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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-2658741
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(State or Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Eleven Penn Center
1835 Market Street, Suite 1100
Philadelphia, PA 19103
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(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 25,325,487 issued and outstanding shares of the registrant's
common stock, par value $.01 per share, at January 31, 1998. In addition, there
were 887,229 shares of treasury stock as of such date.
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NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Facing Sheet............................................................................................... 1
Index...................................................................................................... 2
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at December 31, 1997 and March 31, 1997........................ 3
Condensed Consolidated Statements of Operations Three months ended December 31, 1997 and 1996........ 4
Condensed Consolidated Statements of Operations Nine months ended December 31, 1997 and 1996......... 5
Condensed Consolidated Statements of Cash Flows Nine months ended December 31, 1997 and 1996......... 6
Notes to Condensed Consolidated Financial Statements................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 14
Part II. Other Information
Item 1. Legal Proceedings............................................................................... 22
Item 6. Exhibits and Reports on Form 8-K................................................................ 22
Signatures.............................................................................................. 23
</TABLE>
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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>
DECEMBER 31, MARCH 31,
1997 1997
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(UNAUDITED) (SEE NOTE BELOW)
<S> <C> <C>
ASSETS
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Current assets:
Cash and cash equivalents....................................................... $ 11,834 $ 4,058
Accounts receivable, net........................................................ 28,412 40,179
Inventories, net................................................................ 24,836 30,919
Prepaid media................................................................... 4,130 3,563
Prepaid show production......................................................... 5,504 6,765
Deferred costs.................................................................. 5,638 3,318
Prepaid expenses and other current assets....................................... 1,736 2,505
Deferred income taxes........................................................... 2,571 2,591
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Total current assets.......................................................... 84,661 93,898
Property and equipment, net....................................................... 12,925 14,182
Excess of cost over net assets of acquired businesses and other intangible assets,
net............................................................................. 50,874 50,732
Other assets...................................................................... 2,530 6,820
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Total assets.................................................................. $ 150,990 $ 165,632
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................................................ $ 17,657 $ 21,810
Accrued expenses................................................................ 24,650 30,830
Deferred revenue................................................................ 1,561 686
Income taxes payable............................................................ -- 552
Deferred income taxes........................................................... 2,351 2,351
Current portion of long-term debt and capital lease obligations................. 23,433 17,901
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Total current liabilities..................................................... 69,652 74,130
Long-term debt and capital lease obligations...................................... 2,529 959
Deferred income taxes............................................................. 240 240
Other liabilities................................................................. 3,764 1,743
Shareholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares; issued 86,250 and
95,000 shares Series B convertible preferred stock, respectively, and 20,000
and 0 shares Series C convertible preferred stock, respectively............... 1 1
Common stock, $.01 par value; authorized 75,000,000 shares; issued 26,212,716 and
24,752,792 shares, respectively............................................... 262 248
Additional paid-in capital...................................................... 155,643 127,764
Retained earnings............................................................... (64,615) (29,122)
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91,291 98,891
Treasury stock, 887,229 and 707,311 shares, respectively, at cost............... (6,802) (4,244)
Notes receivable, officer....................................................... (139) --
Foreign currency translation adjustment......................................... (9,545) (6,087)
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Total shareholders' equity.................................................... 74,805 88,560
Total liabilities and shareholders' equity.................................... $ 150,990 $ 165,632
------------ --------
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</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.
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<PAGE>
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
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Revenues:
Product sales............................................................................. $ 63,182 $ 68,979
Retail royalties.......................................................................... -- 354
Sales commissions and other revenues...................................................... 1,735 1,509
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Net revenues.......................................................................... 64,917 70,842
Operating costs and expenses:
Media purchases........................................................................... 20,532 28,112
Direct costs.............................................................................. 38,157 38,934
Selling, general and administrative....................................................... 13,475 11,486
Severance expense......................................................................... -- 1,100
Interest expense.......................................................................... 910 414
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Total operating costs and expenses.................................................... 73,074 80,046
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Loss before income taxes.................................................................. (8,157) (9,204)
Income tax benefit........................................................................ (11) (3,220)
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Net loss................................................................................. $ (8,146) $ (5,984)
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Net loss per common share................................................................ $ (0.34) $ (0.26)
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Net loss per common share-assuming dilution............................................... $ (0.34) $ (0.26)
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Weighted average number of common shares outstanding:
Basic.................................................................................... 25,324 23,268
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Diluted.................................................................................. 25,324 23,268
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1996
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Revenues:
Product sales........................................................................... $ 182,959 $ 261,643
Retail royalties........................................................................ -- 14,119
Sales commissions and other revenues.................................................... 3,676 4,036
---------- ----------
Net revenues.......................................................................... 186,635 279,798
Operating costs and expenses:
Media purchases......................................................................... 61,332 99,748
Direct costs............................................................................ 116,272 137,732
Selling, general and administrative..................................................... 41,925 34,611
Severance expense....................................................................... -- 1,100
Interest expense........................................................................ 2,299 1,127
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Total operating costs and expenses.................................................... 221,828 274,318
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(Loss) income before income taxes......................................................... (35,193) 5,480
Income taxes.............................................................................. 300 1,920
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Net (loss) income......................................................................... $ (35,493) $ 3,560
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Net (loss) income per common share...................................................... $ (1.45) $ 0.17
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Net (loss) income per common share-assuming dilution.................................... $ (1.45) $ 0.13
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Weighted average number of common shares outstanding:
Basic................................................................................... 24,736 21,415
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Diluted................................................................................. 24,736 27,043
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</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
---------------------
<S> <C> <C>
1997 1996
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Cash flows from operating activities:
Net (loss) income......................................................................... $ (35,493) $ 3,560
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization............................................................ 5,355 3,318
Amortization of loan discount............................................................ 286 379
Non-cash executive compensation.......................................................... 750 --
Changes in operating assets and liabilities, net of effects from acquisitions............ 4,298 (30,948)
Other.................................................................................... 5,304 (4,438)
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Net cash used in operating activities....................................................... (19,500) (28,129)
Cash flows from investing activities:
Additions to property and equipment....................................................... (1,805) (5,343)
Cost of companies acquired, net of cash acquired.......................................... -- (615)
Proceeds from sale of common stock investment............................................. 1,025 --
Investment in common stock................................................................ -- (1,250)
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Net cash used in investing activities....................................................... (780) (7,208)
Cash flows from financing activities:
Net proceeds from issuance of preferred stock............................................. 19,708 --
Proceeds from borrowings.................................................................. 8,759 9,400
Payments on long-term debt, notes payable and capital lease obligations................... (1,857) (15,294)
Exercise of stock options and warrants.................................................... 1,602 6,027
Net proceeds from issuance of common stock................................................ -- 28,869
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Net cash provided by financing activities................................................... 28,212 29,002
Effect of exchange rate changes on cash and cash equivalents................................ (156) (2,100)
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Net increase (decrease) in cash and cash equivalents........................................ 7,776 (8,435)
Cash and cash equivalents at beginning of period............................................ 4,058 18,405
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Cash and cash equivalents at end of period.................................................. $ 11,834 $ 9,970
---------- ---------
---------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 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 under the Securities Exchange Act of 1934 (the "Exchange
Act"). 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 nine months ended December 31, 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 on Form 10-K/A.
Certain prior-year amounts have been reclassified to conform to current
presentation.
2. PER SHARE AMOUNTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement 128
replaces the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements. Earnings per share is computed on
the basis of the weighted average number of shares outstanding during the
periods presented. Earnings per share-assuming dilution is computed on the
basis of the weighted average number of shares outstanding during the period
plus the dilutive effect of stock options, warrants and preferred stock.
3. INCOME TAXES
The Company recorded income tax expense of $300,000 for the nine months
ended December 31, 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.
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
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
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agreement with the plaintiffs. The Company recorded a charge of approximately
$6.0 million in the fourth quarter of the fiscal year ended March 31, 1997
("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, and 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 the Company
cannot 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.
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 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, 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 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
8
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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. The Company and PRTV have, pursuant to the terms of the
above-referenced consent orders, notified the FTC of the proposed merger (the
"Merger") with ValueVision International,, Inc. ("ValueVision"). The FTC may
request additional information about the Merger.
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, in November 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
"September Agreement"). The September 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 Company's
$4.0 million Term Loan (the "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 September Agreement increased the interest rates on the Line
from prime to prime plus 3%, and the rate on the Term Loan from prime plus
0.5% to prime plus 3%. Interest was payable at the rate of prime plus 1.5% on
the first day of each month through May 31, 1998. The remaining 1.5% was to
be accrued and repaid in seven equal installments starting June 1, 1998. As
of and after June 1, 1998 interest was to be payable monthly at the
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rate of prime plus 3.0%. The September Agreement provides 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 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
September Agreement. On a monthly basis, the Company must compute a borrowing
base (as defined in the September Agreement) which must be greater than the
outstanding amount of debt owed under the September 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 monthly basis during the remaining term of the Line.
At December 31, 1997, the Company was 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 lien on approximately
$1.0 million of certain non-domestic assets pledged to Barclays Bank PLC. At
December 31, 1997, the Company had outstanding cash advances of $18,600,000
and $875,000 in stand-by and commercial letters of credit under the Line. On
January 5, 1998, the Company executed a further agreement with the Bank in
connection with the execution of the Agreement and Plan of Reorganization and
Merger (the "Merger Agreement") between the Company and ValueVision and V-L
Holdings Corp. (discussed in note 9 below). This amendment changed the
interest payment terms to the extent that the entire 3% above prime is
payable on a monthly basis and the previous 1.5% accrued interest from
September 18, 1997 to January 5, 1998 was due and paid immediately. In this
most recent agreement, the Bank waived a "due on sale" clause otherwise
applicable to the Line and accommodated certain other terms of the Merger
Agreement, in consideration of a guaranty of the Loan by ValueVision upon
consummation of the Merger and certain other concessions by the Company,
including, granting the Bank a security interest in the assets of its
Prestige Marketing Limited subsidiary (collectively with Prestige Marketing
International Limited, "Prestige") upon the termination of the Company's
credit facility with ASB Bank (discussed below).
In connection with the September Agreement, the Company granted to the Bank
warrants to acquire 125,000 shares of the Company's common stock, par value $.01
per share (the "Common Stock"), at a price of $5.1875 per share, the market
price of the Company's Common Stock as of the date of the grant. These warrants
have a term of five years from the date of grant and contain standard
antidilution provisions. The value accorded the warrants has been accounted for
as a loan discount and is being amortized over the remaining term of the Line
(15 months) and included in interest expense.
In July 1997, the Bank notified the Company that the foreign currency
line being provided by the Bank had been reduced to cover only the then
current outstanding amount of the Company's forward contracts of $6.0
million. Pursuant to 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 $1.5 million in outstanding forward
contracts at December 31, 1997. The Company had no borrowings outstanding
under its $1.0 million overdraft line with Barclays Bank PLC as of December
31, 1997.
In July 1997, the Company obtained a credit facility from ASB Bank
through Prestige consisting of a working capital facility (overdraft and
letter of credit) of $1.0 million New Zealand dollars (approximately $0.6
million US dollars at December 31, 1997) and a short term loan of $4.3
million New Zealand dollars (approximately $2.5 million US dollars at
December 31, 1997). At December 31, 1997, the Company had no amounts
outstanding under the working capital facility and $4.3 million New Zealand
dollars outstanding under the short term loan. The working capital facility
is due on demand, bears interest at the ASB Bank Banking Business Rate (the
"BBBR Rate"), plus 1% payable monthly, and expires on February 15, 1998. The
short term loan bore interest at the BBBR Rate plus 2% and was paid in full
pursuant to its terms on January 24, 1998. Under the credit 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 is presently in discussions with ASB Bank to extend and increase
the working capital facility. Such extension is subject to Bank approval.
10
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The Company's remaining debt includes a note payable to Edmark Industries in
the amount of $900,000 (original amount of $1,400,000) relating to the
settlement of litigation which occurred in fiscal 1997. Payment terms are
$50,000 per month, plus 8% interest. The remaining debt of approximately
$700,000 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, if not
converted prior thereto. By its original terms, 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 or 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
weighted average sales price on the date of the initial announcement of the
transaction in which the Series C Preferred Stock was issued. If converted at
December 31, 1997, the Series C Preferred Stock would have been convertible
into approximately 3,300,330 shares of the Company's Common Stock. Depending
on market conditions at the time of conversion, the number of shares issuable
could prove to be significantly greater, based upon the then prevailing
trading price of the Company's Common Stock. In connection with the execution
of the Agreement related to 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 sales price at the date of initial announcement of the transaction.
The Series C Preferred Stock carries a 6% annual premium, payable in cash or
the Company's 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.
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.
See "Note 9-Subsequent Events" below concerning a subsequent transaction
concerning the Series C investors.
7. ACQUISITION-POSITIVE RESPONSE TELEVISION, INC.
The Company, in connection with its May 17, 1996 acquisition of PRTV,
issued 211,146 shares of the Company's Common Stock, valued at $2,982,000,
into an escrow account for possible future delivery to PRTV shareholders
based on the realization of certain assets by September 30, 1997. The Company
included these escrow shares in the original $25.9 million purchase price of
PRTV. Based on the Company's calculation, PRTV shareholders will receive
29,197 shares from the escrow account. The Company has accounted for the
remaining unissued escrow shares of 181,949 as treasury stock and accordingly
recorded an adjustment to increase treasury stock and decrease
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goodwill by $2,570,000 during the three months ended December 31, 1997. The
actual shares will be delivered upon approval of the PRTV shareholder
representative.
8. EXECUTIVE COMPENSATION
Subsequent to December 31, 1997, the Company and its Chief Executive Officer
executed an agreement concerning the terms of his continuing employment. The
agreement reaffirms the issuance to the executive of options to acquire 700,000
shares of the Company's Common Stock with an initial exercise price of $4.75. 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),
including the consummation of the Merger Agreement, the executive can realize a
reduction of up to an aggregate of approximately $3.0 million in the exercise
price of his options. The current quarter includes a $750,000 non-cash charge in
connection with this matter. The charge is being amortized from November 13,
1997, the date of the agreement in principal, 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 the triggering event.
9. SUBSEQUENT EVENTS
On January 5, 1998, the Company announced that it had entered into the
Merger Agreement, dated as of January 5, 1998, by and among the Company,
ValueVision and V-L Holdings Corp. ("Newco"), a newly-formed Delaware
corporation to be renamed upon consummation of the Merger Agreement. ValueVision
is a Minnesota-based integrated electronic and print media direct marketing
company which operates the third largest telelvision home shopping network in
the United States. Following consummation of the transactions contemplated by
the Merger Agreement, the Company and ValueVision will be wholly-owned
subsidiaries of Newco (the "Merger"). Subject to the satisfaction of certain
conditions set forth below, the Merger Agreement is expected to be consummated
in the second calendar quarter of 1998. The Merger will be accounted for as a
purchase for accounting and financial reporting purposes with ValueVision as the
acquiror. As a result, approximately $80 million in goodwill will have to be
recognized by Newco and amortized over a 25-year period. Newco will apply to
have its common stock listed for trading on a national exchange or market.
Pursuant to the terms of the Merger Agreement, each outstanding share of the
Company's Common Stock will be converted into the right to receive one share of
common stock in Newco and each outstanding share of common stock, $.01 par value
per share ("ValueVision Common Stock") of ValueVision, will be converted into
the right to receive 1.19 shares of common stock in Newco. Following
consummation of the Merger, Newco will have an aggregate of approximately 57
million shares of common stock issued and outstanding (based upon 25.3 million
shares of the Company's Common Stock and 26.8 million shares of ValueVision
Common Stock issued and outstanding as of January 19, 1998). The Company's
stockholders will own approximately 45% of the common stock of Newco after the
Merger. ValueVision's shareholders will own approximately 55% of the common
stock of Newco after the Merger.
Concurrently with the execution of the Merger Agreement, the Company entered
into an agreement with the Series C Investors (the "Redemption and Consent
Agreement") in which the Company agreed to exchange the Series C Preferred Stock
for a to be newly created Series D Convertible Preferred Stock of the Company
(the "Series D Preferred Stock") and redeem all of the Series D Preferred Stock
for approximately $23.5 million upon consummation of the Merger. Pursuant to the
terms of the Redemption and Consent Agreement, the Series C Investors agreed,
among other things, not to request the Company to convert the Series C Preferred
Stock or Series D Preferred Stock into Common Stock at a per share price below
$6.06 prior to the earliest of (i) June 1, 1998 (which date may be extended
until August 31, 1998 in certain circumstances set forth in the Redemption and
Consent Agreement), (ii) the date upon which it is publicly announced that
ValueVision is unwilling to proceed with the Merger on the terms set forth in
the Merger Agreement, or (iii) the date upon which demand is made to the Company
to repay the Loan (as defined below). In order to make the required amendments
to the terms of the Series C Preferred Stock, the Company agreed to exchange the
Series C Preferred Stock for a class of newly designated preferred stock, Series
D Preferred Stock, which would contain
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<PAGE>
terms substantially similar to those set forth in the Series C Certificate of
Designations, Preferences and Rights. As further consideration for executing
the Redemption and Consent Agreement, the Company issued to the Series C
Investors warrants to acquire 500,000 shares of the Company's Common Stock at
an exercise price of $6.82 per share. Such warrants are exercisable at any
time prior to January 5, 2003.
Pursuant to the terms of the Merger Agreement, ValueVision extended to
the Company a working capital loan (the "Loan") of up to $10.0 million to be
utilized pending consummation of the Merger Agreement. $7.0 million was
advanced under the Loan upon execution of the Merger Agreement. The Loan
proceeds will be used by the Company for various purposes, including funding
of inventory and media purchases. The Loan bears interest at prime rate plus
1.5% per annum and is due on the earlier of January 1, 1999 or upon
termination of the Merger Agreement in certain circumstances. In the event
the Company is unable to repay the Loan when due, ValueVision may elect to
receive payment in shares of the Company's Common Stock at the then present
market value. In consideration for providing the Loan, the Company issued to
ValueVision warrants to acquire 250,000 shares of the Company's Common Stock
with an exercise price per share equal to $2.74. The warrants are exercisable
until the earlier of (i) January 5, 2003 and (ii) the occurrence of one of
the following termination events: (x) the consummation of the Merger or (y)
the termination by the Company of the Merger Agreement, if such termination
results from a breach of a covenant by ValueVision or in the event
ValueVision's shareholders do not approve the Merger Agreement; provided,
however, that if, within 75 days after such termination event, the Company
has not repaid the Loan in full or if during such 75 days, the Company
defaults under its obligations pursuant to the Loan, no termination event
will be deemed to have occurred and the warrants shall remain exercisable.
The Company also granted registration rights in connection with the shares of
the Company's Common Stock issuable in connection with the Loan and the
warrants issued to ValueVision. The Company is currently in the process of
valuing these warrants. The value accorded the warrants will be accounted for
as a loan discount which will be amortized over the term of the loan and
included in interest expense.
Consummation of the Merger is subject to the satisfaction (or waiver) of
a number of conditions, including, but not limited to: (i) approval by
holders of a majority of the issued and outstanding shares of the Company's
Common Stock and ValueVision Common Stock; (ii) redemption of the Company's
Series D Stock for approximately $23.5 million; and (iii) the receipt of
certain regulatory and other approvals.
In the event of the termination of the Merger Agreement under certain
circumstances, such as the proposal of an Alternative Transaction (as defined in
the Merger Agreement), the Company is obligated to pay to ValueVision, or
ValueVision is obligated to pay to the Company, a termination fee equal to $5.0
million. In addition, the Company has granted to ValueVision an option to
purchase up to 19.9% (5,075,979 shares of the Company's Common Stock based upon
the number of shares of the Company's Common Stock issued and outstanding on the
date of execution of the Merger Agreement) of the Company's Common Stock at a
per share cash purchase price of $3.4375. Similarly, ValueVision has granted to
the Company an option to purchase up to 19.9% (5,579,119 shares of ValueVision
Common Stock based upon the number of shares of ValueVision Common Stock issued
and outstanding as of the date of execution of the Merger Agreement) of
ValueVision's Common Stock at a per share cash purchase price of $3.875. Such
options (each, a "Termination Option") are exercisable by the respective party,
in whole or in part, at any time after the occurrence of an event which would
entitle such party to the termination fee described above; provided, however,
that neither party may exercise the Termination Option if such party is in
material breach of any of its material representations, warranties, covenants or
agreements contained in the Merger Agreement or in the Termination Option.
Neither party may receive in excess of $7.5 million in connection with the
receipt of the termination fee and the exercise of such party's Termination
Option.
<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) the operations of the Company
following consummation of the Merger; (ii) competition for customers for its
products and services; (iii) 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; (iv) the limited market
life of the Company's products; and (v) other statements about the Company or
the direct response industry.
The Company's ability to predict results or the effect of any pending
events, including the Merger, 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."
The following does not attempt to give effect to the consummation of the
Merger or to the business or prospects of ValueVision.
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. The Company continually attempts
to diversify and expand its product offerings to generate increased revenues.
The Company's diversification efforts are designed to reduce the risk
associated with relying on a limited number of successful products for a
disproportionate amount of its revenues. Such efforts include the expansion
of its presence in the global marketplace, thereby creating new markets for
its products and joining forces with strategic partners to increase its
product base. As the Company enters new markets, it is able to air shows from
its existing library, thus reducing its dependence on new products and new
show productions. The Company takes advantage of the product awareness
created by its infomercials by extending the sales life of its infomercial
products through non-infomercial distribution channels, such as retail
arrangements and by entering into agreements with manufacturers of consumer
products in which the Company's strategic partners supply new products and
retail distribution channels for product sales.
RESULTS OF OPERATIONS
The Company's operating results for the nine months ended December 31,
1996 included the operating results of certain of the Company's operating
subsidiaries for only a portion of the period, as follows: Positive Response
Television, Inc. ("PRTV") from May 17, 1996 (date of acquisition) to December
31, 1996 and Prestige Marketing Limited and Prestige Marketing International
Limited (collectively, "Prestige") and Suzanne Paul Holdings Pty Limited and
its operating subdivisions (collectively, "Suzanne Paul") from July 2, 1996
(date of acquisition) to December 31, 1996.
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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Statement of Operations Data:
Net revenues................................................................... 100.0% 100.0% 100.0% 100.0%
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Operating costs and expenses:
Media purchases................................................................ 31.6% 39.7% 32.9% 35.7%
Direct costs................................................................... 58.8% 55.0% 62.3% 49.2%
Selling, general and administrative............................................ 20.8% 16.2% 22.5% 12.4%
Severance expense.............................................................. -- 1.6% -- 0.4%
Interest expense............................................................... 1.4% 0.6% 1.2% 0.4%
--------- --------- --------- ---------
Total operating costs and expenses........................................... 112.6% 113.1% 118.9% 98.1%
(Loss) income before income taxes............................................... (12.6%) (13.1%) (18.9%) 1.9%
Income taxes (benefit).......................................................... -- (4.5%) 0.2% 0.7%
--------- --------- --------- ---------
Net (loss) income............................................................... (12.6%) (8.6%) (19.1%) 1.2%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Three months ended December 31, 1997 compared to three months ended
December 31, 1996
NET REVENUES
Net revenues were $64.9 million for the three months ended December 31, 1997,
as compared to $70.8 million for the three months ended December 31, 1996, a
decrease of $5.9 million or 8.4%. The Company aired three new shows in the
domestic marketplace in the quarter ended December 31, 1997. These shows did
not have a significant impact on the revenues for the current year quarter
due to the timing of their airings and the buildup of a backlog of orders
created by timing issues related to manufacturing and sourcing for the
related products. As of December 31, 1997, the Company's North American
operation had a backlog of approximately $13.0 million in gross revenues due
in part to these new shows as compared to a backlog of $10.5 million at
December 31, 1996. The Company believes it has created a pipeline of new
shows to support its domestic operations on an ongoing basis and to add to
its library of shows.
Domestic net revenues for the three months ended December 31, 1997 were $27.8
million as compared to $26.7 million for the three months ended December 31,
1996, an increase of $1.1 million or 4.1%. The revenues remained relatively
flat as a result of the Company's inability to fully realize the benefits of
the three new shows that tested and aired successfully during the current
period. Due to timing issues related to manufacturing and sourcing, these
shows did not contribute significantly to revenues until very late in the
quarter ended December 31, 1997. Approximately 41.7% of net revenues for the
three months ended December 31, 1997 were generated by sales of the Company's
PVA 10X Mop product.
International net revenues for the three months ended December 31, 1997 were
$37.1 million as compared to $44.1 million for the three months ended
December 31, 1996, a decrease of $7.0 million or 15.9%. The majority of this
decrease was due to the approximate 52% decline in revenues earned in the
Japanese marketplace, of which approximately 5% was due directly 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 productive airtime was not obtained.
In addition, the entire Asian marketplace, including Japan, continued to
experience the negative impact of the economic downturn being experienced
throughout that region, which resulted in a significant decline in the
consumer spending ability. The Company's South Pacific revenues and operating
results were negatively impacted in the three months ended December 31, 1997
by the current poor economy, as well as, significant returns associated with
its Fitness Strider product. In addition, revenues for the current three
month period as compared to the prior year three month period declined
approximately 13.7% directly as a result of currency devaluation. All of
these factors are expected to have a continuing impact on fourth quarter
revenues in these regions.
OPERATING COSTS
Total operating costs and expenses were $73.0 million for the three months
ended December 31, 1997 as compared to $80.0 million for the three months
ended December 31, 1996, a decrease of $7.0 million or 8.7%. This was
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principally due to a lower advertising to sales ratio and was directly
related to a 8.4% decline in revenues.
MEDIA PURCHASES
Media purchases were $20.5 million for the three months ended December 31,
1997 as compared to $28.1 million for the three months ended December 31,
1996, a decrease of $7.6 million or 27.0%. The ratio of media purchases to
net revenues decreased from 39.7% for the three months ended December 31,
1996 to 31.6% for the three months ended December 31, 1997. This was
attributable to a significant reduction in the domestic advertising to sales
ratio primarily due to the successful airings of several new shows. This was
partially offset by a slight increase in the international advertising to
sales ratio. Recent trends indicate an increase in international media ratios
due to increased competition and a trend towards minimum guarantee of media
purchases. The Company recently was notified that the Eutelsal Hot Bird
Satellite, on which it leases a 24 hour transponder, will launch in April
1998 at which time the Company will begin making monthly payments for the use
of the transponder. While potentially providing the Company with expanded
media coverage in Europe, if viewership and/or viewer response is not
obtained at the desired levels and/or within the desired timeframe, the
Company could experience an increase in its overall European advertising to
sales ratio (taking into account the cost of the transponder lease and the
cost of uplinking) starting in the first quarter of fiscal 1999.
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 $38.2 million for the three months
ended December 31, 1997 as compared to $38.9 million for the three months
ended December 31, 1996, a decrease of $0.7 million or 2.0%, primarily
related to the decrease in net revenues. As a percentage of net revenues,
direct costs were 58.8% for the three months ended December 31, 1997 and
55.0% for the three months ended December 31, 1996. A decline in domestic
direct costs was more than offset by an increase in international direct
costs. Domestically, the Company benefited primarily from a reduction in
production and telemarketing expense. Internationally, the increase in direct
costs was a result of higher product cost and lower sales volume
(international revenues declined 15.9% from the comparable fiscal 1997
quarter). A significant contributing factor was the economic downturn,
including the significant currency devaluation, experienced in the Far East
and South Pacific rim countries. The Company was not able to adjust its
prices to the extent or level required to offset the rapid deterioration in
these countries' currencies. In addition, such poor economic conditions
negatively impacted consumers' purchasing power in these regions, resulting
in lower sales volume, and a higher negative impact from certain fixed and
semi-fixed costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $13.5 million for the three
months ended December 31, 1997 as compared to $11.5 million for the three
months ended December 31, 1996, an increase of $2.0 million or 17.3%. The
increase was primarily a result of higher professional fees, increased
depreciation primarily associated with the Company's MIS system, higher
occupancy expense, primarily due to the Company's new California office and
costs associated with the reduction of the Company's presence in Russia. In
addition, the current period includes non-cash compensation expense of
$750,000 associated with options granted to an executive officer (See Note 8
to the financial statements). Selling, general and administrative expenses as
a percentage of net revenues increased from 16.2% for the three months ended
December 31, 1996 to 20.8% for the three months ended December 31, 1997 due
to the aforementioned cost increases combined with the 8.4% decrease in net
revenues.
SEVERANCE
During the three months ended December 31, 1996, the Company recorded a $1.1
million charge against earnings relating to severance expense associated with
the restructuring of management. No such charge was recorded in the current
quarter.
INTEREST EXPENSE
Interest expense was approximately $0.9 million for the three months ended
December 31, 1997 compared to $.4 million for the three months ended December
31, 1996, an increase of $.5 million. This increase was primarily due to an
increase in the Company's average outstanding indebtedness from approximately
$7.4 million during the third quarter of fiscal 1997 to approximately $26.6
million during the third quarter of fiscal 1998, as well as the increased
interest rate to prime plus 3% which took effect in connection with Company's
Loan Modification Agreement
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discussed elsewhere herein.
INCOME TAXES
The Company recorded a minimal income tax benefit for the three months ended
December 31, 1997 resulting from a decrease in its Asian and South Pacific
profits during the period. 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 $3.2 million of income
tax benefit recorded for the third quarter of fiscal 1997 in order to reflect
a 35.0% effective tax rate for the Company as a whole.
NET INCOME
The Company incurred a net loss of $8.1 million for the three months ended
December 31, 1997, compared to a net loss of $6.0 million for the three
months ended December 31, 1996. The current quarter reflected the negative
impact of the economic downturn being experienced in the Far East and Pacific
Rim countries on the Company's international revenues and margins.
Nine months ended December 31, 1997 compared to nine months ended December
31, 1996
NET REVENUES
Net revenues were $186.6 million for the nine months ended December 31, 1997,
as compared to $279.8 million for the nine months ended December 31, 1996, a
decrease of $93.2 million or 33.3%. Retail royalties were negligible for the
nine months ended December 31, 1997 versus $14.1 million for the nine months
ended December 31, 1996. The fiscal 1997 period royalties principally
reflected the royalties generated from retail sales of the Ab Roller Plus
product.
Domestic net revenues for the nine months ended December 31, 1997 were $70.0
million as compared to $154.9 million for the nine months ended December 31,
1996, a decrease of $84.9 million or 54.8%. This decrease was due primarily
to the Ab Roller Plus performing strongly in the nine months ended December
31, 1996 on television and in print and retail. The Ab Roller Plus accounted
for approximately 61% of domestic net revenues for the nine months ended
December 31, 1996. Approximately 49% of net revenues for the nine months
ended December 31, 1997 were generated by sales of the Company's Great North
American Slim Down (29.9%) and PVA 10X Mop (19.1%) products. 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 rollout
of a number of shows was postponed due to show production delays, to timing
issues related to product manufacturing and sourcing, and to the Company's
tight cash position which affected, among other things, inventory purchasing
and media acquisition. Current period domestic revenues were also unfavorably
impacted by an increased return rate primarily due to a change in product
mix. The Company started benefiting from the infusion of new shows beginning
late in the second quarter of fiscal 1998. In addition, the Company has built
a backlog of approximately $13.0 million in gross revenues at December 31,
1997 primarily as a result of the introduction of three new shows in the
third quarter of fiscal 1998.
International net revenues for the nine months ended December 31, 1997 were
$116.6 million as compared to $124.9 million for the nine months ended
December 31, 1996, a decrease of $8.3 million or 6.6%. The current year
included nine months of revenues from the Prestige and Suzanne Paul
acquisitions compared to approximately six months in the prior year; as well
as a 2.3% increase in European net revenues due to expansion in Eastern
Europe. These increases offset the approximate 49.4% 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 productive airtime was not obtained. In
addition, the Company's Asian and South Pacific revenues were negatively
impacted by the recent economic downturn in these regions, especially in the
third quarter when these regions experienced significant currency
devaluations. This downturn is expected to have a continuing adverse impact
on these regions in the fourth fiscal quarter.
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<PAGE>
OPERATING COSTS
Total operating costs and expenses were $221.8 million for the nine months
ended December 31, 1997, as compared to $274.3 million for the nine months
ended December 31, 1996, a decrease of $52.5 million or 19.1%, due to the
33.3% decline in revenue.
MEDIA PURCHASES
Media purchases were $61.3 million for the nine months ended December 31,
1997 as compared to $99.7 million for the nine months ended December 31,
1996, a decrease of $38.4 million or 38.5%. This decrease was directly
related to the 33.3% decline in net revenues. The ratio of media purchases to
net revenues improved slightly to 32.9% for the nine months ended December
31, 1997 as compared to 35.7% for the nine months ended December 31, 1996.
This was due to the favorable impact of a higher percentages of revenues
being earned in the international marketplace in which media rates are
generally more favorable. The domestic ratio in the current nine months
remained consistent with the prior year nine month ratio despite the prior
year period benefiting from significant retail royalties. Retail royalties
carry no direct media costs and therefore produce a more favorable ratio. The
ability to maintain a consistent domestic advertising to sales ratio was
mainly due to a significant improvement in the domestic advertising to sales
ratio in the current quarter.
DIRECT COSTS
Direct costs were $116.2 million for the nine months ended December 31, 1997
as compared to $137.7 million for the nine months ended December 31, 1996, a
decrease of $21.5 million or 15.6%, primarily related to the decrease in net
revenues. As a percentage of net revenues, direct costs were 62.3% for the
nine months ended December 31, 1997 and 49.2% for the nine months ended
December 31, 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 54.8% 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 due to
product mix, negatively impacted the ratio. The nine months ended December
31, 1996 benefited from retail royalties ($0 for December 31, 1997 as
compared to $14.1 million for December 31, 1996) which carry minimal direct
costs. Internationally, the current economic downturn and currency
devaluation in the Far East and South Pacific regions (especially in the
three months ended December 31, 1997), a change in product mix, and increased
show customization costs adversely affected the ratio. The currency
devaluation, particularly in the three months ended December 31, 1997,
resulted in higher product costs due to the Company's inability to increase
pricing to a level to offset the full impact of the significant decline in
currency. 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 $41.9 million for the nine
months ended December 31, 1997 as compared to $34.6 million for the nine
months ended December 31, 1996, an increase of $7.3 million or 21.1%.
Approximately $2.4 million of the increase related to selling, general and
administrative expenses associated with the operations of Prestige which was
acquired in July of 1996 resulting in six months of expense in the nine month
period of fiscal year 1997 compared to the nine months during the current
fiscal period. In addition, the current period includes non-cash compensation
expense of $750,000 associated with options granted to an executive officer
as well as $2.3 million of goodwill amortization, as compared to only $1.7
million in the prior period. The increase is due to the current year
containing a full nine months of expense compared to partial expense during
the prior nine months period during 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 MIS system, and higher occupancy expense. Selling, general and
administrative expenses as a percentage of net revenues increased from 12.4%
for the nine months ended December 31, 1996 to 22.5% for the nine months
ended December 31, 1997 due to the aforementioned cost increases, combined
with the 33.3% decrease in net revenues.
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<PAGE>
SEVERANCE EXPENSE
The nine months ended December 31, 1996 includes a $1.1 million charge to
earnings related to severance expense associated with the restructuring of
management. No such charge was recorded in the nine months ended December 31,
1997.
INTEREST EXPENSE
Interest expense was approximately $2.3 million for the nine months ended
December 31, 1997 compared to $1.1 million for the nine months ended December
31, 1996, an increase of $1.2 million. This increase was due to an increase
in the Company's average outstanding indebtedness from approximately $7.9
million during the nine months ended December 31, 1996 to approximately $25.3
million during the nine months ended December 31, 1997, and higher interest
rates, primarily as a result of the Loan Modification Agreement in fiscal
1998 versus fiscal 1997.
INCOME TAXES
The Company recorded income tax expense of approximately $.3 million for the
nine months ended December 31, 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 $1.9
million of income tax expense recorded for the nine months ended December 31,
1996, a 35.0% effective tax rate.
NET INCOME
The Company incurred a net loss of $35.5 million for the nine months ended
December 31, 1997, compared to a net income of $3.6 million for the nine
months ended December 31, 1996 primarily as a result of the 33.3% decrease in
net revenues and higher direct costs and selling, general and administrative
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $15.0 million at December 31, 1997 compared
to working capital of $19.8 million at March 31, 1997, a decrease of $4.8
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
fiscal quarter. Operating activities for the nine months ended December 31,
1997 resulted in a use of cash of $19.5 million. The Company's cash flow from
operations in the nine months ended December 31, 1997 was adversely affected
by the net loss of approximately $35.5 million.
Consolidated accounts receivable decreased by $11.8 million, or 29.3%,
primarily due to the decrease in both domestic and Far East and South Pacific
rim accounts receivables. This decrease was principally due to the 16.8% and
25.7% decreases in domestic and certain international (Far East and South
Pacific rim) revenues, respectively, during the month of December 1997 as
compared to the month of March 1997, and a significant reduction in the
domestic installment receivables balance due to a greater percentage of the
March 1997 quarter's revenues being earned from products sold under multi-pay
arrangements.
On September 18, 1997 the Company sold 20,000 shares of the Company's Series
C Preferred Stock to two institutional investors (as more fully described in
Note 6 to the financial statements), which included the issuance of warrants
to acquire 989,413 shares of the Company's Common Stock. This transaction
generated proceeds, net of offering costs, of approximately $19.7 million. At
the present date, the Series C Preferred Stock would be convertible into
3,300,330 shares of the Company's Common Stock. The proceeds from this
transaction are primarily being used for working capital purposes.
In September 1997, the Company also executed the September Agreement (as
more fully described in Note 5 to the
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<PAGE>
financial statements) with its principal lender for the extension of its
principal credit facility through December 31, 1998. The Company's $20.0
million Line was thereby 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. 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 September 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, $2.0 million of the $3.95 million Term Loan has been
classified as long term debt at December 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
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 December 31, 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 $0.6
million US dollars at December 31, 1997) and a short term loan of $4.3
million New Zealand dollars (approximately $2.5 million US dollars at
December 31, 1997). The working capital facility is due on demand, bears
interest at the ASB Bank Banking Business Rate (the "BBBR Rate") plus 1%
payable monthly, and expires on February 15, 1998. The short term loan bore
interest at the BBBR Rate plus 2% and was paid in full on January 24, 1998.
Amounts outstanding under short term loan totaled $4.3 million New Zealand
dollars at December 31, 1997. The working capital facility was not utilized
at December 31, 1997. Under the credit 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 is currently in
negotiations with ASB to extend and increase the working capital facility;
however there can be no assurance that the Company will be successful in its
efforts.
On January 5, 1998, in connection with the execution of the Merger Agreement,
the Company received a $7.0 million advance against a $10.0 million loan
extended by ValueVision (as more fully discussed in Note 9). This loan will
be used primarily for working capital purposes. The loan bears interest at
prime plus 1.5 % and is due on the earlier of January 1, 1999 or upon
termination of the Merger Agreement in certain circumstances. In the event
that the Company is unable to repay the loan when due, ValueVision may elect
to receive payment in shares of the Company's Common Stock at the then
present market value. In consideration for providing this loan, the Company
issued to ValueVision warrants to purchase 250,000 of the Company's Common
Stock with an exercise price per share equal to $2.74.
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 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 the Bank for such purposes. Pursuant
to the September 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 foreign hedge did not have a
material impact in the current nine month period. The Company's future
ability to hedge may be negatively impacted as a result of its current tight
cash position. All forward contracts must now be cash collateralized. In the
long term, the Company has the ability to change prices to a certain extent
in a timely manner in order to react to major currency fluctuations; thus
reducing a portion of the risk associated with local currency movements. The
Company has and is currently further revising its pricing in the Far East and
South Pacific rim in an effort to offset some of the recent significant
currency devaluation. However, the Company still expects that the significant
currency devaluation and the economic downturn being experienced in these
regions will have a negative impact on the Company's operating results and
cash flows in its fourth fiscal 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 large recent fluctuations; however, its certain
other currencies
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<PAGE>
(Australia, New Zealand, Indonesia, Malaysia, Philippines) have recently
experienced more significant devaluations.
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 nine months
ended December 31, 1997, the Company amended the acquisition agreements
accelerating the $5.0 million contingent purchase price amount and revising
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 former 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 for the
Prestige and Suzanne Paul entities and is included in goodwill.
The decrease in other assets at December 31, 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 to the financial statements)
and the sale of the Company's investment in a public company for
approximately $1.0 million.
On January 5, 1998, the Company announced that it had entered into a Merger
Agreement by and among the Company, ValueVision and V-L Holdings Corp.
("Newco") (as more fully described in Note 9). The Merger will be accounted
for as a purchase for accounting and financial reporting purposes with
ValueVision being the acquiror. Each share of the Company's Common Stock will
be converted into one share of Newco common stock while each share of
ValueVision's common stock will be converted into 1.19 shares of Newco common
stock. Newco is expected to have an aggregate of approximately 57 million
shares of common stock issued and outstanding following the consummation of
the Merger. Concurrently with the Merger Agreement, the Company entered into
an agreement with the Series C Investors to exchange the Series C Preferred
Stock for a newly created Series D Preferred Stock and to redeem all of the
Series D Preferred Stock for approximately $23.5 million in connection with
the Merger.
The Company's cash position continues to be pressured as a result of the
losses incurred in the first nine months of fiscal 1998 and the continued
downturn in Asian revenues. While benefiting from the proceeds of the recent
preferred stock sale, the extension of its credit facility with its principal
lender, the Loan from ValueVision, 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 continued introduction of successful new shows, to return the
Company to profitability, to improve its liquidity and to realize the
benefits from its recently announced Merger with ValueVision. No assurance
can be given that any of these actions will be successful.
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<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 Form 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
10.1 Amendment No. 2 to Employment Agreement dated April 28, 1997
between the Company and Constantinos I. Costalas, dated as of
January 5, 1998.
10.2 Amendment No. 1 to Employment Agreement dated February 27, 1997
between the Company and Frederick S. Hammer, dated as of
January 5, 1998.
10.3 Amended and Restated Employment Agreement between the Company
and Robert N. Verratti dated as of January 28, 1998.
10.4 Amended and Restated Non-Incentive Stock Option Agreement
between the Company and Robert N. Verratt dated as of January
28, 1998.
11.1 Statement Re: Computation of Per Share Earnings.
27.1 FINANCIAL DATA SCHEDULE.
(b) The Company did not file any Current Reports on Form 8-K during the three
month period ended December 31, 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<S> <C>
NATIONAL MEDIA CORPORATION
REGISTRANT
Date: February 13, 1998 /s/ Robert N. Verratti
----------------------------------------
Robert N. Verratti
CHIEF EXECUTIVE OFFICER AND DIRECTOR
/s/ John J. Sullivan
-----------------------------------------
John J. Sullivan
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
10.1 Amendment No. 2 to Employment Agreement dated April 28, 1997
between the Company and Constantinos I. Costalas, dated as of
January 5, 1998.
10.2 Amendment No. 1 to Employment Agreement dated February 27, 1997
between the Company and Frederick S. Hammer, dated as of January
5, 1998.
10.3 Amended and Restated Employment Agreement between the Company and
Robert N. Verratti, dated as of January 28, 1998.
10.4 Amended and Restated Non-Incentive Stock Option Agreement between
the Company and Robert N. Verratti, dated as of January 28, 1998.
11.1 Statement Re: Computation of Per Share Earnings.
27.1 Financial Data Schedule.
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This Amendment No. 2 (the "Amendment") to the Employment Agreement dated
April 28, 1997 (as previously amended by Amendment No. 1 to the Employment
Agreement dated as of July 23, 1997, the "Employment Agreement") between
NATIONAL MEDIA CORPORATION, a Delaware corporation (the "Company") and
CONSTANTINOS I. COSTALAS (the "Executive") is hereby entered into as of
January 5, 1998 by and between the Company, Executive and V-L Holdings Corp.
Capitalized terms used but not otherwise defined herein shall have the meanings
ascribed thereto in the Employment Agreement.
WHEREAS, in connection with the proposed merger between the Company and
ValueVision International, Inc., a Minnesota corporation ("ValueVision"),
pursuant to the Agreement and Plan of Reorganization and Merger dated as of the
date hereof by and among the Company, ValueVision and V-L Holdings Corp. ("V-L
Holdings") (the "Merger Agreement"), the Company and the Executive wish to
modify certain provision of the Employment Agreement (which modifications will
be null and void if the transactions contemplated by the Merger Agreement are
not consummated);
WHEREAS, the Company, the Executive and V-L Holdings agree that the terms
of this Amendment shall only become effective immediately preceding consummation
of the transactions contemplated by the Merger Agreement; and
WHEREAS, V-L Holdings is a party to this Amendment only for purposes of
paragraph 8 below.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree to the
following amendments to the Employment Agreement, subject to Paragraph 8 of this
Amendment:
1. Term. Section 3 is hereby amended to delete the first sentence and
replace it with the following: "The Executive's employment under this Agreement
shall commence as of the date of this Agreement (the "Commencement Date") and
shall, unless sooner terminated in accordance with the provisions hereof,
continue uninterrupted for a term expiring on the date (the "Termination Date")
that is eighteen (18) months after the Effective Time (as defined in the Merger
Agreement), unless sooner terminated in accordance with the provisions herein."
2. Change in Control. Section 10(a) is hereby amended to insert the
following sentence at the end of the paragraph: "; provided, however, that a
"Change in Control" shall not include any of the transactions contemplated by,
or taken in connection with, the Merger Agreement."
3. Change in Control. Section 10(a)(iii) is hereby amended to read as
follows: "All allowances and benefits, as contained in Sections 4(c)-(d), 5 and
7 of this Agreement, shall be continued for the full Term of this Agreement, as
defined in Section 3 of this Agreement; and"
4. Change in Control. Section 10(b) of the Agreement is hereby deleted.
5. Change in Control. Following the Effective Time (as defined in the
Merger Agreement), Section 10(d) is hereby amended in its entirely to read:
1
<PAGE>
"As used in this Section 10, a "Change in Control" shall be
deemed to have taken place if: (i) subsequent to the date of
this Agreement, any "Person" (including any individual, firm,
corporation, partnership or other entity except the Executive,
V-L Holdings, the Company or any employee benefit plan of V-L
Holdings or the Company or of any Affiliate or Associate (each as
defined in Rule 12b-2 under the Securities Exchange Act of 1934,
as amended), and any Person or entity organized, appointed or
established by V-L Holdings or the Company for or pursuant to the
terms of any such employee benefit plan), together with all
Affiliates and Associates of such Person, shall become the
beneficial owner in the aggregate of twenty percent (20%) or more
of the Common Stock of V-L Holdings then outstanding; or
(ii) during the Term of this Agreement, individuals who, as of
the date of the Effective Time (as defined in the Merger
Agreement), constituted the Board of V-L Holdings cease for any
reason to constitute a majority thereof."
6. Retention Payment. Section 10 is hereby amended to include the
following new subparagraph (f): "Notwithstanding anything to the contrary
herein, if the Executive maintains continuous employment with the Company on the
terms and conditions hereunder for the period commencing on the date hereof and
ending on the Termination Date, the Executive shall be entitled to receive a
lump sum payment in the amount of $975,000 on the Termination Date (the
"Retention Payment"), provided that if the Executive's employment is terminated
at any time during the period commencing on the Effective Time and ending on the
Termination Date by reason of (and only by reason of) the Executive's death or
Total Disability, by the Company without "Cause" or by the Executive's
resignation for "Good Reason", then the Executive (or the Executive's estate, as
the case may be) shall be entitled to receive the Retention Payment within
thirty (30) days from the date of such termination of employment. If, as a
result of any of the foregoing events, the Executive is entitled to receive the
Retention Payment, the Company shall have no further liability or obligations
hereunder to the Executive (other than to make the Retention Payment and to
provide the allowances and benefits in accordance with Section 4(c)-(d),
Section 5 and Section 7 to Executive) (including with respect to any of the
payments and benefits set forth in Section 9). Notwithstanding anything to the
contrary herein, if a "Change in Control" occurs at any time prior to the
Termination Date, this Section 10(f) shall be null and void upon the occurrence
of such Change in Control and the Executive shall under no circumstances be
entitled to receive the Retention Payment (or any portion thereof); provided,
however, that Executive shall be entitled to receive all benefits to which
Executive is then entitled to under Section 10(a) hereof.
7. Section 280G of the Tax Code. Section 10(e) is hereby amended to
insert the words "and Section 10(f)" after every reference to "Section 10(a)."
8. Guaranty. The following Section 15 is hereby added to the Agreement:
"15. Guaranty. Effective only in the event of the consummation
of the transactions contemplated by the Merger Agreement, V-L
Holdings shall guaranty in full the payment of all amounts due to
Executive under the Employment Agreement."
9. Entire Agreement. The Employment Agreement, as amended by this
Amendment, constitutes the entire agreement between the parties pertaining to
the subject matter hereof and fully
2
<PAGE>
supersedes any and all prior or contemporaneous agreements or understandings
between the parties hereto pertaining to the subject matter hereof.
10. Full Force and Effect. Except as expressly amended in this Amendment,
the Employment Agreement shall remain in full force and effect.
11. Termination of Amendment. Notwithstanding anything to the contrary
herein, this Amendment shall immediately and automatically terminate and have no
further force and effect upon the termination or expiration, if any, of the
Merger Agreement, in accordance with the provisions thereunder. In the event of
any such termination of this Amendment, the Employment Agreement shall remain in
full force and effect.
12. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
NATIONAL MEDIA CORPORATION
By: /s/ Brian J. Sisko
----------------------------------------------
Name: Brian J. Sisko
Title: Senior Vice President
V-L HOLDINGS CORP.
By: /s/ Robert L. Johander
----------------------------------------------
Name: Robert L. Johander
Title: President
/s/ Constantinos I. Costalas
----------------------------------------------
CONSTANTINOS I. COSTALAS
4
<PAGE>
EXHIBIT 10.2
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 (the "Amendment") to the Employment
Agreement dated February 27, 1997 (the "Employment Agreement")
between NATIONAL MEDIA CORPORATION, a Delaware corporation (the
"Company") and FREDERICK S. HAMMER ("Hammer") is hereby entered
into as of January 5, 1998 by and between the Company, Hammer and
V-L Holdings Corp. Capitalized terms used but not otherwise
defined herein shall have the meanings ascribed thereto in the
Employment Agreement.
WHEREAS, in connection with the proposed merger between the
Company and ValueVision International, Inc., a Minnesota
corporation ("ValueVision"), pursuant to the Agreement and Plan
of Reorganization and Merger dated as of the date hereof by and
among the Company, ValueVision and V-L Holdings Corp. ("V-L
Holdings") (the "Merger Agreement"), the Company and the Hammer
wish to modify certain provision of the Employment Agreement
(which modifications will be null and void if the transactions
contemplated by the Merger Agreement are not consummated);
WHEREAS, the Company, Hammer and V-L Holdings agree that the
terms of this Amendment shall only become effective immediately
preceding consummation of the transactions contemplated by the
Merger Agreement; and
WHEREAS, V-L Holdings is a party for this Agreement only for
purposes paragraph 7 below.
NOW, THEREFORE, in consideration of the mutual covenants and
promises contained herein and for other good and valuable
consideration the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree to the following
amendments to the Employment Agreement, subject to Paragraph 8 of
this Amendment:
1. Term. The first sentence of Section 2 is hereby
deleted and replaced by the following sentence: "Hammer's
employment under this Agreement shall commence as of February 27,
1997 (the "Commencement Date") and terminate on the date (the
"Termination Date") that is six (6) months after the Effective
Time (as defined in the Merger Agreement), unless sooner
terminated in accordance with the provisions herein."
2. Change in Control. Section 7(a) is hereby amended to
insert the following at the end of the paragraph: "; provided,
however, that a "Change in Control" shall not include any of the
transactions contemplated by, or taken in connection with, the
Merger Agreement."
3. Change in Control. Section 7(a)(ii) is hereby amended
to read as follows: "All allowances and benefits, as contained
in Sections 3(b)-(c), 4 and 5(b) of this Agreement, shall be
continued for the full Term of this Agreement, as defined in
Section 2 of this Agreement; and"
4. Change in Control. Following the Effective Time (as
defined in the Merger Agreement), Section 7(c) is hereby amended
in its entirely to read:
"As used in this Section 7, a "Change in Control"
shall be deemed to have taken place if:
(i) subsequent to the date of this Agreement, any
"Person" (including any individual, firm,
corporation, partnership or other entity except
Hammer, V-L Holdings, the Company or any employee
benefit plan of V-L Holdings or the Company or of
any Affiliate or Associate (each as defined in
Rule 12b-2 under the Securities Exchange Act of
1934, as amended), and any Person or entity
<PAGE>
organized, appointed or established by V-L
Holdings or the Company for or pursuant to the
terms of any such employee benefit plan), together
with all Affiliates and Associates of such Person,
shall become the beneficial owner in the aggregate
of twenty percent (20%) or more of the Common
Stock of V-L Holdings then outstanding; or
(ii) during the Term of this Agreement,
individuals who, as of the date of the Effective
Time (as defined in the Merger Agreement),
constituted the Board of V-L Holdings cease for
any reason to constitute a majority thereof."
5. Retention Payment. Section 7 is hereby amended to
include the following new subparagraph (e): "Notwithstanding
anything to the contrary herein, if Hammer maintains continuous
employment with the Company on the terms and conditions hereunder
for the period commencing on the date hereof and ending on the
Termination Date, Hammer shall be entitled to receive a lump sum
payment in the amount of $200,000 on the Termination Date (the
"Retention Payment"), provided that if Hammer's employment is
terminated at any time during the period commencing on the
Effective Time and ending on the Termination Date by reason of
(and only by reason of) Hammer's death, by the Company without
"Cause" or by Hammer's resignation for "Good Reason", then Hammer
(or Hammer's estate, as the case may be) shall be entitled to
receive the Retention Payment within thirty (30) days from the
date of such termination of employment. If, as a result of any
of the foregoing events, Hammer is entitled to receive the
Retention Payment, the Company shall have no further liability or
obligations hereunder to Hammer (other than to make the Retention
Payment and to provide the allowances and benefits in accordance
with Section 3(b)-(c), Section 4 and Section 5(b) to Hammer)
(including with respect to any of the payments and benefits set
forth in Section 6). Notwithstanding anything to the contrary
herein, if a "Change in Control" occurs at any time prior to the
Termination Date, this Section 7(e) shall be null and void upon
the occurrence of such Change in Control and Hammer shall under
no circumstances be entitled to receive the Retention Payment (or
any portion thereof); provided, however, that Hammer shall be
entitled to receive all benefits to which Hammer is then entitled
to under Section 7(a) hereof.
6. Section 280G of the Tax Code. Section 7(d) is hereby
amended to insert the words "and Section 7(e)" after every
reference to "Section 7(a)."
7. Guaranty. The following Section 12 is hereby added to
the Agreement:
"12. Guaranty. Effective only in the event of the
consummation of the transactions contemplated by
the Merger Agreement, V-L Holdings shall guaranty
in full the payment of all amounts due to
Executive under the Employment Agreement."
8. Entire Agreement. The Employment Agreement, as amended
by this Amendment, constitutes the entire agreement between the
parties pertaining to the subject matter hereof and fully
supercedes any and all prior or contemporaneous agreements or
understandings between the parties hereto pertaining to the
subject matter hereof.
9. Full Force and Effect. Except as expressly amended in
this Amendment, the Employment Agreement shall remain in full
force and effect.
2
<PAGE>
10. Termination of Amendment. Notwithstanding anything to
the contrary herein, this Amendment shall immediately and
automatically terminate and have no further force and effect upon
the termination or expiration, if any, of the Merger Agreement,
in accordance with the provisions thereunder. In the event of
any such termination of this Amendment, the Employment Agreement
shall remain in full force and effect.
11. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be deemed an
original, but all of which shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first written above.
NATIONAL MEDIA CORPORATION
By: /s/ Brian J. Sisko
-----------------------------------
Name: Brian J. Sisko
Title: Senior Vice President
V-L HOLDINGS CORP.
By: /s/ Robert L. Johander
-----------------------------------
Name: Robert L. Johander
Title: President
/s/ Frederick S. Hammer
-----------------------------------
FREDERICK S. HAMMER
3
<PAGE>
EXHIBIT 10.3
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement")as of January 28,
1998 by and between NATIONAL MEDIA CORPORATION (the "Company"), a Delaware
corporation and ROBERT N. VERRATTI (the "Executive").
Background
WHEREAS, the Company desires to continue to employ the Executive and the
Executive desires to continue such employment, all on the terms and
conditions set forth herein.
WHEREAS, the Company and the Executive, based on circumstances that have
arisen concerning the Company and the Executive and on the Company's and the
Executive's mutual desire to revise previously discussed terms of employment,
wish to amend and restate any prior verbal or written agreements concerning
the terms of Executive's employment by the Company. Accordingly, in
consideration of the mutual covenants and agreements set forth herein and the
mutual benefits to be derived herefrom, and intending to be legally bound
hereby, the Company and the Executive agree as follows:
1. Employment.
a. Duties. During the Term, as hereinafter defined, the Company
shall employ the Executive, on the terms set forth in this Agreement, as its
Chief Executive Officer. The Executive accepts such employment with the
Company and shall perform and fulfill such duties as are reasonably assigned
to him hereunder by the Chairman of the Board or the Board of Directors of
the Company (the "Board"), devoting his best efforts and a portion of his
professional time and attention to the performance and fulfillment of his
duties and to the advancement of the interests of the Company, subject only
to the direction, approval, control and directives of the Chairman of the
Board and the Board. Nothing contained herein shall be construed, however, to
prevent the Executive from investing, trading in or managing, for his own
account and benefit, stocks, bonds, securities, real estate, commodities or
other forms of investments (subject to law and Company policy with respect to
trading in Company securities), or serving on noncompetitive corporate
boards; or holding any other position with any entity not in competition with
the Company.
b. Place of Performance. In connection with his employment by the
Company, the Executive shall be based in the Philadelphia, Pennsylvania or
Los Angeles, California metropolitan areas (or at such other location as the
Company and Executive may mutually agree) except for required travel on
Company business. Company shall furnish Executive with office space,
stenographic assistance and such other facilities and services as shall be
suitable to Executive's position and sufficient and satisfactory to the
Executive for the performance of his duties as Chief Executive Officer.
2. Term.
The Executive's employment under this Agreement shall, unless sooner
terminated in accordance with the provisions hereof, continue uninterrupted
for a term expiring December 31, 1998, As used herein, the term "Term" shall
refer to such initial term subject to earlier termination of employment in
accordance with Section 8 hereof.
1
<PAGE>
3. Compensation.
a. Salary. During the Term unless this Agreement is sooner
terminated in accordance with the provisions hereof, the Executive shall be
paid an annual salary of at least $200,000 (the "Base Salary"), payable in
installments at such times as the Company customarily pays its other senior
executive employees (but in any event no less often than monthly). The Base
Salary may be increased (but not decreased) from time to time by the Board of
Directors as conditions warrant including, but not limited to, Executive's
performance as determined by the Board of Directors. In no event shall
Executive's Base Salary be less than $200,000 in any full year during the
Term.
b. Incentive Pay.
(1) In addition to the Base Salary provided for in Section 3(a) of
this Agreement, the Executive shall during the Term, unless this Agreement is
sooner terminated in accordance with the provisions hereof, participate in
the Company's 1995 Management Incentive Plan ("MIP"), or such successor plan
of bonus, incentive or additional compensation as the Company may hereafter
implement.
c. Options. On July 23, 1997, in connection with the solicitation
of Executive's employment with the Company, the Company granted and issued
Executive options to purchase 750,000 shares of the Company's Common Stock.
The option price per share for such options was established at $4.75 per
share. Which was established based upon the lowest closing price of the
Company's common stock on the New York Stock Exchange for the ten (10)
trading days ending on July 22, 1997. Subject to the Company's agreement set
forth in the following paragraph, Executive hereby relinquishes 50,000 of
such options. Furthermore, the terms of Executive's options are hereby
amended and restated as set forth in the attached form of Amended and
Restated Non-Incentive Stock Option Agreement (Non-Plan).
d. In consideration of Executive's option relinquishment described
in c. above, the Company hereby agrees to issue 50,000 new options, out of
its 1991 Stock Option Plan, divided equally between Brian J. Sisko and John
J. Sullivan, upon substantially the same terms as Mr. Verratti's options
referred to in c. above.
e. Health Insurance and Other Benefits. During the Term, unless
this Agreement is sooner terminated in accordance with the provisions hereof,
the Executive shall receive all employee benefits offered by the Company to
its senior executives and key management employees, including, without
limitation, all pension, profit sharing, retirement, salary continuation,
deferred compensation, disability insurance, hospitalization insurance, major
medical insurance, medical reimbursement, survivor income, life insurance and
any other benefit plan or arrangement established and maintained by the
Company, subject to the rules and regulations then in effect regarding
participation therein. Unless such change is required by federal, state or
local law, the Company shall not make any changes in any employee benefit
plan or arrangement that would result in a disproportionately greater
reduction in the rights of, or benefits to, the Executive compared with any
other senior executive of the Company.
f. Withholding. The Company may withhold from any compensation,
bonus or benefits payable or otherwise conferred by this Agreement all
federal, state, city or other taxes as shall be required pursuant to any law
or governmental regulation or ruling.
4. Life Insurance.
a. Generally. At the Executive's option, the Executive may obtain
up to $1,000,000 in face amount of term life insurance to be carried on the
Executive's life. During the Term, unless
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this Agreement is sooner terminated in accordance with the provisions hereof,
the Company shall reimburse, on a semi-annual basis, the premiums paid by the
Executive for periods covered by the Term for such insurance upon
presentation of invoices duly reflecting such premiums (subject, however, to
the limitations on reimbursement set forth in Section 4(b) hereof). The
Executive shall be the owner of such life insurance policy and shall have the
absolute right to designate the beneficiaries thereunder. The Executive shall
be solely responsible for procuring any such life insurance. The Company
shall have no independent obligation to procure such life insurance or any
other insurance on the life of the Executive (excepting only such insurance
as the Company may offer to its executives and key management employees as
part of its standard benefit package).
b. Limitation on Reimbursement Obligation. Notwithstanding anything
to the contrary contained herein, the Company shall not be obligated to
reimburse premium payments under Section 4(a) hereof or otherwise to the
extent that such payments exceed the rates which would be obtainable for such
insurance on persons of similar age and position who are nonsmokers and
otherwise in good health.
5. Reimbursement of Expenses. During the Term, unless the Agreement is
sooner terminated in accordance with the provisions hereof, the Executive
shall be reimbursed for all items of travel, entertainment and miscellaneous
expenses which the Executive reasonably incurs in connection with the
performance of his duties hereunder, provided that the Executive shall submit
to the Company such statements and other evidence supporting said expenses as
the Company may reasonably require.
6. Automobile Allowance. During the Term, unless the Agreement is
sooner terminated in accordance with the provisions hereof, the Company shall
pay Executive a monthly automobile allowance of $600.00.
7. Vacations. During the Term, unless the Agreement is sooner
terminated in accordance with the provisions hereof, the Executive shall be
entitled to the number of paid vacation days in each calendar year determined
by the Company from time to time for its senior executive officers, but not
less than three (3) weeks in any calendar year. The Executive shall also be
entitled to all paid holidays given by the Company to its senior executive
officers.
8. Termination of Employment.
a. Death or Total Disability. In the event of the death of the
Executive during the Term, this Agreement shall terminate, and the Company
shall have no further obligation hereunder except as provided in this Section
8(a). The terms of the option agreements issued pursuant to Section 3 shall
control as to the vesting and expiration thereof upon the death of Executive.
In the event of the Total Disability (as that term is defined below) of the
Executive for one hundred eighty (180) days in the aggregate during any
consecutive twelve (12) month period during the Term, the Company shall have
the right to terminate this Agreement by giving the Executive thirty (30)
days' prior written notice thereof, and upon the expiration of such thirty
(30) day period, the Executive's employment under this Agreement shall
terminate. If the Executive shall resume his duties within thirty (30) days
after receipt of such a notice of termination and continue to perform such
duties for four (4) consecutive weeks thereafter, this Agreement shall
continue in full force and effect, without any reduction in Base Salary,
other compensation and other benefits, and the notice of termination shall be
considered null and void and of no effect. Upon termination of this
Agreement under this Section 8(a), the Company shall have no further
obligations or liabilities under this Agreement, except to pay to the
Executive's estate or the Executive, as the case may be, the portion, if any,
that remains unpaid of the Base Salary for the period prior to termination.
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The term "Total Disability," as used herein, shall mean a mental or
physical condition which, in the reasonable opinion of an independent medical
doctor mutually selected by the Company and the Executive, renders the
Executive unable or incompetent to carry out the material duties and
responsibilities of the Executive under this Agreement at the time the
disabling condition was incurred.
b. Discharge for Cause. The Company may discharge the Executive
for Cause and thereby immediately terminate his employment under this
Agreement. For purposes of this Agreement, the Company shall have "Cause" to
terminate the Executive's employment if the Executive, in the reasonable
judgment of the Company, (i) materially breaches any of his agreements,
duties or obligations under this Agreement and has not cured or commenced in
good faith to cure such breach within thirty (30) days after notice; (ii)
embezzles or converts to his own use any funds of the Company or any client
or customer of the Company; (iii) converts to his own use or unreasonably
destroys any property of the Company, without the Company's consent; (iv) is
convicted of a felony; (v) is adjudicated as mentally incompetent; (vi) is
habitually intoxicated or is diagnosed by an independent medical doctor to be
addicted to a controlled substance or any drug whatsoever; or (vii)
appropriates or usurps any client, customer or opportunity of the Company for
his own use without the Company's consent. Notwithstanding the foregoing, the
Executive shall not be deemed to have been terminated for Cause unless and
until the Executive has received thirty (30) days' prior written notice
("Dismissal Notice") of such termination. In the event the Executive does
not dispute such determination within thirty (30) days after receipt of the
Dismissal Notice, the Executive shall not have the remedies provided pursuant
to Section 8(e) of this Agreement.
c. Termination Prior to Expiration of Term. Either party may
terminate this Agreement upon sixty (60) days' prior written notice. Except
as provided in Section 8(d) of this Agreement, such termination shall be
without liability to either party.
d. Termination without Cause or for Good Reason.
(1) In the event that the Executive's employment is terminated
by the Company without Cause, as defined in Section 8(b) of this Agreement,
or the Executive shall resign for "Good Reason," as defined in Section
8(d)(ii) of this Agreement, then, to the extent provided below, the Company
shall:
(i) pay the Executive in lieu of other damages, except as
specifically provided herein, $300,000. Such amounts shall be payable in
installments in accordance with the Company's normal payroll practices until
such amount is paid in full. During such period of payments, the restrictions
contained in Section 11(a)(i) of this Agreement shall be applicable to
Executive. In addition, Executive may accept employment he might not
otherwise accept under Section 11(a)(i) of this Agreement, in which event
payment of salary received from such other employment shall not be deducted
from payments made hereunder; and
(ii) maintain in full force and effect, for the continued
benefit of the Executive for a period of one year after termination or for
the balance of the Term, whichever is greater, all employee benefit plans and
programs, except option plans and except bonus plans to the extent the
Executive is not employed by the Company for all or a portion of the period
of measurement for the bonus, in which the Executive was entitled to
participate immediately prior to the Executive's discharge or resignation,
provided that the Executive's continued participation is possible under the
general terms and provisions of such benefit plans and programs, and provided
further that any Options unvested and unexercisable at the date of
termination shall then become vested and exercisable. In the event that the
Executive's participation in any such benefit plan or program is barred, the
Company shall arrange to provide the
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Executive with benefits substantially similar to those which the Executive is
entitled to receive under such plans and programs. At the end of the period
of coverage, the Executive shall have the option to have assigned to him at
no cost and with no apportionment of prepaid premiums any assignable
insurance policy owned by the Company which relates specifically to the
Executive.
(2) For purposes of this Section 8(d), "Good Reason" shall mean
the failure by the Company to comply with the material provisions of this
Agreement which failure is not cured within thirty (30) days after notice.
Notwithstanding the foregoing, the Executive shall not be deemed to terminate
this Agreement for Good Reason unless and until the Company has received five
(5) days prior written notice of termination ("Notice of Termination for Good
Reason"). In the event the Company does not dispute such termination within
thirty (30) days after receipt of such Notice of Termination for Good Reason,
the Company shall not have the remedies provided pursuant to Section 8(e) of
this Agreement.
e. Arbitration. In the event that the Executive disputes a
determination that Cause exists for terminating his employment pursuant to
Section 8(b) of this Agreement, or the Company disputes Executive's
determination that Good Reason exists for Executive's termination of his
Employment pursuant to Section 8(d)of this Agreement, either party disputing
this determination shall serve the other with written notice of such dispute
("Dispute Notice") within thirty (30) days after receipt of the Dismissal
Notice or Notice of Termination for Good Reason. Within fifteen (15) days
thereafter, the Executive may, in accordance with the Rules of the American
Arbitration Association ("AAA"), file a petition with the AAA for arbitration
of the dispute, the costs thereof to be shared equally by the Executive and
the Company unless an order of the AAA provides otherwise and, in such
arbitration, each party shall be responsible for his or its legal fees. If
Executive files such a petition for arbitration, such proceeding shall also
determine all other disputes between the parties relating to Executive's
employment, and the parties covenant and agree that the decision of the AAA
shall be final and binding and hereby waive their rights to appeal therefrom.
9. Change in Control. Upon a Change in Control, as hereinafter defined,
notwithstanding anything in this Agreement to the contrary, the following
terms and provisions shall apply:
a. If, within thirty (30) days following the Change in Control,
there is a Termination of Employment (as defined below), the Executive shall
receive an immediate lump sum payment (within thirty (30) days following the
Termination of Employment), of $600,000;
b. If a Termination of Employment does not occur within thirty (30)
days following the Change in Control, then the Term of this Agreement shall
continue as aforesaid and all of the terms and conditions of this Agreement
shall remain in full force and effect until the end of such Term.
c. As used in this Section 9, "Termination of Employment" shall
mean termination of the Executive's employment (i) by the Company for any
reason, or (ii) by the Executive's death, Total Disability or resignation.
d. As used in this Section 9, a "Change in Control" shall be deemed
to have taken place if: (i) subsequent to the date hereof, any "Person"
(including any individual, firm, corporation, partnership or other entity
except the Executive, the Company or any employee benefit plan of the Company
or of any Affiliate or Associate (each as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended), and any Person or entity
organized, appointed or established by the Company for or pursuant to the
terms of any such employee benefit plan), together with all Affiliates and
Associates of such Person, shall become the beneficial owner in the aggregate
of twenty percent (20%)
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or more of the Common Stock of the Company then outstanding; or (ii) during
the Term of this Agreement, individuals who, as of the date of this
Agreement, constituted the Board cease for any reason to constitute a
majority thereof; or (iii) a combinative transaction with ValueVision
International, Inc. is consummated.
10. No Mitigation. The Executive shall not be required to mitigate the
amount of any payment or benefit provided for in this Agreement by seeking
other employment or otherwise nor shall the amount of any payment provided
for in this Agreement be reduced by any compensation earned by the Executive
as the result of his employment by another employer.
11. Restrictive Covenant.
a. Competition.
(i) Executive will not compete, directly or indirectly, as a
compensated or non-compensated director, officer, employee, consultant,
agent, representative or otherwise, or as a stockholder, partner or joint
venturer, or have any direct or indirect financial interest, including,
without limitation, the interest of a creditor, in any business competing
directly with the infomercial direct response business of Company or any of
its subsidiaries within any geographical area in which the business of
Company or its subsidiaries is being conducted during Executive's employment
during the "Covenant Period." The Covenant Period shall be (1) the Term of
this Agreement or (2) for a period of six (6) months after termination of
this Agreement pursuant to Section 8(a) or 8(b) of this Agreement; provided
that the Covenant Period shall expire on the date of Executive's termination
pursuant to Section 8(c) or 8(d) of this Agreement.
(ii) Executive further undertakes and agrees that during the
Covenant Period he will not, directly or indirectly, employ, cause to be
employed, or solicit for employment any of Company's or its subsidiaries'
employees.
b. Confidential Information.
(i) Duty of Care. The Executive shall not, directly or
indirectly, disclose to any person or entity for any reason or use for the
Executive's own personal benefit any Confidential Information (as defined in
Section 11(b)(3) hereof) either during the Term or thereafter, despite any
early termination of this Agreement, and shall at all times take all
precautions reasonably necessary to protect Confidential Information from
loss or disclosure to third parties.
(ii) Return of Confidential Information. Upon the expiration or
earlier termination of this Agreement, the Executive shall promptly return to
the Company all documents and other tangible property in the Executive's
possession or control which constitute, contain or incorporate Confidential
Information, whether prepared by the Executive or others.
(iii) "Confidential Information" Defined. For purposes of this
Agreement, "Confidential Information" shall mean all information, whether in
written, electronic or oral form, disclosed or known to the Executive in the
course of the Executive's employment by the Company, concerning the
operations or business of the Company or any of its subsidiaries, including,
without limitation, (i) marketing and promotional plans and strategies, (ii)
information relating to products conceived, developed in the process of
development, (iii) information, including names and addresses, relating to
with licensors, suppliers, producers performers and program providers, (iv)
information relating to the purchase and placement of media, results of media
deployment or media monitoring and tracking
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systems, (v) information relating to rates, costs and facilities for
telemarketing, order processing, fulfillment or credit card processing
services, (vi) financial information beyond that which is publicly reported
by the Company, and (vii) all other proprietary and competitively sensitive
information. Notwithstanding the foregoing, Confidential Information shall
not include any information which (a) is or becomes within the public domain
through no act of the Executive in breach of this Agreement, (b) was lawfully
in the possession of the Executive without any restriction on use or
disclosure prior to its disclosure hereunder, (c) is lawfully received from
another source subsequent to the date of this Agreement without any
restriction on use or disclosure, (d) is deemed in writing by the Company no
longer to be Confidential Information, or (e) is required to be disclosed by
order of any court of competent jurisdiction or other governmental authority.
c. Injunctive Relief. The parties hereto agree that the remedy at
law for any breach of the provisions of this Section 11 will be inadequate
and that the Company or any of its subsidiaries or other successors or
assigns shall be entitled to injunctive relief without bond. Such injunctive
relief shall not be exclusive, but shall be in addition to any other rights
and remedies Company or any of its subsidiaries or their successors or
assigns might have for such breach.
d. Scope of Covenant. Should the duration, geographical area or
range of prescribed activities in Section 11(a) of this Agreement be held
unreasonable by any court of competent jurisdiction, then such duration,
geographical area or range of prescribed activities shall be modified to such
degree as to make it or them reasonable and enforceable.
12. Counsel Fees and Indemnification.
a. In the event that it shall be necessary or desirable for the
Executive to retain legal counsel and/or incur other costs and expenses in
connection with the enforcement of any and all of his rights under this
Agreement, including participation in any proceeding contesting the validity
or enforceability of this Agreement and any arbitration proceeding pursuant
to Section 8(e) of this Agreement, the Executive shall be entitled to recover
from the Company his reasonable attorney's fees and costs and expenses in
connection with the enforcement of his rights. No fees shall be payable if
the Company is successful on the merits.
b. The Company shall indemnify and hold Executive harmless to the
maximum extent permitted by law against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees incurred by
Executive, in connection with the defense of, or as a result of, any action
or proceeding (or any appeal from any action or, proceeding) in which
Executive is made or is threatened to be made a party by reason of any act or
omission of Executive in his capacity as an officer, director or employee of
the Company, regardless of whether such action or proceeding is one brought
by or in the right of the Company to procure a judgment in its favor.
Expenses (including attorneys' fees) incurred by the Executive in defending
any civil, criminal, administrative, or investigative action, suit or
proceeding shall be paid by the Company in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the Executive to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Company as
authorized in this Section 12(b).
13. Miscellaneous.
a. Notices. Any notice, demand or communication required or
permitted under this Agreement shall be in writing and shall either be
hand-delivered to the other party or mailed to the addresses set forth below
by registered or certified mail, return receipt requested or sent by
overnight
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express mail or courier or facsimile to such address, if a party has a
facsimile machine. Notice shall be deemed to have been given and received
when so hand- delivered or after three business days when so deposited in the
U.S. Mail, or when transmitted and received by facsimile or sent by express
mail properly addressed to the other party. The addresses are:
To the Company:
National Media Corporation
1835 Market Street
Philadelphia, PA 19103
FAX #: (215) 988-4900
Attn: Corporate Secretary
To the Executive:
Mr. Robert N. Verratti
100 Grays Lane
Unit 200
Haverford, PA 19014
The foregoing addresses may be changed at any time by notice given in the
manner herein provided.
b. Integration; Modification. This Agreement dated the date hereof
constitutes the entire understanding and agreement between the Company and
the Executive regarding its subject matter and supersedes all prior
negotiations and agreements, whether oral or written, between them with
respect to its subject matter. This Agreement may not be modified except by
a written agreement signed by Executive and a duly authorized officer of the
Company.
c. Enforceability. If any provision of this Agreement shall be
invalid or unenforceable, in whole or in part, such provision shall be deemed
to be modified or restricted to the extent and in the manner necessary to
render the same valid and enforceable, or shall be deemed excised from this
Agreement, as the case may require, and this Agreement shall be construed and
enforced to the maximum extent permitted by law as if such provision had been
originally incorporated herein as so modified or restricted, or as if such
provision had not been originally incorporated herein, as the case may be.
d. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the parties, including their respective heirs, executors,
successors and assigns, except that this Agreement may not be assigned by the
Executive. This Agreement supersedes the Prior Employment Agreement, which
is hereby deemed null and void and of no further force or effect.
e. Waiver of Breach. No waiver by either party of any condition or
of the breach by the other of any term or covenant contained in this
Agreement, whether by conduct or otherwise, in any one or more instances
shall be deemed or construed as a further or continuing waiver of any such
condition or breach or a waiver of any other condition, or the breach of any
other term or covenant set forth in this Agreement. Moreover, the failure of
either party to exercise any right hereunder shall not bar the later exercise
thereof.
f. Governing Law and Interpretation. This Agreement shall be
governed by the laws of the Commonwealth of Pennsylvania without regard to
its conflict of laws rules. Each of the parties
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agrees that he or it, as the case may be, shall deal fairly and in good faith
with the other party in performing, observing and complying with the
covenants, promises, duties, obligations, terms and conditions to be
performed, observed or complied with by him or it, as the case may be,
hereunder; and that this Agreement shall be interpreted, construed and
enforced in accordance with the foregoing covenant notwithstanding any law to
the contrary.
g. Headings. The headings of the various sections and paragraphs
have been included herein for convenience only and shall not be considered in
interpreting this Agreement.
h. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive
and on behalf of the Company by its duly authorized officers and approved by
its Compensation, Committee, as of the date first above written.
Attest: NATIONAL MEDIA CORPORATION
By: /s/ Frederick S. Hammer
- ------------------------ ------------------------------
Secretary Frederick S. Hammer, Chairman
/s/ Robert N. Verratti
-------------------------------
Robert N. Verratti
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EXHIBIT 10.4
AMENDED AND RESTATED
NON-INCENTIVE STOCK OPTION AGREEMENT
(non-Plan)
THIS AMENDED AND RESTATED NON-INCENTIVE STOCK OPTION AGREEMENT
("Agreement") is dated as of July 23, 1997, as amended and restated as of
January 28, 1998, and is by and between NATIONAL MEDIA CORPORATION, a
Delaware corporation with its principal office located at Eleven Penn Center,
Suite 1100, 1835 Market Street, Philadelphia, Pennsylvania 19103 (the
"Company"), and Robert N. Verratti.
On July 23, 1997, the Compensation Committee of the Board of Directors of
the Company (the "Committee") determined to grant to the Optionee an option
to purchase 750,000 shares of the Company's Common Stock in order to provide
the Optionee with an added incentive to contribute to the Company's future
success and prosperity. The option granted was issued outside of the Plan (as
hereinafter defined) in connection with the solicitation and commencement of
the Optionee's employment but, except as provided herein, subject to such
terms and conditions as if it were issued under the Company's Amended and
Restated Stock Option Plan, as it may be amended from time to time hereafter
(the "Plan"). The option granted is hereby amended and restated, as of
January 28, 1998, in its entirety as set forth herein. This option agreement
replaces and is in lieu of any and all prior option agreements between the
Company and Optionee. Capitalized terms contained herein and not otherwise
defined shall have the meanings ascribed to such terms in the Plan.
In consideration of the premises set forth herein, and for other good an
valuable consideration, receipt of which is hereby acknowledged, the Company
has granted the Optionee the option to acquire shares of the common stock of
the Company upon the following terms and conditions:
1. Grant of Option.
(a) In connection with Optionee's relinquishment and waiver of
50,000 of the 750,000 options referred to above, the Company hereby reaffirms
its grant to the Optionee of the right and option (the "Option") to purchase
up to Seven Hundred Thousand (700,000) fully paid and non-assessable shares
of common stock, par value $.01 per share, of the Company (the "Shares"), to
be issued upon the exercise hereof.
(b) The Option may be exercised during the period ("Option Period")
commencing on the date hereof and, unless sooner terminated as provided
herein, expiring and terminating at 5:00 p.m. Eastern Standard Time on July
22, 2007, at which time the Optionee shall have no further right to purchase
any Shares not then purchased. The Company shall at all time during the term
of this Agreement reserve and keep available such number of Shares as will be
sufficient to satisfy the requirements of this Agreement.
(c) It is not intended that the Option qualify as an Incentive Stock
Option within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "Code").
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2. Exercise Price. The exercise price of the Option (the "Exercise
Price") shall be lesser of (a) $4.75 per share or (b) if there is a
Triggering Event (as hereinafter defined) occurring between January 28, 1998
and June 30, 1998, the "Triggering Event Price" (as hereinafter defined) per
share less $4.00, but in no event less than $.01 per share. For purposes of
this paragraph, a "Triggering Event" shall be defined as (i) a sale of
substantially all of the assets of the Company, (ii) a merger of the Company
into another company, or a merger of another company into the Company or some
other combinative transaction with another company after which the
shareholders of such other company have the right to elect a majority of the
board of directors of the Company or the resulting entity, or (iii) an
investment by another company , which under the rules of the NYSE requires
shareholder approval (whether or not such requirement is waived). "Triggering
Event Price" shall be deemed to be the closing price of the Company's stock
on the NYSE on the day of the closing of such sale, merger, combination or
investment. The exercise price shall be payable by certified or bank check
payable to the order of the Company in full at the time of the exercise in
cash or, with the consent of the Committee in its sole discretion, by
delivering (i) shares of Common Stock already owned by the Optionee and
having a fair market value (as determined under the Plan) on the date of
exercise equal to the Exercise Price, or (ii) a combination of cash and
shares of Common Stock with a fair market value equal to the Exercise Price.
3. Exercise of Option. The Optionee may exercise this Option to
purchase Shares by providing notice to the Company by registered or certified
mail, return receipt requested, addressed to its principal office, or by hand
delivery, signed by the Optionee, indicating the number of whole Shares which
Optionee desire to purchase under the Option. The notice shall be accompanied
by payment of the Exercise Price therefor as specified in Paragraph 2 above,
any amounts payable pursuant to Paragraph 10 below and any required written
representation as specified pursuant to Paragraph 7 below. As soon as
practicable after the receipt of such notice of exercise, payments and
written representation, the Company shall issue to the Optionee a
certificate(s) issued in the Optionee's name evidencing the Shares purchased
by the Optionee hereunder, subject to the Company's right to require that
Optionee hereunder, subject to the Company's right to require that Optionee
execute such other documents as it deems reasonably necessary.
4. Limitations on Right to Exercise. Should the Optionee cease to be an
Eligible Participant for any reason other than the Optionee's death or
disability, the Option shall be exercisable for a period of two years after
the Optionee ceases to be an Eligible Participant or until the expiration of
the Option Period, whichever shall occur first.
5. Death or Disability of Optionee. In the event of the death or
disability of the Optionee while the Optionee is an Eligible Participant (or
the death of the Optionee within two years after the date on which the
Optionee ceases to be an Eligible Participant), any unexercised portion of
the Option shall be exercisable for a period of one year after the Optionee's
death or disability or upon the expiration of the Option Period, whichever
shall occur first, and, in the event of the death of the Optionee, shall be
exerciseable only by the Optionee's personal representative or such person or
persons to whom the Optionee's rights pass under the Optionee's will or by
the Laws of descent and distribution.
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6. Non-Transferability of Option. Except as provided in Paragraph 5
herein, the Option shall be exercisable only the Optionee. The Optionee may
not give, grant, sell, exchange, transfer legal title, pledge, assign or
otherwise encumber or dispose of the Option herein granted or any interest
therein, otherwise than by will or the laws of the descent and distribution
or, if permitted under Rule 16b-3 promulgated under the Securities Exchange
Act of 1934 and by the Committee in its sole discretion pursuant to a
qualified domestic relations order as defined in the Code or Title 1 of ERISA
or the rules promulgated thereunder. Upon any attempt to so transfer the
Option, or upon the levy or attachment or similar process of the Option, the
Option shall automatically become null and void.
7. Restriction on Issuance of Shares-Investment Representation. The
Optionee agreed for himself, his heirs and legatees that, unless the time of
exercise there exists an effective registration statement under the
Securities Act of 1933 concerning the Shares issuable pursuant to the Option
providing for the issuance of such Shares to the Optionee and/or the
subsequent transfer of the shares by Optionee, any and all Shares purchased
upon the exercise of the Option shall be acquired for investment and not for
distribution. Upon the issuance of any or all of the Shares subject to the
Option, the Company, in its discretion and in accordance with the foregoing,
may require the Optionee, or his heirs or legatees receiving such Shares, to
deliver to the Company a representation in writing, in a form satisfactory to
the Board, that such Shares are being acquired in good faith for investment
and not for distribution. In accordance with the foregoing, (i) the Company
may place with its transfer agent a "stop transfer" order with respect to
such Shares and may place an appropriate restrictive legend on the
certificate(s) evidencing such Shares; and (ii) any stock certificates issued
upon the exercise of the Option may bear an appropriate restrictive legend,
if deemed necessary by the Company.
8. No Rights as Shareholder. The Optionee shall have no rights as a
shareholder of the Company in respect of the Shares as to which the Option
shall not have been exercised and payment made as herein provided.
9. No Obligation Relating to Engagement of Optionee. Nothing herein
shall obligate the Company or any of its subsidiaries to engage the Optionee,
nor shall this Agreement constitute an agreement of employment or for
services, nor confer upon the Optionee any right to continue to render
services to the Company or any of its subsidiaries or interfere in any way
with the right of the Company or any of its subsidiaries to terminate the
services of the Optionee at any time without liability to the Company or the
subsidiary.
10. Taxes. The Company may make such provisions as it may deem
appropriate for the withholding of any taxes which it determines is required
in connection with any options granted under the Plan. The Company may
further require notification from the Optionee upon any disposition of Shares
acquired pursuant to the exercise of the Option.
11. Conflict between Option Agreement and Plan. In the event of any
conflicts between this Agreement and the Terms and Condition of the Plan, the
terms and conditions of the Plan shall control.
3
<PAGE>
12. Binding Effect. Except as herein otherwise expressly provided, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto, their legal representatives and assigns.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements
made and to be performed wholly within the State of Delaware.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
NATIONAL MEDIA CORPORATION
By: /s/ Frederick S. Hammer
---------------------------
Frederick S. Hammer
Chairman of the Board
/s/ Robert N. Verratti
-------------------------
Robert N. Verratti
5
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ---------------------
<S> <C> <C> <C> <C>
BASIC 1997 1996 1997 1996
--------- --------- ---------- ---------
Average common shares outstanding...................................... 25,324 23,268 24,736 21,415
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Net (loss) income...................................................... $ (8,146) $ (5,984) $ (35,493) $ 3,560
Adjustments to net (loss) income:
Deemed dividend on convertible preferred stock......................... (358) -- (401) --
--------- --------- ---------- ---------
Adjusted net (loss) income............................................. $ (8,504) $ (5,984) $ (35,894) $ 3,560
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Per share (loss) earnings:
Net (loss) income...................................................... $ (0.34) $ (0.26) $ (1.45) $ 0.17
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Diluted
Average common shares outstanding...................................... 25,324 23,268 24,736 21,415
Conversion of preferred stock.......................................... -- -- -- 1,248
Net effect of common stock equivalents (1)............................. -- -- -- 4,380
--------- --------- ---------- ---------
Total.................................................................. 25,324 23,268 24,736 27,043
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Net (loss) income...................................................... $ (8,146) $ (5,984) $ (35,493) $ 3,560
Adjustments to net (loss) income:
Deemed dividend on convertible preferred stock......................... (358) -- (401) --
--------- --------- ---------- ---------
Adjusted net income.................................................... $ (8,504) $ (5,984) $ (35,894) $ 3,560
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Per share (loss) earnings:
Net (loss) income (1).................................................. $ (0.34) $ (0.26) $ (1.45) $ 0.13
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
- ------------------------
(1) Common stock equivalents include the effect of the exercise of dilutive
stock options and warrants using the treasury stock method.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 11,834
<SECURITIES> 0
<RECEIVABLES> 31,629
<ALLOWANCES> (3,217)
<INVENTORY> 24,836
<CURRENT-ASSETS> 84,661
<PP&E> 12,925
<DEPRECIATION> 3,085
<TOTAL-ASSETS> 150,990
<CURRENT-LIABILITIES> 68,652
<BONDS> 0
0
1
<COMMON> 262
<OTHER-SE> 74,542
<TOTAL-LIABILITY-AND-EQUITY> 150,990
<SALES> 186,635
<TOTAL-REVENUES> 186,635
<CGS> 177,604
<TOTAL-COSTS> 219,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,299
<INCOME-PRETAX> (35,193)
<INCOME-TAX> 300
<INCOME-CONTINUING> (35,493)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,493)
<EPS-PRIMARY> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>
