrease
was principally due to the 67.1% decrease in revenues in the month of
September 1997 as compared to the month of March 1997, and a $7.0 million
reduction in the installment receivable balance due to the continued decline
in domestic net revenues.
On September 18, 1997 the Company sold to two institutional investors 20,000
shares of Series C Convertible Preferred Stock (as more fully described in Note
6), which included the issuance of warrants to acquire 989,413 shares of the
Common Stock. This transaction generated proceeds of approximately $19.8
million, net of approximately $200,000 in offering costs. At the present date,
the Series C Preferred Stock would be convertible into 3,300,330 shares of the
Common Stock. The proceeds from this transaction are primarily being used for
working capital purposes, a portion of which was used to repay accounts payable
at September 30, 1997.
In September 1997, the Company also reached an agreement (the "Agreement")
with its principal lender for the extension of its principal credit facility
through December 31, 1998. The Company's $20.0 million Line has been reduced to
$19.475 million, with the maximum amount of cash advances outstanding under the
Line limited to $19.0 million, and the maximum amount of outstanding letters of
credit limited to $5.0 million. In connection with the extension the interest
rate on the Company's Line and Term Loan were increased from prime and prime
plus .5%, respectively, to prime plus 3.0%. The payment of the Company's Term
Loan was restructured on a basis more favorable to the Company as follows:
$50,000 per month from December 1, 1997 to March 1, 1998; $800,000 on April 1,
1998; and $1.0 million on each of December 1, 1998, 1999 and 2000. The Agreement
also contains certain financial covenants including tangible net worth and
working capital minimums and other financial ratios with which the Company must
be in compliance on a quarterly basis through December 31, 1997 and on a
continuous basis during the remainder of the term. Certain violations may
trigger an increase in the interest rate of 1.0% and/or an event of default. As
previous defaults under the old facility have been waived, $3.0 million of the
$4.0 million Term Loan has been classified as long term debt at September 30,
1997. The Line and Term Loan are secured by a lien on substantially all the
assets of the Company and its subsidiaries, excluding the assets of Prestige
which are pledged to ASB Bank. Such lien on certain non-domestic assets of the
Company is subordinated to a lien held by Barclays Bank PLC. The Company has an
overdraft line of approximately $1.0 million with Barclays, which was unused at
September 30, 1997.
In July 1997, the Company obtained a credit facility from ASB Bank through
its Prestige subsidiary consisting of a working capital facility (overdraft and
letter of credit) of $1.0 million New Zealand dollars (approximately $.7 million
US dollars) and a short term loan of $4.3 million New Zealand dollars
(approximately $2.8 million US dollars). The working capital facility is due on
demand, bears interest at the ASB Bank Banking Business Rate (BBBR rate) plus 1%
payable monthly, and expires on February 15, 1998. The short term loan bears
interest at the BBBR rate plus 2% and matures on January 24, 1998. Amounts
outstanding under short term loan totalled $4.3 million New Zealand dollars at
September 30, 1997. The working capital facility was not utilized at September
30, 1997. Under the facility, Prestige is subject to certain financial covenants
including tangible net worth and working capital minimums and various financial
ratios and the Company is limited in its ability to obtain future financing from
Prestige.
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
17
<PAGE>
is reduced significantly. The Company monitors exchange rate movements and
can protect short term cash flows through the use of options and/or forward
contracts when appropriate. Until July 1997, the Company maintained a foreign
exchange line with its principal lender for such purposes. Pursuant to the
Agreement described in Note 5 to the financial statements, the Company and
the Bank agreed to terminate the foreign exchange line on a run off basis.
The results of the Company's hedge did not have a material impact in the
current six month period. The Company's future ability to hedge may be
negatively impacted as a result of its tight cash position. All forward
contracts must now be cash collateralized. In the long term, the Company has
the ability to change prices in a timely manner in order to react to major
currency fluctuations; thus reducing the risk associated with local currency
movements. The Company is currently revising its pricing in the Far East in
an effort to offset the recent significant currency devaluation. However, the
Company still expects that the currency devaluation and the economic downturn
being experienced in this region will have a negative impact on the Company's
operating results and cash flows in the third quarter. 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 July 1996, 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 $21.7 million in a
combination of cash, a note payable and Common Stock. 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. During the quarter ended September 30, 1997, the
Company amended the acquisition agreements which accelerated the $5.0 million
contingent purchase price amount and revised certain other provisions of the
agreements. In connection with such amendments, the Company issued 909,091
shares of the Company's Common Stock to the principals of these entities based
on the closing price of the Company's Common Stock on the New York Stock
Exchange on July 16, 1997. This additional amount represents an increase in the
purchase price and is included in goodwill.
The decrease in other assets at September 30, 1997 was a result of payment
of $3.0 million from an escrow account in connection with the Ab Roller
settlement (as more fully described in Note 4) and the sale of the Company's
investment in Earthlink for approximately $1.0 million.
The Company has retained Lehman Brothers, as a financial advisor, to assist
it in continuing discussions regarding potential strategic partnerships and
other matters with interested parties. On November 7, 1997, the Company
confirmed that it is actively pursuing a strategic partnership or merger but
also cautioned that it can give no assurance regarding the completion of any
such transaction.
The Company's cash position continues to be pressured as a result of the
losses incurred in the first half of fiscal 1998 and the continued downturn in
both Japanese and domestic revenues. While the Company anticipates showing
significant improvement in its operating results, it expects to report a net
loss for the third quarter of fiscal year 1998. While benefitting from the
proceeds of the recent preferred stock offering, the extension of its credit
facility with its principal lender and its strategy, which focuses on cost
reductions, the restructuring of PRTV and the re-negotiation of a number of its
media contracts to terms that are more favorable to the Company, the Company's
ability to continue as a going concern is dependent on its ability to implement
certain plans and actions designed to rebuild its business, including the
introduction of successful new shows, to return the Company to profitability,
and to improve its liquidity. No assurance can be given that any of these
actions will be successful.
18
<PAGE>
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 4 (Contingent Matters) to the Condensed
Consolidated Financial Statements in Part I of this report is incorporated
herein by reference. Certain of the matters referred to in Note 4 (Contingent
Matters) have been the subject of disclosure in prior reports on Form 10-Q
and/or 10-K.
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 to enforce its rights in these areas.
Except as disclosed herein, 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 18, 1997, the Company issued and sold an aggregate of 20,000
shares of its Series C Preferred Stock to the Series C Investors. The Company
completed the offering of the Series C Preferred Stock in reliance upon an
exemption from registration provided by Regulation D as promulgated by
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The Series C Preferred Stock has a four year term and is automatically
converted into common stock at maturity. Each share of Series C Preferred Stock
is convertible into such number of shares of the Company's common stock, as is
determined by dividing the stated value ($1,000) of the Series C Preferred Stock
(plus a 6% per annum premium accrued as of the conversion date) by (i) if the
conversion occurs on or before March 17, 1998, a conversion price equal to $6.06
per share (subject to adjustment), or (ii) in the case of conversion after March
18, 1998, a conversion price equal to the lower of $6.06 per share and the
lowest daily volume weighted average sale price during a specified trading
period immediately prior to such conversion. The $6.06 conversion price was
based on 120% of the volume weighted average sales price on the date of issuance
of the Series C Preferred Stock. If converted at September 30, 1997, the Series
C Preferred Stock would be convertible into approximately 3,300,330 shares of
common stock. Depending on market conditions at the time of conversion, the
number of shares issuable could prove to be significantly greater in the event
of a decrease in the trading price of the Company's common stock. In connection
with the issuance of the Series C Preferred Stock, the Company issued the Series
C Warrants to purchase an aggregate of 989,413 shares of the Company's common
stock to the Series C Investors. The Series C Warrants are exercisable until
September 17, 2002 at an exercise price of $6.82 per share of the Company's
common stock (subject to adjustment). The exercise price of $6.82 per share
represents 135% of the volume weighted average price at the date of issuance of
the Series C Preferred Stock. The Series C Preferred Stock carries a 6% annual
premium payable in cash or common stock, at the Company's option, at the time of
conversion. The premium is being recorded as a deemed dividend from the date of
issuance to the date of conversion, solely for the purpose of calculating
earnings per share. During the three months ended September 30, 1997 the Company
recognized approximately $43,000 as a deemed dividend.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
11.1 Statement Re: Computation of Per Share Earnings.
27.1 Financial Data Schedule.
(b) The Company filed the following Quarterly Reports on Form 8-K during the
three month period ended September 30, 1997:
19
<PAGE>
The Company filed a Current Report on Form 8-K, dated September 18, 1997,
reporting the completion of a private placement of $20 million of the Company's
Series C Convertible Preferred Stock.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 2 to Registrant's Quarterly Report
on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly
authorized.
NATIONAL MEDIA CORPORATION
Registrant
Date: January 23, 1998 /s/ Robert N. Verratti
-----------------------------------------------
Robert N. Verratti
President, Chief Executive Officer and Director
Date: January 23, 1998 /s/ Paul R. Brazina
-----------------------------------------------
Paul R. Brazina
Vice President and Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
--------------
Exhibit No.
- -----------
11.1 Statement Re: Computation of Per Share Earnings.
27.1 Financial Data Schedule.
22
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
PRIMARY 1997 1996 1997 1996
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Average shares outstanding........................................... 25,156 22,580 24,652 20,630
Conversion of preferred stock........................................ -- 1,364 -- 1,263
Net effect of common stock equivalents (2)(3)........................ -- 4,478 -- 4,994
---------- --------- ---------- ---------
Total................................................................ 25,156 28,422 24,652 26,887
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income........................................................... $ (14,358) $ 4,994 $ (27,347) $ 9,544
Adjustments to net income:
Reduction of interest expense (net of tax)
related to retired debt.......................................... -- 35 -- --
Deemed dividend on convertible preferred stock..................... (43) -- (43) --
---------- --------- ---------- ---------
Adjusted net income.................................................. $ (14,401) $ 5,029 $ (27,390) $ 9,544
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Per share earnings:
Net income........................................................... $ (0.57) $ .18 $ (1.11) $ .36
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Fully Diluted
Average shares outstanding........................................... 25,156 22,580 24,652 20,630
Conversion of preferred stock........................................ -- 1,364 -- 1,263
Net effect of common stock equivalents (2)(4)........................ -- 4,478 -- 4,994
---------- --------- ---------- ---------
Total................................................................ 25,156 28,422 24,652 26,887
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income........................................................... $ (14,358) $ 4,994 $ (27,347) $ 9,544
Adjustments to net income:
Reduction of interest expense (net of tax)
related to retired debt.......................................... -- 35 -- --
Deemed dividend on convertible preferred stock..................... (43) -- (43) --
---------- --------- ---------- ---------
Adjusted net income.................................................. $ (14,401) $ 5,029 $ (27,390) $ 9,544
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Per share earnings:
Net income (1)....................................................... $ (0.57) $ .18 $ (1.11) $ .36
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,727
<SECURITIES> 0
<RECEIVABLES> 32,354
<ALLOWANCES> (4,558)
<INVENTORY> 27,917
<CURRENT-ASSETS> 94,415
<PP&E> 13,830
<DEPRECIATION> 2,037
<TOTAL-ASSETS> 165,150
<CURRENT-LIABILITIES> 69,833
<BONDS> 0
262
0
<COMMON> 1
<OTHER-SE> 87,117
<TOTAL-LIABILITY-AND-EQUITY> 165,150
<SALES> 121,718
<TOTAL-REVENUES> 121,718
<CGS> 118,915
<TOTAL-COSTS> 147,365
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,389
<INCOME-PRETAX> (27,036)
<INCOME-TAX> 311
<INCOME-CONTINUING> (27,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,347)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
