<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED].
For the transition period from ________________ to ________________
Commission file number 1-6715
NATIONAL MEDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 13-2658741
(State of Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
ELEVEN PENN CENTER, SUITE 1100, 1835 MARKET 19103
STREET, PHILADELPHIA, PA (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: 215-988-4600
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(b) Name of each exchange
of the Act: on which registered:
Title of each class: NEW YORK STOCK EXCHANGE
COMMON STOCK, PAR VALUE $.01 PER SHARE PHILADELPHIA STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of June 15, 1998 was approximately
$32,560,733.*
There were approximately 25,453,752 issued and outstanding shares of the
Registrant's common stock, par value $.01 per share, at June 15, 1998. In
addition, there were 887,229 shares of treasury stock as of such date.
*Calculated by excluding all shares that may be deemed to be beneficially owned
by executive officers and directors of the Registrant, without conceding that
all such persons are "affiliates" of the Registrant for purposes of the federal
securities laws, but including the shares beneficially owned by others listed on
the "Security Ownership of Certain Beneficial Owners" table included in
Registrant's proxy statement. Based upon a market value per share of $1.3125,
which was the closing price of the Company's Common Stock on the New York Stock
Exchange on June 15, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NATIONAL MEDIA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I
Cautionary Statement Regarding Forward-Looking Statements..................................... 3
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 13
Item 3. Legal Proceedings............................................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........................................... 15
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Stock and Related Stockholder
Matters....................................................................................... 16
Item 6. Selected Consolidated Financial Data.......................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 18
Item 8. Financial Statements and Supplementary Data................................................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 27
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 28
Item 11. Executive Compensation........................................................................ 28
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 28
Item 13. Certain Relationships and Related Transactions................................................ 28
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 29
SIGNATURES
</TABLE>
2
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS "FORWARD-LOOKING" STATEMENTS REGARDING POTENTIAL FUTURE
EVENTS AND DEVELOPMENTS AFFECTING THE BUSINESS OF THE COMPANY. SUCH STATEMENTS
RELATE TO, AMONG OTHER THINGS, (I) FUTURE OPERATIONS OF THE COMPANY, INCLUDING
POTENTIAL STRATEGIC TRANSACTIONS AND THE DEVELOPMENT OF NEW PRODUCT SALES MEDIA;
(II) COMPETITION FOR CUSTOMERS FOR THE COMPANY'S PRODUCTS; (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.
FORWARD-LOOKING STATEMENTS MAY BE INDICATED BY THE WORDS "EXPECTS,"
"ESTIMATES," "ANTICIPATES," "INTENDS," "PREDICTS," "BELIEVES" OR OTHER SIMILAR
EXPRESSIONS. FORWARD-LOOKING STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS
REPORT AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF THE COMPANY AND ITS DIRECTORS AND OFFICERS WITH RESPECT TO
NUMEROUS ASPECTS OF THE COMPANY AND ITS BUSINESS. THE COMPANY'S ABILITY TO
PREDICT RESULTS OR THE EFFECT OF ANY PENDING EVENTS ON THE COMPANY'S OPERATING
RESULTS IS INHERENTLY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THE
RISKS ATTENDANT TO 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
"RECENT DEVELOPMENTS"; "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
PART I
ITEM 1. BUSINESS
National Media Corporation ("National Media" or the "Company") is a global
leader in the use of direct response transactional television programming, known
as infomercials, to market consumer products. National Media makes infomercial
programming available to more than 370 million households in over 70 countries
worldwide.
BACKGROUND
The infomercial industry was first developed in the United States after the
Federal Communications Commission (the "FCC") rescinded its limitations on
advertising minutes per hour in 1984, thereby permitting 30-minute blocks of
television advertising. The deregulation of the cable television industry and
the resulting proliferation of cable channels increased the available media time
and led to the growth of the United States infomercial industry. Producers of
infomercials combined direct response marketing and retailing principles within
a television talk show-type format and purchased media time from cable channels
to air their infomercials. After an initial growth period, the industry
consolidated through the end of the 1980s. At the same time, increased attention
from the Federal Trade Commission (the "FTC") and federal and state consumer
protection agencies led to greater regulation of the industry and to the
development of the National Infomercial Marketing Association as a
self-regulatory organization. By the early 1990s, infomercials and home shopping
cable channels had become a more accepted forum for obtaining information about
products and services and making purchases from home. As the infomercial
industry has matured, the variety of products marketed through infomercials has
steadily increased. Today, offerings as diverse as car care products and weight
loss programs are marketed through infomercials.
The development of the international infomercial industry began in Western
Europe following the initial industry development in the United States. Quantum
Marketing International, which was acquired by the Company in 1991, was one of
the pioneers in the international infomercial industry's development, commencing
operations in 1990. The industry expanded throughout Europe and then into
non-European markets through the early 1990s and continues to expand into other
worldwide markets today. Whereas domestically, distribution of products through
infomercials is viewed as an alternative to retail, mail order and other means
of distribution, in many international markets distribution through traditional
channels is
3
<PAGE>
not readily accessible to many consumers. As a result of these factors, the
Company believes that it has an opportunity to be a primary distributor of
innovative consumer products in the international marketplace.
RECENT DEVELOPMENTS
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
ValueVision International ("ValueVision") and Quantum Direct Corporation,
formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware
corporation. On April 8, 1998, it was announced that ValueVision had received
preliminary notification from holders of more than 5% of ValueVision's common
stock that they intended to exercise their dissenter's rights with respect to
the proposed transaction and that the Company and ValueVision had therefore
postponed the previously scheduled shareholder meetings regarding the proposed
merger and were going to try to reach a mutually acceptable restructuring. On
June 2, 1998 the Company announced that the Company and ValueVision had mutually
terminated the Merger Agreement after not having been able to reach agreement on
a restructured transaction. Certain actual and potential effects of the
termination of the Merger Agreement are described in Note 16 to the financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
STRATEGY
National Media's goal is to be recognized as a worldwide leader in direct
marketing. Through direct response transactional television programming and
integrated consumer marketing techniques, the Company is pursuing a business
strategy focusing on: (i) increasing the effective utilization and leveraging of
its global presence and its media access (ii) continuing to develop and market
innovative consumer products and (iii) engineering the most efficient business
model for the conduct of its worldwide direct response business.
LEVERAGING GLOBAL PRESENCE AND MEDIA ACCESS. The Company is continuing its
efforts to expand its position as a worldwide leader in infomercial programming
and to become a more complete direct marketing company. Through its existing
media access and order fulfillment operations, the Company has the ability to
deliver infomercial or other product programming/advertising and products to
over 370 million households worldwide. The Company intends to continue to
explore new ways to effectively utilize and leverage this worldwide distribution
reach and capability and its media access, possibly, by offering such reach and
capability to other consumer distributors; by entering into alliances with
companies that need or desire to reach the households that the Company's
programming reaches; and by taking advantage of the product/brand awareness
created by its programming in other methods of consumer distribution (i.e.,
retail, internet and continuity). In addition, the Company intends to more
aggressively utilize its assets such as its customer lists in order to realize
the true value thereof.
CONTINUE TO DEVELOP AND MARKET INNOVATIVE PRODUCTS. The Company continually
seeks out innovative consumer products which it can market and distribute
profitably. The Company has an in-house product development/marketing department
responsible for researching, developing and analyzing products and product
ideas. The Company augments its product development activities through
relationships with third parties.
The Company believes that its library of infomercial programs, together with
its extensive international operations and experience in product sourcing,
telemarketing, order fulfillment and customer service, gives it a significant
competitive advantage over others desiring to enter its existing or new markets.
While the Company incurs certain initial and ongoing costs in connection with
adapting a product and infomercial for specific markets, the primary expenses
are incurred when the product/infomercial is first developed for its initial
target market. Thus, as the Company decides to introduce a product into
additional markets, it can do so quickly, efficiently and relatively
inexpensively.
4
<PAGE>
ENGINEERING THE MOST EFFICIENT BUSINESS MODEL FOR THE COMPANY. The Company
continues to explore methods to improve each step in the development and life
cycle of a product/infomercial and to develop its expertise in, and refine its
approach with regards to, among other things, product sourcing, in-bound
telemarketing, order fulfillment, non-infomercial revenue production and
customer service. National Media believes that its current competitive
advantages of international media access, multi-country coverage and
fully-integrated program production, product sourcing and order fulfillment, as
well as the development of new partnership relationships, provide it with a
strong base from which it can lower its costs and engineer a business model
which is the most efficient for a worldwide direct response business.
PRODUCT DEVELOPMENT
The Company's product development/marketing department researches and
develops new products that may be suited for direct response television
marketing and subsequent marketing through non-infomercial distribution
channels. The Company's product development staff develops new product offering
ideas from or with a variety of sources, including inventors, suppliers, trade
show participants, industry conference contacts, manufacturing and consumer
product companies and the Company's ongoing review of new developments within
its targeted product categories. The Company does not invent new products but,
as a result of the Company's prominence in the infomercial industry, it often
receives and reviews new product proposals from independent third parties who
have invented or patented a product which they wish to market through the
Company. During the evaluation phase of product development, the Company
evaluates the suitability of the product for television demonstration and
explanation as well as the anticipated perceived value of the product to
consumers, determines whether an adequate and timely supply of the product can
be obtained, and analyzes whether the estimated profitability of the product
satisfies the Company's criteria. The Company oversees the enhancement of
products brought to it by these parties for purposes of targeting the products
for a direct marketing audience. This effort may include actual changes to the
product itself as well as alterations of tradename, packaging, etc.
In order to develop or acquire the rights to distribute or market new
products, the Company sometimes works with consumer product companies. A clear
advantage of these relationships is that the Company's partner typically will
underwrite the research and development function, thereby reducing the Company's
financial risk as well as its working capital requirements.
The Company reviews its products on an ongoing basis to select those
products which it believes will be successful in Europe, Asia and/or one of its
other international markets. When a product which was initially sold
domestically is selected for international distribution, the infomercial is
dubbed, if necessary, and product literature is created in the appropriate
foreign languages. In addition, a review of the product's and the infomercial's
compliance with local laws is completed, as necessary. The Company then begins
airing the infomercial internationally. As competition in the international
marketplace has increased, the Company has begun introducing domestically
originated products internationally on a much more rapid basis. Internationally,
the Company airs shows which it produces and also distributes products of other
independent domestic infomercial companies. The Company brought approximately 64
new products to market globally during fiscal 1998, 11 of which were products
marketed through infomercials produced by the Company.
The Company obtains the rights to new products created by third parties
through various licensing arrangements generally involving royalties related to
sales of the product. The amount of the royalty is negotiated and generally
depends upon the level of involvement of the third party in the development and
marketing of the product. The Company generally pays the smallest royalty to a
third party that only provides a product concept. A somewhat higher royalty is
paid to a third party that has fully developed and manufactured a product. The
Company also obtains the rights to sell products which have already been
developed, manufactured and marketed through infomercials produced by other
companies. In such cases, the Company generally pays a higher royalty rate to
the third party because of the relatively small amount of the Company's
resources required to develop the product. The Company generally seeks exclusive
5
<PAGE>
worldwide rights to all products in all means of distribution. In some cases,
the Company does not obtain all marketing and distribution rights, but seeks to
receive a royalty on sales made by the licensor pursuant to the rights retained
by the licensor.
INFOMERCIAL DEVELOPMENT AND TEST MARKETING
Once the Company decides to bring a product to market, it arranges for the
production of an infomercial that will provide in-depth demonstrations and
explanations of the product. The Company's infomercials have historically been
28 minutes in length. The Company attempts to present a product in an
entertaining and informative manner utilizing a variety of program formats,
including live talk shows and live paid studio audience programs. The Company's
infomercials are currently produced in-house or by independent production
companies with experience in the Company's product categories in the United
States and other countries. The cost of producing an infomercial generally
ranges from $200,000 to $400,000. In addition, producers, hosts and
spokespersons generally receive fees based upon sales of the product.
Following completion of the production of an infomercial, the program is
then tested in the United States in specific time slots on both national cable
networks and targeted broadcast stations. If a show achieves acceptable results
in the market tests and a supply of product is available, it is generally aired
on a rapidly increasing schedule on cable networks and broadcast channels.
During this initial phase, the Company may modify the creative presentation of
the infomercial and/or the retail pricing, depending upon viewer response. After
the initial marketing phase, the Company may adjust the frequency of a program's
airings to achieve a schedule of programs that it believes maximizes the
profitability of all of the Company's products being marketed through
infomercial programming at a given time. In the past, the Company generally
aired each successful infomercial domestically for 4 to 10 months or more,
before international airings were begun. International airings then would range
from 12 to 24 months, or longer in some instances. The Company has more recently
begun introducing products internationally soon after, or simultaneously with,
its domestic introduction of the products.
The Company believes that it has the largest library of infomercials and
associated products in the world. The Company believes that this library is a
significant asset when it negotiates to gain access to media time, particularly
in new markets where media sources require that a variety of programming be
aired over given periods of time.
MEDIA ACCESS
An important part of the Company's ability to successfully market products
is its access to media time. An integral part of the Company's results of
operations is its ability to purchase media time at a price which allows it to
sell sufficient product units to make a profit. Many factors, such as changing
viewer patterns, cable company practices and competition impact on the Company's
ability to properly manage this function. The Company's infomercial programming
is presently available to more than 370 million households in over 70 countries
worldwide.
In peak periods, the Company utilizes upwards of 1000 hours of cable and
broadcast television time per week in the United States and upwards of 650 hours
per week internationally, most of which is satellite and terrestrial broadcast
time, to air its infomercials. For the most part, cable broadcast technology is
not as prevalent internationally as it is in North America. Historically,
approximately one-half of the Company's cable air time in the United States and
a majority of the Company's satellite and terrestrial air time internationally
has been purchased under long-term contracts that provide for specific time
slots over the life of the respective contracts. Over the past 18 months, the
Company has effectuated an intentional reduction in the United States market to
the point where, only one-quarter of its time is now purchased pursuant to
longer term contracts. The Company's current strategy in North America is to
avoid long-term commitments unless they include a variable rate pricing feature.
6
<PAGE>
DOMESTIC
Domestically, the Company purchases most of its cable television time
directly from cable networks and their respective media representatives, rather
than from multi system operators, and presently has commitments for cable
television time slots for periods ranging from two weeks to six months. Such
commitments for cable television access are generally longer in duration than
broadcast television time, which is often purchased on an "as available" basis.
The Company believes that its programming is seen on at least one network which
is carried by every local cable system carrier throughout the United States.
In addition to domestic air time purchased on cable networks, the Company
also purchases broadcast television time from network affiliates and independent
stations. Broadcast television time segments are purchased primarily in
30-minute spots. The Company also purchases 60 and 120-second spots where
economically feasible and adapts portions of its infomercials for airings in
such spots. The time segments on broadcast television are purchased primarily on
a quarterly basis based on the availability of programming time. In the event
that the Company determines that such time slots are not advantageous to the
Company, the Company is able to terminate such agreements quickly. The Company
believes that there is currently more than an adequate supply of broadcast
television time available from these sources in the United States to satisfy the
Company's needs. In fiscal 1998 in the United States, approximately 49.6% (in
dollar terms) of the media time purchased by the Company for airings its
infomercials came from cable television and approximately 50.4% came from
network affiliates and independent television. The Company's infomercials
generally are aired in the United States between the hours of 3:00 a.m. and 2:00
p.m., Eastern time, seven days a week.
The Company generally has the right to resell any media time it may have the
right to use. During fiscal 1998, the Company maintained a broker relationship
with several companies to which it sold air time. This ability to resell excess
time can reduce some of the risk associated with large or longer term purchases
of media time.
As discussed above, the Company purchases a significant amount of its media
time from cable television and satellite networks. These cable television and
satellite networks assemble programming for transmission to multiple and local
cable system operators. These operators may not be required to carry all the
network's programming. The Company currently does not pay and is not paid for
the "privilege" of being broadcast by these operators. It is possible that, if
demand for air time grows in the United States, these operators will begin to
charge the Company to continue broadcasting the Company's infomercials or limit
the amount of air time available to the Company. The Company is dependent on
having access to media time to televise its infomercials on cable networks,
satellite networks, network affiliates and local stations.
INTERNATIONAL
Internationally, the Company's infomercials are aired on one or more of
three technologies in its market territories: (i) satellite transmission direct
to homes with satellite reception dishes, (ii) cable operators who retransmit
satellite broadcasts to cable-ready homes and (iii) terrestrial broadcast
television. The Company's satellite air time has historically been obtained
through long-term agreements with companies that own or lease satellite
transponder time. The Company at present is a party to contracts with
pan-European satellite channels such as Eurosport, Flextech (Starstream) and The
NBC Super Channel. During the term of these contracts, the Company is generally
entitled to broadcast programming continuously for a specified period of time
daily. Under some of these arrangements, the Company has rights of first refusal
for any additional infomercial air time that becomes available. In April, 1998
the Company began a direct lease of a twenty four hour per day transponder on a
newly-launched Eutelstat satellite, the "Hotbird IV" (the "Eutelstat Satellite")
the coverage of which reaches across the European continent. It remains to be
seen how many households will actually access the Company's programming via the
Eutelstat Satellite. The Company expects to incur significant start up costs,
especially in the first half of
7
<PAGE>
fiscal 1999, associated with the Eutelstat Satellite which will adversely effect
its media costs. However, the Company believes that in the long term the
Eutelstat Satellite will be beneficial to its European operations. At present,
in Japan and throughout most of Asia, the Company purchases the majority of its
media time through its partner, Mitsui & Co., Ltd. ("Mitsui"). The Company's
existing agreement with Mitsui regarding its operations in Japan will terminate
on January 1, 1999. The Company and Mitsui are involved in negotiations to
restructure their relationships in Japan and throughout Asia in order to address
changes in that market and other circumstances which have arisen. As a result of
its media relationships, the Company's transactional television programming can
be seen in the Middle East, South Africa, Asia and in virtually every country in
Europe, and its products are available for purchase in over 70 countries. As the
Company's media contracts expire, the Company expects that it will face
increases in costs associated with the renewal of certain of such media
contracts, which may or may not have a material adverse effect on the Company.
The Eutelstat Satellite lease expires in 2010.
SOURCING AND MANUFACTURING
The Company uses sources in the United States and several countries in
Europe and Asia to manufacture products sold through its infomercials and
otherwise. The Company monitors the availability of supplies of products and
adjusts the amount of air time on which an infomercial for a particular product
which cannot be adequately supplied will be aired. Additionally, the Company
uses the services of a technical/engineering firm in Hong Kong and Taiwan to
assist in the coordination of the manufacturing of some of the Company's
products in Asia and to assist in the monitoring of the quality of the products
manufactured in such countries. The same product manufacturing sources are
generally utilized irrespective of whether an infomercial is being aired in the
United States or internationally.
In general, when possible, before the Company takes any sizeable inventory
position in a product, the Company test markets the product. The Company then
purchases additional inventory for a future roll-out of the product infomercial.
Sometimes, due to issues of timing and payment relating to sourcing, the Company
does take an inventory position in a product before testing is completed.
IN-BOUND TELEMARKETING
The Company strives to create a problem-free fulfillment process for its
customers. This process consists of in-bound telemarketing, order fulfillment
and customer services. The first step in this process is the order-taking
function known as in-bound telemarketing. Customers may order products marketed
through infomercials during or after the infomercial by calling a telephone
number (toll-free in the United States), which is shown periodically on the
television screen during the broadcast. Both domestically and, in most cases,
internationally, the Company currently subcontracts its telemarketing function
to one of various third parties that provide this service for a fee based
principally on the number of telephone calls answered. In Australia and New
Zealand, the Company operates its own in-bound telemarketing. In all instances
domestically and in most instances internationally, in-bound telemarketers
electronically transmit orders to the Company's order fulfillment centers where
the product is packaged and shipped. In certain cases, at the time of purchase,
the in-bound telemarketers also promote, cross-sell and upsell complementary
and/or additional products or services. Such sales efforts are orchestrated by
the Company's marketing personnel who script the sales approaches of the
telemarketing personnel.
The large majority of customer payments in the United States are made by
credit cards over the telephone with the remainder paid by check. The trend in
the infomercial industry, especially over the last few years, has been to sell
products on a multi-pay basis whereby customers make installment payments over
some predetermined period after having received the product. This practice is
prevalent in the United States and the South Pacific Rim regions. In Europe and
Asia, products are generally delivered to consumers on a "cash on delivery"
basis. In other areas of the world, payment by check at the time of delivery is
not uncommon. In fiscal 1998, the Company introduced domestically the direct
debit method of
8
<PAGE>
payment (i.e., use of customer's checking account as a credit card), a method
utilized previously in the South Pacific Rim region.
ORDER FULFILLMENT
At present the Company's North American order fulfillment center is operated
by the Company out of a leased facility located in Phoenix, Arizona. Activities
at this facility include receiving merchandise from manufacturers, inspecting
merchandise for damages or defects, storing and assembling product for later
delivery, packaging and shipping of products and processing of customer returns.
The Company's Phoenix fulfillment center, an approximately 188,000 square foot
facility, processes substantially all orders for the Company's products sold in
North America. The Company primarily uses bulk shippers to deliver products to
customers in the United States. Each customer is charged a shipping and handling
fee, which varies among products. The Company is presently analyzing whether it
should reduce the size of its Phoenix operation and/or, outsource some or all of
the functions currently being performed there.
Throughout most of Europe and Asia, the Company operates the warehousing,
order fulfillment, distribution and customer service functions of its business
through independent third parties, each of which is responsible for a particular
territory. In New Zealand and Australia, the Company performs these functions
internally. European products are shipped by the Company or the manufacturer to
an independent warehouse in Rotterdam, The Netherlands. Products are then
shipped to independent fulfillment centers throughout Europe that process the
Company's European sales orders. The Company is currently expanding direct
shipments of European products to all independent fulfillment centers throughout
Europe. In Asia, the Company's partner, Mitsui, plays a key role in the
warehousing and distribution of the Company's products. Outside of Europe, the
Company generally contracts with independent licensees who buy the Company's
products outright and then sell them to consumers, both through infomercials and
through other local distribution channels, under conditions and standards
prescribed and monitored by the Company. In many international countries, the
Company's products are delivered to purchasers through the postal system on a
"cash on delivery" basis. In some countries, consumers who order products in
response to an infomercial pick up their product at a central warehouse
facility.
CUSTOMER SERVICE
An important aspect of the Company's marketing strategy is to maintain and
improve the quality of customer service. Domestically, the Company operates
toll-free customer service telephone numbers and maintains its own customer
service department in Phoenix, Arizona to respond to customer inquiries, provide
product information to customers and process product returns. Outside of the
United States and Canada, customer service is generally provided on a contract
basis through third parties whose operations are monitored by the Company. The
Company's New Zealand and Australian subsidiaries perform these functions
internally.
The Company generally offers an unconditional 30-day money back return
policy to purchasers of any of its products. In addition, products are generally
covered by warranties offered by the manufacturer for defective products. The
terms of such warranties vary depending upon the product and the manufacturer.
The average return rate of the Company's products for each of fiscal 1998, 1997
and 1996 was 15.7%, 10.3% and 9.2%, respectively. The Company believes that its
overall return rate has increased as a result of the following factors: 1) a
higher percentage of international sales; 2) more larger product (i.e., fitness
equipment) sales; and 3) more book and tape type products. International sales
carry a higher average return rate due to the "cash on delivery" terms of a
significant portion of this business. In countries where the Company depends
upon the postal system for deliveries on a "cash on delivery" basis, official
return rates include instances where there is no answer at the attempted
delivery site and where a person at the delivery site does not have the cash on
hand at the time of delivery. The Company believes that its return experience is
within the customary range for direct marketing businesses.
9
<PAGE>
NON-INFOMERCIAL MARKETING
Based on the success of certain of its products in traditional retail
markets and the evolution of its business, the Company believes that its
transactional television programming is effective in building consumer awareness
of its products, as well as in positioning the Company to act as the media
marketing partner for manufacturers of consumer products. The Company attempts
to capitalize on its ability to create product awareness and its ability to act
as a media marketing partner to extend the sales life of its products by
shifting products from infomercial programming to non-infomercial marketing
channels such as continuity sales, retail distribution, catalogs, direct mail,
direct response print ads, television home shopping programs, credit card
statement inserts and other channels resulting from the development of strategic
partnerships. The Company believes that established manufacturers are
increasingly regarding infomercials as a desirable vehicle to showcase their
products to create and build brand awareness and generate follow-up product
sales through traditional retail outlets.
Prior to fiscal 1992, a limited amount of the Company's sales had been
through non-infomercial distribution channels that did not include retail
distribution. In fiscal 1992, the Company began selling products through
traditional retail channels, such as mass merchandisers, specialty retailers and
wholesale clubs. During fiscal 1994, the Company began entering into agreements
with partners who handle the retail marketing and pay a royalty to the Company
based on retail sales in consideration of the television advertising for the
product funded by the Company. In fiscal 1998, 1997 and 1996, non-infomercial
distribution channels accounted for 9.3%, 6.6% and 3.3%, respectively, of the
Company's net revenues. The increased percentage in fiscal 1998 was primarily
due to increased retail sales in the Far East and South Pacific Rim Regions.
Fiscal 1997 included significant royalties earned from the sale of the Ab Roller
Plus product in the retail marketplace.
The Company intends to pursue further expansion of its retail operations in
order to capitalize on the consumer brand-awareness created by the Company's
infomercials and reinforced by the "As Seen On TV" in-store signage. The Company
believes that the product exposure created by the Company's transactional
television programming enables the Company and its partners to utilize
traditional retail distribution channels without incurring any of the additional
advertisement costs that other consumer product companies may incur. In this
manner, the Company believes that it will be able to market products to
consumers who view its programming, but do not traditionally purchase products
through direct response marketing. In New Zealand, Australia and parts of Asia,
the Company operates small retail locations of its own.
PRODUCTS
The Company markets consumer products in a variety of categories. In fiscal
1998, the Company offered a total of over 125 products to consumers in one or
more geographic markets worldwide, of which, on a revenue basis, approximately
80.0% were products sold through the Company's infomercials and approximately
20.0% were products sold through infomercials produced by other companies and
aired by the Company. Of the products sold through the Company's infomercials in
fiscal 1998, approximately 11 were products first introduced by the Company in
fiscal 1998 and approximately 49 were products that were originally offered in
previous years. Through its international programming, the Company has brought
to the international marketplace many of its products that had been successfully
marketed in the United States.
The Company's five most successful products in each of fiscal 1998, 1997 and
1996 accounted for approximately 40.3%, 41.2% and 46.0%, respectively, of the
Company's net revenues for such periods. The Company continues to be dependent,
in significant part, upon its ability to develop or obtain rights to new
products to supplement and replace existing products as they mature through
their product life cycles. The Company's international operations lengthen the
potential duration of the life cycle of programs that comprise the Company's
infomercial library. Historically, the majority of the Company's products
generate
10
<PAGE>
their most significant domestic revenues in the first 6 months following initial
airing of the product's infomercial. Internationally, however, products
typically generate revenues more evenly over a longer period due, in part, to
the introduction of such products into new markets each year. Based on the fact
that the Company already markets its products in over 70 countries, the
Company's ability to continue to expand into new markets each year will be
limited. To illustrate an infomercial's life cycle, the Company derived fiscal
1998 net infomercial revenue as follows: approximately 43.9% from products
introduced during fiscal 1998, approximately 46.3% from products introduced
during fiscal 1997 and 1996 and approximately 9.8% from products introduced
prior to fiscal 1996.
BACKLOG
Backlog orders for the Company at April 30, 1998 and 1997 were approximately
$12.1 million and $12.0 million, respectively. Average monthly backlog orders
for fiscal 1998 were approximately $12.5 million as compared to $11.6 million in
fiscal 1997. The consumer is notified upon placement of an order that normal
shipping time is four to six weeks. Orders in excess of anticipated production
capacity are included in backlog figures. However, product shortages,
cancellations, returns and allowances may reduce the amount of sales realized
from the fulfillment of backlog orders. Backlogs of orders may result from
unexpectedly large volumes of product orders, inventory supply delays, other
matters affecting the ability of the Company to fulfill orders, etc, some of
which are outside the Company's control. The Company does not make an effort to
intentionally create backlog situations because delays in delivering product
typically increase product rejection/return rates.
COMPETITION
The Company competes directly with many other companies, large and small,
which generate sales from infomercials. The Company also competes with a large
number of consumer product companies and retailers which have substantially
greater financial, marketing and other resources than the Company, some of which
presently conduct, or indicated their intent to conduct, direct response
marketing. The Company also competes with companies that make imitations of the
Company's products at substantially lower prices. Companies which "knockoff" the
Company's products take advantage of the product category awareness, product
development, etc. which the Company pays for when it develops a product and an
infomercial. The Company seeks to protects itself from "knockoffs" through
establishment and enforcement of its intellectual property rights. Products
similar to the Company's products may be sold in department stores, pharmacies,
general merchandise stores and through magazines, newspapers, direct mail
advertising and catalogs.
MANAGEMENT INFORMATION SYSTEMS
The Company's computer system features programs which allow the Company to
manage its media time purchases and program scheduling, the flow of product
order information among its telemarketers, its order fulfillment center, its
credit card clearing house and the flow of shipping, billing and payment
information. The Company believes that its management information systems are in
need of improvement and it is currently in the process of doing so including
discussions regarding the outsourcing of portions of this function.
YEAR 2000 ISSUES
The efficient operation of the Company's business is dependent in part on
its computer hardware, software programs and operating systems (collectively,
"Programs and Systems"). These Programs and Systems are used in key areas of the
Company's business, including merchandise purchasing, inventory management,
pricing, sales, shipping and financial reporting, as well as in various
administrative functions. The Company has been evaluating its Programs and
Systems to identify potential Year 2000 compliance issues. These actions are
necessary to ensure that the Programs and Systems will recognize and process the
11
<PAGE>
Year 2000 and beyond. It is anticipated that modification or replacement of some
of the Company's Programs and Systems will be necessary to make such Programs
and Systems Year 2000 compliant. The Company is also communicating with
suppliers, financial institutions and others to coordinate Year 2000 conversion.
Based on present information, the Company believes that it will be able to
achieve such Year 2000 compliance through a combination of modification of some
existing Programs and Systems, and the replacement or upgrade of other Programs
and Systems that are already Year 2000 compliant. However, no assurance can be
given that these efforts will be successful. The Company currently believes that
the expenses and capital expenditures associated with achieving Year 2000
compliance will be in the range of $1.0 to $2.0 million.
GOVERNMENT REGULATION
Various aspects of the Company's business are subject to regulation and
ongoing review by a variety of federal, state, and local agencies, including the
FTC, the United States Post Office, the CPSC, the FCC, FDA, various States'
Attorneys General and other state and local consumer protection and health
agencies. The statutes, rules and regulations applicable to the Company's
operations, and to various products marketed by it, are numerous, complex and
subject to change.
As a result of prior settlements with the FTC, the Company has agreed to two
consent orders. Prior to the Company's May 1996 acquisition of Positive Response
Television, Inc. ("PRTV"), PRTV and its Chief Executive Officer, Michael S.
Levey, also agreed to a consent order with the FTC. For further discussion, see
Item 3 -Legal Proceedings, Regulatory Matters.
The Company's international business is subject to the laws and regulations
of England, the European Union, Japan and other countries in which the Company
sells its products, including, but not limited to, the various consumer and
health protection laws and regulations in the countries in which the programming
is broadcast, where applicable. If any significant actions were brought against
the Company or any of its subsidiaries in connection with a breach of such laws
or regulations, including the imposition of fines or other penalties, or against
one of the entities through which the Company obtains a significant portion of
its media access, the Company could be materially adversely affected. There can
be no assurance that changes in the laws and regulations of any territory which
forms a significant portion of the Company's market will not adversely affect
the Company's business or results of operations.
The Company collects and remits sales tax in the states in which it has a
physical presence. Certain states in which the Company's only activity is direct
marketing have attempted to require direct marketers, such as the Company, to
collect and remit sales tax on sales to customers residing in such states. A
1995 United States Supreme Court decision held that Congress can legislate such
a change. Thus far, Congress has taken no action to that effect. The Company is
prepared to collect sales taxes for other states, if laws are passed requiring
such collection. The Company does not believe that a change in the tax laws
requiring the collecting of sales tax will have a material adverse effect on the
Company's financial condition or results of operations.
EMPLOYEES
As of May 31, 1998, the Company had approximately 430 full-time employees.
The Company also utilizes contract/part-time laborers at its order fulfillment
center in Phoenix, Arizona on an as needed basis. None of the Company's
employees are covered by collective bargaining agreements and management
considers relations with its employees to be good.
12
<PAGE>
TRADEMARKS/PATENTS
The Company has a number of registered trademarks and other common law
trademark rights for certain of its products and marketing programs. It is the
Company's policy that it will seek to fully protect and vigorously defend its
trademark rights in its products and programs, although the Company often will
not actively seek to register certain trademarks in all jurisdictions where its
sells its products. The Company does not hold any patents, but the products
which the Company markets are often protected by patents (or the subject of
pending patent applications) held by the Company's product partners. The Company
seeks to have its product partners indemnify the Company against claims that the
product marketed by the Company with such partner infringe some third party's
patent rights.
ITEM 2. PROPERTIES
The Company currently leases approximately 25,200 square feet of office
space pursuant to an eleven-year lease for its principal executive offices in
Philadelphia, Pennsylvania. The lease, which commenced in December 1996,
provides for annual rent payments of $479,000 in years one through five, and
$568,000 in years 6 through 11. Pursuant to the terms of such lease, the
Company's rent was abated from inception of the lease through November 1, 1997.
On May 1, 1997, the Company began leasing approximately 23,000 square feet
in Los Angeles, California for its new production facility and offices. The
Company does not maintain any studio space. The lease runs for 126 months and
requires payments at varying rates from $520,000 in year one to $662,000 in the
final year. In January 1998, the Company exercised a five year option to lease
an additional 3,530 square feet for approximately $63,500 per year.
The Company leases approximately 188,000 square feet in Phoenix, Arizona for
warehousing, order fulfillment and customer service operations. The Company
currently has approximately 30,000 square feet of office space available for
subletting or expansion. The annual lease payments for this lease range from
approximately $565,000 for fiscal year 1998 to $1.1 million for fiscal years
2010 through 2014.
The Company leases approximately 10,800 square feet of office space in
London, England, approximately 3,600 square feet of which it currently sublets.
The lease expires in February 2001. The lease requires annual rent payments of
L269,433 ($450,500 as of March 31, 1998). Additionally, pursuant to the terms of
such lease, the Company must pay a basic service charge for services provided by
the landlord. For the fiscal year ended March 31, 1998, the Company paid a basic
service charge of approximately L73,800 ($126,000 as of March 31, 1998).
The Company leases an office building, warehouse, showroom facility and
retail stores in Auckland, New Zealand. The main lease, which commenced on April
1, 1996, runs for ten years and currently requires annual payments of NZ$376,000
per year ($207,500 as of March 31, 1998). In addition, the Company entered into
a three year lease, beginning in August 1997, for its primary offices and
warehouse in New South Wales, Australia. The lease requires annual payments of
AUS$571,000 ($378,500 as of March 31, 1998). This amount includes AUS$78,000
($51,500 as of March 31, 1998) per year for general area charges and
maintenance.
ITEM 3. LEGAL PROCEEDINGS
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
13
<PAGE>
infringement of Precise's initial US patent for an exercise device. The suit
claimed that a product marketed by the Company pursuant to a license granted by
a third party violated Precise's initial US patent. The suit sought an
injunction and treble damages.
On July 16, 1997, the Company and certain of the other defendants to the
action entered into a settlement agreement with the plaintiffs. The Company
recorded a charge of approximately $6.0 million in the fourth quarter of the
fiscal year ended March 31, 1997 in connection with this matter.
WWOR LITIGATION
In March 1997, WWOR-TV filed a breach of contract action in the United
States District Court for New Jersey against one of the Company's operating
subsidiaries alleging that the subsidiary wrongfully terminated a contract for
the purchase of media time, seeking in excess of $1,000,000 in compensatory
damages. The Company is contesting the action. 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 results of operations.
PARKIN LITIGATION
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. The Company and Mr. Parkin settled the
action through a mutually beneficial business arrangement which is not expected
to have any material adverse impact on the Company's results of operations.
PRTV LITIGATION
PRTV SHAREHOLDERS' CALIFORNIA CLASS ACTION LITIGATION
On May 1, 1995, prior to the acquisition of 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. The suit sought unspecified compensatory damages and other equitable
relief. The Company reached an agreement in principle to settle this action in
fiscal 1997 which provided for the payment of $550,000 to the class, 66% of
which was paid by PRTV's insurance carrier. The Company recorded a charge of
$187,000 during fiscal 1997 in connection with this matter. Such settlement
received final court approval in April 1998.
SUNTIGER LITIGATION
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 is not expected to have any material adverse impact upon the
Company's financial condition or results of operations.
REGULATORY MATTERS
As a result of prior settlements with the FTC, the Company has agreed to two
consent orders. Prior to the Company's 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 PRTV and Mr. Levey to
submit compliance reports to the FTC staff. The Company 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 certain of the Company's informercials in order to
14
<PAGE>
determine whether the Company was operating in compliance with the consent
orders referred to above. 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 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, especially
given the applicable indemnification, the Company does not believe that any
remedies to which it may become subject will have a material adverse effect on
the Company's results of operations or financial condition. The FTC recently
notified the Company that it had concerns about claims being made in one of the
Company's current infomercials and also raised questions concerning certain
aspects of the Company's pricing practices in certain of its current
infomercials. The Company is responding to the FTC's inquiries.
In addition, in Spring 1997, in accordance with applicable regulations, The
Company notified the 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 Fitness Strider product and upgraded
component present a substantial product hazard, as defined under applicable law.
The Company and the CPSC 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 and an exercise
rider product marketed only in Australia and New Zealand. 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. 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. The Company has also received letters and
telephone calls from persons purporting to be stockholders of the Company,
concerning their stated intention to commence legal action against the Company
and its officers and directors relating to the Company's financial performance
over the recent past as well as the decline in the market price of the Company's
Common Stock. No specific allegations have been communicated to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended March 31, 1998.
15
<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange and the
Philadelphia Stock Exchange under the symbol "NM". Based on the Company's
present financial condition, the Company may be in violation of the listing
criteria required for trading of the Company's Common Stock on the New York
Stock Exchange and Philadelphia Stock Exchange. Failure to maintain such
criteria could result in the de-listing of the Company's Common Stock on such
exchanges and, therefore, cause the Company to fail to meet its obligations
under certain of its financing arrangements.
The following table sets forth the quarterly high and low last sales prices
as reported on the New York Stock Exchange and dividends declared for the last
two fiscal years. The Company's common stock has been traded on the New York
Stock Exchange since September 14, 1990.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
------------------------------------- --------------------
CASH
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED HIGH LOW
- ------------------------------------------------------------------- --------- --------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C>
June 30............................................................ 9 3/8 5 15/16 -- 20 5/8 16
September 30....................................................... 7 9/16 4 7/16 -- 18 14 5/8
December 31........................................................ 7 3/16 2 1/2 -- 15 3/8 5 3/4
March 31........................................................... 3 7/16 2 1/8 -- 10 1/8 6 1/2
<CAPTION>
CASH
DIVIDENDS
QUARTER ENDED DECLARED
- ------------------------------------------------------------------- ---------------
<S> <C>
June 30............................................................ --
September 30....................................................... --
December 31........................................................ --
March 31........................................................... --
</TABLE>
The number of record holders of the Company's Common Stock on June 15, 1998
was approximately 840. The Company is currently restricted in its ability to pay
dividends under the terms of its debt financing as more fully described in Note
5 to the financial statements.
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues......................................... $ 278,474 $ 358,179 $ 292,607 $ 176,167 $ 172,602
(Loss) income before income taxes (3),(4)............ (56,069) (43,794) 20,104 (372) (8,699)
Net (loss) income (3),(4)............................ (56,769) (45,691) 16,579 (672) (8,699)
---------- ---------- ---------- ---------- ----------
Net (loss) income per common share:
Basic.............................................. $ (2.31) $ (2.09) $ 1.08 $ (.05) $ (.72)
Diluted............................................ (2.31) (2.09) .73 (.05) (.72)
Cash dividends....................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Weighted average number of shares
Basic.............................................. 24,904 21,905 15,411 14,024 12,078
Diluted............................................ 24,904 21,905 22,674 14,024 12,078
---------- ---------- ---------- ---------- ----------
Balance Sheet Information:
Working capital...................................... $ 9,442 $ 19,768 $ 38,722 $ 22,081 $ 1,377
Total assets......................................... 143,091 165,632 116,548 64,143 47,475
Short-term debt(1)................................... 30,812 17,901 876 184 4,770
Long-term debt(2).................................... 469 959 4,054 3,613 448
Shareholders' equity................................. 54,327 88,560 56,462 26,625 10,571
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Net of loan discount of $900 and $768 as of March 31, 1998 and 1997,
respectively.
(2) Net of loan discount of $1,251 and $1,650 as of March 31, 1996 and 1995,
respectively.
(3) Fiscal 1998 includes a charge of $14.5 million related to the write-off of
the remaining PRTV goodwill which was determined to be unrecoverable. In
addition, fiscal 1998 includes $6.5 million in provisions for inventory
obsolence.
(4) Fiscal 1997 includes the operating results of certain of the Company's
operating subsidiaries as follows: PRTV, from May 17, 1996 forward and
Prestige and Suzanne Paul (as defined below) from July 1, 1996 forward. In
addition, the fiscal 1997 loss included $8.7 million in provisions for
inventory obsolescence; $5.7 million in bad debt expense; $13.3 million in
legal fees and settlements; $2.5 million of amortization primarily related
to the new acquisitions; $4.4 million related to a write-off of additional
PRTV goodwill; and PRTV's significant operating loss, all as discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Fiscal 1995 included $5.3 million in expenses related to certain
legal settlements and associated fees; $1.0 million in relocation costs; and
$1.8 million in anti-takeover and aborted stock offering costs.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As more fully described elsewhere herein, the Company is engaged in the
direct marketing of consumer products, primarily through the use of
infomercials, in both domestic and international markets. Domestically, the
Company has historically been dependent on a limited number of successful
products to generate a significant portion of its net revenue. The Company's
strategies for future periods are being designed to reduce the risk associated
with relying on a limited number of successful products for a disproportionate
amount of its revenues and tailoring the Company's domestic operations to more
efficiently deal with the cyclical nature of the Company's domestic business.
These include the more effective utilization and leveraging of its global
presence and media access, the continued development and marketing of innovative
products to enhance its existing infomercial programs, and engineering the most
efficient business model for the Company's future operations. International
expansion over the last five (5) years, has resulted in approximately one-half
of the Company's revenues being generated from the international infomercial
marketplace. The Company takes advantage of product awareness created by its
infomercials and also extends the sales life of its products through
non-infomercial distribution channels. These include retail arrangements as well
as continuity sales efforts; and internet marketing, among others.
RESULTS OF OPERATIONS
The operating results for certain of the Company's operating subsidiaries,
namely PRTV, Prestige Marketing Limited ("Prestige") and Suzanne Paul Holdings
Pty Limited and its subsidiaries (collectively, "Suzanne Paul") are included in
the Company's results from the date of each respective acquisition during fiscal
1997.
The following table sets forth operating data of the Company as a percentage
of net revenues for the periods indicated below.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------
<S> <C> <C> <C>
1998 1997 1996
------- ------- -------
Net Revenues..................................................... 100.0% 100.0% 100.0%
Operating costs and expenses:
Media purchases.................................................. 33.0 36.6 29.6
Direct costs..................................................... 60.2 55.0 51.7
Selling, general and administrative.............................. 20.5 18.3 11.5
Write-off of impaired goodwill................................... 5.2 1.2 --
Severance expense for former executive officers.................. -- 0.7 --
Interest expense................................................. 1.2 0.4 0.3
------- ------- -------
Total operating costs and expenses............................... 120.1 112.2 93.1
------- ------- -------
(Loss) income before income taxes................................ (20.1) (12.2) 6.9
Net (loss) income................................................ (20.4)% (12.8)% 5.7%
------- ------- -------
------- ------- -------
</TABLE>
COMPARISON OF FISCAL 1998 WITH FISCAL 1997
NET REVENUES
Net revenues were $278.5 million in fiscal 1998 as compared to $358.2
million in fiscal 1997, a decrease of $79.7 million or 22.3%. Retail royalties
were negligible in fiscal 1998 versus $16.3 million in fiscal 1997. The fiscal
1997 royalties principally reflected the royalties generated from retail sales
of the Ab Roller Plus product.
Domestic net revenues were $123.6 million in fiscal 1998 as compared to
$188.5 million in fiscal 1997, a decrease of $64.9 million or 34.4%. This
decrease was due primarily to the lack of a product or products to replace the
revenues generated by the Ab Roller Plus which performed strongly in fiscal 1997
in
18
<PAGE>
television and in print and retail. The Ab Roller Plus accounted for
approximately 41.9% of domestic net revenues in fiscal 1997. The rollout of a
number of shows during fiscal 1998 was postponed due to show production delays,
to timing issues related to product manufacturing and sourcing, and the
Company's tight cash position which affected, among other things, inventory
purchasing and media acquisition. Approximately 63% of net revenues for fiscal
1998 were generated by sales of the Company's Great North American Slim Down
(16.8%), Cyclone (16.6%), T-Fal (14.7%) and PVA 10X Mop (14.1%) products.
Current year domestic revenues were also unfavorably impacted by an increased
return rate primarily due to a change in product mix. In fiscal 1998, the
Company offered more high priced products and book and audio or video tape type
products, which traditionally carry higher return rates. The Company started
benefiting from the rollout of new shows beginning late in the second quarter of
fiscal 1998.
International net revenues in fiscal 1998 were $154.9 million as compared to
$169.7 million in fiscal 1997, a decrease of $14.8 million or 8.7%. The current
year included a full year of revenues from the Prestige and Suzanne Paul
acquisitions compared to approximately nine months in the prior year; as well as
a 12.6% increase in European net revenues due to expansion into Eastern Europe.
These increases only partially offset the approximate 40.3% decline in revenues
generated in the Asian marketplace. Japan, the Company's principal Asian market,
experienced a 49.7% decline in fiscal 1998 revenues from fiscal 1997.
Approximately 4.6% was due to currency devaluation. This decline was the result
of extreme downturns in general economic conditions in this marketplace,
increased competition from traditional programming and other infomercial
competitors and the fact that the Company was unable to acquire additional
productive airtime. In addition, the Company's Asian and South Pacific Rim
revenues were negatively impacted by the significant currency devaluations
experienced in these markets. These factors are expected to have a continuing
adverse impact on these regions, and the Company's results of operations, in
fiscal 1999. The Company's South Pacific Rim revenues and operating results were
also negatively impacted in fiscal 1998 by significant returns associated with
its Fitness Strider product.
OPERATING COSTS
Total operating costs and expenses were $334.5 million in fiscal 1998, as
compared to $402.0 million in fiscal 1997, a decrease of $67.5 million or 16.8%,
principally due to the 22.3% decline in net revenue. Excluding the write-offs in
fiscal 1998 and 1997 of impaired goodwill of $14.5 million and $4.4 million,
respectively, total operating costs and expenses decreased by 19.5% during
fiscal 1998 as compared to fiscal 1997.
MEDIA PURCHASES
Media purchases were $91.9 million in fiscal 1998 compared to $131.1 million
in fiscal 1997, a decrease of $39.2 million or 29.9%. This decrease correlates
in large part to the 22.3% decline in net revenues. During periods where the
Company was lacking in successful new shows, less media was purchased for
airings. The ratio of media purchases to net revenues improved to 33.0% as
compared to 36.6% in fiscal 1997. This was due to a significant improvement in
the domestic ratio of media purchases to net revenues. The Company sold more
products per dollar of media purchased in fiscal 1998 compared to fiscal 1997.
The current year domestic ratio decreased in excess of five percentage points
over the prior year ratio. This decrease was achieved in spite of the prior year
ratio benefiting from higher retail royalties than in fiscal 1998. Retail
royalties carry no direct media costs and therefore contribute to a more
favorable ratio. In addition, the fiscal 1998 ratio benefited from a higher
percentage of revenues being earned in the international marketplace in which
media rates are generally more favorable. The international ratio increased
slightly in fiscal 1998 as compared to fiscal 1997. Recent trends indicate an
increase in international media costs due to increased competition and a trend
towards minimum guarantees of media purchases. Higher costs could result in
higher ratios of media expenditures to revenues. The Eutelstat Satellite, on
which the Company leases a 24 hour transponder, launched in April 1998 at which
time the Company began making monthly payments for the use of the transponder.
While potentially
19
<PAGE>
providing the Company with expanded media coverage in Europe, if viewership
and/or viewer response is not obtained at the desired levels or within the
desired timeframe, the Company could experience an increase in its European
advertising to sales ratio (taking into account the cost of the transponder
lease and the cost of uplinking to the satellite). Based on preliminary results,
the cost of the Eutelstat Satellite will contribute to an increase in its
European advertising to sales ratio in fiscal 1999, especially during the first
six months of the fiscal year.
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 $167.5 million in fiscal 1998 as compared to $197.0
million in fiscal 1997, a decrease of $29.5 million or 14.9%, primarily related
to the decrease in net revenues. As a percentage of net revenues, direct costs
were 60.2% in fiscal 1998 as compared to 55.0% in fiscal 1997. Direct costs as a
percentage of net revenues increased in both the domestic and international
marketplaces. The expense for inventory obsolescence was $6.5 million (2.3% of
net revenues) and $8.7 million (2.4% of net revenues) in fiscal 1998 and 1997,
respectively. Domestically, the ratio was unfavorably impacted by the 34.4%
decrease in net revenues. The lower sales volume, especially in the first six
months of fiscal 1998, coupled with certain fixed costs associated with the
Company's fulfillment operations and a significant increase in the domestic
return rate, negatively impacted the ratio. In addition, fiscal 1997 benefited
from retail royalties ($.7 million for fiscal 1998 as compared to $16.3 million
for fiscal 1997) which carry minimal direct costs. Internationally, the economic
downturn and currency devaluation in the Far East and South Pacific Rim regions,
a change in product mix and increased show customization costs adversely
affected the ratio. The currency devaluation, particularly in the six months
ended March 31, 1998, resulted in higher product costs due to the Company's
inability to increase pricing sufficiently to offset the full impact of the
significant decline in local currency values. In Japan, fulfillment and
warehousing costs increased as a percentage of revenues as a result of the lower
sales volume and higher inventory levels.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $57.1 million in fiscal
1998 as compared to $69.8 million in fiscal 1997, a decrease of $12.7 million or
18.2%. Fiscal 1998 included approximately $2.0 million of additional selling,
general and administrative expenses associated with the operations of Prestige
and Suzanne Paul which were acquired in July of 1996, resulting in nine months
of expense in fiscal 1997 compared to a full year of expense in fiscal 1998. In
addition, the current period includes non-cash compensation expense of $1.9
million associated with options granted to an executive officer. Fiscal 1998
benefited from a decrease in legal settlements and legal fees of in excess of
$10.0 million. Fiscal 1997 included $9.4 million of legal settlements, including
$6.0 million related to the Ab Roller settlement. In addition, fiscal 1998
included bad debt expense of $2.2 million as compared to $5.7 million in fiscal
1997. This decrease was due to fiscal 1997 including $2.1 million for two
specific customers. Fiscal 1998 also included cost reductions associated with
PRTV in the first half of fiscal 1998. The above reductions more than offset
higher consulting 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 19.5%
to 20.5% in fiscal 1998 due primarily to the 22.3% decrease in net revenues.
WRITE-OFF OF IMPAIRED GOODWILL
Fiscal 1998 included the write-off of the remaining goodwill related to the
acquisition of PRTV in the amount of $14.5 million. This write-off was based on
an recent re-valuation of PRTV. Management determined its business strategy for
PRTV has not been successful. The Company does not anticipate any future benefit
or cash flows from PRTV. As a result, the Company has determined that there is
no value to
20
<PAGE>
the goodwill. Fiscal 1997 included the write-off of approximately $4.4 million
of PRTV goodwill based on an evaluation performed by an independent appraiser.
SEVERANCE EXPENSE
Fiscal 1997 included a $2.5 million charge to earnings related to severance
expense associated with the discontinuance of employment of five executive
officers. No such charges were recorded in fiscal 1998.
INTEREST EXPENSE
Interest expense was approximately $3.5 million in fiscal 1998 compared to
$1.5 million in fiscal 1997, an increase of $2.0 million. This increase was due
to an increase in the Company's average outstanding indebtedness from
approximately $10.0 million in fiscal 1997 to approximately $26.6 million in
fiscal 1998, and higher interest rates, primarily as a result of the Loan
Modification Agreement (as defined below) signed in fiscal 1998.
INCOME TAXES
The Company recorded income tax expense of approximately $.7 million in
fiscal 1998 resulting from tax liabilities related to its Asian and South
Pacific rim operating results. Income tax benefits have not been recorded during
the current period on domestic and European losses. These benefits will be
recorded when it is more likely than not that they will be realized, reducing
the effective tax rate on future domestic and European earnings. This compares
to approximately $1.9 million of income tax expense recorded in fiscal 1997
resulting from tax liabilities generated relating to Asian and South Pacific rim
profits.
NET LOSS
The Company incurred a net loss of $56.8 million in fiscal 1998, compared to
a net loss of $45.7 million in fiscal 1997. As discussed above, fiscal 1998
included a write-off of impaired goodwill related to PRTV in the amount of $14.5
million.
COMPARISON OF FISCAL 1997 WITH FISCAL 1996
NET REVENUES
Net revenues were $358.2 million in fiscal 1997 as compared to $292.6
million in fiscal 1996, an increase of $65.6 million or 22.4%. This increase was
primarily a result of an increase in net revenues generated from the
acquisitions in July 1996 of Prestige and Suzanne Paul which operate in New
Zealand and Australia (approximately $39.7 million) and an increase in the
Company's North American net revenues.
Domestic net revenues in fiscal 1997 were $188.5 million as compared to
$141.6 million in fiscal 1996, an increase of $46.9 million or 33.1%. This
increase was primarily a result of 1) the acquisition in May 1996 of PRTV, which
generated $35.7 million in net revenues and 2) retail royalties which were $16.3
million in fiscal 1997 versus $5.6 million in fiscal 1996. These royalties were
principally generated from sales of the Ab Roller Plus product into the retail
marketplace. The Ab Roller Plus product represented approximately 41.9% of
domestic net revenues in fiscal 1997. Domestically, the Company aired new
infomercials during the latter part of fiscal 1997 which did not perform as
anticipated, especially in the fourth quarter, which had a negative impact on
revenue generation. Additionally, domestic net revenues were unfavorably
impacted by an increase in the average infomercial return rate as a percentage
of gross revenues from 6.4% in fiscal 1996 to 9.9% in fiscal 1997. This increase
resulted primarily from sales of higher-priced products in the current year.
Higher priced products historically have higher return rates. In the
international marketplace, the Company's Japanese revenues declined due to
increased competition from traditional programming and other infomercial
competitors; the fact that Japanese airtime was not obtained in the quantity or
speed anticipated; and the effect of currency fluctuations. Japanese revenues in
21
<PAGE>
fiscal 1997 decreased approximately 30.3% as compared to fiscal 1996. This
included a 19.9% decline on a local currency basis. Japanese revenues were $11.6
million in the fourth quarter of fiscal 1997 as compared to $22.2 million in the
fourth quarter of fiscal 1996, a decrease of 47.9%. On a local currency basis,
Japanese fiscal 1997 fourth quarter revenues decreased by 40.4%. This trend
continued in the first quarter of fiscal 1998. As to other sectors of the
Company's international business, European revenues, excluding Eastern Europe,
remained relatively constant from fiscal 1996 to fiscal 1997. Net revenues in
non-Japanese countries in the Pacific Rim (including New Zealand and Australia),
Eastern Europe, the Middle East, Canada, Africa and Latin America, were $62.7
million in fiscal 1997 as compared to $11.8 million in fiscal 1996, an increase
of $50.9 million or 430%. Approximately $39.7 million of the increase was
generated from the Prestige and Suzanne Paul acquisitions. The remaining
increase was principally a result of ongoing expansion of the Company's
operations into new marketplaces.
OPERATING COSTS
Total operating costs and expenses were $402.0 million in fiscal 1997 as
compared to $272.5 million in fiscal 1996, an increase of $129.5 million or
47.5%.
MEDIA PURCHASES
Media purchases were $131.1 million in fiscal 1997 as compared to $86.5
million in fiscal 1996, an increase of $44.6 million or 51.6%, principally as a
result of growth in revenues, higher U.S. media costs and the acquisitions
completed in fiscal 1997. The ratio of media purchases to net revenues increased
substantially from 29.6% in fiscal 1996 to 36.6% in fiscal 1997. This was
primarily due to higher U.S. media costs; a higher percentage of the current
year's net revenues being earned in the domestic marketplace where media costs
are typically higher; the acquisitions of PRTV and Nancy Langston & Associates,
Inc. ("Nancy Langston") which added significant blocks of media time which could
not be sold or used profitably during the 1996 pre-holiday period; the inability
of the Company to deliver effective new shows on a timely basis and higher
European media costs, primarily associated with the Eurosport satellite
contract. In addition to the impact of the Eurosport contract, the Company's
European operations were also negatively affected by a change in product mix to
products with a lower average selling price, higher production costs and
currency fluctuations. Fourth quarter domestic media management was negatively
impacted by: a decline in the success rate of current year infomercials; loss of
Fitness Flyer and Fitness Strider product airings due to litigation with Guthy
Renker which was taking place during key fitness product sales months of January
and February; increased domestic cancellation and return rates due to the
aforementioned litigation and manufacturing/sourcing difficulties related to
certain products; the lack of successful new shows; and the effect of the
Company airing lead generation type shows, which typically have a higher
advertising to sales ratio.
DIRECT COSTS
Direct costs were $197.0 million in fiscal 1997 as compared to $151.2
million in fiscal 1996, an increase of $45.8 million or 30.3%. This increase was
primarily a result of increased revenues and higher domestic direct costs in the
second half of fiscal 1997. As a percentage of net revenues, direct costs were
55.0% in fiscal 1997 and 51.7% in fiscal 1996. Domestically, direct costs as a
percentage of net revenues increased by 3.6 percentage points primarily due to
an increased provision for obsolete stock of approximately $8.7 million in
fiscal 1997 and a substantial increase in production expense during fiscal 1997.
This was a result of a decline in the effectiveness of the Company's new shows
which generated lower than expected revenues and profit margins, especially in
the fourth quarter of fiscal 1997. Contributing factors to the reduced success
rate on new shows were the failure of some new format type shows and the less
than expected success of the introduction of new product categories. Of the 19
new or revised shows aired during the fourth quarter and late third quarter of
fiscal 1997, 16 did not perform up to expectations. This resulted in
approximately $3.3 million in write-offs of show production costs associated
with PRTV. In addition, the lower domestic sales volume and higher backlog in
the second half of fiscal 1997 resulted in
22
<PAGE>
an increase in domestic fulfillment costs. Telemarketing expenses also increased
in the second half of fiscal 1997 as a result of new show formats being tested
such as lead generation shows which require longer and more complicated
telemarketing scripts and, therefore, higher telemarketing costs per inquiry. On
an annual basis, these increases were partially offset by the favorable impact
of retail royalties earned in fiscal 1997. These retail royalties carry very low
cost of sales. Internationally, direct costs as a percentage of net revenues
increased approximately 3.3 percentage points, primarily due to higher product
costs in Europe and Asia resulting from a change in product mix; increased
provisions for obsolete stock, especially in the fourth quarter of fiscal 1997;
and increased production expense resulting from an increase in the number of
countries for which show customization was required. The increased provision for
obsolete stock, especially in the Asian markets, was a result of the decline in
revenues experienced in the latter portion of fiscal 1997. The lower than
expected revenues resulted in the Company's existing inventory levels of
multiple products being in excess of quantities needed to meet revised sales
forecasts and thus required an addition to the obsolescence provision. Lower
sales volume levels and higher inventory levels in Japan, particularly in the
fourth quarter had a negative impact on certain minimum fulfillment and
warehousing costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $69.8 million in fiscal
1997 as compared to $33.8 million in fiscal 1996, an increase of $36.0 million
or 106.7%, primarily due to increases in compensation expense, legal fees and
legal settlements, bad debt expense and amortization of goodwill. Compensation
expense increased primarily to support the Company's continued global expansion.
Current year acquisitions accounted for approximately 52.0% of the current year
compensation expense increase. Legal expenses were $4.0 million and legal
settlements were $9.3 million in fiscal 1997 as compared to $1.8 million and
$0.1 million in fiscal 1996, respectively. The fourth quarter of fiscal 1997
included $2.6 million of legal fees and $9.3 million of legal settlements or
reserves for legal settlements. This included significant amounts of PRTV legal
fees and legal settlements related to matters prior to the Company's acquisition
of PRTV. The fourth quarter also included legal fees incurred in connection with
the Fitness Flyer litigation. Bad debt expense was $5.7 million in fiscal 1997
as compared to $1.2 million in fiscal 1996 and included approximately $3.8
million in the fourth quarter of fiscal year 1997, including a substantial
portion related to the write-off of two specific customer accounts. During the
fourth quarter of fiscal 1997, it became clear that the collectability of these
receivables was impaired. The increase in bad debt expense in fiscal 1997 was
primarily due to a provision of approximately $2.1 million made for the
aforementioned two specific customers, higher write-offs of media receivables
due to a change in credit terms and increased average multi-pay receivable
balances. Amortization of goodwill increased from approximately $1.0 million in
fiscal 1996 to $2.5 million in fiscal 1997, primarily due to the current year
acquisitions of PRTV, Prestige, Suzanne Paul and Nancy Langston. Selling,
general and administrative expenses as a percentage of net revenues increased
from 11.5% in fiscal 1996 to 19.5% in fiscal 1997. Selling, general and
administrative expenses as a percentage of net revenues were 44.9% in the fourth
quarter of fiscal 1997 as compared to 11.5% in the fourth quarter of fiscal
1996. This increase was primarily a result of the aforementioned fourth quarter
items and the 22.9% decrease in fourth quarter net revenues from fiscal 1997 to
fiscal 1996.
WRITE-OFF OF IMPAIRED GOODWILL
The fourth quarter of fiscal 1997 included a write-down of goodwill related
to PRTV in the approximate amount of $4.4 million based on an evaluation
performed by an independent appraiser.
SEVERANCE EXPENSE
In fiscal year 1997, the Company recorded severance expense related to
discontinuance of employment of five executive officers. Total severance charges
related to these officers are $2,500,000 and include salary, insurance, and
other benefits.
23
<PAGE>
INTEREST EXPENSE
Interest expense was approximately $1.5 million in fiscal 1997 as compared
to $1.0 million in fiscal 1996, an increase of $527,000. This increase was
primarily due to an increase in the Company's average outstanding indebtedness
from approximately $4.2 million in fiscal 1996 to approximately $10.0 million in
fiscal 1997.
INCOME TAXES
The Company recorded income tax expense of approximately $1.9 million for
fiscal 1997 resulting from tax liabilities relating to its profitable Asian and
South Pacific operations. Income tax benefits have not been recorded in fiscal
1997 on domestic losses and fully reserved until realized. These benefits will
be recorded when realized, reducing the effective tax rate on future domestic
earnings. Income tax benefits have been recorded on European losses without
being reserved. This compares to approximately $3.5 million of income tax
expense recorded for fiscal 1996, a 17.5% effective tax rate.
NET LOSS
The Company had a net loss of $45.7 million in fiscal 1997 as compared to
net income of $16.6 million in fiscal 1996. This variance was primarily a result
of losses incurred by its PRTV subsidiary and charges related to the following:
excess and/or obsolete inventory; write-downs of production costs; legal fees;
legal settlements; severance; and increased media costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $9.4 million at March 31, 1998 compared to
working capital of $19.8 million at March 31, 1997, a decrease of $10.4 million.
The Company met its current period cash needs primarily through its cash flow
from borrowings (from its principal lender, certain foreign bank lenders and
from ValueVision), liquidation of accounts receivable and inventory and an
equity infusion of $20.0 million which occurred late in the second quarter of
fiscal 1998. Operating activities for the year ended March 31, 1998 resulted in
a use of cash of $19.6 million. The Company's cash flow from operations in the
year ended March 31, 1998 was adversely affected by the net loss of
approximately $56.8 million.
Consolidated accounts receivable decreased by $2.9 million, or 7.2%,
primarily due to the decrease in Far East and South Pacific Rim accounts
receivables. This decrease was principally due to the 29.6% and 53.5% decreases
in Far East and South Pacific Rim revenues, respectively, during the month of
March 1998 as compared to the month of March 1997 and the effect of currency
devaluations which occurred in that region. Consolidated inventories decreased
$9.7 million or 31.3% primarily due to a decrease in international inventory,
especially in the European and South Pacific Rim areas. This is reflective of
management's efforts to reduce global inventory levels. This was partially
offset by an increase in domestic inventories of $2.2 million due to the Company
currently having a higher number of active infomercials(5) at March 31, 1998 as
compared to March 31, 1997.
On September 18, 1997, the Company sold 20,000 shares of a series of
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. The proceeds
from this transaction were primarily used for working capital purposes.
In September 1997, the Company also executed an agreement (the "Loan
Modification Agreement") (as more fully described in Note 5 to the financial
statements) with its principal lender concerning, among other things, the
extension of its principal credit facility through December 31, 1998. The
Company's $20.0 million line of credit (the "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
24
<PAGE>
Loan (as defined in Note 5 to the financial statements) 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
Company has made all payments related to its Term Loan, including the April 1,
1998 payment, on a timely basis. The Loan Modification 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 continuous basis. In certain cases, failure to meet required ratios
triggers an increase in the interest rate of 1.0%. In certain other cases,
failure to meet required ratios constitutes an event of default. At March 31,
1998, the Company's failure to maintain one of its financial ratios within
required parameters not only triggered an interest rate increase at 1.0% but
also constituted an event of default. As a result, the Company's long term debt
has been reclassified to current debt in the March 31, 1998 balance sheet and,
effective April 1, 1998, the interest rate on the Company's Line and Term Loan
became prime plus 4.0%. The Line and Term Loan are secured by a lien on
substantially all of 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 ("Barclays"). The Company has an overdraft line of
approximately $1.0 million with Barclays, which was unused at March 31, 1998.
This line expired at June 30, 1998.
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 March 31, 1998) and a short term loan of $4.3 million New
Zealand dollars (approximately $2.4 million US dollars at March 31, 1998). The
working capital facility bore interest at the ASB Bank Banking Business Rate
(the "BBBR Rate") plus 1%. The short term loan bore interest at the BBBR Rate
plus 2%. All amounts under this facility were repaid in full as of March 31,
1998.
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 5 to the financial
statements). The Company subsequently received the remaining $3.0 million in
available proceeds under the $10.0 million loan, $1.5 million of which was
received subsequent to March 31, 1998. This loan was used primarily for working
capital purposes. Approximately $545,000 of this amount was used to provide a
loan to an executive officer funded subsequent to March 31, 1998 in connection
with his employment agreement. The ValueVision loan bears interest at prime plus
1.5%, payable quarterly and is due on any demand made after the earlier of
January 1, 1999 or upon the occurrence of certain triggering events, including,
but not limited to a change in control of the Company, a sale of the Company's
assets or a default under the Line or Term Loan. The Company anticipates that
one or more of these triggering events may occur in fiscal 1999. 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 lower of $1.07
per share or 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 and/or
forward contracts when appropriate. Until July 1997, the Company maintained a
foreign exchange line with its principal lender for such purposes. Pursuant to
the Loan Modification Agreement described in Note 5 to the financial statements,
the Company and its principal lender agreed to terminate the foreign exchange
line on a run off basis. The results of the Company's foreign currency hedge did
not have a material impact in the twelve month period ended March 31, 1998. 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. At March 31, 1998 the Company pledged $400,000 in cash against
$2.0 million in outstanding future contracts. In the long term, the Company has
the ability to change prices to a certain
25
<PAGE>
extent in a timely manner in order to react to major currency fluctuations; thus
possibly 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 devaluations in that region. 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 fiscal 1999. 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. In addition, certain
other currencies utilized by the Company (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 the Company's 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 fiscal 1998, the
Company amended the acquisition agreements, thereby 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 Prestige and Suzanne Paul entities and is
included in goodwill.
The decrease in other assets at March 31, 1998 was primarily a result of the
payment of $3.0 million from an escrow account in connection with the Ab Roller
settlement (as more fully described in Note 12 to the financial statements) and
the sale of the Company's investment in a public company for approximately $1.0
million.
In January 1998, the Company announced that it had entered into a Merger
Agreement with ValueVision and (as more fully described in Note 16 to the
financial statements). Concurrently with the Merger Agreement, the Company
entered into an agreement with the holders of the series of its preferred stock
issued in September 1997 to exchange such preferred stock for a newly created
series of preferred stock with similar terms, to redeem all of the new preferred
stock for approximately $23.5 million in connection with the consummation of the
Merger and to issue warrants to acquire 500,000 shares of the Company's Common
Stock at $6.82 per share (subject to adjustment). On June 2, 1998 the Company
announced the termination of the Merger Agreement. As a result, the new
preferred stock and the exercise price of the 1,489,413 warrants (500,000
warrants referred to above plus 989,413 received in connection with the original
funding) were automatically adjusted to $1.07 per share, 101% of the closing bid
price of the Company's Common Stock at said date. The conversion price of the
preferred stock may decrease if the Company's Common Stock price falls below
$1.07 per share. Based on the market value of the Company's Common Stock at June
15, 1998 the Series D preferred stock is convertible into a minimum of
18,543,972 shares of the Company's Common Stock, not including shares of the
Company's Common Stock issuable upon conversion of any accrued premium.
The Company's cash position continues to be pressured as a result of the
losses incurred in fiscal 1998 and the continued downturn in its Asian and South
Pacific Rim operations. While benefiting from the proceeds of the September 1997
preferred stock sale, the extension of its credit facility with its principal
lender, the loan from ValueVision, its strategy which focuses on cost reductions
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
successfully extend its current credit facility or obtain new
26
<PAGE>
financing to replace its existing facility. No assurance can be given that any
of these actions will be successful.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS ENDED
----------------------------------------------------
<S> <C> <C> <C> <C>
1998 FISCAL YEAR JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31(1)
- ----------------------------------------------------------- ---------- ------------ ------------ ------------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues............................................... $ 67,155 $ 54,563 $ 64,917 $ 91,839
Operating costs and expenses
Media purchases.......................................... 23,218 17,582 20,532 30,572
Direct costs............................................. 41,228 36,887 38,157 51,266
Selling, general and administrative...................... 14,769 13,681 13,475 15,173
Write-off of impaired goodwill........................... -- -- -- 14,546
Interest expense......................................... 625 764 910 1,158
Total operating costs and expenses....................... 79,840 68,914 73,074 112,715
Loss before income taxes................................... (12,685) (14,351) (8,157) (20,876)
Net loss $ (12,989) $ (14,358) $ (8,146) $ (21,276)
Net loss per share
Basic.................................................... $ (.54) $ (.58) $ (.34) $ (.85)
Diluted.................................................. $ (.54) $ (.58) $ (.34) $ (.85)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS ENDED
----------------------------------------------------
<S> <C> <C> <C> <C>
1997 FISCAL YEAR JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31(2)
- ----------------------------------------------------------- ---------- ------------ ------------ ------------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues............................................... $ 109,300 $ 99,656 $ 70,842 $ 78,381
Operating costs and expenses
Media purchases.......................................... 37,576 34,060 28,112 31,388
Direct costs............................................. 53,241 45,557 38,934 59,240
Selling, general and administrative...................... 11,128 11,997 11,486 30,820
Write-off of impaired goodwill........................... -- -- -- 4,392
Severance expense........................................ -- -- 1,100 1,400
Interest expense......................................... 305 408 414 415
Total operating costs and expenses....................... 102,250 92,022 80,046 127,655
(Loss) income before income taxes.......................... 7,050 7,634 (9,204) (49,274)
Net (loss) income.......................................... $ 4,550 $ 4,994 $ (5,984) $ (49,251)
Net (loss) income per share
Basic.................................................... $ .25 $ .22 $ (.26) $ (2.10)
Diluted.................................................. $ .18 $ .18 $ (.26) $ (2.10)
</TABLE>
- ------------------------
(1) The quarter ended March 31, 1998 included a charge of $14.5 million related
to the write-off of the remaining PRTV goodwill which was determined to be
unrecoverable.
(2) The quarter ended March 31, 1997 included a charge of $4.4 million related
to the write-off of PRTV goodwill, legal settlements and fees of $11.9
million, provisions for bad debts of $3.8 million and $6.4 million for
inventory obsolescence.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
The information required by Items 10, 11, 12 and 13 is hereby incorporated
by reference from the Company's definitive proxy statement for its 1998 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
The following is a list of the consolidated financial statements of the
Company and its subsidiaries and supplementary data submitted in a separate
section of this report.
- Report of Independent Auditors.
- Consolidated Balance Sheets--March 31, 1998 and 1997.
- Consolidated Statements of Operations--Years ended March 31, 1998, 1997
and 1996.
- Consolidated Statements of Shareholders' Equity--Years ended March 31,
1998, 1997 and 1996.
- Consolidated Statements of Cash Flows--Years ended March 31, 1998, 1997
and 1996.
- Notes to Consolidated Financial Statements
The following is a list of the schedules filed as part of this Form 10-K.
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(b) Reports on Form 8-K filed in the fourth quarter of 1998:
(i) Current Report on Form 8-K, dated January 5, 1998 and filed January 7,
1998 and Current Report on Form 8-K/A, dated January 5, 1998 and filed
January 16, 1998.
The Company filed the foregoing Current Reports on Form 8-K reporting,
under Item 5, the execution of the Agreement and Plan of Reorganization
and Merger (the "Merger Agreement"), dated January 5, 1998, by and among
ValueVision, the Company and Quantum Direct Corporation (formerly known
as V-L Holdings Corp.).
(ii) Current Report on Form 8-K, dated March 30, 1998.
The Company filed the foregoing Current Report on Form 8-K reporting,
under Item 5, the selection of veteran marketing, direct response and
retail executive, Gene McCaffery, as Chief Executive Officer of Quantum
Direct Corporation, the international electronic commerce company to be
formed by the proposed merger of the Company and ValueVision.
(iii) Current Report on Form 8-K, dated April 8, 1998.
The Company filed the foregoing Current Report on Form 8-K reporting,
under item 5, the mutual postponement of the shareholder meetings
regarding the Merger.
(iv) Current Report on Form 8-K, dated June 1, 1998.
The Company filed the foregoing Current Report on Form 8-K reporting,
under Item 5, the termination of the Merger Agreement.
29
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
2.1 (12) Agreement and Plan of Merger and Reorganization, dated as of October 24, 1995, by and among the
Registrant, DA Acquisition Corp., DirectAmerica Corporation, California Production Group, Inc. and
other parties thereto
2.2 (13) Agreement and Plan of Merger and Reorganization, dated as of January 17, 1996 and amended as of April
4, 1996, by and among the Registrant, PRT Acquisition Corp. and Positive Response Television, Inc.
2.3 (18) Acquisition Agreement, dated as of May 29, 1996, by and among Registrant, Paul Meier, Susan Barnes
and Prestige Marketing Holdings Limited
2.4 (19) Agreement and Plan of Merger and Reorganization, dated as of August 7, 1996, by and among Registrant,
NLA Acquisition Corp., Nancy Langston & Associates, Inc. and Nancy Langston.
2.5 (18) Acquisition Agreement, dated as of May 30, 1996, by and among Registrant, Paul Meier, Susan Barnes,
Alan Meier and Tancot Pty Limited
2.6 (26) Agreement and Plan of Reorganization, dated January 5, 1998, by and among ValueVision International,
Inc., the Registrant and V-L Holdings Corp.
3.1 (1) Certificate of Incorporation
3.2 (2) By-laws
3.3 (3) Amendment to By-laws dated February 1992
3.4 (6) Amendment to By-laws dated April 1995
4.1 (1) Specimen copy of stock certificate for shares of Common Stock of the Registrant
4.2 (6) Specimen copy of stock certificate for shares of Series B Convertible Preferred Stock of the
Registrant
4.3 (5) Rights Agreement dated as of January 3, 1994
4.4 (5) Amendment No. 1 to Rights Agreement, dated as of March 6, 1994
4.5 (6) Amendment No. 2 to Rights Agreement, dated as of September 26, 1994
4.6 (6) Amendment No. 3 to Rights Agreement, dated as of September 30, 1994
4.7 (6) Amendment No. 4 to Rights Agreement, dated as of November 30, 1994
4.8 (24) Amendment No. 5 to Rights Agreement, dated as of August 14, 1997
4.9 (29) Amendment No. 6 to Rights Agreement, dated as of January 5, 1998
4.10(6) Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock
4.11(16) Director's Stock Grant Plan
4.12(9) Form of Warrant to Purchase Common Stock of the Registrant, dated November 24, 1995, issued to Value
Vision International, Inc. concerning an aggregate of 500,000 shares at an exercise price of $8.865
per share
4.13(9) Form of Warrant to Purchase Common Stock of the Registrant, dated November 24, 1995,
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
issued to various persons concerning an aggregate of 500,000 shares at an exercise price of $10.00
per share
<C> <S>
4.14(24) Certificate of Designations, Preferences and Rights of the Series C Convertible Preferred Stock
4.15(24) Form of Warrant issued in connection with the Series C Convertible Preferred Stock
4.16(28) Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock
4.17(28) Form of Warrant issued in connection with the Series D Convertible Preferred Stock
4.18(28) Amendment to Form of Warrant issued in connection with the Series C Convertible Preferred Stock
10.1 (15) Amended and Restated 1991 Stock Option Plan
10.2 (4) 401(k) Plan Document
10.3 (15) 1995 Management Incentive Plan
10.4 (7) Lease for 7822 S. 46th Street, Phoenix, Arizona
10.5 (10) Securities Purchase Agreement between the Registrant and certain purchasers dated September 30, 1994
10.6 (6) Amendment to Securities Purchase Agreement dated as of December 19, 1994
10.7 (10) Note and Warrant Purchase Agreement between the Registrant, Media Arts International, Ltd., Quantum
International Limited and Safeguard Scientifics (Delaware), Inc. dated October 19, 1994
10.8 (11) Securities Purchase Agreement between the Registrant and certain purchasers dated as of November 30,
1994
10.9 (14) Telemarketing, Production and Post-Production Agreement between the Registrant and ValueVision
International, Inc., dated April 13, 1995
10.10(14) Joint Venture Agreement between the Registrant and ValueVision International, Inc., dated April 13,
1995
10.11(6) Registration Rights Agreement dated as of December 19, 1994 by and among Registrant and certain other
parties
10.12(8) Modification Agreement between the Registrant, Media Arts International, Ltd., Quantum International
Limited, Safeguard Scientifics (Delaware), Inc. and Meridian Bank dated as of April 20, 1995
10.13(12) DirectAmerica Corporation Employee Bonus Plan
10.14(9) Loan and Security Agreement, dated November 28, 1995, by and between the Registrant, certain of its
subsidiaries and Meridian Bank
10.15(9) Allonge, dated November 28, 1995, by the Registrant and certain of its subsidiaries for the benefit
of Meridian Bank
10.16(13) Employment Agreement, dated as of May 17, 1996, by and between Positive Response Television, Inc.,
the Registrant and Michael Levey
10.17(13) Escrow Agreement, dated as of May 17, 1996, by and among Registrant, Positive Response Television,
Inc., the Shareholders' Representative and Escrow Agent
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
10.18(17) Lease, dated March 6, 1996, by and between Stoll Moss Theaters Limited and Quantum International
Limited
10.19(19) Lease Agreement, dated 1996, between Registrant and Eleven Colonial Penn Plaza Associates
10.20(21) Consulting Agreement, dated as of December 19, 1996, by and between Brian McAdams and Registrant
10.21(22) Amended and Restated Employment Agreement, dated April 28, 1997, between Registrant and Constantinos
I. Costalas
10.22(22) Amendment No. 1 to Employment Agreement, dated July 23, 1997, between Registrant and Constantinos I.
Costalas
10.23(22) Employment Agreement, dated February 28, 1997, between Registrant and Frederick S. Hammer
10.24(23) Agreement, dated April 24, 1997, between Mark P. Hershhorn and the Registrant
10.25(24) Registration Rights Agreement, dated September 4, 1997, among the Registrant and the Series C
Investors
10.26(24) Securities Purchase Agreement, dated September 4, 1997, among the Registrant and the Series C
Investors
10.27(18) Employment Agreement, dated as of July 2, 1996, by and between Prestige Marketing Limited and Paul
Meier
10.28(18) Employment Agreement, dated as of July 2, 1996, by and between Prestige Marketing Limited and Susan
Barnes
10.29(18) Employment Agreement, dated as of July 3, 1996, by and between Suzanne Paul (Australia) Pty Limited
and Alan Meier
10.30(25) Employment Agreement, dated May 12, 1997, by and between Registrant and Paul R. Brazina
10.31(25) Facility Agreement, dated July 23, 1997, between ASB Bank Limited and Prestige Marketing Limited
10.32(25) Short Term Facility, dated May 19, 1997, between Quantum International Limited and Barclays Bank PLC
10.33(25) Amended and Restated Loan and Security Agreement, dated June 26, 1996, by and between Registrant,
Quantum North America, Inc., Quantum International Limited, Positive Response Television, Inc. and
DirectAmerica Corporation and Meridian Bank
10.34(25) Loan Modification Agreement, dated September 18, 1997, by and between Registrant, Quantum North
America, Inc., Quantum International Limited, Positive Response Television, Inc. and DirectAmerica
Corporation and CoreStates Bank, N.A.
10.35(25) Agreement, dated as of July 16, 1997, by and among Registrant, Paul Meier, Suzanne Kilworth, Alan
Meier and Tancot Pty Limited
10.36(25) Agreement, dated as of July 16, 1997, by and among Registrant, Paul Meier, Suzanne Kilworth, Alan
Meier, P&S Holdings Limited (formerly known as Prestige Marketing Holdings Limited)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
10.37(26) Stock Option Agreement (ValueVision), dated as of January 5, 1998 between ValueVision and the
Registrant
10.38(26) Stock Option Agreement (National Media), dated as of January 5, 1998 between the Registrant and
ValueVision
10.39(26) Redemption and Consent Agreement, dated January 5, 1998, by and between the Registrant, ValueVision,
Capital Ventures International and RGC International Investors, LDC
10.40(26) Consent Waiver and Amendment, dated as of January 5, 1998, by and between CoreStates Bank, N.A., the
Registrant, Quantum North America, Inc., Quantum International Limited, Positive Response Television,
Inc. and DirectAmerica Corporation
10.41(26) $10,000,000 Demand Promissory Note, dated January 5, 1998 issued by the Registrant to ValueVision
10.42(26) Subsidiary Guaranty, dated as of January 5, 1998, by Quantum North America, Inc., Quantum
International Limited, Quantum Far East Ltd., Quantum Marketing International, Inc., Quantum
International Japan Company Ltd., DirectAmerica Corporation, Positive Response Television, Inc.,
Quantum Productions AG, Suzanne Paul (Australia) Pty Limited and National Media Holdings, Inc., for
the benefit of ValueVision
10.43(26) Warrant Agreement by and between the Registrant and ValueVision, dated as of January 5, 1998
10.44(26) Warrant Certificate No. 1, dated January 5, 1998, issued by the Registrant to ValueVision to purchase
250,000 shares of the Registrant's common stock
10.45(26) Registration Rights Agreement by and between the Registrant and ValueVision, dated as of January 5,
1998
10.46(27) Amendment No. 2 to Employment Agreement dated April 28, 1997 between the Company and Constantinos I.
Costalas, dated as of January 5, 1998
10.47(27) Amendment No. 1 to Employment Agreement dated February 27, 1997 between the Company and Frederick S.
Hammer, dated as of January 5, 1998
10.48(27) Amended and Restated Employment Agreement between the Company and Robert N. Verratti, dated as of
January 28, 1998
10.49(27) Amended and Restated Non-Incentive Stock Option Agreement between the Company and Robert N. Verratti,
dated as of January 28, 1998
10.50(28) Amendment No. 1 to Registration Rights Agreement by and among the Company and the Series D Investors
10.51(29) Employment Agreement, dated as of March 20, 1998, between the Company and John W. Kirby.
10.52(29) Loan Agreement, dated as of March 31, 1998, by and between the Company and John W. Kirby.
10.53(29) Non-Incentive Stock Option Agreement, dated as of January 28, 1998, by and between the Company and
John W. Kirby.
10.54(29) Lease, dated November 26, 1996, by and between Encino Terrace Center and Positive Response
Television, Inc. and DirectAmerica Corporation.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
11.1 (29) Statement Re: Computation of Per Share Earnings
21.1 (29) Subsidiaries of the Company
23.1 (29) Consent of Independent Auditors
27.1 (29) Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Reg. No. 33-26778) filed January 31, 1989
(2) Incorporated by reference to Registrant's Registration Statement on Form
S-3 (Reg. No. 33-35301) filed June 8, 1990
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended March 31, 1992 filed June 26, 1992
(4) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended March 31, 1991 filed June 20, 1991
(5) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended March 31, 1994 filed July 14, 1994
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended March 31, 1995 filed June 29, 1995.
(7) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1993 filed November 12, 1993.
(8) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1995 filed August 14, 1995.
(9) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended December 31, 1995 filed February 15, 1996.
(10) Incorporated by reference to Registrant's Current Report on Form 8-K dated
October 5, 1994.
(11) Incorporated by reference to Registrant's Current Report on Form 8-K dated
December 8, 1994.
(12) Incorporated by reference to Registrant's Current Report on Form 8-K dated
October 19, 1995.
(13) Incorporated by reference to Registrant's Current Report on Form 8-K dated
May 17, 1996.
(14) Incorporated by reference to Registrant's Current Report on Form 8-K dated
April 13, 1995.
(15) Incorporated by reference to Registrant's Proxy Statement in connection
with Annual Meeting of Stockholders held on February 22, 1995.
(16) Incorporated by reference to Registrant's Registration Statement on Form
S-8 filed October 19, 1995.
(17) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1996.
(18) Incorporated by reference to Registrant's Current Report on Form 8-K dated
July 1, 1996.
(19) Incorporated by reference to Registrant's Current Report on Form 8-K dated
August 7, 1996.
(20) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1996.
34
<PAGE>
(21) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended December 31, 1996.
(22) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended March 31, 1997, as amended.
(23) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1997.
(24) Incorporated by reference to Registrant's Current Report on Form 8-K dated
September 18, 1997.
(25) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1997, as amended.
(26) Incorporated by reference to Registrant's Current Report on Form 8-K/A
dated January 5, 1998.
(27) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended December 31, 1997.
(28) Incorporated by reference to Registrant's Registration Statement on Form
S-3 (Reg. No. 333-48217) filed January 31, 1998.
(29) Filed herewith.
35
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A)(1) AND (2), (C) AND (D)
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED MARCH 31, 1998
NATIONAL MEDIA CORPORATION
PHILADELPHIA, PA
National Media Corporation
Consolidated Financial Statements
Years ended March 31, 1998 and 1997
<TABLE>
<S> <C>
Contents
Report of Independent Auditors........................................................ 37
Audited Consolidated Financial Statements
Consolidated Balance Sheets........................................................... 38
Consolidated Statements of Operations................................................. 39
Consolidated Statements of Shareholders' Equity....................................... 40
Consolidated Statements of Cash Flows................................................. 42
Notes to Consolidated Financial Statements............................................ 44
</TABLE>
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
National Media Corporation
We have audited the accompanying consolidated balance sheets of National
Media Corporation as of March 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998. Our audits also included the
financial statement schedule included in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
National Media Corporation at March 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. For the years ended March 31, 1998 and
1997, the Company incurred losses of $56,769,000 and $45,691,000, respectively,
experienced negative cash flows from operations and is party to significant
pending litigation. In addition, the Company has not complied with certain
covenants of its loan agreements. These conditions have impaired the Company's
liquidity and may cause it to be unable to meet its obligations as they become
due. These conditions raise substantial doubt as to the Company's ability to
continue as a going concern. Management's plans regarding these conditions are
discussed in Note 1. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the possible outcome of these uncertainties.
Ernst & Young LLP
Philadelphia, Pennsylvania
June 29, 1998
37
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES
AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $ 17,915 $ 4,058
Restricted cash............................................................................ 400 --
Accounts receivable, net................................................................... 37,285 40,179
Income tax receivable...................................................................... 341 --
Inventories, net........................................................................... 21,228 30,919
Prepaid media.............................................................................. 1,872 3,563
Prepaid show production.................................................................... 4,845 6,765
Deferred costs............................................................................. 4,191 3,318
Prepaid expenses and other current assets.................................................. 2,014 2,505
Deferred income taxes...................................................................... 2,835 2,591
--------- ---------
Total current assets................................................................... 92,926 93,898
Property and equipment, net.................................................................. 12,338 14,182
Excess of cost over net assets of acquired businesses and other intangible assets, less
accumulated amortization of $6,977 and $9,472, respectively................................ 35,877 51,022
Other assets................................................................................. 1,950 6,530
--------- ---------
Total assets........................................................................... $ 143,091 $ 165,632
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................... $ 21,167 $ 21,810
Accrued expenses........................................................................... 29,598 30,830
Deferred revenue........................................................................... 115 686
Income taxes payable....................................................................... -- 552
Deferred income taxes...................................................................... 1,792 2,351
Current portion of long-term debt and capital lease obligations............................ 30,812 17,901
--------- ---------
Total current liabilities.............................................................. 83,484 74,130
Long-term debt and capital lease obligations................................................. 469 959
Deferred income taxes........................................................................ 1,043 240
Other liabilities............................................................................ 3,768 1,743
Shareholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares; issued 81,250 and 95,000
shares Series B convertible preferred stock, respectively, and 20,000 and 0 shares Series
D convertible preferred stock, respectively (liquidation preference of $3,250 and $20,643
for Series B and D, respectively, as of March 31, 1998).................................. 1 1
Common stock, $.01 par value; authorized 75,000,000 shares; issued 26,262,716 and
24,752,792 shares, respectively.......................................................... 263 248
Additional paid-in capital................................................................. 156,975 127,764
Retained earnings.......................................................................... (85,891) (29,122)
--------- ---------
71,348 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.................................................... (10,080) (6,087)
--------- ---------
Total shareholders' equity............................................................. 54,327 88,560
--------- ---------
Total liabilities and shareholders' equity............................................. $ 143,091 $ 165,632
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
38
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES
AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales......................................................... $ 272,710 $ 337,508 $ 285,676
Retail royalties...................................................... 679 16,337 5,597
Sales commissions and other revenues.................................. 5,085 4,334 1,334
------------ ------------ ------------
Net revenues............................................................ 278,474 358,179 292,607
Operating costs and expenses:
Media purchases....................................................... 91,904 131,136 86,518
Direct costs.......................................................... 167,538 196,972 151,198
Selling, general, and administrative.................................. 57,098 65,431 33,772
Write-off of impaired goodwill........................................ 14,546 4,392 --
Severance expense for former Executive Officers....................... -- 2,500 --
Interest expense...................................................... 3,457 1,542 1,015
------------ ------------ ------------
Total operating costs and expenses...................................... 334,543 401,973 272,503
------------ ------------ ------------
(Loss) income before income taxes....................................... (56,069) (43,794) 20,104
Income taxes............................................................ 700 1,897 3,525
------------ ------------ ------------
Net (loss) income....................................................... $ (56,769) $ (45,691) $ 16,579
------------ ------------ ------------
------------ ------------ ------------
Net (loss) income per common share...................................... $ (2.31) $ (2.09) $ 1.08
------------ ------------ ------------
------------ ------------ ------------
Net (loss) income per common share--assuming dilution................... $ (2.31) $ (2.09) $ .73
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares outstanding:
Basic............................................................... 24,904,000 21,905,000 15,411,000
------------ ------------ ------------
------------ ------------ ------------
Diluted............................................................. 24,904,000 21,905,000 22,674,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
39
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ---------
Preferred stock:
Beginning balance............................................................ $ 1 $ 1 $ 3
Issuance of Series D preferred stock (20,000 shares)......................... -- -- --
Conversion to common stock (13,750; 41,375; and 119,421 shares).............. -- -- (2)
---------- ---------- ---------
Ending balance................................................................. 1 1 1
Common stock:
Beginning balance............................................................ 248 182 149
Conversion of preferred stock (137,500; 413,750; and 1,194,210 shares)....... 1 4 12
Exercise of stock options (33,333; 1,215,099; and 1,219,099 shares).......... 1 12 12
Exercise of warrants (330,000; 162,552; and 198,985 shares).................. 3 2 2
Issuance of shares for acquisitions (909,091; 2,651,239; and 554,456
shares).................................................................... 9 27 6
Issuance of shares in secondary offering (2,000,000 shares).................. -- 20 --
Issuance of shares for management incentive plan (102,860 shares)............ -- 1 --
Issuance of shares to settle litigation (100,000; 0; and 106,000 shares)..... 1 -- 1
Stock grant (0; 30,000; and 25,000 shares)................................... -- -- --
---------- ---------- ---------
Ending balance................................................................. 263 248 182
Additional paid-in capital:
Beginning balance............................................................ 127,764 48,135 31,877
Issuance of Series D preferred stock, net of costs........................... 19,690 -- --
Conversion of preferred stock................................................ (1) (4) (11)
Exercise of stock options.................................................... 157 7,016 5,123
Exercise of warrants......................................................... 1,580 790 1,033
Issuance of shares for acquisitions.......................................... 4,991 41,191 6,994
Issuance of shares in secondary offering, net of costs....................... (14) 28,734 --
Amortization of executive compensation....................................... 1,875 -- --
Series D preferred stock 6% premium.......................................... (643) -- --
Issuance of warrants in connection with debt................................. 688 -- --
Issuance of warrants to settle litigation.................................... 89 -- --
Issuance of shares for management incentive plan............................. -- 1,707 --
Issuance of shares to settle litigation...................................... 799 -- 724
Stock grant.................................................................. -- 542 344
Tax (cost) benefit from exercise of stock options............................ -- (347) 2,051
---------- ---------- ---------
Ending balance................................................................. 156,975 127,764 48,135
Retained earnings:
Beginning balance............................................................ $ (29,122) $ 16,569 $ (10)
Net (loss) income............................................................ (56,769) (45,691) 16,579
---------- ---------- ---------
Ending balance................................................................. (85,891) (29,122) 16,569
</TABLE>
40
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Treasury stock:
Beginning balance............................................................ (4,244) (3,791) (3,791)
Repurchase of treasury shares (181,949 and 25,220 shares).................... (2,570) (482) --
Issuance of shares for 401(k) match (2,031 and 4,619 shares)................. 12 29 --
---------- ---------- ---------
Ending balance................................................................. (6,802) (4,244) (3,791)
Notes receivable:
Beginning balance............................................................ -- (473) (1,868)
Exercise of stock options.................................................... (139) -- (1,088)
Collection of notes receivable............................................... -- 473 2,483
---------- ---------- ---------
Ending balance................................................................. (139) -- (473)
Foreign currency translation adjustment:
Beginning balance............................................................ (6,087) (4,161) 265
Translation adjustment for the year.......................................... (3,993) (1,926) (4,426)
---------- ---------- ---------
Ending balance................................................................. (10,080) (6,087) (4,161)
---------- ---------- ---------
Total shareholders' equity..................................................... $ 54,327 $ 88,560 $ 56,462
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes.
41
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income.............................................................. $ (56,769) $ (45,691) $ 16,579
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization................................................ 7,073 5,574 2,099
Write-off of impaired goodwill............................................... 14,546 4,392 --
Amortization of loan discount................................................ 555 484 399
Provision for deferred rent expense.......................................... 497 328 384
Noncash executive compensation............................................... 1,875 -- --
Tax (cost) benefit from exercise of stock options............................ -- (347) 2,051
Decrease (increase) in:
Accounts receivable, net................................................... 846 1,721 (18,242)
Income tax receivable...................................................... (341) -- --
Inventories, net........................................................... 7,882 (3,057) (8,591)
Prepaid cable and advertising costs........................................ 3,634 1,374 (3,936)
Deferred costs............................................................. (873) 4,233 (2,282)
Other current assets....................................................... 247 855 (1,060)
Increase (decrease) in:
Accounts payable........................................................... (1,111) (2,358) 8,569
Accrued expenses........................................................... (1,547) (6,007) 9,505
Deferred revenue........................................................... (571) (1,583) 1,236
Income taxes payable....................................................... (552) (3,405) 1,044
Notes payable.............................................................. -- 1,400 --
Other...................................................................... 5,031 (3,480) (2,225)
---------- ---------- ---------
Net cash (used in) provided by operating activities............................ (19,578) (45,567) 5,530
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment............................................ (2,244) (8,439) (3,923)
Investment in common stock..................................................... -- (1,250) --
Proceeds from sale of common stock investment.................................. 1,025 -- --
Cost of companies acquired, net of cash acquired............................... -- (1,236) (897)
---------- ---------- ---------
Net cash used in investing activities.......................................... (1,219) (10,925) (4,820)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock.................................. 19,690 -- --
Proceeds from long-term debt................................................... 17,259 22,400 --
Principal payments on long-term debt and capital lease obligations............. (5,122) (15,493) (166)
Net proceeds from issuance of common stock..................................... -- 28,754 --
Exercise of stock options and warrants......................................... 1,602 7,820 5,085
Payments received on notes receivable.......................................... -- 473 2,483
---------- ---------- ---------
Net cash provided by financing activities...................................... 33,429 43,954 7,402
</TABLE>
42
<PAGE>
NATIONAL MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ---------
Effect of exchange rate changes on cash and cash equivalents................... $ 1,225 $ (1,809) $ (3,174)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents........................... 13,857 (14,347) 4,938
Cash and cash equivalents at beginning of year................................. 4,058 18,405 13,467
---------- ---------- ---------
Cash and cash equivalents at end of year....................................... $ 17,915 $ 4,058 $ 18,405
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest..................................................................... $ 3,201 $ 774 $ 528
---------- ---------- ---------
---------- ---------- ---------
Taxes on income.............................................................. $ 1,456 $ 5,105 $ 430
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for acquisitions........................................... $ 5,000 $ 41,218 $ 7,000
---------- ---------- ---------
---------- ---------- ---------
Reacquired escrow shares from acquisition...................................... $ 2,570 $ -- $ --
---------- ---------- ---------
---------- ---------- ---------
Note payable and other liabilities used to finance acquisitions................ $ -- $ 3,190 $ 1,496
---------- ---------- ---------
---------- ---------- ---------
Common stock issued upon exercise of stock options for notes receivable........ $ 139 $ -- $ 1,088
---------- ---------- ---------
---------- ---------- ---------
Common stock issued for management incentive plan, 401(k) match, and directors'
stock grant.................................................................. $ 13 $ 2,279 $ --
---------- ---------- ---------
---------- ---------- ---------
Issuance of stock to settle litigation......................................... $ 800 $ -- $ 725
---------- ---------- ---------
---------- ---------- ---------
Deemed dividend on preferred stock............................................. $ 643 $ -- $ --
---------- ---------- ---------
---------- ---------- ---------
Issuance of loan warrants...................................................... $ 688 $ -- $ --
---------- ---------- ---------
---------- ---------- ---------
Purchase of equipment financed by capital leases............................... $ 416 $ -- $ --
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes.
43
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
National Media Corporation (the "Company") incurred a net loss of
$56,769,000 during the year ended March 31, 1998, primarily as a result of
reduced sales volume in its key market areas due to its inability to timely
deliver successful new shows in the first half of fiscal 1998, the economic
downturn in the Far East and South Pacific Rim markets, and a $14,546,000
write-off of the remaining goodwill related to the Company's May 1996
acquisition of Positive Response Television, Inc. ("PRTV").
The Company recently announced that it had mutually terminated its January
5, 1998 merger agreement (the "Merger Agreement") with ValueVision
International, Inc. ("ValueVision"). As a result, a $10.0 million loan from
ValueVision made in connection with the execution of the Merger Agreement and
discussed in Note 5 is due January 1, 1999, subject to acceleration in certain
circumstances. In addition, the Company's revolving credit facility with its
principal lender expires on December 31, 1998. Negotiations with the principal
lender are ongoing. The Company is currently in technical default of a loan
covenant as of March 31, 1998. The principal lender has been notified, and a
waiver for this violation has not been granted, but the lender has not indicated
an intention to act on such default. There can be no assurance that the
ValueVision loan and/or the revolving credit facility/term loan will be
successfully modified or extended.
The Company is currently continuing its evaluation of its strategic options,
including continued implementation of plans to reduce operating expenses,
identifying a strategic partner or the sale of the business. The Company is
currently pursuing a business strategy which concentrates on targeted expansion
and cost reduction and has taken the following steps to rebuild its business
including:
- Leveraging the Company's media expenditures and customer base to generate
incremental revenues through continuity programs, list rentals and
internet revenues.
- A reevaluation of its global partnerships, particularly in Asia.
- Continued discussions with potential strategic partners.
- Continued discussions with the Company's primary lender.
- Downsizing of the global workforce, the initiation of a plan to reduce
global office space and other cost-cutting measures.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. The
Company's ability to continue as a going concern is dependent upon its ability
to successfully implement the plans and actions described above and return to
profitability and improve its liquidity. There can be no assurance that the
Company will be able to extend or replace the ValueVision loan and/or its
existing revolving credit facility/term loan, or return its operations to
profitability. These factors, among others, raise substantial doubt about the
ability of the Company to continue as a going concern. Management of the Company
believes that its plans to address the issues described above will be successful
and that sufficient cash will be obtained to meet its obligations as they become
due, however, no such assurance can be given. The financial statements do not
include any adjustments relating to the recoverability of recorded assets, or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
44
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
B. DESCRIPTION OF BUSINESS
The Company is engaged in the direct marketing of consumer products,
principally through television media. The Company currently brings infomercial
programming to more than 70 countries.
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of National Media
Corporation and its wholly-owned subsidiaries which include Quantum North
America, Inc., PRTV, DirectAmerica Corporation, Quantum International Limited,
Quantum Far East Limited, Quantum International Japan Company Limited, Prestige
Marketing Limited, Suzanne Paul Pty Limited, and Nancy Langston & Associates,
Inc. All significant intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and notes to the consolidated financial statements. Estimates are
routinely made for inventory obsolescence, goodwill, sales returns and
allowances, stock warrant valuations, allowances for bad debts, show production
amortization, and contingencies. Actual results could differ from those
estimates.
REVENUE RECOGNITION AND RESERVE FOR RETURNED MERCHANDISE
Product sales and retail royalty revenue are generally recognized when the
product is shipped. Generally, it is the Company's policy to refund
unconditionally the total price of merchandise returned within 30 days of the
customer's receipt of the merchandise. The Company provides an allowance, based
upon experience, for returned merchandise.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
RESTRICTED CASH
Restricted cash represents cash pledged as collateral for two outstanding
foreign exchange forward contracts.
ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $5,440,000 and $6,907,000 at March
31, 1998 and 1997, respectively.
45
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories consist principally of products purchased for resale, and are
stated at the lower of cost (determined by the first-in, first-out method) or
market. The reserve for obsolete inventory was $6,519,000 and $11,739,000 at
March 31, 1998 and 1997, respectively. The reduction in the reserve is due
mainly to worldwide disposal and liquidation of the Company's unprofitable
inventory.
PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method based on the estimated useful lives of
the assets or lease terms, generally 3 to 10 years.
EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS
Excess of cost over net assets of acquired businesses ("goodwill") is being
amortized by the straight-line method over 10 to 40 years. Other intangible
assets are being amortized by the straight-line method over 2 to 5 years.
Amortization expense for excess of cost over net assets acquired and other
intangible assets was $3,015,000, $2,532,000, and $629,000 for the years ended
March 31, 1998, 1997, and 1996, respectively, and is included in selling,
general, and administrative expenses. The recoverability of goodwill is
evaluated annually by an analysis of operating results for each acquired
business, significant events or changes in the business environment, synergies
with other operating units, and, if necessary, independent appraisals. In 1997,
because indicators of impairment (losses, asset writeoffs, etc.) did exist, the
Company engaged an independent appraiser to evaluate the carrying value of the
assets of PRTV. The appraiser used a combination of the income and market
approaches and determined that the goodwill balance fairly stated the goodwill
related to PRTV. Based on this evaluation, the Company wrote-off an additional
$4,392,000 of PRTV goodwill during the year ended March 31, 1997. Based on a
recent re-valuation of PRTV, management has determined its business strategy for
PRTV has not been successful. The Company does not anticipate any future benefit
or cash flows from PRTV. As a result, the Company has determined that there is
no value to the goodwill. The Company wrote-off the remaining $14,546,000 of
goodwill during the fourth quarter of fiscal year 1998.
SHOW PRODUCTION COSTS
Costs related to the production of the Company's direct response televised
advertising programs are capitalized and amortized over the estimated useful
life of the production, generally 12 to 24 months. The useful life of each
production is initially estimated and regularly evaluated and adjusted as sales
response information becomes available. Show production expense was $14,845,000,
$21,406,000 and $8,630,000 for the years ended March 31, 1998, 1997 and 1996,
respectively. Production expense for the years ended March 31, 1998, 1997 and
1996 included $1,608,000, $10,811,000 and $1,900,000, respectively, for amounts
written down related to unsuccessful shows for which sales response did not meet
expectations. Contributing factors to the reduced success rate on new shows in
fiscal 1997 were the failure of some new format type shows and the
less-than-expected success of the introduction of new product categories.
46
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE AND COSTS
Deferred revenue consists of funds received by the Company for items
ordered, but not shipped, and product sales subject to a free trial period. The
related costs are deferred and expensed as orders are shipped. The Company also
defers direct costs on product orders for which the funds are not yet received
and expenses these costs as orders are shipped.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
the liability method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Income tax benefits have
not been recorded during the current period on domestic and European losses.
These benefits will be recorded when it is more likely than not that they will
be realized, reducing the effective tax rate on future domestic and European
earnings.
PER SHARE AMOUNTS
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE, which replaced the
primary and fully diluted earnings per share measures with basic and diluted
earnings per share. Basic earnings per share is computed on the basis of the
weighted average number of shares outstanding during the periods presented.
Diluted earnings per share 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. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements. In computing per share amounts, deemed dividends on
preferred stock have been deducted from net income to arrive at net income
applicable to common shareholders.
FOREIGN CURRENCY TRANSLATION
Results of operations for the Company's foreign subsidiaries are translated
using the average exchange rates during the period, while assets and liabilities
are translated into U.S. dollars using the rate at the balance sheet date.
Resulting translation adjustments are recorded as a component of shareholders'
equity. The Company from time to time uses forward contracts to hedge the
foreign exchange exposure related to revenues generated in their foreign
operations.
STOCK OPTION PLANS
The Company accounts for stock options in accordance with Accounting
Principles Board ("APB") Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and its related interpretations. No compensation expense is recognized for the
Company's options which have an exercise price equal to or above the market
price on the date of the grant. The Company adopted the disclosure requirements
of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (FAS 123), as of the fiscal year ended March 31, 1997
(see Note 7).
47
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to current
presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME
and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. These statements are required to be adopted by the Company as of
the beginning of fiscal 1999. SFAS No. 130 requires disclosure of transactions
from non-owner sources which affect stockholder's equity in a separate financial
statement for the period in which they are recognized. SFAS No. 131 requires
disclosure of certain information about operating segments, products and
services, geographic areas of operations and major customers and the factors
used by management to determine reportable segments. The adoption of these
statements will not affect the Company's financial position or results of
operations. Management has not completed its determination of the effect these
statements will have on its financial statement disclosures.
2. ACQUISITIONS
The value of the common stock issued in all acquisitions was based on the
market price of the Company's common stock during the periods in which
agreements were reached (i.e., the date of the signing of the letter of intent
or definitive agreement) to undertake the relevant transactions, which the
Company believes is indicative of the fair value of the acquired businesses.
FISCAL 1997 ACQUISITIONS
On May 17, 1996, the Company acquired all of the issued and outstanding
capital stock of PRTV, a publicly traded direct marketing company and producer
of infomercials, for 1,836,773 shares of the Company's common stock then valued
at $25.9 million. The acquisition was accounted for as a purchase and the
results of PRTV are included in the Company's financial statements from the date
of acquisition. A total of $39.1 million in assets were acquired and included
goodwill of $18.6 million, which was initially being amortized over 20 years.
Under the terms of the purchase agreement, 181,949 of the shares were returned
to the Company because certain assets were not realized. During the third
quarter of fiscal 1998, the Company accounted for these shares as treasury stock
and a reduction in goodwill of $2.6 million. In March 1998, the Company
wrote-off the remaining goodwill associated with PRTV as more fully described in
Note 1.
On July 2, 1996, the Company also acquired two direct response marketing
companies, Prestige Marketing Limited and Prestige Marketing International
Limited (collectively, "Prestige") and Suzanne Paul Holdings Pty Limited and its
operating subsidiaries (collectively, "Suzanne Paul"). The aggregate
consideration initially paid by the Company for Prestige and Suzanne Paul was
approximately $4.2 million in cash, $2.8 million in a note payable due and paid
on December 5, 1996, and 787,879 shares of the Company's common stock then
valued at $14.7 million. The acquisition was accounted for as a purchase and the
results of Prestige and Suzanne Paul are included in the Company's financial
statements from the date of acquisition. A total of $33.8 million in assets were
acquired and included goodwill of approximately $18.7 million, which is being
amortized over 20 years. In addition, included in the Prestige and Suzanne
48
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
2. ACQUISITIONS (CONTINUED)
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 fiscal year 1998, 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.
On August 7, 1996, the Company acquired all of the issued and outstanding
capital stock of Nancy Langston & Associates, Inc. ("Langston"), a media agency.
The aggregate consideration paid by the Company was 26,587 shares of the
Company's common stock then valued at $500,000, and a $390,000 promissory note
payable in equal installments over 2 years which began on September 1, 1996. A
total of $904,600 in assets were acquired and included goodwill of approximately
$880,000, which is being amortized over 10 years.
FISCAL 1996 ACQUISITIONS
On October 25, 1995, the Company acquired all of the issued and outstanding
capital stock of DirectAmerica Corporation and California Production Group, Inc.
(collectively, "DirectAmerica") for 554,456 shares of the Company's common stock
then valued at $7.0 million. The acquisition was accounted for as a purchase and
the results of DirectAmerica are included in the Company's financial statements
from the date of acquisition. A total of $8.5 million in assets were acquired
and included goodwill of $7.8 million, which is being amortized over 20 years.
On October 16, 1995, the Company acquired the assets related to the "Flying
Lure" product from United Brands International Corp. and Langer Technologies,
Inc. The purchase price of $1.9 million included a $1.0 million cash payment and
a two-year promissory note bearing interest at 9.0% in the principal amount of
$900,000. In addition, the Company agreed to pay $596,000 over three years for a
covenant not to compete. The Company may be required to make additional payments
of up to $6.0 million if worldwide sales of "Flying Lure" products exceed
certain targeted levels. Any such additional amounts will be recognized as
additional cost of the "Flying Lure" assets. Total assets acquired, principally
the brand name and product rights, the noncompete agreement and product
development talent, were approximately $2.5 million. These amounts are included
in goodwill and other intangible assets and are being amortized over 20 years.
PRO FORMA INFORMATION
The purchase price allocations for DirectAmerica, PRTV, Prestige, Suzanne
Paul, and Langston were based on management's estimates of the fair value of
assets acquired and liabilities assumed. Had the DirectAmerica, PRTV, Prestige,
Suzanne Paul, and Langston acquisitions been made at April 1, 1996 and
49
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
2. ACQUISITIONS (CONTINUED)
April 1, 1995, respectively, pro forma unaudited condensed results from
operations for the years ended March 31, 1997 and 1996 would have been as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------
<S> <C> <C>
1997 1996
---------- ----------
Net revenues.......................................................... $ 372,694 $ 374,889
Net (loss) income..................................................... $ (45,468) $ 16,024
Basic (loss) income per share......................................... $ (2.07) $ .84
Diluted (loss) income per share....................................... $ (2.07) $ .61
</TABLE>
The pro forma information does not purport to be indicative of the combined
results of operations that would have been reported had the transactions taken
place on April 1, 1995 or of future results of operations.
3. ACCRUED EXPENSES
Accrued expenses include the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------
<S> <C> <C>
1998 1997
---------- ----------
Allowance for product refunds and returns............................. $ 7,870 $ 4,771
Accrual for legal settlements......................................... 2,100 7,512
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Furniture, fixtures, and office equipment............................... $ 21,359 $ 20,745
Leasehold improvements.................................................. 1,854 1,931
Equipment under capital leases.......................................... 1,316 923
--------- ---------
24,529 23,599
Less accumulated depreciation and amortization.......................... (12,191) (9,417)
--------- ---------
Total............................................................. $ 12,338 $ 14,182
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization expense for property and equipment, including
equipment under capital lease, was $4,058,000, $3,042,000 and $1,470,000 for the
years ended March 31, 1998, 1997 and 1996, respectively.
50
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Line of credit, net of discount......................................... $ 18,377 $ 13,000
Term loan, net of discount.............................................. 3,373 3,232
Notes payable--ValueVision, net of discount............................. 8,172 --
Notes payable--other.................................................... 832 2,326
Obligations under capital leases........................................ 527 302
--------- ---------
31,281 18,860
Less current portion.................................................... 30,812 17,901
--------- ---------
Long-term portion....................................................... $ 469 $ 959
--------- ---------
--------- ---------
</TABLE>
The Company believes the carrying value of long-term debt and capital lease
obligations approximates fair value.
In September 1997, the Company and its principal lender signed a loan
modification agreement which limited the maximum outstanding amount of cash
advances under its line of credit to $19,000,000 less the amount of permitted
outstanding letters of credit (maximum of $5,000,000). The Company's line of
credit also provides for a standby letter of credit in the amount of $475,000
which was outstanding at March 31, 1998 and expires on September 30, 1998. The
line of credit was extended until December 31, 1998 and the payment terms of the
Company's term loan were revised. The term loan is payable as follows: $800,000
was due and paid on April 1, 1998 and $1,000,000 on each of December 1, 1998,
1999 and 2000. As of March 31, 1998, interest under the line of credit and term
loan accrued at prime plus 3% and is payable monthly. The discount on the term
loan of $427,000 represents the remaining unamortized balance of the $1,800,000
value assigned to warrants to purchase 2,250,000 shares of the Company's common
stock at an exercise price of $4.80 per share issued in October 1994 in
connection with the making of the term loan. 2,025,000 of these warrants remain
outstanding at March 31, 1998 and are exercisable until September 30, 2004. The
valuation was based an independent analysis. The discount is being amortized
over the extended life of the term loan and is included in interest expense.
Under the loan modification agreement, the Company is required to maintain
certain financial covenants, including tangible net worth and working capital
minimums and other financial ratios. The Company is in technical default of one
of its loan covenants as of March 31, 1998 as described in Note 1. As a result,
the $2,000,000 long-term portion of the term loan has been classified as current
as of March 31, 1998. The loan modification agreement provides for an interest
rate increase of 1% at any period during which the Company fails to be in
compliance with certain of its financial covenants. At March 31, 1998, the
Company was in violation of a certain financial covenant triggering the interest
rate increase. As a result, effective April 1, 1998, the Company's line of
credit and term loan began accruing interest at a rate of prime plus 4%. The
loan modification agreement also subjects the Company to certain restrictions,
including the payment of dividends and incurrence of additional indebtedness.
Borrowings under the line are subject to a monthly borrowing base
computation comprised of a percentage of domestic cash, inventory and global
receivables. The loan modification agreement requires the Company to pay an
annual fee of .25% on the unused portion of the line of credit, maintain an
average
51
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
quarterly compensating balance of $2,500,000 subject to a .25% deficiency fee,
and pay a loan restructuring fee of $304,000 in 16 equal monthly installments.
In connection with the loan modification agreement, the Company granted to
its principal lender warrants to acquire 125,000 shares of the Company's 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 then remaining term of the line of credit (15 months) and is
included in interest expense.
The line of credit and the term loan are secured by a lien on substantially
all of the assets of the Company. Such lien on certain nondomestic assets of the
Company is subordinate to a lien held by Barclays Bank PLC. At March 31, 1998,
the Company had an overdraft line with Barclays in the amount of approximately
$1,000,000 which expired June 30, 1998. Under its agreements with Barclays, the
Company is subject to certain restrictions in respect to the repayment of
intercompany loans. There were no borrowings outstanding under the Barclays'
line at March 31, 1998.
In July 1997, the Company obtained a working capital credit facility from
ASB Bank through Prestige consisting of a working capital facility (overdraft
and letter of credit) of $1,000,000 New Zealand dollars (approximately $550,000
US dollars at March 31, 1998) and a short-term loan of $4,300,000 New Zealand
dollars (approximately $2,400,000 US dollars at March 31, 1998). The working
capital facility bore interest at the ASB Bank Banking Business Rate (the
"BBBR"), plus 1% and the short-term loan bore interest at the BBBR Rate plus 2%.
All amounts under this agreement were paid in full as of March 31, 1998.
In connection with a Merger Agreement, dated as of January 5, 1998, by and
among the Company, ValueVision, and Quantum Direct Corporation which was
subsequently terminated on June 2, 1998, ValueVision extended to the Company a
working capital loan of up to $10,000,000 to be utilized pending consummation of
the Merger Agreement. There was $8,500,000 outstanding at March 31, 1998 with
the remaining $1,500,000 having been advanced during April 1998. The loan bears
interest at prime plus 1.5%, payable quarterly, and is due on January 1, 1999,
subject to acceleration in certain circumstances. The Company is required to
maintain compliance with certain financial covenants under this agreement. The
Company anticipates that it may not be in compliance with certain of these
covenants in fiscal 1999.
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
lower of $1.07 per share or the then present market value. The Company has
reserved approximately 9.4 million shares of the Company's common stock for this
purpose. 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 equal to $2.74 per share. The warrants are exercisable
until the earlier of January 5, 2003, or on the date of repayment of the loan by
the Company, if repaid by August 14, 1998. The Company also granted registration
rights in connection with the shares of the Company's common stock issuable
pursuant to the loan and the warrants issued to ValueVision. The value accorded
the warrants has been accounted for as a loan discount which is being amortized
over the term of the loan (12 months) and is included in interest expense.
The Company's remaining debt includes a note payable to Edmark Industries in
the amount of $750,000 (original amount of $1,400,000) relating to the
settlement of litigation which occurred in fiscal
52
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
1997. Payment terms are $50,000 per month, plus 8% interest. Additionally,
approximately $82,000 relates to a note payable in connection with a prior-year
acquisition.
The effective interest rate on the Company's debt was approximately 13.0%
and 15.5% for the years ended March 31, 1998 and 1997, respectively.
Long-term debt maturities and payments due under capital lease obligations
are as follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
YEAR ENDING MARCH 31 DEBT OBLIGATIONS
- ----------------------------------------------- ----------- ---------------
<S> <C> <C>
1999........................................... $ 31,504 $ 268
2000........................................... 150 192
2001........................................... -- 108
2002........................................... -- 39
2003........................................... -- 6
----------- -----
31,654 613
Less: Interest portion......................... -- 86
Loan discount............................ 900 --
----------- -----
Total.................................. $ 30,754 $ 527
----------- -----
----------- -----
</TABLE>
6. CAPITAL TRANSACTIONS
STOCK PURCHASE RIGHTS
On January 13, 1994, the Company distributed one preferred share purchase
right on each outstanding share of its common stock. The rights will become
exercisable only if, without the Company's consent or waiver, a person or group
acquires 15% or more of the Company's outstanding common stock or announces a
tender offer, the consummation of which would result in ownership by a person or
group of 15% or more of the Company's outstanding common stock. Each right will
entitle shareholders to buy one one-hundredth of a share of a new series of
junior participating preferred stock at an exercise price of $40. In addition,
upon the occurrence of certain events, the holders of rights will thereafter
have the right to receive, upon exercise at the then-current exercise price,
common stock (or, in certain circumstances, cash, property, or other securities
of the Company) having a value equal to two times the exercise price of the
right. In the event that the Company is acquired in a merger or other business
combination, or 50% or more of the Company's assets or earning power is sold,
proper provision will be made so that each holder of a right will thereafter
have the right to receive, upon exercise at the then- current exercise price of
the right, common stock of the acquiring or surviving company having a value
equal to two times the exercise price of the right. Any rights that are, or
were, under certain circumstances, beneficially owned by such a 15% owner will
immediately become null and void.
The holders of rights, as such, have no rights as stockholders of the
Company. The Company has the ability to redeem the rights at $.001 per right
until the occurrence of certain specified events.
53
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
6. CAPITAL TRANSACTIONS (CONTINUED)
SERIES D CONVERTIBLE PREFERRED STOCK
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 $20,000,000, net of costs
of $310,000. The Series C Preferred Stock had a four-year term and was to be
automatically converted into the Company's common stock at maturity, if not
converted prior thereto. Immediately upon issuance, each share of Series C
Preferred Stock was convertible at the holder's option into such number of
shares of the Company's common stock, as 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 conversion occurred on or before March 17,
1998, a conversion price equal to $6.06 per share (subject to adjustment), or
(ii) if conversion occurred after March 18, 1998, a conversion price equal to
the lower of $6.06 per share (the "Fixed Conversion Price") or the lowest daily
volume weighted average sale price during the five days immediately prior to
such conversion. The $6.06 conversion price was equal to 120% of the volume
weighted average sales price of the Company's common stock on the date of the
initial announcement of the transaction in which the Series C Preferred Stock
was issued (the "Announcement Date Price"). In connection with this investment,
the Company also issued warrants to the Series C Investors to acquire an
aggregate of 989,413 shares of the Company's common stock at an initial exercise
price of $6.82 which was equal to 135% of the Announcement Date Price. Such
warrants are exercisable until January 5, 2003.
In January 1998, in connection with the Merger Agreement, the Company
entered into a Redemption and Consent Agreement with the Series C Investors, in
which the Company agreed to exchange the Series C Preferred Stock for a newly
created Series D Convertible Preferred Stock containing terms substantially
similar to those of the Series C Preferred Stock but with a mechanism by which
the fixed conversion price could be adjusted downward in certain circumstances.
In addition, the Company's granted warrants to acquire 500,000 shares of the
Company's Common Stock to the Series C investors. These warrants had an exercise
price of $6.82 but contained a mechanism by which the exercise price could be
adjusted downward in certain circumstances. In exchange, the Series C Investors
agreed, among other things, to waive their right to convert their Series C or D
Preferred Stock into the Company's common stock at a per share price below $6.06
prior to the earliest of the termination of the Merger Agreement or June 1,
1998. The actual exchange of Series C for Series D Preferred Stock took place on
April 14, 1998.
Upon termination of the Merger Agreement on June 1, 1998. The fixed
conversion price of the Series D Preferred Stock and the exercise price of the
all of the warrants were automatically adjusted to $1.07 per share, 101% of the
closing bid price of the Company's common stock at said date. In addition, the
standstill provision under the Redemption and Consent Agreement expired. Based
on the current fixed common price, the Series D Preferred Stock is convertible
into a minimum of 18,637,157 shares of common stock, not including shares
issuable upon conversion of any accrued premium.
Depending on market conditions at the time of conversion, the number of
shares issuable could be significantly greater, based upon the then-prevailing
trading price of the Company's common stock. The Series D Preferred Stock
carries a 6% annual premium payable, at the Company's option in cash or the
Company's common stock, 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.
54
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
6. CAPITAL TRANSACTIONS (CONTINUED)
Except under certain circumstances, no holder of the Series D Preferred
Stock or the related 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 D 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 is
senior to the Company's common stock and Series A Junior Participating Preferred
Stock and junior to the Company's Series B Convertible Preferred Stock.
SERIES B CONVERTIBLE PREFERRED STOCK
In October 1994, the Company authorized the issuance of a series of
preferred stock designated "Series B Convertible Preferred Stock," par value
$.01 per share, consisting of 400,000 shares, of which a total of 255,796 shares
were issued, as described below. At March 31, 1998, there were 81,250 shares
outstanding.
Each share of Series B Preferred Stock is valued at $40.00 per share for
conversion purposes and is presently convertible at the option of the holder
into shares of the Company's common stock at a price of $4.00 per share of the
Company's common stock (subject to adjustment). The holders of shares of Series
B Preferred Stock shall be entitled to receive dividends declared on the
Company's common stock as if the shares of Series B Preferred Stock had been
converted into shares of the Company's common stock. Except as to the election
of directors, each share of Series B Preferred Stock has voting rights
equivalent to the total number of shares of Company's common stock into which
the share of the Series B Preferred Stock is convertible. The holders of the
Series B Preferred Stock, voting as a class, originally had the right to elect
two directors; the holders of the Company's common stock, voting as a class, had
the right to elect the remaining directors. The Series B Preferred stockholders'
right to elect two directors has since terminated.
In connection with the sale, in privately negotiated transactions of
investment units in fiscal 1995, the Company issued 255,796 warrants, each of
which represent the right to purchase twelve (12) shares (subject to adjustment)
of the Company's common stock. The warrants are exercisable at a price of $4.80
per share of the Company's common stock, except for those applicable to 3,546
warrants which are exercisable at a price of $5.74 per share of the Company's
common stock. At March 31, 1998, 221,000 warrants to acquire 2,652,000 shares of
the Company's common stock were outstanding and exercisable, and expire between
October 5, 2004 and December 19, 2004.
At March 31, 1998, there were approximately 20,400,000 shares of the
Company's common stock reserved for conversion of preferred stock, for exercise
of stock options and warrants, for issuance under the Company's Management
Incentive Plan, and for matching contributions under the Company's 401(k) plan.
Based on the various conversion/exercise price events described above, this
number has increased to approximately 41,750,000 as of June 15, 1998. In
addition, based on the stock price of $1.3125 per share at June 15, 1998, only
2,239,413 outstanding options and warrants had an exercise price below the
market price of the stock at June 15, 1998.
55
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
6. CAPITAL TRANSACTIONS (CONTINUED)
PUBLIC OFFERING
On August 6, 1996, the Company completed a public offering of 2,000,000
shares of its common stock with net proceeds to the Company of approximately
$28.9 million. If these shares had been outstanding for the entire years ended
March 31, 1997 and 1996 and the DirectAmerica, PRTV, Prestige, Suzanne Paul, and
Langston acquisitions had been made at the beginning of these periods, basic and
diluted loss per share would have been $1.90 for the year ended March 31, 1997.
For the year ended March 31, 1996, basic income per share would have been $.76
and diluted income per share would have been $.57.
56
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
7. STOCK OPTIONS
The Company has various stock option plans, which are described below. The
Company applies the provisions of APB Opinion 25, and related interpretations in
accounting for its plans. Accordingly, no compensation has been recognized in
the financial statements, except as related to the 750,000 options granted to
the Chief Executive Officer and two other senior executive officers discussed
below, for the options issued under such plans as the majority of options are
granted at an exercise price equal to or related to the market price of the
Company's common stock at the date of grant. Had compensation cost for the
Company's stock option plans been determined using fair values at the grant
dates for awards under those plans as defined by SFAS No. 123, the Company's net
(loss) income and net (loss) income per share would have changed to the pro
forma amounts shown below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ---------
<CAPTION>
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net (loss) income................................ $ (62,316) $ (56,323) $ 15,929
Pro forma (loss) earnings per share:
Basic...................................................... $ (2.50) $ (2.57) $ 1.07
Diluted.................................................... $ (2.50) $ (2.57) $ .70
</TABLE>
Option valuation models use highly subjective assumptions to determine fair
value of traded options with no vesting or trading restrictions. Because options
granted under the Company's stock option plans have vesting requirements and
cannot be traded, and because changes in the assumptions can materially affect
the fair value estimate, in management's opinion, the existing valuation models
do not necessarily provide a reliable measure of the fair value of its employee
stock options.
For purposes of determining the pro forma disclosures, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model, with the following weighted-average assumptions used for
each year presented: dividend yield of 0%; and expected lives of 5 years.
Expected volatility of 50.0%, 51.8% and 51.8%, and risk-free interest rates of
6.4%, 6.1% and 6.1% have been used in fiscal 1998, 1997 and 1996 respectively.
In accordance with the transition provisions of SFAS No. 123, the pro forma
disclosures presented above reflect the statement's application only to option
grants and stock awards dated on or after April 1, 1995. Therefore, because
option grants and awards generally vest over several years and additional awards
are expected to be made in the future, the pro forma results should not be
considered to be representative of the effects on reported results for future
years.
Under the above-mentioned stock option plans, as amended, a maximum of
8,065,000 shares of common stock may be issued upon exercise of incentive or
nonincentive stock options, special options, or stock appreciation rights
granted pursuant to such plans. All employees of the Company, as well as
directors, officers, and third parties providing services to the Company are
eligible to participate in the stock option plans.
During fiscal 1997 and 1996, the Company recognized $491,000 and $344,000,
respectively, in compensation expense related to the issuance of 30,000 and
25,000 shares of the Company's common stock to non-employee directors under its
Director Stock Grant Plan in each year. No such amounts were made in fiscal 1998
as the Director Stock Grant Plan was terminated as of March 31, 1997. The shares
were valued at closing price of the Company's common stock on the New York Stock
Exchange at the date of grant.
56
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
7. STOCK OPTIONS (CONTINUED)
In addition, in fiscal 1996 the Company recognized approximately $1.5
million in compensation expense related to the issuance of 93,007 shares of its
common stock to officers, directors and other employees in connection with its
Management Incentive Plan at a weighted average fair value of $16.50 per share.
As an inducement to the execution of employment agreements employment
agreements with various officers of the Company who entered into employment
agreements after August 31, 1991, as well as certain other agreements, the Board
of Directors has authorized the grant of options to purchase up to 2,686,750
shares of the Company's common stock at exercise prices equal to at least the
market price at the time of grant with the exception of 700,000 options granted
to the Company's Chief Executive Officer and 50,000 plan options granted to two
other senior executive officers. These 750,000 options contain a provision which
provides that, upon the occurrence of certain triggering events (such as a sale
or merger of the Company, or significant investment), the executives could
realize a reduction of up to an aggregate of approximately $3.0 million in the
exercise price of their options. This $3.0 million charge is being amortized
from November 13, 1997, the date of the agreement in principal with the CEO,
through June 30, 1998. Fiscal 1998 includes $1.9 million in noncash compensation
expense in connection with these grants. The ultimate aggregate expense, 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. This charge will be reversed in the first quarter of fiscal
1999 as no triggering events have occurred as of the June 30, 1998 expiration
date.
Options granted generally vest over a period ranging from the date of grant
up to a maximum of five years. Options may be exercised up to a maximum of 10
years from date of grant. The weighted-average remaining contractual life of all
outstanding options at March 31, 1998 is 8 years (9 years for options with an
exercise price less than $10.00, and 5 years for options with an exercise price
greater than $10.00).
In fiscal 1997, 1,129,000 stock options originally issued to Company
employees at an exercise price of $16.375 were canceled and 564,500 stock
options with an exercise price of $8.325 were issued. In fiscal 1998, 716,500
stock options originally issued to Company employees, officers and directors
were canceled and 358,250 stock options with exercise prices ranging from $7.00
to $8.325 were issued.
57
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
7. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
SHARES UNDER WEIGHTED
OPTION AVERAGE
------------- -----------
<S> <C> <C>
Outstanding at April 1, 1995........................................ 2,908,096 $ 5.06
Granted............................................................. 350,000 12.99
Exercised........................................................... (1,219,099) 4.22
Expired and canceled................................................ (116,665) 5.82
------------- -----------
Outstanding at March 31, 1996....................................... 1,922,332 6.90
Granted............................................................. 3,921,250 15.18
Exercised........................................................... (1,215,099) 5.78
Expired and canceled................................................ (1,543,979) 16.40
------------- -----------
Outstanding at March 31, 1997....................................... 3,084,504 13.11
Granted............................................................. 2,686,250 5.29
Exercised........................................................... (33,333) 4.70
Expired and canceled................................................ (1,265,559) 13.92
------------- -----------
Outstanding at March 31, 1998....................................... 4,471,862 $ 8.10
------------- -----------
------------- -----------
Exercisable at March 31, 1998....................................... 2,612,279 $ 7.74
------------- -----------
------------- -----------
Non-exercisable at March 31, 1998................................... 1,859,583 $ 8.61
------------- -----------
------------- -----------
Exercisable at March 31, 1997 1,213,591 $ 12.19
------------- -----------
------------- -----------
Nonexercisable at March 31, 1997 1,870,913 $ 13.70
------------- -----------
------------- -----------
Shares available for future grant at March 31, 1998................. 560,932
-------------
-------------
Shares available for future grant at March 31, 1997................. 1,068,430
-------------
-------------
</TABLE>
Of the outstanding options, 3,451,749 have exercise prices ranging from
$2.69 to $10.00 with a weighted average price of $5.70, and 1,020,113 have
exercise prices ranging from $10.01 to $20.00 with a weighted average price of
$16.24. The weighted average fair value of options granted during the years
ended March 31, 1998, 1997 and 1996 was $2.58, $7.59 and $7.68, respectively.
58
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net (loss) income.......................................... $ (56,769) $ (45,691) $ 16,579
Deemed dividend on convertible preferred stock............. (643) -- --
---------- ---------- ---------
Adjusted net (loss) income for basic and diluted earnings
per share................................................ $ (57,412) $ (45,691) $ 16,579
---------- ---------- ---------
---------- ---------- ---------
Weighted average shares outstanding--basic................. 24,904 21,905 15,411
Effect of dilutive securities:
Convertible preferred stock................................ -- -- 2,248
Stock options and warrants................................. -- -- 5,015
---------- ---------- ---------
Dilutive potential common shares........................... -- -- 7,263
Adjusted weighted average and assumed
conversions.............................................. 24,904 21,905 22,674
---------- ---------- ---------
---------- ---------- ---------
Basic earnings per share................................. $ (2.31) $ (2.09) $ 1.08
---------- ---------- ---------
---------- ---------- ---------
Diluted earnings per share............................... $ (2.31) $ (2.09) $ .73
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
Convertible preferred stock to purchase 4,112,830 and 950,000 shares of
common stock and stock options and warrants to purchase of 11,565,000 and
8,592,000 shares of common stock for the years ended March 31, 1998 and 1997
were not included in the computation of diluted earnings per share because of
losses incurred by the Company in those years, therefore, the effect would be
antidilutive.
Diluted earnings per share for the year ended March 31, 1998 does not
include 3,400,000 shares of common stock which would be issuable in the event
that the Company was unable to repay the ValueVision loan in cash.
Stock option and warrants to purchase 3,067,000 shares of common stock were
outstanding during the year ended March 31, 1996 but were not included in the
computation of diluted earnings per share because the exercise price was greater
than the average market price of the common shares and, therefore, the effect
would be antidilutive.
As a result of the termination of the Merger Agreement on June 1, 1998 the
Series D Preferred Stock, not including shares issuable upon conversion of any
accrued premium is convertible into a minimum of 18,637,157 shares of the
Company's common stock as compared to 3,300,330 shares at March 31, 1998. In
addition, potential shares issuable in connection with repayment of the
ValueVision loan increased to approximately 9,400,000.
59
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
9. INCOME TAXES
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
FEDERAL STATE FOREIGN TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1998
Current............................................ $ -- $ -- $ 700 $ 700
Deferred........................................... -- -- -- --
--------- --------- --------- ---------
Provision for income taxes......................... $ -- $ -- $ 700 $ 700
--------- --------- --------- ---------
--------- --------- --------- ---------
1997
Current............................................ $ -- $ -- $ 1,897 $ 1,897
Deferred........................................... 1,201 -- (1,201) --
--------- --------- --------- ---------
Provision for income taxes......................... $ 1,201 $ -- $ 696 $ 1,897
--------- --------- --------- ---------
--------- --------- --------- ---------
1996
Current (1)........................................ $ 9,722 $ 1,174 $ 1,258 $ 12,154
Deferred........................................... (4,825) (761) 1,324 (4,262)
Benefit of net operating loss carryforward......... (4,367) -- -- (4,367)
--------- --------- --------- ---------
Provision for income taxes......................... $ 530 $ 413 $ 2,582 $ 3,525
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) In 1996, current income taxes payable were reduced by approximately
$2,100,000 due to the exercise of employee stock options that are deductible
for income tax purposes but do not affect net income.
Pretax (loss) income was taxed under the following jurisdictions (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
United States.............................................. $ (37,682) $ (44,794) $ 15,525
Foreign.................................................... (18,387) 1,000 4,579
---------- ---------- ---------
Total................................................ $ (56,069) $ (43,794) $ 20,104
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
60
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31
----------------------
<S> <C> <C>
1998 1997
---------- ----------
Deferred tax assets:
Net operating loss carryforwards.................................... $ 31,150 $ 14,371
Alternative minimum tax credit carryforward......................... 835 835
Accrued vacation and severance pay.................................. 542 901
Inventory and accounts receivable reserves.......................... 5,240 7,162
Reserve for legal settlements....................................... 2,043 2,811
Other................................................................. 1,504 701
---------- ----------
Total deferred tax assets....................................... 41,314 26,781
Valuation allowance................................................... (38,118) (23,171)
---------- ----------
Deferred tax assets................................................... 3,196 3,610
Deferred tax liabilities:
Prepaid media and other costs....................................... 361 769
Tax over book depreciation.......................................... 1,043 240
Deferred production costs........................................... 703 703
Deferred sales...................................................... 1,089 1,898
---------- ----------
Total deferred tax liabilities.................................. 3,196 3,610
---------- ----------
Net deferred tax asset................................................ $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The increase in the valuation allowance relates to the increase in U.S. and
foreign net operating loss carryforwards and other deferred tax assets from
March 31, 1997 to March 31, 1998.
A reconciliation of the Company's provision for income taxes to the
provision for income taxes at the U.S. federal statutory rate of 35% is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ---------
Tax (benefit) expense at statutory rate..................... $ (19,624) $ (15,328) $ 7,036
Tax effect of:
Net operating loss not benefited.......................... 14,394 14,449 --
Utilization of net operating loss carryforward............ -- -- (4,367)
Foreign income taxes in excess of
U.S. Federal statutory rate............................... 700 97 980
State and local income taxes.............................. -- -- 268
Nondeductible items, principally goodwill................. 5,230 2,679 301
Other..................................................... -- -- (693)
---------- ---------- ---------
Income tax expense.......................................... $ 700 $ 1,897 $ 3,525
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
61
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
9. INCOME TAXES (CONTINUED)
At March 31, 1998, the Company has the following loss and credit
carryforwards for tax purposes (in thousands):
<TABLE>
<CAPTION>
AMOUNT EXPIRATION
--------- -------------
<S> <C> <C>
U.S. net operating loss............................................. $ 62,700 2009-2018
Foreign net operating loss.......................................... 19,703 Unlimited
Alternative minimum tax credit...................................... 835 Unlimited
</TABLE>
A portion of the U.S. net operating loss carryforward is related to the
exercise of employee stock options. If that portion of the loss carryforward
related to the exercise of stock options is realized, the resulting tax benefit
will be recorded directly to shareholders' equity. For financial reporting
purposes, a valuation allowance has been recognized to offset the deferred tax
assets related to the entire U.S. net operating loss carryforward, because
utilization of net operating loss carryforwards cannot be reasonably assumed.
Due to certain collateral requirements in the Company's credit facilities
(as discussed in Note 5), the majority of earnings from its foreign subsidiaries
have been deemed distributed for tax purposes. All appropriate U.S. federal and
state income taxes have been provided thereon. Foreign withholding taxes on
actual distributions of these earnings would be immaterial.
10. SEVERANCE TO FORMER EXECUTIVE OFFICERS
In fiscal 1997, the Company recorded severance expense related to the
discontinuance of employment of five executive officers. Total severance charges
related to these officers were $2,500,000 and included salary, insurance and
other benefits.
11. COMMITMENTS AND CONTINGENCIES
The Company rents warehouses, retail stores and office space under various
operating leases which expire through December 2013 including leases with
related parties as described in Note 13. Future minimum lease payments
(exclusive of real estate taxes and other operating expenditures) as of March
31, 1998 under noncancelable operating leases with initial or remaining terms of
one year or more are as follows for the years ended March 31 (in thousands):
<TABLE>
<S> <C>
1999............................................... $ 5,163
2000............................................... 4,095
2001............................................... 2,991
2002............................................... 2,204
2003............................................... 2,231
Thereafter......................................... 16,813
---------
$ 33,497
---------
---------
</TABLE>
Rent expense under various operating leases aggregated $4,833,000,
$4,233,000 and $2,335,000 in 1998, 1997 and 1996, respectively. Subleased
building space rental income aggregated $136,800, $106,300 and $85,300 for 1998,
1997 and 1996, respectively.
During fiscal year 1998, the Company expended $91,904,000 on media
purchases, a portion of which were made under long-term agreements. The largest
domestic agreement runs through December 1998
62
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
and requires a fixed monthly payment of approximately $1.8 million per month. In
addition, the Company has long-term agreements with certain Pan-European
satellite channels to purchase a specific number of television hours per week at
a minimum guaranteed amount. These contracts expire at various dates over the
next 3 years. In addition, the Company has a contract to lease a transponder
which continues through the year 2010. Total commitments under these media
contracts are; $27,122,000 in 1999; $4,843,000 in 2000; $4,456,000 in 2001, 2002
and 2003; and $26,609,000 thereafter.
12. LITIGATION AND REGULATORY MATTERS
NATIONAL MEDIA LITIGATION
SHAREHOLDERS' FEDERAL CLASS ACTIONS
In fiscal year 1996, the Company settled a class action involving
allegations concerning disclosure by the Company of its ongoing relationship
with PRTV, then an independent infomercial producer, and Ronic, S.A., a supplier
of the Company. The settlement resulted in cash payments by the Company's
insurer of $2,175,000 and the issuance of 106,000 shares of the Company's common
stock valued at the closing price on the New York Stock Exchange on the date of
settlement, to the class. The Company recorded a charge in fiscal year 1995 of
$725,000 in connection with this matter.
TERMINATED 1994 TENDER OFFER AND MERGER AGREEMENT WITH VALUEVISION
INTERNATIONAL, INC.
In April 1994, the Company filed suit in federal court against ValueVision
alleging that ValueVision had wrongfully terminated its amended tender offer. In
May 1994, ValueVision answered the Company's complaint and set forth various
counterclaims. In April 1995, the parties to this litigation entered into a
settlement agreement. In connection with the settlement agreement, the Company
and ValueVision executed a Telemarketing, Production and Post-Production
Agreement (the "Telemarketing Agreement") and a Joint Venture Agreement. The
Telemarketing Agreement obligated ValueVision to provide to the Company over a
three-year period in-bound telephone call-taking services at rates more
favorable than those currently being paid by the Company. The Telemarketing
Agreement also obligated ValueVision to provide to the Company certain
production and post-production services.
As additional consideration for the services to be provided by ValueVision
under the Telemarketing Agreement, the Company granted to ValueVision ten (10)
year warrants (the "Warrants") to purchase up to 500,000 shares of the Company's
common stock at a price of $8.865 per share (subject to adjustment pursuant to
the antidilution provision of the Warrants). This price was based on a premium
over the average 20-day market value prior to the date of settlement. The
Warrants were scheduled to vest with respect to an equal number of shares on
each of the thirteen-month, 2-year and 3-year anniversaries of the effective
date (November 24, 1995), provided that ValueVision satisfied certain
conditions. The Warrants will expire on the tenth anniversary of the effective
date. During fiscal year 1997, the parties entered into an amendment to the
Telemarketing Agreement pursuant to which ValueVision was no longer obligated to
provide in-bound Telemarketing Services and is required to pay $1.3 million for
the Warrants. As of March 31, 1998, the Company had received $800,000 in
payments for 333,333 vested warrants. The remaining warrants will vest upon
payment of the final installment due November 28, 1998.
As part of the settlement, the Company and ValueVision also entered into a
Joint Venture Agreement. Pursuant to the Joint Venture Agreement, the Company is
required, subject to certain exceptions, to negotiate in good faith with
ValueVision to form a joint venture to pursue home shopping opportunities
63
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
12. LITIGATION AND REGULATORY MATTERS (CONTINUED)
outside the United States and Canada before pursuing such opportunities by
itself or with certain third parties. ValueVision granted the Company similar
rights with respect to infomercial opportunities ValueVision may have outside of
the United States and Canada.
In connection with the matters discussed above, the Company (1) reimbursed
its former Chairman $50,000 for certain legal costs, (2) paid approximately
$300,000 due to the former Chairman under the Consulting Agreement, and (3) paid
$220,000 in connection with the exercise of the Company's early termination
option for its then-principal offices which were located in a building owned by
a company controlled by the former Chairman.
The issuance of the Warrants to ValueVision required the prior consent of
the holders of the promissory notes issued pursuant to a Note Agreement for a
$5,000,000 five-year secured loan. As an inducement to the noteholders to permit
the issuance of the Warrants, the Company issued to the noteholders warrants
(the "Waiver Warrants") to purchase 500,000 shares of the Company's common stock
at a price of $10.00 per share. These warrants expired unexercised on November
28, 1997.
AB ROLLER PLUS PATENT LITIGATION
On March 1, 1996, Precise Exercise Equipment ("Precise") filed suit in the
United States District Court for the Central District of California against
certain parties, including the Company, alleging patent infringement, unfair
competition, and other intellectual property claims. Such claims relate to an
alleged infringement of Precise's initial US patent for an exercise device. The
suit claimed that a product marketed by the Company, the Ab Roller Plus,
pursuant to a license granted by a third party violated Precise's initial US
patent. On July 16, 1997, the Company and certain of the other defendants to the
action entered into a settlement agreement with the plantiffs. The Company
recorded a charge of approximately $6.0 million in the fourth quarter of the
fiscal year ended March 31, 1997 in connection with this matter.
FITNESS FLYER LITIGATION
In February 1997, the Company filed suit in a Los Angeles, California state
court against Guthy Renker Corporation in connection with a joint venture
between Guthy Renker and the Company concerning the marketing of a fitness
product. Guthy Renker also filed actions against the Company in California
federal and state court concerning the same circumstances. In early March 1997,
the parties reached a settlement of these actions pursuant to which the Company
retained its rights to market a competing product that it had developed, and
gave up the right to sell the original fitness product.
WWOR LITIGATION
In March 1997, WWOR-TV filed a breach of contract action in the United
States District Court for New Jersey against one of the Company's operating
subsidiaries alleging that the subsidiary wrongfully terminated a contract for
the purchase of media time, seeking in excess of $1,000,000 in compensatory
damages. The Company is contesting the action.
While at this stage it is not possible to predict the outcome of this
matter, the Company believes that any resolution of this matter will not have a
material adverse effect on the Company's results of operations.
64
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
12. LITIGATION AND REGULATORY MATTERS (CONTINUED)
PRTV LITIGATION
PRTV SHAREHOLDERS' CALIFORNIA CLASS ACTION
On May 1, 1995, prior to the acquisition of PRTV by the Company, a purported
class action suit was filed in the United States District Court for the Central
District of California against PRTV and its principal executive officers. The
suit sought unspecified compensatory damages and other equitable relief. The
Company settled this action in fiscal 1997 which settlement provided for the
payment of $550,000 to the class, 66% of which was paid by PRTV's insurance
carrier. The Company recorded a charge of $187,000 during fiscal year 1997. Such
settlement has received court approval.
EDMARK INDUSTRIES LITIGATION
In February 1996, prior to the acquisition of PRTV by the Company, Edmark
Industries ("Edmark"), a supplier of the SUPER SLICER kitchen product, filed
suit in the U.S. District Court for the Southern District of Texas against PRTV
and the retail distributor of the product. The action was settled in April 1997
upon the payment by the Company, on behalf of PRTV, of $200,000, a $200,000 note
payable on June 30, 1997, the issuance of a note requiring the payment of
$50,000 per month for 24 months beginning July 31, 1997, with interest at 8%,
and certain other nonmaterial matters. The Company recorded a charge of
$2,656,000 during the fourth quarter of fiscal year 1997 in connection with this
matter.
BLUBLOCKER LITIGATION
In September 1995, prior to the acquisition of PRTV by the Company, suit was
filed by Blublocker Corp., a distributor of sunglasses, against PRTV alleging
unfair competition and false advertising relating to a PRTV product campaign. In
April 1997, the suit was settled by the parties with PRTV agreeing to pay
$400,000 to Blublocker Corp. The Company recorded this charge in the fourth
quarter of fiscal year 1997 in connection with this matter.
SUNTIGER LITIGATION
In late March 1997, Suntiger, Inc. ("Suntiger"), a distributor of
sunglasses, filed suit against PRTV and certain other parties alleging patent
infringement. The Company has reached a settlement with the plaintiffs involving
a going-forward business relationship which management believes will not have a
material adverse impact upon the Company's financial condition or results of
operations.
PARKIN LITIGATION
In 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. The action was settled in March 1998 upon the Company agreeing
to pay Parkin $820,000 over a period extending to April 1, 2001 and Mr. Parkin
granting the Company, among other things, the rights to air existing
informercials on a worldwide basis through March 2002. The Company recorded a
charge in fiscal 1998 in connection with this matter.
REGULATORY MATTERS
In June 1996, the Company received a request from the FTC for additional
information regarding certain of the Company's infomercials in order to
determine whether the Company was operating in
65
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
12. LITIGATION AND REGULATORY MATTERS (CONTINUED)
compliance with previously issued consent orders. 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 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, especially given the applicable indemnification, the
Company does not believe that any remedies to which it may become subject will
have a material adverse effect on the Company's results of operations or
financial condition. The FTC recently notified the Company that it had concerns
about claims being made in one of the Company's current infomercials and also
raised questions concerning certain aspects of the Company's pricing practices.
The Company is responding to the FTC's inquiries.
In addition, in Spring 1997, in accordance with applicable regulation, the
Company notified the 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 Fitness Strider product and upgraded
component present a substantial product hazard, as defined under applicable law.
The Company and the CPSC 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 and an exercise
rider product marketed only in Australia and New Zealand. At this point,
management 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. 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.
13. RETIREMENT PLAN
All of the Company's U.S. full-time employees may participate in a 401(k)
defined contribution plan. The Company matches employee contributions at levels
that depend on the return on equity of the Company each year. The Company
recognized $13,000, $22,000, and $110,000 for the years ended March 31, 1998,
1997 and 1996, respectively, in connection with this plan.
66
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
14. RELATED PARTY TRANSACTIONS
The Company previously leased office space in a building owned by the
Company's former Chairman of the Board and Chief Executive Officer. The Company
terminated the lease, effective October 31, 1996 and paid a lump sum of $376,000
in fiscal 1997.
The Company also leases an office building and retail store in New Zealand
owned by an officer of the Company which expires on March 31, 2006. Rental
expense is $17,300 per month.
Included in accounts receivable is approximately $478,000 in notes
receivable and advances to certain officers of the Company. The notes including
accrued interest are due from two officers of the Company and range in amount
from $172,000 to $39,000. The notes bear interest at a rate of 8% with payment
terms ranging from due on demand to December 1998. In March 1998 the Company
entered into an employment agreement with its new president which included the
forgiveness of a loan, including accrued interest, in an amount of $190,000 and
the issuance of a $545,000 loan. The new loan was funded in April 1998, bears
interest at prime plus 1 1/2% and is repayable on May 30, 2000.
The Company also entered into transactions with companies affiliated with
various board members and current and former executives for services including
printing, consulting, show production and professional services. During the
years ended March 31, 1998, 1997 and 1996, the total amount paid to these
companies for such services was approximately $501,000, $1,187,000 and $336,000,
respectively. In addition, a company affiliated with the Chief Executive Officer
subleased a portion of the Company's production facility for part of the year
ending March 31, 1998 for approximately $24,000.
In accordance with provisions of the Company's stock option plan, in fiscal
1997, an officer of the Company delivered 25,220 shares of the Company's common
stock with a fair market value of $473,000 to the Company in satisfaction of an
outstanding note receivable in said amount.
67
<PAGE>
NATIONAL MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment and is engaged in the direct
marketing of products principally through television. Information as to the
Company's operations by geographic area, is set forth below (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
U.S. and Canada........................................ $ 125,725 $ 188,524 $ 141,642
Europe................................................. 66,423 58,977 56,406
Asia................................................... 42,389 71,017 94,559
South Pacific.......................................... 43,937 39,661 --
---------- ---------- ----------
Total.............................................. $ 278,474 $ 358,179 $ 292,607
---------- ---------- ----------
---------- ---------- ----------
Operating (loss) income:
U.S. and Canada........................................ $ (24,644) $ (33,446) $ 4,080
Europe................................................. (10,916) (7,661) 5,384
Asia................................................... (5,436) 5,668 15,728
South Pacific.......................................... (3,337) 5,995 --
Unallocated corporate expenses......................... (8,279) (12,808) (4,073)
---------- ---------- ----------
Total.............................................. $ (52,612) $ (42,252) $ 21,119
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
U.S. and Canada........................................ $ 76,373 $ 83,185 $ 73,051
Europe................................................. 20,448 25,925 19,106
Asia................................................... 14,007 16,956 24,391
South Pacific.......................................... 32,263 39,566 --
---------- ---------- ----------
Total.............................................. $ 143,091 $ 165,632 $ 116,548
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Operating income is net income before interest and income taxes. Fiscal 1998
U.S and Canada operating loss includes a $14,546,000 write-off of PRTV goodwill.
16. SUBSEQUENT EVENTS
On January 5, 1998, the Company entered into an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement"), by and among the Company,
ValueVision and Quantum Direct Corporation, formerly known as V-L Holdings Corp.
("Quantum Direct") a newly formed Delaware corporation. On April 8, 1998, it was
announced that ValueVision had received preliminary notification from holders of
more than 5% of ValueVision's common stock that they intended to exercise their
dissenter's rights with respect to the proposed transaction. On June 2, 1998,
the Company announced that the Company and ValueVision had mutually terminated
their agreement after not having been able to reach agreement on a restructured
transaction. As a result of the termination of the merger, the Company will
record a charge to writeoff in excess of $600,000 of merger related costs in the
first quarter of fiscal 1999.
In addition, in June 1998 the Company and Mitsui and Co., Ltd., the
Company's Asian partner, each notified the other that the existing agreement
regarding their operations in Japan will terminate pursuant to its terms on
January 1, 1999. The Company and Mitsui are involved in negotiations to
restructure their relationships in Japan and throughout Asia in order to address
changes in that market and other circumstances which have arisen.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
NATIONAL MEDIA CORPORATION
Date: July 1, 1998 By: /s/ ROBERT N. VERRATTI
-----------------------------------------
Robert N. Verratti
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
AND DIRECTOR
Date: July 1, 1998 By: /s/ JOHN SULLIVAN
-----------------------------------------
John Sullivan
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL ACCOUNTING AND FINANCIAL
OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates so indicated.
<TABLE>
<C> <S> <C>
Chief Executive Officer
/s/ ROBERT N. VERRATTI (Principal
- ------------------------------ Executive Officer) and July 1, 1998
Robert N. Verratti Director
/s/ CONSTANTINOS I. COSTALAS
- ------------------------------ Vice Chairman of the Board July 1, 1998
Constantinos I. Costalas and Director
/s/ ALBERT R. DOWDEN
- ------------------------------ Director July 1, 1998
Albert R. Dowden
- ------------------------------ Director July 1, 1998
Michael J. Emmi
/s/ WILLIAM M. GOLDSTEIN
- ------------------------------ Director July 1, 1998
William M. Goldstein
/s/ FREDERICK S. HAMMER
- ------------------------------ Chairman of the Board and July 1, 1998
Frederick S. Hammer Director
/s/ ROBERT E. KEITH, JR.
- ------------------------------ Director July 1, 1998
Robert E. Keith, Jr.
/s/ JOHN W. KIRBY
- ------------------------------ President and Director July 1, 1998
John W. Kirby
/s/ IRA M. LUBERT
- ------------------------------ Director July 1, 1998
Ira M. Lubert
/s/ WARREN V. MUSSER
- ------------------------------ Director July 1, 1998
Warren V. Musser
/s/ JON W. YOSKIN, II
- ------------------------------ Director July 1, 1998
Jon W. Yoskin, II
</TABLE>
<PAGE>
SCHEDULE II
NATIONAL MEDIA CORPORATION
AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE --------------------------
AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------- ----------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1998:
Allowance for doubtful accounts............ $ 6,907 $ 2,203 $ -- $ 3,670(1) $ 5,440
----------- ----------- ------------- ----------- -------
----------- ----------- ------------- ----------- -------
Reserve for refunds........................ $ 4,771 $ 51,861 $ -- $ 48,762(2) $ 7,870
----------- ----------- ------------- ----------- -------
----------- ----------- ------------- ----------- -------
Inventory reserve.......................... $ 11,739 $ 6,535 $ -- $ 11,755(3) $ 6,519
----------- ----------- ------------- ----------- -------
----------- ----------- ------------- ----------- -------
YEAR ENDED MARCH 31, 1997
Allowance for doubtful accounts............ $ 2,127 $ 5,698 $ 1,877(4) $ 2,795(1) $ 6,907
----------- ----------- ------------- ----------- -------
----------- ----------- ------------- ----------- -------
Reserve for refunds........................ $ 5,089 $ 41,309 $ -- $ 41,627(2) $ 4,771
----------- ----------- ------------- ----------- -------
----------- ----------- ------------- ----------- -------
Inventory reserve.......................... $ 1,558 $ 8,743 $ 1,828(4) $ 390(3) $ 11,739
----------- ----------- ------------- ----------- -------
----------- ----------- ------------- ----------- -------
YEAR ENDED MARCH 31, 1996:
Allowance for doubtful accounts............ $ 1,954 $ 1,194 $ -- $ 1,021(1) $ 2,127
----------- ----------- ------------- ----------- -------
----------- ----------- ------------- ----------- -------
Reserve for refunds........................ $ 3,371 $ 29,705 $ -- $ 27,987(2) $ 5,089
----------- ----------- ------------- ----------- -------
----------- ----------- ------------- ----------- -------
Inventory reserve.......................... $ 1,126 $ 674 $ -- $ 242(3) $ 1,558
----------- ----------- ------------- ----------- -------
----------- ----------- ------------- ----------- -------
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Refunds on products sold.
(3) Obsolete inventory written off.
(4) Acquired through acquisitions.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
4.9 Amendment No. 6 to Rights Agreement, dated as of January 5, 1998
10.51 Employment Agreement, dated as of March 20, 1998, between the Company and John W. Kirby.
10.52 Loan Agreement, dated as of March 31, 1998, by and between the Company and John W. Kirby.
10.53 Non-Incentive Stock Option Agreement, dated as of January 28, 1998, by and between the Company and
John W. Kirby.
10.54 Lease, dated November 26, 1996, by and between Encino Terrace Center and Positive Response
Television, Inc. and DirectAmerica Corporation.
11.1 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 4.9
AMENDMENT NO. 6 TO RIGHTS AGREEMENT ("Amendment No. 6") between NATIONAL MEDIA
CORPORATION, a Delaware corporation (the "Company") and ChaseMellon Shareholder
Services, LLC, a New Jersey Corporation, as Rights Agent (the "Rights Agent").
W I T N E S S E T H
WHEREAS, on January 3, 1994, the Company and the Rights Agent entered
into that certain Rights Agreement (as amended by Amendments Nos. 1 through 5 to
Rights Agreement, the "Rights Agreement"); and
WHEREAS, pursuant to Section 27 of the Rights Agreement, this Amendment
No. 6 may be entered into by the Company and the Rights Agent without the
approval of any holders of Rights.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto hereby agree as follows:
1. The definition of "Acquiring Person" set forth in Section 1(a)
of the Rights Agreement is hereby amended by adding to the
second sentence thereof, after the words "(vi) the execution
or consummation of the transactions contemplated by that
certain Securities Purchase Agreement between National Media
Corporation and the Purchasers named therein, dated September
4, 1997, or the conversion of the Series C Preferred Stock or
the exercise of the Warrants to be issued pursuant to such
Securities Purchase Agreement; or (vii)" the following new
language:
"the execution or consummation of the transactions
contemplated by that certain Agreement and Plan of
Reorganization and Merger (the "Merger Agreement") by
and among ValueVision International, Inc.
("ValueVision"), the Company and V-L Holdings Corp.,
dated as of January 5, 1998, or the exercise of the
warrants or the conversion of the note to be issued
in connection therewith, (viii) the execution or
consummation of the transactions contemplated by that
certain Redemption and Consent Agreement by and
between the Company and Capital Ventures
International and RGC International Investors, LDC,
dated as of January 5, 1998, or the conversion of the
Series D Preferred Stock or the exercise of the
Warrants to be issued pursuant to such Redemption and
Consent Agreement or the exercise of the Warrants to
be amended pursuant to such Redemption and Consent
Agreement, (ix) the execution or consummation of the
transactions contemplated by that certain Stock
Option Agreement (ValueVision), dated January 5,
1998, between ValueVision and the Company, or (x)"
2. Section 3(a) of the Rights Agreement is hereby amended by
adding as a new sentence (to be inserted after language added
by Amendment No. 5 to the Rights Agreement, dated August 14,
1997) the following:
"Notwithstanding the foregoing, no Distribution Date
shall occur as a result of (i) the execution or
consummation of the transactions contemplated by that
certain Agreement and Plan of Reorganization and
Merger, by and among ValueVision International, Inc.,
the Company and V-L Holdings Corp., dated as of
January 5, 1998, or the exercise of the Warrants or
the conversion of the Note to be issued in connection
therewith, (ii) the execution or consummation of the
transactions contemplated by that certain Stock
Option Agreement between the Company and ValueVision
International, Inc., dated as of January 5, 1998, or
the exercise of the options to be granted pursuant to
such Stock Option Agreement, or (iii) the execution
or consummation of the transactions contemplated by
that certain Redemption and Consent Agreement by and
between the Company and Capital Ventures
International and RGC
<PAGE>
International Investors, LDC, dated as of January 5,
1998, or the conversion of the Series D Preferred
Stock or the exercise of the Warrants to be issued
pursuant to such Redemption and Consent Agreement or
the exercise of the Warrants to be amended pursuant
to such Redemption and Consent Agreement."
3. Section 7(a) of the Rights Agreement is hereby amended by
replacing "and (iii)" from the ninth line thereof with the
following new language:
"(iii) at the "Effective Time" of the "Merger" as
such terms are defined in the Merger Agreement and
(iv)"
4. Capitalized terms used but not defined in this Amendment No. 6
shall have the respective meanings ascribed thereto in the
Rights Agreement.
5. Except as expressly amended by this Amendment No. 6, the
Rights Agreement shall remain in full force and effect as the
same was in effect immediately prior to the effectiveness of
this Amendment No. 6.
6. This Amendment No. 6 shall be governed and construed on the
same basis as the Rights Agreement, as set forth therein.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 6
to the Rights Agreement to be executed by their respective officers thereunto
duly authorized as of January 5, 1998.
NATIONAL MEDIA CORPORATION
By: /s/ Brian J. Sisko
-----------------------------------
Name: Brian J. Sisko
Title: Senior Vice President and
General Counsel
ChaseMellon Shareholder Services, LLC
By: /s/ Donald Messmer
-----------------------------------
Name: Donald Messmer
Title: Relationship Manager
3
<PAGE>
Exhibit 10.51
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, is made as of the 20th day of March, 1998,
by and between NATIONAL MEDIA CORPORATION, a Delaware corporation (the "Company"
or "National Media"), and JOHN W.
KIRBY ("Executive").
WITNESSETH
WHEREAS, Executive, DirectAmerica Corporation, a wholly-owned
subsidiary of National Media, and National Media entered into an employment
agreement on October 24, 1995 in connection with the acquisition of
DirectAmerica Corporation by National Media (the "Prior Agreement");
WHEREAS, the parties wish to enter into this agreement in lieu of such
prior agreement for periods subsequent to the date hereof;
WHEREAS, Executive is willing to serve the Company on a full-time basis
during the term hereof, subject to the terms and conditions hereinafter set
forth; and
WHEREAS, the Company desires to employ Executive in accordance with the
terms hereof.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, it is agreed as follows:
1. Employment. The Company hereby employs Executive, and Executive
hereby accepts employment from the Company, upon the terms and conditions
hereinafter set forth.
2. Term of Employment. The term ("Term") of this Agreement shall be
deemed to have commenced as of the date hereof (the "Commencement Date") and
shall continue thereafter until September 30, 1998 (the "Termination Date"),
unless sooner terminated in accordance with the terms hereof. As used herein,
"Term" shall refer to the initial Tenn of this Agreement. "Termination Date"
shall refer to the last day of the Term of this Agreement.
3. Duties. Executive shall be engaged as, and hold the positions of,
President of the Company and as Chairman, President and Chief Executive Officer
of DirectAmerica Corporation d/b/a Quantum TV, and in such other capacities as
the Boards of Directors of
1
<PAGE>
DirectAmerica Corporation or the Company shall decide. Executive shall have such
authority and responsibilities as are normally attendant thereto and agrees to
perform such duties and render such services consistent therewith, and as may
from time to time be reasonably required of him by the Company. Executive shall
devote his full business time, attention and best efforts to the affairs of the
Company during the Tenn of this Agreement. Executive will report directly to the
Company's Board of Directors (the "Board") and to the Chairman and/or Chief
Executive Officer of the Company, as instructed by the Board. Of even date
herewith, Executive shall be appointed as a director of the Company, effective
as soon as practicable. Provided, however, that during any period that National
Media is a publicly-held company, Executive's service as a director of National
Media shall be at the discretion of National Media's shareholders.
4. Compensation and Reimbursement for Expenses.
4.1 Base Salary. The Company shall pay to Executive a minimum
base salary of Three Hundred Twenty Five Thousand Dollars ($325,000.00) per
annum (as the same may be increased or decreased (but not below $325,000) from
time to time, the "Base Salary"). The Base Salary shall be payable in accordance
with the Company's regular payroll practices in effect from time to time and
shall be subject to annual review and adjustment as the Board deems appropriate.
The Base Salary may be increased or decreased from time to time in the
discretion of the Board; provided, however, that Executive's Base Salary shall
at no time be less than Three Hundred Twenty Five Thousand Dollars ($325,000.00)
per annum. In addition to the Base Salary, Executive shall be advanced an
aggregate of Seventy Five Thousand Dollars ($75,000.00) per annum, in
installments, against bonuses otherwise payable hereunder to Executive. Such
Base Salary and advance shall be deemed to have commenced as of October 1, 1997.
4.2 Bonus. Executive shall not participate in National Media's
Management Incentive Plan or any other bonus plan or program of the Company or
DirectAmerica or V-L Holdings Corp., as referred to in Paragraph 10 below, or
any of the Company's other subsidiaries, other than the Production Bonus program
described in Exhibit A attached hereto and made a part hereof. The Production
Bonus program shall be deemed to have taken effect
2
<PAGE>
as of October 1, 1997 but only as to products/show revenues generated after
October 1, 1997. The applicability of any other bonus or incentive plans will be
deemed to have ceased as of October 1, 1997.
4.3 Reimbursement of Expenses. The Company will promptly
reimburse Executive, upon receipt of vouchers therefor, for all reasonable and
necessary expenses incurred by Executive for travel, entertainment and
miscellaneous and other business expenses which are incurred in connection with
the performance of his duties hereunder. such reimbursements shall be made in
accordance with the regular reimbursement procedures and practices in effect
from time to time for similarly situated officers of National Media and its
other subsidiaries.
5. Fringe Benefits.
5.1 General. Other than as specifically set forth herein,
during the Term, unless this Agreement is sooner terminated in accordance with
the terms hereof, Executive shall be entitled to participate in any and all
fringe and other employee benefit type programs generally available to the
officers of National Media and its subsidiaries, including without limitations
profit sharing plans, thrift and savings plans, insurance plans, supplemental
insurance health, medical, and savings investment plans and benefit plans.
However, nothing contained in this subparagraph 5.1 shall be construed as
requiring the Company or National Media generally to maintain any such benefit
program or to make any discretionary grant to Executive thereunder.
5.2 Life Insurance.
(a) Purchase. During the Term hereof, unless this
Agreement is sooner terminated in accordance with the terms hereof, if
Executive chooses to obtain a life insurance policy (term, whole life,
universal life, etc.) concerning Executive, the Company will reimburse
Executive for the amount of the premiums therefor (covering portions of the
Term, no more than six (6) months at one time) as set forth in invoices
presented to the Company; provided the Company shall not be required to
reimburse premiums in excess of the out-of-pocket costs it would otherwise
have incurred had Executive purchased a one year or shorter $1,000,000 term
policy for a person of Executive's age who was in good health at the time of
3
<PAGE>
application. The Company shall have no claim to any accrued cash value of any
such policy upon Termination hereunder.
5.3 Automobile Allowance. During the Tenn, unless this
Agreement is sooner terminated in accordance with the terms hereof, the
Company shall pay Executive a monthly automobile allowance of Eight Hundred
Dollars ($800.00) which shall be deemed to compensate Executive for all
automobile related costs, including, but not limited to, insurance, fuel,
maintenance, wear and tear, etc.
5.4 Club Memberships. During the Term, unless this
Agreement is sooner terminated in accordance with the terms hereof, the
Company shall pay Executive's reasonable dues and membership fees (up to a
maximum-reimbursement of $2000 per annum) in one (1) health and/or eating
club of Executive's choice. Executive's club-related expenses other than dues
and membership fees may be reimbursed to Executive by the Company in
accordance with the provisions and requirements of subparagraph 4.3 hereunder.
5.5 Vacations; Holidays; Sick Leave. During the Term,
unless this Agreement is sooner terminated in accordance with the terms
hereof, Executive shall be entitled to such number of paid vacation days in
each calendar year as are generally awarded to senior executive officers of
National Media, but not less than three (3) weeks in any calendar year
(prorated in any calendar year during which Executive is employed hereunder
for less than the entire year in accordance with the number of days in such
calendar year during which he is so employed). Notwithstanding any other
National Media company policy generally applicable to non-executive
employees, other than as set forth herein, Executive shall not be permitted
to carry over any portion of Executive's accrued but unused vacation time
from one fiscal year to the next fiscal year; provided, however, that in the
event applicable law renders the preceding clause unenforceable, Executive
shall be permitted to carry over accrued but unused vacation time, but in no
event shall Executive be permitted to accrue at any time more than three (3)
weeks' vacation time. If Executive is unable to utilize planned vacation time
in a given year due to the demands of the business as set forth by the
Chairman or the Chief Executive Officer of National Media, and such vacation
time is not thereafter used in the applicable year, Executive shall be paid
for such accrued but unused vacation time at the expiration of such year.
4
<PAGE>
Executive shall also be entitled to all paid holidays and sick leave as are
generally awarded to senior executives of National Media.
6. Non-Disclosure. Executive shall not at any time during the Term of
this Agreement or thereafter, except (i) as properly required in the conduct of
the business of the Company and as authorized by the Company, or (ii) as
otherwise required by law or court order, or (iii) to his attorneys,
accountants, financial advisors or other professional advisors as necessary in
the conduct of their services to Executive, disclose or authorize anyone else to
disclose any secret, proprietary or confidential information, material or matter
relating to the Company or any of its customers. For purposes of this agreement,
"secret, proprietary or confidential information" shall not include any
information which (i) is or becomes within the public domain or becomes
generally available to the public through no act of Executive, (ii) is lawfully
received by Executive from another source unrelated to his employment with the
Company, which information is not subject to any restriction on use or
disclosure in the hands of the provider, (iii) is deemed in writing by the
Company no longer to be secret, proprietary or confidential information, (iv)
was or is developed independently by Executive, outside of the normal course of
his employment hereunder and not in breach of this Agreement, without reference
to or use of any secret, proprietary, or confidential information, or (v) is
required to be disclosed by order of any court of competent jurisdiction or
other governmental authority. (Provided, however, that, in the event of (v)
above, Executive shall timely inform the Company of such required disclosure in
order to give the Company the opportunity to limit disclosure and maintain
confidentiality.)
7. Covenant Not to Complete. From the Commencement Date through the
Termination Date ( and thereafter for any additional period during which
Executive is being paid any severance amount hereunder), Executive shall not,
without the prior written consent of the Company, take part directly or
indirectly (other than as a non-"Substantial Owner", as hereinafter defined) in
any television infomercial venture or in any television infomercial production
or in any "home shopping" style marketing venture which is competitive with the
business of the Company or its affiliates and shall not be an officer, director,
employee, independent contractor or Substantial Owner of any such restricted
business. "Substantial
5
<PAGE>
Owner" as used herein shall mean an owner of at least five percent (5%) of the
beneficial equity or voting interests in a subject restricted business. In
addition, for a period of ninety (90) days following the termination of this
Agreement, Executive shall not engage directly or indirectly, other than as
non-Substantial Owner, in any television infomercial marketing or any television
infomercial production or home shopping ventures which are involved in the
development or marketing of any product(s) which are the same or substantially
similar to any product(s) which the Company developed or began developing or as
to which the Company produced a show or began producing a show with the
Executive's involvement, either itself or through a third party producer, during
Executive's employment by the Company. Notwithstanding the foregoing, if
Executive terminates this Agreement pursuant to subparagraph 8.1(c) hereof or if
the Company terminates this Agreement other than pursuant to subparagraph
8.1(b), the restrictions described above shall terminate as of the date of such
termination. Thus, by way of example, Executive has been involved in the
development and sale of the cyclone elliptical exercise machine. Pursuant to the
foregoing, he will not be involved in a television infomercial or other
television activity, for the term set forth above, concerning another elliptical
exercise machine. The involvement of Executive with the cyclone elliptical
machine does not, in and of itself restrict Executive's activities with regard
to other exercise equipment.
Executive acknowledges that the obligations and restrictions contained
in this Paragraph 7, in view of the nature of the business in which the Company
is engaged, are reasonable and necessary in order to protect the legitimate
interests of the Company and that any violation thereof would result in
irreparable injury to the Company. Executive understands and agrees that the
remedies at law for any breach of the forgoing covenant may be inadequate and
that the Company may be entitled to, in addition to all other remedies which it
may have, enforcement of this Agreement by injunctive relief or by decree of
specific performance in a court of competent jurisdiction. If one or more of the
provisions contained in this Paragraph 8 shall for any reason be held to be
excessively broad in scope, subject or otherwise, to be unenforceable at law,
such provision or provisions shall be construed by the appropriate judicial body
by limiting or reducing it or them, as the case may be, so as to be enforceable
to the maximum extent compatible with applicable law then in existence.
6
<PAGE>
8. Termination.
8.1 Executive's employment under this Agreement shall
terminate upon the occurrence of any of the following:
(a) Death or Disability. If Executive dies or becomes
"Permanently Disabled" (meaning that, in the opinion of an independent
physician selected by the Company and reasonably satisfactory to Executive or
his representative, he is unable to perform his duties hereunder due to
partial or total mental or physical disability for an aggregate of 90 days
(whether or not consecutive) in any consecutive six (6) month period).
(b) Cause. 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, such breach within thirty (30) days after notice, or, if the breach
cannot be cured within thirty (30) days, Executive has not commenced to cure
such breach as soon as practicable following notice and has not thereafter
diligently pursued to cure such breach; (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 (v) breaches his obligations pursuant to
the Loan Agreement, defined in Paragraph 17 below. Notwithstanding the
foregoing, Executive shall not be deemed to have been terminated for Cause
unless and until the Executive has received thirty (30) days' prior written
notice (the "Dismissal Notice") of such termination. In the event Executive
does not dispute such determination within thirty (30) days after receipt of
the Dismissal Notice, Executive shall not have the remedies provided pursuant
to Paragraph 11 of this Agreement.
(c) Company Breach. In the event of the Company's
material breach of any provisions of this Agreement, Executive shall have the
right to terminate his employment hereunder; provided that Executive shall
give written notice to the Company of his intent to so terminate setting
forth the basis for such termination, and the Company shall then have thirty
7
<PAGE>
(30) days after receipt of such notice to cure the subject breach.
8.2 Termination Obligations of Executive. In the event
Executive's employment under this Agreement is terminated, Executive, or his
legal representative in case of termination by death or Executive's physical or
mental incapacity to serve, shall:
(a) by the close of the next business day following
termination, resign from all corporate and board positions held in National
Media, and any of its subsidiaries and affiliated companies;
(b) promptly return to a representative designated by
the Company all property, including but not limited to, automobiles, keys,
identification cards and credit cards of the Company or any of its
subsidiaries or affiliated companies; and
(c) incur no further expenses or obligations on
behalf of the Company or any of its subsidiaries and affiliated companies.
9. Termination Compensation.
9.1 Compensation. Subject to the terms of subparagraph 9.2
hereof, in the event that Executive shall terminate his employment under this
Agreement pursuant to subparagraph 8.1(c) above, or if the Company shall
terminate Executive's employment under this Agreement prior to the
Termination Date for any reason other than those set forth in subparagraphs
8.1(a) or (b), the Company shall (a) pay Executive or, in the event of
Executive's death following termination, Executive's estate (i) his full Base
Salary through the date of termination at the rate in effect at the time
notice of such termination is given; and (ii) in lieu of any further salary
or other payments to Executive hereunder for periods subsequent to the date
of termination, the Company shall pay as liquidated damages to Executive in
accordance with the terms of subparagraph 9.2 hereof an amount equal to his
full Base Salary through the Termination Date calculable at the then current
Base Salary and (b) maintain in full force and effect for the continued
benefit of Executive through the earlier of the Termination Date or Executive
obtaining similar benefits through other employment, all employee benefit
plans and programs in which Executive was entitled to participate immediately
prior to Executive's discharge or resignation, provided that Executive's
continued participation is possible under the general terms and provisions of
such benefit plans and programs and otherwise in
8
<PAGE>
accordance with applicable law other than as specifically set forth elsewhere
herein, no additional compensation shall be payable hereunder, nor shall the
Company have any obligation to continue any benefits if this Agreement is
terminated by Executive pursuant to any other provision of this Agreement.
9.2 In the event that Executive is entitled to receive
severance in accordance with subparagraph 9.1 hereof or Paragraph 16 hereof,
such severance shall be paid to Executive in accordance with the Company's
normal payroll practices in effect from time to time as if Executive was
employed by the Company through the Termination Date; provided, however, that
in the event that Executive violates the Covenant Not to Compete contained in
Paragraph 7 hereof, in addition to all other rights and remedies which the
Company may have, the foregoing severance shall only be payable through the
date of such violation and the Company shall be entitled to cease providing
Executive with the benefits to which he would otherwise be entitled.
9.3 No Mitigation. Executive shall not be required to
mitigate the amount of any payments provided for in subparagraph 9.1 above by
seeking other employment or otherwise, nor shall the amount of any payment
provided for herein be reduced by any compensation earned as a result of
employment by another employer.
10. Change in Control. Within thirty (30) days following a Change in
Control, as hereinafter defined, notwithstanding anything in this Agreement to
the contrary, Executive may resign and thereby terminate this Agreement by
giving the Company at least thirty (30) days' prior written notice of the
effective date of such termination and upon such termination, all of the terms
and provisions of this Agreement (including the provisions contained in
Paragraph 7 hereunder) shall terminate and be of no further force and effect.
Notwithstanding the foregoing, in such event, Executive shall have the
obligation hereunder to oversee the completion of shows in pre production,
production or post production at the time of resignation/termination, despite
such resignation/termination. As used in this Paragraph 10, a "Change in
Control" shall be deemed to have occurred only if, other than as a result of the
consummation of that certain Agreement and Plan of Reorganization and Merger,
dated January 5, 1998, by and between the Company, ValueVision International,
Inc. and V-L
9
<PAGE>
Holdings Corp. (since renamed Quantum Direct Corporation), or any amendment or
extension thereof (The "ValueVision Merger"), (a) any person or group (as such
term is defined in Section 13(d)(3) of the Securities Exchange Act of 1934)
acquires direct or indirect control over in excess of twenty-five (25%) percent
of the voting power of the voting stock of the Company prior to consummation of
the ValueVision Merger, or of Quantum Direct Corporation subsequent to the
ValueVision Merger, in a transaction's not approved by the Company's, or Quantum
Direct Corporation as the case may be, Board of Directors.
11. [Intentionally Omitted].
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, the Executive shall be
entitled to recover from the Company his reasonable attorneys' 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
Executive's employment hereunder and/or any act or omission of Executive in
his capacity as an officer, director or employee of the Company, or the
Company or any officer, director, employee, agent or representative 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 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
Executive to repay such amount if it shall ultimately be
10
<PAGE>
determined that he is not entitled to be indemnified by the Company as
authorized in this subparagraph 12(b).
(c) The provisions of this Paragraph 12 shall survive
termination of this Agreement and shall survive indefinitely with respect to
any cost or liability incurred by Executive on account of any actual or
alleged act, omission, or decision by Executive during the Term.
13. Notices. Unless either party notifies the other to the contrary,
any notice required hereunder shall be duly given if delivered in person or by
registered first class mail or recognized overnight mail carrier:
If to the Company, to:
National Media Corporation
1835 Market Street, Suite 1100
Philadelphia, PA 19103
Attention: Chairman
If to Executive, to:
John W. Kirby
La Tour Wilshire
10380 Wilshire Blvd., #401
Beverly Hills, CA 90024
with a copy to:
Bloom, Hergott, Cook, Diemer and Klein, LLP
150 S. Rodeo Drive
3rd Floor
Beverly Hills, CA 90212
Attention: Stephen F. Breimer, Esq.
14. General Provisions.
14.1 Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the Company and its successors and assigns and
Executive, his designees, and his estate. Neither Executive, his designees,
nor his estate shall commute, pledge, encumber, sell or otherwise dispose of
the rights to receive the Payments provided in this Agreement, which payments
and the rights thereto are expressly declared to be nontransferable and
nonassignable (except by death or otherwise by operation of law).
14.2 Set-Off. Executive hereby acknowledges and agrees that
the Company shall have the right to set-off against any amounts payable by
the Company to Executive under
11
<PAGE>
this Agreement all amounts payable to the Company or DirectAmerica Corporation
by Executive under the Agreement and Plan of Merger and Reorganization (the
"Acquisition Agreement") by and among the Company and DirectAmerica
Corporation's predecessors, et. al., dated as of October 24, 1995 (including,
without limitation, Article 8 thereof (other than Section 8.2(b) thereof)).
14.3 Governing Law. This Agreement shall be governed by
the laws of the State of Delaware from time to time in effect.
14.4 Entire Agreement. This Agreement represents the entire
agreement between Executive and the Company with respect to the subject
matter hereof and supersedes any prior employment agreements between the
parties. The parties confirm that the Prior Agreement has lapsed, effective
as of the date of this Agreement. In that regard, without limitation, the
Company confirms that all restrictions on Executive's current share holdings
of Company stock set forth in paragraph 6 of the Prior Agreement have lapsed.
This Agreement may not be amended or modified except by a writing signed by
the parties hereto. Any written amendment, waiver or termination hereof
executed by the Company and Executive (or his estate) shall be binding upon
them and upon all persons, without the necessity of securing the consent of
any other person and no person shall be deemed to be a third party
beneficiary under this Agreement.
14.5 Third Party Beneficiaries. Except as provided in this
Agreement, each of Executive and the Company intends that this Agreement
shall not benefit or create any right or cause of action in or on behalf of
any person other than Executive and the Company.
14.6 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same Agreement.
14.7 No Waiver. Except as otherwise expressly set forth
herein, no failure on the part of either party hereto to exercise and no
delay in exercising any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power
or remedy hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or remedy.
12
<PAGE>
14.8 Headings. The headings of the paragraphs of this
Agreement have been inserted for convenience of reference only and shall in
no way restrict any of the terms or provisions hereof.
15. Release. For good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, effective upon the execution of this
Agreement, Executive does hereby remise, release and forever discharge the
Company and its predecessors, successors, subsidiaries and affiliates and its
present and former agents, employees, assigns, directors and officers
(collectively, the "National Media Parties") of and from any and all debts,
demands, actions, causes of action, manner of actions, suits, claims, cross
claims, third-party claims, impleader or interpleader claims, demands and
liabilities whatsoever, of any nature whatsoever, both in law and in equity,
whether known or unknown (collectively "Claims"), which Executive ever had, now
has as of the date hereof and may ever have had as of the date hereof, prior to
the date hereof or hereafter, including, but not limited to, any and all Claims
against any and all of the National Media Parties arising from, pursuant to, or
in connection with: (i) any representation, warranty, covenant, agreement or
obligation of any National Media Party contained in the Acquisition Agreement or
any other contract, instrument or agreement executed in connection therewith;
(ii) the consummation of the Acquisition Agreement; (iii) the issuance of shares
of Common Stock in connection with the Acquisition Agreement; (iv) any action or
omission of any National Media Party in connection with the consummation of the
transactions contemplated by the Acquisition Agreement and any other contract,
instrument or agreement executed in connection therewith; and (v) any action or
inaction by the National Media Parties in connection with the management,
operations or financial condition of the Company on or prior to the date hereof.
For good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, effective upon the execution of this Agreement,
the Company does hereby remise, release and forever discharge Executive of and
from any and all debts, demands, actions, causes of action, manner of actions,
suits, claims, cross claims, third-party claims, impleader or interpleader
claims, demands and liabilities whatsoever, of any nature whatsoever both in law
and in equity, whether known or unknown (collectively "Claims"), which
13
<PAGE>
the Company ever has, now has as of the date hereof and may ever have had as of
the date hereof, prior to the date hereof or hereafter, including, but not
limited to, any and all Claims against Executive arising from, pursuant to, or
in connection with: (i) any representation, warranty, covenant, agreement or
obligation of Executive contained in the Acquisition Agreement or any other
contract, instrument or agreement executed in connection therewith; (ii) the
consummation of the Acquisition Agreement; (iii) any action or omission of any
Executive in connection with the consummation of the transaction contemplated by
the Acquisition Agreement and any other contract, instrument or agreement
executed in connection therewith; and (iv) any action or inaction by Executive
in connection with the performance of his duties as an employee of the Company
on or prior to the date hereof.
The foregoing releases do not affect the validity or
enforceability of this Agreement (including, but not limited to, Sections 12 or
14.2 hereof) or the Loan Agreement (as hereinafter defined).
16. Retention of CEO by Quantum Direct Corporation. It is presently
intended that, in connection with the ValueVision Merger, a Chief Executive
Officer will be retained by Quantum Direct Corporation to replace Robert
Johander. Executive shall have the right hereunder to resign his position as
President of the Company and thereby terminate this Agreement by giving the
Company written notice of such intention within six (6) months of the hiring of
such Chief Executive Officer. Such resignation and termination shall take effect
on the thirtieth (30th) day following the delivery of such written notice. In
the event of such a termination, Executive shall have the right to receive, as
severance three (3) months Base Salary, payable in installments. Notwithstanding
the foregoing, in such event, Executive shall have the obligation hereunder to
oversee the completion of shows in pre production, production or post production
at the time of resignation/termination despite such resignation/termination.
17. Loan Matters. The existing promissory note of Executive to the
Company in the aggregate principal amount of $175,000 shall be deemed satisfied
as of the date hereof. The Company hereby agrees to advance to Executive an
aggregate of up to $545,000, upon the terms and conditions set forth in the
documentation attached hereto as Exhibit B (collectively, the "Loan Agreement"),
as soon as practicable after the date hereof.
14
<PAGE>
18. Option. In connection with the execution hereof, the Company hereby
issues to Executive (in addition to the already outstanding option to purchase
30,000 shares at an exercise price of $8.325) an option to purchase up to
300,000 shares of the Company's common stock in the form attached hereto as
Exhibit C. In the event that the ValueVision Merger is not consummated during
the Term hereof, the Company agrees to negotiate with Executive in good faith
regarding the possible issuance of additional options, subject to availability
under the Company's 1991 Stock Option Plan, in exchange for additional
consideration on the part of Executive. The foregoing shall not constitute an
obligation on the part of the Company to issue any options at any particular
exercise price.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NATIONAL MEDIA CORPORATION
By: /s/ Robert N. Verratti
------------------------------------------------
Name: Robert N. Verratti
Title: President and Chief Executive Officer
/s/ John W. Kirby
------------------------------------------------
JOHN W. KIRBY
15
<PAGE>
Exhibit 10.52
LOAN AGREEMENT
This LOAN AGREEMENT (this "Agreement") is entered into as of this
31st day of March, 1998, by and between JOHN W. KIRBY, as borrower
("Borrower"), and NATIONAL MEDIA CORPORATION, a Delaware corporation, as
lender ("Lender").
RECITALS
18.1 Borrower desires to borrow up to Five Hundred Forty Five Thousand
Dollars ($545,000.00) from Lender.
18.2 Borrower has agreed to pledge the [Three Hundred Thirty Nine
Thousand Seven Hundred Eighty Four (339,784)] shares of Lender common stock, par
value $0.01, and certain related interests, owned by Borrower (the "Common
Stock") to Lender to secure the obligations of Borrower under this Agreement and
the other Loan Documents (as defined below).
18.3 Lender is willing to lend Borrower Five Hundred Forty Five
Thousand Dollars ($545,000.00) on the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:
(a) Loan Disbursement. Subject to the terms and conditions of this
Agreement, Lender will make a loan or loans (individually, a "Loan," and
collectively, the "Loans") to Borrower in a principal amount up to Five Hundred
Forty Five Thousand Dollars ($545,000.00) to be evidenced by a secured
promissory note (the "Note") in the form of Exhibit A. Borrower hereby requests
a Loan in the amount of Five Hundred Forty Five Thousand Dollars ($545,000.00)
(b) Conditions Precedent.
(a) Conditions to Loan. Lender's obligation to make the Loan
is subject to the fulfillment of each of the following conditions:
(i) Each of the conditions section forth in
Section 2(b) shall be satisfied as of the date of the funding of the Loan.
(ii) Lender shall have received the following
documents (collectively, the "Loan Documents") fully executed and acknowledged,
where applicable, and in form and substance satisfactory to Lender: (A) this
Agreement; (B) the Note; (C) that certain Pledge Agreement (the "Pledge
Agreement") dated as of the date hereof by and between Lender and Borrower, in
the form attached hereto as Exhibit B; and (D) such other documents as Lender
shall reasonably request in connection with the other Loan Documents.
(b) Conditions to All Loans. Lender's obligation to make any
Loan is subject to the fulfillment of each of the following conditions:
(i) Each of the representations and warranties
of Borrower contained in this Agreement and in the other Loan Documents shall be
true in all material respects as of the date of the making of such Loan.
(ii) No Event of Default (as defined herein) or an
event that with the giving of
<PAGE>
notice or the passage of time or both would constitute an Event of Default
has occurred and is continuing.
(iii) The funding of such Loan by Lender does not
violate any agreement, indenture,
mortgage, deed of trust, instrument or other document to which Lender or by
which Lender or any of its properties may be bound or affected.
(c) Representations and Warranties. In order to induce Lender to make
the Loan, Borrower represents and warrants as follows:
(a) Each of the Loan Documents constitutes the legal, valid
and binding obligation of Borrower enforceable against Borrower in accordance
with its terms; and
(b) Neither the execution and delivery of any of the Loan
Documents by Borrower nor the consummation of the transactions herein
contemplated nor the fulfillment of the terms hereof will result in a breach of
any of the terms or provisions of, or constitute a default under, or constitute
an event which with notice or lapse of time or both will result in a breach of
or constitute a default under, any agreement, indenture, mortgage, deed of
trust, instrument or other document to which Borrower is a party or conflict
with any law, order, rule or regulation applicable to Borrower of any court or
any federal or state government, regulatory body or administrative agency, or
any other governmental body having jurisdiction over Borrower or its properties.
(d) Covenants. Borrower covenants and agrees that promptly upon the
occurrence of an Event of Default or event that with the giving of notice or the
passage of time or both would constitute an Event of Default, Borrower shall
notify Lender of such event.
(e) Prepayment. The Loan may be prepaid without premium or penalty.
(f) Defaults. Upon the occurrence of any of the following events (each
an "Event of Default"):
(a) Borrower shall fail to make any payment required under any
of the Loan Documents on or before the date such payment is due.
(b) Any representation or warranty made by Borrower in any of
the Loan Documents or which is contained in any certificate, document, financial
or other written statement furnished at any time pursuant thereto shall prove to
have been untrue, incorrect or misleading in any material respect when made.
(c) Borrower shall fail duly to observe or perform any
covenant or agreement contained in the Loan Documents.
(d) Borrower commences or proposes to commence any bankruptcy,
reorganization or insolvency proceeding, or other proceeding under any federal,
state or other law for the relief of debtors.
(e) Borrower fails to obtain the dismissal, within thirty (30)
days after the commencement thereof, of any bankruptcy, reorganization or
insolvency proceeding, or other proceeding under any law for the relief of
debtors, instituted by one or more third parties, fails actively to oppose any
such proceeding, or, in any such proceeding, defaults or files an answer
admitting the material allegations upon which the proceeding was based or
alleges its willingness to have an order for relief entered or its desire to
seek liquidation, reorganization or adjustment of its debts.
(f) Any receiver, trustee or custodian is appointed to take
possession of all or any substantial portion of the assets of Borrower, or any
committee of Borrower's creditors, or any class thereof, is formed for the
purpose of monitoring or investigating the financial affairs of Borrower or
enforcing such creditors' rights.
then, on notice of acceleration by Lender to Borrower in the case of an Event of
Default specified in subsections (a) through (c) above, and Borrower's failure
to cure such Event of Default within a reasonable period of time after
notification thereof (or automatically and immediately without demand, notice,
protest or other action of any kind by Lender, which Borrower hereby expressly
waives, in the case of an Event of Default specified in subsections (d)
2
<PAGE>
through (f) above), all amounts outstanding hereunder and under each of the Loan
Documents shall be immediately due and payable in full.
(g) Waiver and Release by Borrower. To the maximum extent permitted by
applicable Laws, Borrower hereby:
(a) Waives: (i) protest of all commercial paper at any time
held by Lender on which Borrower is in any way liable; and (ii) except as
otherwise set forth herein or in the Loan Documents, notice and opportunity to
be heard, after acceleration in the manner provided in Section 6 before exercise
by Lender of the remedies of self-help, set-off, or of other summary procedures
permitted by any applicable Laws or by any agreement with Borrower and, except
where required hereby or by any applicable Laws, notice of any other action
taken by Lender; and
(b) Releases Lender and its officers, attorneys, agents and
employees from all claims for loss or damage caused by any act or omission on
the part of any of them.
(h) Indemnification.
(a) Borrower hereby indemnifies and agrees to protect, defend
and hold harmless Lender, Lender's Affiliates and any member, officer, director,
official, agent, employee or attorney of Lender or Lender's Affiliates and their
respective heirs, administrators, executors, successors and assigns
(collectively, the "Indemnified Parties"), from and against any and all losses,
damages, expenses or liabilities of any kind or nature and from any suits,
claims or demands, including reasonable attorneys' fees incurred in
investigating or defending such claim, suffered by any of them and caused by,
relating to, arising out of, resulting from, or in any way connected with this
Agreement, the Note or the Loan Documents or the transactions contemplated
therein (unless determined by a final judgment of a court of competent
jurisdiction to have been caused by the gross negligence or willful misconduct
of the Indemnified Parties) including, without limitation: (i) any untrue
statement of a material fact contained in information submitted to Lender by
Borrower or the omission of any material fact necessary to be stated therein in
order to make such statement not misleading or incomplete; and (ii) the failure
of Borrower to perform any obligations herein required to be performed by
Borrower.
(b) In case any action shall be brought against Lender or any
other Indemnified Party in respect to which indemnity may be sought against
Borrower, Lender or such other Indemnified Party shall promptly notify Borrower
and Borrower shall assume the defense thereof, including the employment of
counsel selected by Borrower and satisfactory to Lender, the payment of all
costs and expenses and the right to negotiate and consent to settlement. The
failure of Lender to so notify Borrower shall not relieve Borrower of any
liability it may have under the foregoing indemnification provisions or from any
liability which it may otherwise have to Lender or any of the other Indemnified
Parties. Lender shall have the right, at its sole option, to employ separate
counsel in any such action and to participate in the defense thereof, all at
Borrower's joint and several cost and expense. Borrower shall not be liable for
any settlement of any such action effected without its consent (unless Borrower
fails to defend such claim), but if settled with Borrower's consent, or if there
be a final judgment for the claimant in any such action, Borrower agrees to
indemnify and save harmless Lender from and against any loss or liability by
reason of such settlement or judgment.
(c) The provisions of this Section 8 shall survive the
repayment or other satisfaction of the obligations.
(i) Warrant of Attorney. BORROWER HEREBY IRREVOCABLY AUTHORIZES AND
EMPOWERS ANY ATTORNEY OR ANY CLERK OF ANY COURT OF RECORD UPON OR AFTER THE
OCCURRENCE AND DURING THE CONTINUANCE OF ANY EVENT OF DEFAULT TO APPEAR FOR AND
CONFESS JUDGMENT AGAINST BORROWER, (A) FOR SUCH SUMS AS ARE DUE AND/OR MAY
BECOME DUE ON THE BORROWER'S OBLIGATIONS, AND/OR (B) IN ANY ACTION OF REPLEVIN
INSTITUTED BY LENDER TO OBTAIN POSSESSION OF ANY COLLATERAL OR OTHER COLLATERAL
SECURITY FOR THE OBLIGATIONS OF BORROWER TO LENDER, IN EITHER CASE WITH OR
WITHOUT DECLARATION, WITH COSTS OF SUIT,
3
<PAGE>
WITHOUT STAY OF EXECUTION AND WITH FIVE (5%) PERCENT OF THE PRINCIPAL AMOUNT
THEREOF, BUT NOT LESS THAN FIVE THOUSAND ($5,000.00) DOLLARS, ADDED FOR LIEN
PRIORITY PURPOSES WITH ACTUAL ATTORNEY'S FEES GOVERNED BY SECTION [12(a)]
HEREOF. BORROWER UNCONDITIONALLY AND IRREVOCABLY: (A) WAIVES THE RIGHT OF
INQUISITION ON ANY REAL ESTATE LEVIED ON, VOLUNTARILY CONDEMNS THE SAME,
AUTHORIZES THE PROTHONOTARY OR CLERK TO ENTER UPON THE WRIT OF EXECUTION SAID
VOLUNTARY CONDEMNATION AND AGREES THAT SAID REAL ESTATE MAY BE SOLD ON A WRIT OF
EXECUTION; (B) WAIVES AND RELEASES ALL RELIEF FROM ALL REDEMPTION, APPRAISEMENT,
STAY, EXEMPTION OR APPEAL LAWS OF ANY STATE NOW IN FORCE OR HEREAFTER ENACTED;
AND (C) RELEASES ALL ERRORS IN SUCH PROCEEDINGS. IF A COPY OF THIS AGREEMENT,
VERIFIED BY AFFIDAVIT BY OR ON BEHALF OF LENDER SHALL HAVE BEEN FILED IN SUCH
ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL OF THIS AGREEMENT AS A
WARRANT OF ATTORNEY. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT
AGAINST BORROWER SHALL NOT BE EXHAUSTED BY THE INITIAL EXERCISE THEREOF, AND THE
SAME MAY BE EXERCISED, FROM TIME TO TIME, AS OFTEN AS LENDER SHALL DEEM
NECESSARY AND DESIRABLE, AND THIS AGREEMENT SHALL BE A SUFFICIENT WARRANT
THEREFORE. LENDER MAY ENTER ONE OR MORE JUDGMENTS IN THE SAME OR DIFFERENT
COUNTIES FOR ALL OR PART OF THE BORROWER'S OBLIGATIONS, WITHOUT REGARD TO
WHETHER JUDGMENT HAS BEEN ENTERED ON MORE THAN ONE OCCASION FOR THE SAME
BORROWER'S OBLIGATIONS. IN THE EVENT ANY JUDGMENT ENTERED AGAINST BORROWER
HEREUNDER IS STRICKEN OR OPENED UPON APPLICATION BY OR ON BORROWER'S BEHALF FOR
ANY REASON WHATSOEVER, LENDER IS HEREBY AUTHORIZED AND EMPOWERED TO AGAIN APPEAR
FOR AND CONFESS JUDGMENT AGAINST BORROWER; SUBJECT, HOWEVER, TO THE LIMITATION
THAT SUCH SUBSEQUENT ENTRY OR ENTRIES OF JUDGMENT BY LENDER MAY ONLY BE DONE TO
CURE ANY ERRORS IN PRIOR PROCEEDINGS, ONLY AND TO THE EXTENT THAT SUCH ERRORS
ARE SUBJECT TO CURE IN THE LATER PROCEEDINGS.
(j) Waiver of Jury Trial. IN ANY LITIGATION ARISING OUT OF OR RELATING
TO THE LOANS OR ANY OF THE OTHER OBLIGATIONS IN WHICH BORROWER AND LENDER ARE
ADVERSE PARTIES, BORROWER AND LENDER HEREBY WAIVE TRIAL BY JURY.
(k) Jurisdiction. In any litigation arising out of or relating to the
Loans or any of the other Obligations, Borrower hereby consents to the personal
jurisdiction of the State and/or Federal courts of the Commonwealth of
Pennsylvania.
(l) Miscellaneous.
(a) Borrower agrees to pay on demand all costs and expenses,
including legal fees, incurred or paid by Lender in preparing, executing or
amending this Agreement and any of the other Loan Documents, and in exercising
its rights and remedies or protecting its interests hereunder.
(b) All notices, requests and other communications required or
permitted to be made hereunder shall, except as otherwise provided, be in
writing and may be delivered personally or sent by telegram, telecopy, telex or
certified mail, postage prepaid, addressed as follows:
To Lender: National Media Corporation
Suite 1100, 1835 Market Street
Philadelphia, PA 19103
Attention: General Counsel
Telephone number: (215) 988-4600
Telecopy number: (215) 988-4869
To Borrower: John W. Kirby
La Tour Wilshire
4
<PAGE>
10380 Wilshire Boulevard, No. 401
Beverly Hills, CA 90024
Telephone number: (310) 550-7664
Telecopy number: (310) 550-0981
Such notices, requests and other communications sent shall be effective upon
receipt, unless sent by (i) overnight courier, in which case they shall be
effective exactly one (1) business day after deposit with such overnight
courier, or (ii) mail, in which case they shall be effective exactly three
(3) business days after deposit in the United States mail. Either party may
change its address or other information by giving notice thereof to the other
party hereto in conformity with this paragraph.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
(d) This Agreement or any provision hereof may be changed,
waived, or terminated only by a statement in writing signed by the party against
which such change, waiver or termination is sought to be enforced.
(e) No delay in enforcing or failing to enforce any right
under this Agreement by Lender shall constitute a waiver by Lender of such
right. No waiver by Lender of any default hereunder shall be effective unless in
writing, nor shall any waiver operate as a waiver of any other default or of the
same default on a future occasion.
(f) All rights of Lender hereunder shall inure to the benefit
of its successors and assigns. Borrower shall not assign any of its interest
under this Agreement without the prior written consent of Lender. Any purported
assignment inconsistent with this provision shall, at the option of Lender, be
null and void.
(g) In any action or proceeding brought to enforce any
provision of this Agreement, or to seek damages for a breach of any provision
hereof, or where any provision hereof is validly asserted as a defense, the
successful party shall be entitled to recover reasonable attorneys' fees in
addition to any other available remedy.
(h) Borrower waives the right to plead any statute of
limitations as a defense to any indebtedness or obligation hereunder to the full
extent permitted by law.
(i) If any provision of this Agreement should be found to be
invalid or unenforceable, all of the other provisions shall nonetheless remain
in full force and effect to the maximum extent permitted by law.
(j) All representations, warranties and covenants of Borrower
contained herein shall survive the execution and delivery of this Agreement, and
shall terminate only upon the full payment and performance by Borrower of its
indebtedness and obligations hereunder.
(k) This Agreement, together with the other Loan Documents, is
intended by the parties as a final expression of their agreement and is intended
as a complete and exclusive statement of the terms and conditions thereof.
Acceptance of or acquiescence in a course of performance rendered under this
Agreement shall not be relevant to determine the meaning of this Agreement even
though the accepting or acquiescing party had knowledge of the nature of the
performance and opportunity for objection.
(l) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which shall
together constitute one and the same agreement.
[SIGNATURES ON FOLLOWING PAGE]
5
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Loan Agreement
as of the date set forth above.
/s/ John W. Kirby (SEAL)
- ----------------------------- --------------------------------
Witness JOHN W. KIRBY
NATIONAL MEDIA CORPORATION, a Delaware
corporation
By: /s/
---------------------------
Name:
Title:
6
<PAGE>
EXHIBIT A
FORM OF SECURED PROMISSORY NOTE
$545,000.00 March 31, 1998
FOR VALUE RECEIVED, the undersigned, JOHN W. KIRBY ("Borrower"),
promises to pay to NATIONAL MEDIA CORPORATION, a Delaware corporation
("Lender"), or order, the principal amount of Five Hundred Forty Five
Thousand Dollars ($545,000.00), with interest from the date hereof on the
unpaid principal balance under this Note at the Prime Rate (as defined below)
in effect from time to time, plus one and one-half percent (1.5%) per annum.
The "Prime Rate" shall mean the prime, reference or other comparable rate
announced from time to time by Norwest Bank, N.A. ("Norwest Bank"), as
reasonably determined by Lender, with the understanding that the Prime Rate
is intended by the parties to be one of Norwest Bank's base rates and may
serve as the basis upon which effective rates of interest are calculated from
those loans making reference thereto. When interest is determined in relation
to the Prime Rate, each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change in announced by Norwest Bank.
Interest shall be due and payable in immediately available funds (i)
quarterly, on January 1, April 1, July 1 and October 1, and (ii) as of any
date in which any principal payment is due and payable hereunder (whether in
cash or otherwise, as provided herein). The principal amount of this Note,
together with any and all accrued and unpaid interest and any and all costs
and expenses provided for under this Note and the other Loan Documents (as
defined in the Loan Agreement (as defined below)), shall be due and payable
on the earliest to occur of the following dates (the "Maturity Date"): (1)
5/30/00, (2) the forty-fifth day following the first date after which
Borrower is no longer an employee of Lender and (3) the date on which the
indebtedness under this Note is accelerated as provided for under this Note,
that certain Loan Agreement, dated as of the date hereof (as amended,
modified and supplemented from time to time, the "Loan Agreement") between
Borrower and Lender or that certain Pledge Agreement, dated as of the date
hereof (as amended, modified and supplemented from time to time, the "Pledge
Agreement") between Borrower and Lender.
Interest shall be calculated on the basis of a year of three hundred
sixty (360) days for the actual number of days elapsed.
The Note shall continue to accrue interest in accordance with the terms
hereof even after Default, an Event of Default, maturity, acceleration,
judgment, bankruptcy, insolvency proceedings of any kind or the happening of any
other event or occurrence, whether similar or dissimilar.
All payments under this Note shall be made to Lender or its order, in
lawful money of the United States of America at the offices of Lender at its
then principal place of business or at such other place as Lender or any holder
hereof shall designate in writing for such purpose from time to time. If a
payment under this Note otherwise would become due and payable on a Saturday,
Sunday or legal holiday, the due date thereof shall be extended to the next day
which is not a Saturday, Sunday or legal holiday, and interest shall be payable
thereon during such extension. All amounts due under this Note and the Loan
Documents shall be payable without defense, set off or counterclaim.
This Note may be prepaid in whole or in part at any time, and shall be
prepaid in accordance with the terms of the Loan Agreement. Any prepayment shall
be without premium or penalty. Each payment and prepayment under this Note shall
applied in the following order: (i) to the payment of costs and expenses
provided for under this Note or any of the other Loan Documents; (ii) to the
payment of accrued and unpaid interest; and (iii) to the payment of outstanding
principal.
Upon the occurrence of a default under this Note or any of the other
Loan Documents, including, without limitation, failure to make any principal or
interest payment by the stated maturity (whether by acceleration, notice of
prepayment or otherwise) for such payment, interest shall thereafter accrue on
the entire unpaid principal balance under this Note, including without
limitation any delinquent interest which has been added to the principal amount
due under this Note pursuant to the terms hereof, at the rate set forth herein
plus three percent (3%) per annum (on the basis of a 360-day year and the actual
number of days elapsed). In addition, upon the occurrence of a default under
this Note or any of the other Loan Documents the holder of this Note may, at its
option, without notice to or demand upon Borrower or any other party, declare
immediately due and payable the entire principal balance hereof
A-1
<PAGE>
together with all accrued and unpaid interest thereon, plus any other amounts
then owing pursuant to this Note or any of the other Loan Documents,
whereupon the same shall be immediately due and payable. In no event shall
interest be charged under this Note which would violate any applicable law.
This obligations under this Note and the other Loan Documents are
secured pursuant to Pledge Agreement. Reference is hereby made to the Pledge
Agreement for a description of the nature and extent of the security for this
Note and the rights with respect to such security of the holder of this Note.
Nothing herein shall be deemed to limit the rights of Lender under this Note or
the other Loan Documents, all of which rights and remedies are cumulative.
No waiver or modification of any of the terms of this Note shall be
valid or binding unless set forth in a writing specifically referring to this
Note and signed by a duly authorized officer of Lender or any holder of this
Note, and then only to the extent specifically set forth therein.
If any default occurs in any payment due under this Note, Borrower and
any guarantors and endorsers hereof, and their successors and assigns, promise
to pay all costs and expenses, including attorneys' fees, incurred by each
holder hereof in collecting or attempting to collect the indebtedness under this
Note, whether or not any action or proceeding is commenced. None of the
provisions hereof and none of the holder's rights or remedies under this Note on
account of any past or future defaults shall be deemed to have been waived by
the holder's acceptance of any past due installments or by any indulgence
granted by the holder to Borrower.
Borrower and any guarantors and endorsers hereof, and their successors
and assigns, hereby waive presentment, demand, diligence, protest and notice of
every kind (except such notices as may be required under any of the Loan
Documents), and agree that they shall remain liable for all amounts due under
this Note notwithstanding any extension of time or change in the terms of
payment of this Note granted by any holder hereof, any change, alteration or
release of any property now or hereafter securing the payment hereof or any
delay or failure by the holder hereof to exercise any rights under this Note or
any of the Loan Documents. Borrower and any guarantors and endorsers hereof, and
their successors and assigns, hereby waive the right to plead any and all
statutes of limitation as a defense to a demand under this Note to the full
extent permitted by law.
This Note shall inure to the benefit of Lender, its successors and
assigns and shall bind the heirs, executors, administrators, successors and
assigns of Borrower. Each reference herein to powers or rights of Lender shall
also be deemed a reference to the same power or right of such assignees, to the
extent of the interest assigned to them.
In the event that any one or more provisions of this Note shall be held
to be illegal, invalid or otherwise unenforceable, the same shall not affect any
other provision of this Note and the remaining provisions of this Note shall
remain in full force and effect.
BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR ANY
CLERK OF ANY COURT OF RECORD UPON OR AFTER THE OCCURRENCE AND DURING THE
CONTINUANCE OF ANY EVENT OF DEFAULT TO APPEAR FOR AND CONFESS JUDGMENT AGAINST
BORROWER, (A) FOR SUCH SUMS AS ARE DUE AND/OR MAY BECOME DUE ON THE BORROWER'S
OBLIGATIONS, AND/OR (B) IN ANY ACTION OF REPLEVIN INSTITUTED BY LENDER TO OBTAIN
POSSESSION OF ANY COLLATERAL OR OTHER COLLATERAL SECURITY FOR THE OBLIGATIONS OF
BORROWER TO LENDER, IN EITHER CASE WITH OR WITHOUT DECLARATION, WITH COSTS OF
SUIT, WITHOUT STAY OF EXECUTION AND WITH FIVE (5%) PERCENT OF THE PRINCIPAL
AMOUNT THEREOF, BUT NOT LESS THAN FIVE THOUSAND ($5,000.00) DOLLARS, ADDED FOR
LIEN PRIORITY PURPOSES TOGETHER WITH ACTUAL ATTORNEY'S FEES. BORROWER
UNCONDITIONALLY AND IRREVOCABLY: (A) WAIVES THE RIGHT OF INQUISITION ON ANY REAL
ESTATE LEVIED ON, VOLUNTARILY CONDEMNS THE SAME, AUTHORIZES THE PROTHONOTARY OR
CLERK TO ENTER UPON THE WRIT OF EXECUTION SAID VOLUNTARY CONDEMNATION AND AGREES
THAT SAID REAL ESTATE MAY BE SOLD ON A WRIT OF EXECUTION; (B) WAIVES AND
RELEASES ALL RELIEF FROM ALL REDEMPTION, APPRAISEMENT, STAY, EXEMPTION OR APPEAL
LAWS OF ANY STATE NOW IN FORCE OR HEREAFTER ENACTED; AND (C) RELEASES ALL ERRORS
IN SUCH PROCEEDINGS. IF A COPY OF THIS NOTE, VERIFIED BY AFFIDAVIT BY
A-2
<PAGE>
OR ON BEHALF OF LENDER SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE
NECESSARY TO FILE THE ORIGINAL OF THIS NOTE AS A WARRANT OF ATTORNEY. THE
AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST BORROWER SHALL NOT
BE EXHAUSTED BY THE INITIAL EXERCISE THEREOF, AND THE SAME MAY BE EXERCISED,
FROM TIME TO TIME, AS OFTEN AS LENDER SHALL DEEM NECESSARY AND DESIRABLE, AND
THIS NOTE SHALL BE A SUFFICIENT WARRANT THEREFORE. LENDER MAY ENTER ONE OR MORE
JUDGMENTS IN THE SAME OR DIFFERENT COUNTIES FOR ALL OR PART OF THE BORROWER'S
OBLIGATIONS, WITHOUT REGARD TO WHETHER JUDGMENT HAS BEEN ENTERED ON MORE THAN
ONE OCCASION FOR THE SAME BORROWER'S OBLIGATIONS. IN THE EVENT ANY JUDGMENT
ENTERED AGAINST BORROWER HEREUNDER IS STRICKEN OR OPENED UPON APPLICATION BY OR
ON BORROWER'S BEHALF FOR ANY REASON WHATSOEVER, LENDER IS HEREBY AUTHORIZED AND
EMPOWERED TO AGAIN APPEAR FOR AND CONFESS JUDGMENT AGAINST BORROWER; SUBJECT,
HOWEVER, TO THE LIMITATION THAT SUCH SUBSEQUENT ENTRY OR ENTRIES OF JUDGMENT BY
LENDER MAY ONLY BE DONE TO CURE ANY ERRORS IN PRIOR PROCEEDINGS, ONLY AND TO THE
EXTENT THAT SUCH ERRORS ARE SUBJECT TO CURE IN THE LATER PROCEEDINGS.
IN ANY LITIGATION ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS OR
ANY OF THE OTHER OBLIGATIONS IN WHICH BORROWER AND LENDER ARE ADVERSE PARTIES,
BORROWER AND LENDER HEREBY WAIVE TRIAL BY JURY.
This Note shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania, without giving effect to the
principles thereof relating to conflicts of law.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed
the day and year first above written.
- ------------------------------- ----------------------------(SEAL)
Witness JOHN W. KIRBY
A-3
<PAGE>
EXHIBIT B
FORM OF PLEDGE AGREEMENT
This PLEDGE AGREEMENT (this "Agreement") is made and entered into as
of March 31, 1998 by and between JOHN W. KIRBY, as borrower ("Borrower"), and
NATIONAL MEDIA CORPORATION, a Delaware corporation, as lender ("Lender").
RECITALS
18.1 Borrower and Lender have entered into that certain Loan Agreement
dated as of the date hereof (as amended, modified and supplemented from time to
time, the "Loan Agreement"). All capitalized terms used herein which are not
otherwise defined herein shall have the meanings ascribed to them in the Loan
Agreement
18.2 Lender has required, as a condition precedent to making Loans
under the Loan Agreement, that Borrower shall have agreed to make the pledge of
stock contemplated by this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:
(a) Pledge. Borrower hereby pledges and grants to Lender a security
interest in the following collateral (the "Pledged Collateral"):
(a) the shares of Lender Common Stock identified on Schedule 1
hereto, and all other shares of Common Stock delivered to Lender pursuant to
this Agreement and all shares of stock in Lender issued in the future to
Borrower, whether certificated or uncertificated, together with all options (and
shares of stock in which Borrower obtains an interest pursuant to the exercise
of any options), rights, dividends issued in addition to, in substitution or in
exchange for, or on account of, any such shares (collectively, the "Pledged
Shares"), and the certificates representing the Pledged Shares, and all
dividends, cash, instruments, chattel paper and other rights, property or
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the Pledged Shares;
(b) all other claims of any kind or nature, and any
instruments, certificates, chattel paper or other writings evidencing such
claims, whether in contract or tort and whether arising by operation of law,
consensual agreement or otherwise, at any time acquired by Borrower against
Lender or any of its subsidiaries; and
(c) all proceeds of any kind with respect to any of the
foregoing.
(b) Security for Performance. This Agreement (and all of the Pledged
Collateral) secures the payment of the principal of and the interest on the Note
and the performance of Borrower's obligations pursuant to this Agreement and the
other Loan Documents (the "Obligations").
If Borrower shall become entitled to receive or shall receive, in connection
with any of the Pledged Collateral, any: (i) stock or certificate, including,
without limitation, any certificate representing a stock dividend or in
connection with any increase or reduction of capital, reclassification, merger,
consolidation, sale of assets, combination of shares, stock split, spin-off,
split-off or exercise of an option; (ii) option, warrant or right, whether as an
addition to or in substitution or in exchange for any of the Pledged Collateral,
or otherwise; (iii) dividends or distributions payable in property, including
securities issued by an issuer other than Lender; or (iv) dividends or
distributions of any sort; then, Borrower shall accept the same as Lender's
agent, in express trust for Lender, and shall deliver the same forthwith to
Lender in the exact form received with, as applicable, Borrower's endorsement,
or appropriate stock powers duly executed in blank (with signatures "bank
guaranteed"), which the Borrower hereby unconditionally agrees to make and/or
furnish, to be held by Lender, subject to the terms hereof, as part of the
Pledge Collateral.
B-1
<PAGE>
(c) Delivery of Pledged Collateral.
(a) Borrower may at any time deliver to Lender additional
shares of Common Stock to be pledged pursuant to this Agreement, and upon
delivery of such additional shares, they shall become Pledged Shares under and
pursuant to this Agreement.
(b) All certificates or instruments representing or evidencing
the Pledged Collateral shall be delivered to and held by Lender pursuant hereto
and shall be accompanied by duly executed instruments of transfer or assignment
in blank, all in form and substance satisfactory to Lender. Lender shall have
the right, at any time in its discretion and without notice to Borrower
following the occurrence of an Event of Default, to transfer to or to register
in the name of Lender or any of its nominees any or all of the Pledged
Collateral. In addition, Lender shall have the right at any time to exchange
certificates or instruments representing or evidencing Pledged Collateral for
certificates or instruments of smaller or larger denominations.
(d) Representations and Warranties. Borrower represents and
warrants as follows:
(a) Borrower owns the Pledged Collateral free and clear on any
lien, security interest or other encumbrance.
(b) The delivery of the Pledged Shares to Lender pursuant to
this Agreement creates a valid and perfected first priority security interest in
the Pledged Collateral (other than cash not in the possession of Lender),
securing the Obligations.
(c) No consent of any other party (including, without
limitation, any creditor of Borrower) and no governmental approval is required
either (i) for the pledge by Borrower of the Pledged Collateral pursuant to this
Agreement or for the execution, delivery or performance of this Agreement by
Borrower or (ii) for the exercise by Lender of the voting or other rights
provided for in this Agreement or the remedies in respect of the Pledged
Collateral pursuant to this Agreement (except as may be required in connection
with such disposition by laws affecting the offering and sale of securities
generally).
(e) Further Assurances. Borrower agrees that at any time and from time
to time Borrower will promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or desirable or
that Lender may request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable Lender to exercise and
enforce its rights and remedies hereunder with respect to any Pledged Collateral
and to carry out the provisions and purposes hereof.
(f) Administration of Security. The following provisions shall govern
the administration of the Pledged Collateral:
(a) So long as no Event of Default shall have occurred:
(i) Borrower shall be entitled to receive all
cash dividends and other cash distributions paid or payable with respect to any
of the Pledged Collateral. Any and all instruments and other property (other
than cash or checks) received, receivable or otherwise distributed in respect
of, or in exchange for, any Pledged Collateral, shall be, and shall be forthwith
delivered to Lender to hold as Pledged Collateral and shall, if received by the
Borrower, be received in express trust for the benefit of Lender, be segregated
from the other property or funds of Borrower, and be forthwith delivered to
Lender as Pledged Collateral in the same form as so received (with any necessary
indorsement).
(ii) Borrower shall be entitled to exercise any
and all voting and other consensual rights pertaining to the Pledged Collateral
or any part thereof for any purpose not inconsistent with the terms of this
Agreement or the Note; provided, however, that the Borrower shall not exercise
or refrain from exercising any such right if, in Lender's judgment, such action
or inaction would have a material adverse effect on the value of the Pledged
Collateral or any part thereof; and provided, further, that the Borrower shall
give Lender at least ten (10) days' written notice of the manner in which he
intends to exercise, and the reasons therefor, or the reasons for
B-2
<PAGE>
refraining from exercising, any such right.
(b) Upon the occurrence of an Event of Default:
(i) All rights of Borrower to receive the
dividends which he would otherwise be authorized to receive and retain pursuant
to Section 6(a)(i) shall cease, and all such rights shall become vested in
Lender who shall thereupon have the sole right to receive and hold as Pledged
Collateral such dividends (and to the extent permissible, apply them to the
Obligations of Borrower).
(ii) Upon notice by Lender to Borrower, all
rights to exercise the voting and other consensual rights which he would
otherwise be entitled to exercise pursuant to Section 6(a)(ii), shall cease, and
all such rights shall become vested in Lender who shall thereupon have the sole
right to exercise such voting and other consensual rights.
(iii) All dividends which are received by Borrower
contrary to the provisions of paragraph (i) of this Section 6(b) shall be
received in trust for the benefit of Lender, shall be segregated from other
funds of Borrower and shall be forthwith paid over to Lender as Pledged
Collateral in the same form as so received (with any necessary indorsement).
(g) Lender Appointed Attorney-in-Fact. Borrower hereby appoints Lender
Borrower's attorney-in-fact effective upon the occurrence of an Event of
Default, with full authority in the place and stead of Borrower and in the name
of Borrower or otherwise, from time to time in Lender's discretion to take any
action and to execute any instrument which Lender may deem necessary or
advisable to accomplish the purposes of this Agreement, including, without
limitation, to receive, indorse and collect all instruments made payable to
Borrower representing any dividend (other than Tax Dividends) or other
distribution in respect of the Pledged Collateral or any part thereof.
(h) Lender's Duties; Reasonable Care. The powers conferred on Lender
hereunder are solely to protect its interest in the Pledged Collateral and shall
not impose any duty on it to exercise any such powers. Except for the safe
custody of any Pledged Collateral in its possession and the accounting for
monies actually received by it hereunder, Lender shall have no duty as to any
Pledged Collateral. Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Pledged Collateral in its possession if the
Pledged Collateral is accorded treatment that is not materially less protective
than that which Lender accords its own property.
(i) Remedies upon Default. If any Event of Default shall have occurred:
[(a) Lender may exercise in respect of the Pledged Collateral,
in addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party under the
Uniform Commercial Code (the "Code") in effect in the Commonwealth of
Pennsylvania at that time, and Lender may also (i) with ten (10) days' notice to
the Borrower, accept and cancel the certificates evidencing any Pledged Shares,
with each Pledged Share valued as the average of the last reported sales price
for the five (5) consecutive trading days immediately preceding the date in
question, and/or (ii) without notice except as specified below, sell the Pledged
Collateral or any part thereof in one or more parcels at public or private sale,
at any exchange, broker's board or at any of Lender's offices or elsewhere, for
cash, on credit or for future delivery, and upon such other terms as Lender may
deem commercially reasonable. The Borrower acknowledges and agrees that any such
private sale may result in prices and other terms less favorable to the seller
than if such sale were a public sale. The Borrower agrees that, to the extent
notice of sale shall be required by law, at least ten (10) days' notice to the
Borrower of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. Lender
shall not be obligated to make any sale of Pledged Collateral regardless of
notice of sale having been given. Lender may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it was
so adjourned. Lender shall be under no obligation to delay a sale of any of the
Pledged Shares for the period of time necessary to permit the issuing
corporation of such securities to register such securities for public sale under
the Securities Act of 1933, as from time to time amended (the "Securities Act"),
or under applicable state securities laws, even if the issuing corporation would
agree to do so.]
B-3
<PAGE>
(b) Any cash held by Lender as Pledged Collateral and all cash
proceeds received by Lender in respect of any sale of, collection from, or other
realization upon all or any part of the Pledged Collateral may, in the
discretion of Lender, be held by Lender as collateral for, and/or then or at any
time thereafter applied in whole or in part by Lender for its benefit against,
all or any part of the Obligations of Borrower pursuant to the Note or this
Agreement. Any surplus of such cash or cash proceeds held by Lender and
remaining after payment in full of all the Obligations shall be paid over to the
Borrower or to whomsoever may be lawfully entitled to receive such surplus or as
a court of competent jurisdiction may direct; provided, that in the event that
all of the conditions to the termination of this Agreement pursuant to Section
11 shall not have been fulfilled, such balance shall be held and applied from
time to time as provided in this subsection 9(b) until all such conditions shall
have been fulfilled.
(j) Remedies Cumulative. Each right, power and remedy of Lender
provided in this Agreement or now or hereafter existing at law or in equity or
by statute or otherwise shall be cumulative and concurrent and shall be in
addition to every other right, power or remedy provided for in this Agreement or
now or hereafter existing at law or in equity or by statute or otherwise. The
exercise or partial exercise by Lender of any one or more of such rights, powers
or remedies shall not preclude the simultaneous or later exercise by Lender of
all such other rights, powers or remedies, and no failure or delay on the part
of Lender to exercise any such right, power or remedy shall operate as a waiver
thereof.
(k) Release; Termination.
(a) So long as no Event of Default shall have occurred and the
requirements of payment set forth in the Note are satisfied, Borrower may sell
or dispose of any Pledged Collateral, if such sale or disposition is not
prohibited by any terms or conditions of this Agreement or any other Loan
Agreement. Lender shall upon request of Borrower execute and deliver to Borrower
a release or releases in form reasonably satisfactory to Lender to release the
lien of this Agreement with respect to such Pledged Collateral and assign,
transfer and deliver such Pledged Collateral to Borrower. Such releases and
assignments shall be without warranty by or recourse to Lender, except as to the
absence of any prior assignments by Lender of its interest in the Pledged
Collateral, and shall be at the expense of Borrower.
(b) This Agreement shall terminate upon full and complete
payment in full of all Obligations and the termination of the Obligations of the
Lender under the Loan Agreement. Lender, at the time of such termination and at
the expense of Borrower and subject to the provisions of Section 17 below, will
execute and deliver to Borrower a proper instrument or instruments acknowledging
the termination of this Agreement, and will duly assign, transfer and deliver to
the Borrower such of the Pledged Collateral as has not yet theretofore been sold
or otherwise applied or released pursuant to this Agreement, together with any
moneys at the time held by Lender hereunder. Such assignment and delivery shall
be without warranty by or recourse to Lender, except as to the absence of any
prior assignments by Lender of its interest in the Pledged Collateral.
(l) Notice. Any notice, approval, consent or other communication shall
be in the form and manner and to the addresses as set forth in the Loan
Agreement.
(m) Continuing Security Interest; Transfer of Notes. This Agreement
shall create a continuing security interest in the Pledged Collateral and shall
(i) remain in full force and effect until terminated pursuant to Section 11(b),
(ii) be binding upon Borrower, his successors and assigns, and (iii) inure,
together with the rights and remedies of Lender hereunder, to the benefit of
Lender, its successors, transferees and assigns.
(n) Waiver. To the fullest extent he may lawfully so agree, Borrower
agrees that he will not at any time insist upon, claim, plead, or take any
benefit or advantage of any appraisement, valuation, stay, extension,
moratorium, redemption or similar law now or hereafter in force in order to
prevent, delay, or hinder the enforcement hereof or the absolute sale of any
part of the Pledged Collateral; Borrower for himself and all who claim through
him, so far as he or they now or hereafter lawfully may do so, hereby waive the
benefit of all such laws, and all right to have the Pledged Collateral
marshalled upon any foreclosure hereof, and agree that any court having
jurisdiction to foreclose this Agreement may order the sale of the Pledged
Collateral as an entirety.
B-4
<PAGE>
(o) Reinstatement. This Agreement shall continue to be effective or be
reinstated, as the case may be, if at any time any amount received by Lender in
respect of Borrower's Obligations pursuant to the Note or this Agreement is
rescinded or must otherwise be restored or returned by Lender upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of Borrower
or upon the appointment of any intervenor or conservator of, or trustee or
similar official for, Borrower or any substantial part of his assets, or
otherwise, all as though such payments had not been made.
(p) Severability. The provisions of this Agreement are severable, and
if any clause or provision shall be held invalid or unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such clause or provision, or part thereof, in such jurisdiction and shall
not in any manner affect such clause or provision in any other jurisdiction, or
any other clause or provision of this Agreement in any jurisdiction.
(q) Interpretation. Time is of the essence of each provision of this
Agreement of which time is an element. To the extent a term or provision of this
Agreement conflicts with the Loan Agreement and is not dealt with more
specifically herein, the Loan Agreement shall control with respect to such term
or provision.
(r) Survival of Provisions. All representations, warranties and
covenants of Borrower contained herein shall survive the execution and delivery
of this Agreement, and shall terminate only upon the full and final payment and
performance by Borrower of his indebtedness and obligations secured hereby.
(s) Headings Descriptive. The headings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
or construction or any provision of this Agreement.
(t) Entire Agreement. This Agreement, together with the other Loan
Documents is intended by the parties as a final expression of their agreement
and is intended as a complete and exclusive statement of the terms and
conditions thereof. Acceptance of or acquiescence in a course of performance
rendered under this Agreement shall not be relevant to determine the meaning of
this Agreement even though the accepting or acquiescing party had knowledge of
the nature of the performance and opportunity for objection.
(u) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which shall
together constitute one and the same agreement.
(v) Governing Law. This Agreement shall be construed in accordance with
and all disputes hereunder shall be governed by the laws of the Commonwealth of
Pennsylvania, without regard to principles of conflicts of laws.
(w) Amendments. This Agreement may be amended, modified or supplemented
only by a written instrument signed by Borrower and Lender.
IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed and delivered as of the date first above written.
/s/ John W. Kirby (SEAL)
- ---------------------------- -----------------------------------
Witness JOHN W. KIRBY
NATIONAL MEDIA CORPORATION, a Delaware
corporation
By:
---------------------------------
Name:
Title:
B-5
<PAGE>
Schedule 1
List of Pledged Shares
Stock Certificate Number Number of Shares
------------------------ ----------------
<PAGE>
Exhibit 10.53
NON-INCENTIVE STOCK OPTION AGREEMENT
(Plan Option)
THIS NON-INCENTIVE STOCK OPTION AGREEMENT ("Agreement") is dated 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 John
W. Kirby.
The Compensation Committee of the Board of Directors of the Company
(the "Committee") has determined to grant to the Optionee an option to purchase
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 herein shall be issued under the Company's Amended and
Restated Stock Option Plan, as it may be amended from time to time hereafter
(the "Plan"). Capitalized terms contained herein and not otherwise defined shall
have the meanings ascribed to such terms in the Plan.
Accordingly, in consideration of the premises set forth herein, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company hereby grants 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) The Company hereby grants to the Optionee the right and
option (the "Option") to purchase up to Three Hundred Thousand (300,000) 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 January
28, 2008, at which time the Optionee shall have no further right to purchase any
Shares not then purchased the Option may be exercised in whole or in part from
time to time during the Option period. The Company shall at all times 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").
2. Exercise Price. The exercise price of the Option (the "Exercise
Price") shall be $2.6875. 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.
<PAGE>
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 (to the extent then vested) shall be exercisable for a
period of ninety (90) days 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 ninety (90) days 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 exercisable 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.
6. Non-Transferability of Option. Except as provided in Paragraph 5
herein, the Option shall be exercisable only by 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 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; Investment Representation. The Optionee
agrees for himself, his heirs and legatees that, unless at 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.
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.
2
<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/ John W. Kirby
----------------------------------------
John W. Kirby
3
<PAGE>
Exhibit 10.54
STANDARD OFFICE LEASE--GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Lease Provisions ("Basic Lease Provisions").
1.1 Parties: This Lease dated for reference purposes only, November 26,
1996 is made by and between ENCINO TERRACE CENTER (herein called "Lessor") and
Positive Response Television, Inc. and Director America Corporation doing
business under the name of _________________ , (herein called "Lessee").
1.2 Premises: Suite Number(s)_______________ floors, consisting of
approximately 23,180 feet, more or less, as outlined in paragraph 2 and as
shown on Exhibit "A" hereto (the "Premises").
1.3 Building: Commonly described as being located at * 15021 VENTURA
BOULEVARD in the City of LOS ANGELES County of LOS ANGELES State of CALIFORNIA
as more particularly described in Exhibit _____ hereto, and as defined in
paragraph 2.
1.4 Use: General office use
See Addendum 1.4 subject to paragraph 6.
1.5 Term: Ten (10) years commencing May 1, 1997** ("Commencement Date")
and ending Ten (10) years thereafter as defined in paragraph 3.
1.6 Base Rent:______________ per month, payable on the 1st day of each
month per paragraph 4.21 See Addendum 1.6.1.
1.7 Base Rent Increase: On See Addendum 1.6.1. the monthly Base Rent
payable under paragraph 1.6 above shall be adjusted as provided in See Addendum
1.6.1.
1.8 Rent Paid Upon Execution: _____________________________________
for _______________________________________________________________________
1.9 Security Deposit: ______________________________________________
1.10 Lessee's Share of Operating Expense Increase: __________________
as defined in paragraph 4.2.
2. Premises, Parking and Common Areas.
2.1 Premises: The Premises are a portion of a building, herein sometimes
referred to as the "Building" identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
the real property referred to in the Basic Lease Provisions, paragraph 1.2, as
the "Premises,", Including rights to the Common Areas as hereinafter specified.
2.2 Vehicle Parking: So long as Lessee is not in default, and subject to
the rules and regulations attached hereto, and as established by Lessor from
time to time, Lessee shall be entitled to park cars in the Office Building at
the monthly rate applicable from time to time for monthly parking as set by
Lessor and/or its licensee.
2.2.1 If Lessee commits, permits or allows any of the prohibited
activities described in the Lease or the rules then in effect, then Lessor shall
have the right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow aware the vehicle involved and charge the
cost to Lessee, which cost shall be immediately payable upon demand by Lessor.
2.2.2. The monthly parking rate per car will be $70.00 per month at
the commencement of the term of this Lease and is subject to change upon five
(5) days prior written notice to Lessee. Monthly parking fees shall be payable
one month in advance prior to the first day of each calendar month. - See
Addendum 2.2.3.
2.3 Common Areas--Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Office Building Project that are provided and designated by the Lessor
from time to time for the general non-exclusive use of Lessor, Lessee and of
other lessees of the Office
- --------------------
* Suites 570
-------
** or under Tender of Possession (as hereinafter defined), whichever
occurs earlier
1
<PAGE>
Building Project and their respective employees, suppliers, shippers,
customers and invitees, including but not limited to common entrances,
lobbies, corridors, stairways and stairwells, public restrooms, elevators,
escalators, parking areas to the extent not otherwise prohibited by this
Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 Common Areas--Rules and Regulations. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with
respect to the Office Building Project and Common Areas, and to cause its
employees, suppliers, shippers, customers and invitees to so abide and
confirm. Lessor of such other person(s) as Lessor may appoint shall have the
exclusive control and management of the Common Areas and shall have the
right, from time to time, to modify, amend and enforce said rules and
regulations. Lessor shall not be responsible to Lessee for the non-compliance
with said rules and regulations by other Lessees, their agents, employees and
invitees of the Office Building Project.
2.5 Common Areas--Changes. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Building interior and exterior and Common
Areas, including, without limitation, changes in the location, size, shape,
number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and walkways,
provided, however, Lessor shall at all times provide the parking facilities
required by applicable law;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land and improvements outside the boundaries
of the Office Building Project to be a part of the Common Areas, provided that
such other land and improvements have a reasonable and functional relationship
to the Office Building Project;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Office Building Project as Lessor
may, in the exercise of sound business judgment deem to be appropriate.
3. Term.
3.1 Term. The term and Commencement Date of this Lease shall be ads
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 Delay in Possession. Notwithstanding said Commencement Date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee on said date
and subject to paragraph 3.2.2 Lessor shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease or the
obligations of Lessee hereunder or extent the term hereof; but, in such case,
Lessee shall not be obligated to pay rent or perform any other obligations of
Lessee under the terms of this Lease, except as may be otherwise prohibited in
this Lease, until possession of the Premises is tendered to Lessee as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within 90 days following said Commencement Date as
the same may be extended under the terms of a Work Letter executed by Lessor and
Lessee. Lessee may, at Lessee's option, by notice in writing to Lessor within
thirty (3) days thereafter, cancel this Lease. In which event the parties shall
be discharged from all obligations hereunder; provided, however, Less shall
return any money previously deposited by Lessee (less any offsets due Lessor for
NonStandard improvements); and provided further, that if such written notice by
Lessee is not received by Lessor within thirty (30) day period. Lessee's right
to cancel this Lease hereunder shall terminate and be of no further force or
effect.
3.2.1 Possession Tendered--Defined. Possession of the Premises shall be
deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to
be provided by Lessor under this Lease are substantially completed, (2) the
Building utilities are ready for use in the Premises, (3) Lessee has reasonable
access to the Premises, and (4) ten (10) days shall have expired following
advance written notice to Lessee of the occurrence of the matters described in
(1), (2), and (3) above of this paragraph 3.2.1. SEE ADDENDUM 3.2.1
3.2.2. Delays Caused By Lessee. There shall be no abatement of rent,
and the 90 day period following the Commencement Date before which Lessee's
right to cancel this Lease accrues under paragraph 3.2, shall be deemed
extended to the extent of any delays caused by acts or omission of Lessee.
Lessee's agent, employees and contractors.
3.3 Early Possession. If Lessor occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee
2
<PAGE>
shall after the first seven (7) days of such occupancy pay rent for such
occupancy after such seven (7) day period.
3.4 Uncertain Commencement. In the event commencement of the Lease
term is defined as the completion of the improvements, Lessee and Lessor
shall execute an amendment to this Lease establishing the date of Tender of
Possession (as defined in paragraph 3.2.1) or the actual taking of possession
by lessee, whichever first occurs, as the Commencement Date.
4. Rent.
4.1 Base Rent. Subject to adjustment as hereinafter provided in
paragraph 4.3, and except as may be otherwise expressly provided in this
Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in
paragraph 1.6 of the Basic Lease Provisions. Rent for any period during the
term hereof which is for less than one month shall be prorated based upon the
actual number of days of the calendar month involved. Rent shall be payable
in lawful money of the United States to Lessor at the address stated herein
or to such other persons or at such other places as Lessor may designate in
writing.
4.2 Operating Expense Increase. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's share, as
hereinafter defined, of the amount by which all Operating Expenses, as
hereinafter defined, for each Comparison Year exceeds the amount of all
Operating Expenses for the Base Year, such excess being hereinafter referred
to as the "Operating Expense Increase," in accordance with the following
provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease, as
the percentage set forth in paragraph 1.10 of the Basic Lease Provisions,
which percentage has been determined by dividing the approximate square
footage of the Premises by the total approximate square footage of the
rentable space contained in the Office Building Project. It is understood and
agreed that the square footage figures set forth in the Basic Lease Provision
are approximations which Lessor and Lessee agree are reasonable and shall not
be subject to revision except in connection with an actual change in the size
of the Premises or a change in the space available for lease in the Office
Building Project;
(b) "Base Year" is defined as the calendar year in which the Lease
term commences;
(c) "Comparison Year" is defined as each calendar year during the
term of this Lease subsequent tot he base Year; provided, however, lessee shall
have no obligation to pay a share of the Operating Expense increase applicable
to the first twelve (12) months of the Lease Term (other than such as are
mandated by a governmental authority, as to which government mandated expenses
Lessee shall pay Lessee's Share, notwithstanding they occur during the first
twelve (12) months). Lessee's Share of the Operating Expense Increase for the
first and last Comparison years of the Lease Term shall be prorated according to
that portion of such Comparison Year as to which lessee is responsible for a
share of such increase;
(d) "Operating Expense" is defined, for purposes of this Lease, to
include all reasonable and necessary costs, if any, incurred by Lessor in the
exercise of its reasonable discretion, for:
(i) The operation, repair, maintenance, and replacement, in
net, clean, safe, good order and condition, of the Office Building Project,
including but not limited to, the following:
(aa) The Common Areas, including their surfaces,
coverings, decorative items, carpets, drapes and window coverings, and including
parking areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers,
irrigation systems, Common Area lighting facilities, building exterior and
roofs, fences and gates;
(bb) All hearing, air conditioning, plumbing,
electrical systems, life safety equipment, telecommunication and other equipment
used in common by, or for the benefit of, lessees or occupants of the Office
Building Project, including elevators and escalators, tenant directories, fire
detection systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security services;
(iii) Any other service to be provided by Lessor that is
elsewhere in this Lease stated as being an "Operating Expense;"
(iv) The cost of the premises for the liability and property
insurance policies to be maintained by Lessor under paragraph 8 hereof;
(v) (INTENTIONALLY OMITTED)
(vi) The cost of water, sewer, gas, electricity, and other
publicly mandated services to the Office Building Project;
(vii) Labor, salaries and applicable fringe benefits and
costs, materials, supplies and tools, used in maintaining and/or cleaning the
Office Building Project and accounting and a management fee not to exceed 4%
attributable to the operation of the Office Building Project;
(viii) Replacing and/or adding improvements mandated by any
governmental agency and any
3
<PAGE>
repairs or removals necessitated thereby amortized over its useful lie according
to the Federal Income tax regulations or guidelines for depreciation thereof
(including interest on the amortized balance as is then reasonable in the
judgment of Lessor's accountants;
(ix) Replacements of equipment or improvements that have a
useful life for depreciation purposes according to Federal income tax guidelines
of five (5) years or less, as amortized over such life.
(e) Operating Expenses shall not include the costs of replacements of
equipment or improvements that have a useful life for Federal income tax
purposes in excess of five (5) years unless it is of the type described in
paragraph 4.2(d)(viii), in which case their cost shall be included as above
provided.
(f) Operating Expenses shall not include any expenses paid by any
Lessee directly to third parties, or as to which Lessor is otherwise reimbursed
by any third party, other tenant, or by insurance proceeds. See Addendum 4.2(f).
(g) Lessee's Share of Operating Expense Increase shall be payable by
lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount to be estimated by Lessor from time to time in advance of Lessee' Share
of the Operating Expense Increase for any Comparison Year, and the same shall be
payable monthly or quarterly, as Lessor shall designate, during each Comparison
Year of the Lease term, on the same day as the Base Rent is due hereunder In the
event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses
Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60) days
after the expiration of each Comparison Year a reasonably detailed statement
showing Lessee's Share of the actual Operating Expenses Increase incurred during
such year. If Lessee's payments under this paragraph 4.2(g) during said
Comparison Year exceed Lessee's Share as indicated on said statement, Lessee
shall be entitled to credit the amount of such overpayment against Lessee's
Share of Operating Expense Increase next falling. due. If Lessee's payment under
this paragraph during said Comparison Year were less than Lessee's Share as
indicated on said statement, Lessee shall pay to Lessor the amount of the
deficiency within ten (10) days after delivery by Lessor to Lessee of said
statement. Lessor and Lessee shall forthwith adjust between them by cash payment
any balance determined to exist with respect to that portion of the last
Comparison Year for which Lessee is responsible as to Operating Expense
increase, notwithstanding that the Lease term may have terminated before the end
of such Comparison Year.
4.3 Rent increase. See Addendum 4.2(h).
4.3.1 (Intentionally omitted).
4.3.2 (Intentionally omitted).
4.3.3 (Intentionally omitted).
4.3.4 (Intentionally omitted).
4.3.5 (Intentionally omitted).
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as
security for Lessee's faithful performance of Lease, after the expiration of any
applicable notice or grace periods, Lessor may use, apply or retain all or any
portion of said deposit for the payment of any rent or other charge in default
for the payment of any other sum to which Lessor may become obligated by reason
of Lessee's or to compensate Lessor for any loss or damage which Lessor may
suffer thereby. Lessor shall not be required to keep said security deposition
separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not heretofore
been applied by Lessor, shall be returned, without payments of interest or other
increment for its use, to Lessor (or, at Lessor's option, to the last assignee,
if any, of Lessee's interest hereunder at the expiration of the term hereof, and
after Lessee has vacated the Premises. No trust relationship is created herein
between Lessor and Lessee with respect to said Security Deposit.
6. Use.
6.1 Use. The Premises shall be used and occupied only for the purpose set
forth in paragraph 1.4 of the Basis Lease Provisions or any other use which is
reasonably comparable to that use and for no other purpose.
6.2 Compliance with Law.
(a) Lessor warrants to Lessee that the Premises in the state existing
on the date that the Lease term commences but without regard to alterations or
improvements made by Lessee or the use for which Lessee will occupy the Premises
does not violate any covenants or restrictions of record or any applicable
building code, regulation or ordinance in effect on such Lease term Commencement
Date. In the event it is determined that this warranty has been violated, then
it shall be the obligation of the Lessor, after written notice from Lessee, to
promptly, at Lessor's sole cost and expense rectify any such violation.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's
expense, promptly comply with
4
<PAGE>
all applicable statutes, ordinances, rules, regulations, orders, covenants and
restrictions or records, and requirements of any fire insurance underwriters or
rating bureaus, now in effect or which may hereafter come into effect, whether
or not they reflect a change in policy that now existing, during their term or
any part of the term hereof, relating in any manner to the use by Lessee of the
Premises. Lessee shall conduct its business in a lawful manner and shall not use
or permit the use of the Premises or the Common Area in any manner that will
tend to create waste or a nuisance or shall tend to disturb other occupants of
the Office Building Project. See Addendum 6.2(c).
6.3 Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee in a clean condition
on the Lease Commencement Date (unless Lessee is already in possession) and
Lessor warrants to the Lessee that the plumbing, lighting, air conditioning, and
heating systems in the Premises shall be in good operating condition in the
event that it is determined that this warranty has been violated, then it shall
be the obligation of Lessor, alter receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation.
(b) Except at otherwise provided in this Lease, Lessee hereby accepts
the Premises and the Office Building Project in their condition existing as of
the Lease Commencement Date or the date that Lessee takes possession of the
Premises, whichever is earlier, subject to all applicable zoning, municipal,
county and state laws, ordinance and regulations governing and regulating the
use of the Premises, and any easements, covenants or restrictions of record, and
accepts this Lease subject thereto and to all matters disclosed thereby and by
any exhibits attached hereto. Lessee acknowledges that it has satisfied itself
by its own independent investigation that the Premises are suitable for its
intended use, and that neither Lessor not Lessor's agent or agents has made any
representation or warranty as to the present or future suitability of Premises,
Common Areas or Office Building Project for the conduct of Lessee's business.
7. Maintenance, Repairs, Alternation and Common Area Services.
7.1 Lessor's Obligations. Lessor shall keep the Office Building Project,
including the Premises, interior and exterior walls, roof, and common areas, and
the equipment whether used exclusively for the Premises or in common with other
premises, in good condition and repair; provided, however, Lessor shall not be
obligated to paint, repair or replace wall coverings, or to repair or replace
any improvements in the Premises that are not ordinarily a part of the Building
or are above then Building standards. Except as provided in paragraph 9.5, there
shall be no abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alternations or repairs made by Lessor to the Office Building Project any part
thereof, provided that Lessor shall use its best efforts not interfere with
Lessee's business operation. Lessee expressly waives the benefits of any statute
now or hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Premises in good order, condition and repair. SEE ADDENDUM.
7.2 Lessee's Obligations.
(a) Notwithstanding Lessor's obligation to keep the Premises in good
condition and repair, Lessee shall be responsible for payment of the cost
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) that
serves only Lessee or the Premises, to the extent such cost is attributable to
causes by Lessor's negligence. Lessee shall be responsible for the cost of
painting, repairing or replacing wall coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above then Building standards. Lessor may, as its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the costs of which is otherwise Lessee's responsibility hereunder.
(b) On the last day of their term hereof, or on any soon termination,
Lessee shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear casualty and condemnation excepted, clean and free of
debris. Any damage or deterioration of the Premises shall not be deemed ordinary
wear and tear if the same could have been prevented by good maintenance
practices by Lessee. Lessee shall repair any damage to the Premises occasioned
by the installation or removal of Lessee's trade fixtures, alternations,
furnishings and equipment. Except as otherwise stated in this Lease, Lessee
shall leave the air lines, power panels, electrical distribution systems,
lighting fixtures, air conditioning, window covering, wall coverings, carpets,
call paneling, ceiling and plumbing on the Premises and in good operating
condition.
7.3 Alternations and Additions.
(a) Lessee shall not, with Lessor's prior written consent make any
alternations, improvements, additions, utility installations or repairs in, on
or about the Premises, or the Office Building Project. As used in the paragraph
7.3 the term "Utility Installation" shall mean carpeting, window and wall
coverings, power panels,
5
<PAGE>
electrical distribution systems, light fixtures, air conditioning plumbing and
telephone and telecommunication wiring and equipment. At the expiration of the
term, Lessor may require the removal of any or all of said alternation,
improvements, additions or Utility installations, and the restoration of the
Premises of the Office Building Project to their prior condition, at Lessee's
expense. Should Lessor permit Lessee to make its own alternations, improvements,
additions or utility installations, Lessee shall use only such contractors as
has been expressly approved by Lessor, and Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such improvements,
to insure Lessor against any liability for mechanic's and materialmen's liens
and to insure completion of the work. Should Lessee make and alternations,
improvements, addition or utility installations without the prior approval of
Lessor, of use a contractor not expressly approved by Lessor, Lessor, may, at
any time during the term of this Lease, require that Lessee remove any part or
all of the same.
(b) Any alternations, improvements, additions or utility
installations in or about the Premises or the Office Building Project that Less
shall desire make shall be presented to Lessor in written form, with proposed
detailed plans. If Lessor shall give its consent to Lessee's making such
alternation, improvement, addition or utility installation, the consent shall be
deemed conditioned upon Lessee acquiring a permit to do so from the applicable
governmental agencies, furnishing a copy thereof to Lessor prior to the
commencement of the work, and compliance by Lessee with all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises by Lessee, and Lessor
shall have the right to post notices of non-responsibility in or on the Premises
of the Building as provided by law. If Lessee, shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy .
any such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises, the Building or the Office Building
Project, upon the condition that if Lessor, shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien or claim, in addition, Lessor may require Lessee to
pay Lessor's reasonable attorneys' fees and costs in participating such action
if Lessor shall decide it is to Lessor's best interest so to do.
(e) All alternations, improvements, additions and Utility
installations (unless such Utility installations constitute trade fixtures of
Lessee) which may be made to the Premises by Lessee, including but not limited
to, floor coverings, paneling, doors, drapes, built-ins, moldings, sound
attenuation, and lighting and telephone or communications systems, conduct,
wiring and outlets, shall be made and done in a good and workmanlike manner and
of good and sufficient quality and materials and shall be the property of Lessor
and remain upon and be surrendered with the Premises at the expiration of Lease
term unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided
Lessee is not in default, notwithstanding the provisions of this paragraph
7.3(e), Lessee's personal property and equipment, other than that which is
affixed to the Premises so that it cannot be removed with material damage to the
Premises or the Building, and other than Utility installations, shall remain the
property of Lessee and may be removed by Lessee subject to the provisions of
paragraph 7.2. SEE ADDENDUM 7.3(e).
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
installations.
7.4 Utility Additions. Lessor reserves the right to install now or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, communication systems, and fire protection and detection systems, so
long as such installations do not unreasonably interfere with Lessee's use of
the Premises.
8. Insurance; Indemnity.
8.1 Liability Insurance--Lessee. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease a policy of Comprehensive
General Liability Insurance utilizing an Insurance Services Office standard form
with Broad Form General Liability Endorsement (GL040-4). or equivalent, in an
amount of not less than $1,000,000.00 per occurrence of bodily injury and
property damage combined or in a grater amount as reasonably determined by
Lessor and shall insure Lessee with Lessor as an additional insured against
liability arising out of the
6
<PAGE>
use, occupancy or maintenance of the Premises. Compliance with the above
requirement shall not, however, limit the liability of Lessee hereunder.
8.2 Liability Insurance--Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Broad Form Property Damage Insurance, plus coverage against such other risks
Lessor deems advisable from time to time, insuring Lessor, but not Lessee,
against liability arising out of the ownership, use, occupancy or maintenance of
the Office Building Project in an amount not less than $5,000,000.00 per
occurrence.
8.3 Property Insurance--Lessee. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease for the benefit of Lessee,
replacement cost fire and extended coverage insurance, with vandalism and
malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsement in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, on all of Lessee's
personal property, fixtures, equipment and tenant Improvements.
8.4 Property Insurance--Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Office Building Project Improvements, but not Lessee's personal
property, fixtures, equipment or tenant Improvements, in the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent, providing protection
against all perils included within the classification of fire, extended overage,
vandalism, malicious mischief, plate glass, and such other perils as Lessor
deems advisable or may be required by a lender having a lien on the Office
Building Project. In addition, Lessor shall obtain and keep in force, during the
term of this Lease, a policy of rental value insurance covering a period of one
year, with loss payable to Lessor, which insurance shall also cover all
Operating Expenses for said period. Lessee will not be named in any such
policies carried by lessor and shall have no right to any proceeds therefrom.
The policies required by these paragraph 8.2 and 8.4 shall contain such
deductibles as Lessor or the aforesaid lender may determined. In the event that
the Premises shall suffer an Insured Loss as defined in paragraph 9.1(f) hereof,
the deductible amounts under the applicable insurance policies shall be deemed
an Operating Expense, Lessee shall not do or permit to be done anything which
shall invalidate the insurance policies carried by lessor. Lessee shall pay the
entirety of any increase in the property insurance premium for the Office
Building Project over what it was immediately prior to the commencement of the
term of this Lease if the increase is specified by Lessor's Insurance carrier as
being caused by the nature of Lessee's occupancy or any act or omission of
Lessee.
8.5 Insurance Policies. Lessee and Lessor shall deliver to each other
copies of liability insurance policies required under paragraph 8.2 or
certificates evidencing the existence and amounts of such insurance within seven
(7) days after the Commencement Date of this Lease. No such policy shall be
cancelable or subject to reduction of coverage or other modification except
after thirty (30) days prior written notice to the other. Lessee and Lessor
shall, at least thirty (30) days prior to the expiration of such policies,
furnish the other with renewals thereof.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other,
for direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to the
negligence of Lessor or Lessee or their agent, employees, contractors and/or
invitees. If necessary all property insurance policies required under this Lease
shall be endorsed to so provide.
8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its
agent, Lessor's mater or ground lessor, partners and lenders, from and against
any and all claims for damage to the person or property of anyone or any entity
arising from lessee's use of the Office Building Project, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises and shall further indemnify and hold
harmless Lessor from and against any and all claims, costs and expenses arising
from any breach or default in the performance of any obligation on Lessee's part
to be performed under the terms of the Lease, or arising from any act or
omission of Lessee, or any of Lessee's agents, contractors, employees, or
invitees, and from and against all costs, attorney's fees, expenses and
liabilities incurred by Lessor as the result of any such use, conduct, activity,
work, things done, permitted or suffered, breach, default or negligence, and in
dealing reasonably therewith, including but not limited to the defense or
pursuit of any claim or any action or proceeding involved therein; and in case
any action or proceeding be brought against Lessor by reason of any such mater,
Lessee upon notice from Lessor shall defend the same at Lessee's expense by
counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee
in such defense. Lessor need not have first paid any such claim in order to be
so indemnified. Lessee, as a material part of the consideration to Lessor,
hereby assumes all risk of damage to property of Lessee or injury to persons,
in, upon or about the Office Building Project arising from any cause and Lessee
hereby waives all claims in respect hereof against Lessor. See Addendum 8.7 and
8.8.
7
<PAGE>
8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
herefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Office Building Project, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from theft,
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or light fixtures, or from any other cause, whether said damage
or injury results from conditions arising upon the Premises or upon other
portions of the Office Building Project, or from other sources or places, or
from new construction or the repair, alteration or improvement of any part of
the Office Building Project, or of the equipment, fixtures or appurtenances
applicable thereto and regardless of whether the means of repairing the same is
inaccessible. Lessor shall not be liable for any damages arising from any act or
neglect of any other lessee, occupant or use of the Office Building Project, nor
from the failure of Lessor to enforce the provisions of any other lease of any
other lessee of the Office Building Project.
8.9 No Representation of Adequate Coverage. Lessor makes no representation
that the limits or forms of coverage of Insurance specified in this paragraph 8
are adequate to cover Lessee's property or obligations under this Lease. 9.
Damage or Destruction.
9.1 Definitions.
(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that
the cost to repair is less than fifty percent (50%) of the then Replacement
Cost of the building.
(c) "Premises Building Total Destruction" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the
extent that the cost to repair is fifty percent (50%) or more of the then
Replacement Cost of the Building.
(d) "Office Building Project Buildings" shall mean all of the
buildings on the Office Building Project site.
(e) "Office Building Project Buildings Total Destruction" shall
mean if the Office Building Project Buildings are damaged or destroyed to the
extent that the cost of repair is fifty percent (50%) or more of the then
Replacement Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8. The fact that an insured Loss has a deductible amount shall not
make the loss an uninsured loss.
(g) "Replacement Cost" shall mean the amount of money necessary
to be spent in order to repair or rebuilt the damaged area to the condition
that existed immediately prior to the damage occurring, excluding all
improvements made by lessees, other than those installed by Lessor at
Lessee's expense.
9.2 Premises Damage; Premises Building Partial Damage.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is an
insured Loss and which falls into the classification of either Premises
Damage or Premises Building Partial Damage, then Lessor shall as soon as
reasonably possible and to the extent the required materials and labor are
readily available through usual commercial channels, at Lessor' expense
repair such damage (but not Lessee's fixtures, equipment or tenant
improvements originally paid for directly by Lessee) to its condition
existing at the time of the damage, and this Lease shall continue in full
force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4
and 9.5, if at any time during the term of this Lease there is damage which
is not an Insured Loss and which falls within the classification of Premises
Damage or Premises Building Partial Damage, unless caused by a negligent or
willful act of Lessee (in which event Lessee shall make the repairs at
Lessee's expense), which damage prevents Lessee from making any substantial
use of the Premises. Lessor may at Lessor's option either (i) repair such
damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) given written
notice to Lessee within thirty (30) days after the date of occurrence of such
damage of Lessor's intention to cancel and terminate this Lease as of the
date of the occurrence of such damage, in which event this Lease shall
terminate as of the date of the occurrence of such damage.
9.3 Premises Building Total Destruction; Office Building Project Total
Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at any
time during the term of this Lease there is damage, whether or not it is an
Insured Loss, which falls within the classifications of either (i) Premises
Building Total Destruction, or
8
<PAGE>
(ii) Office Building Project Total Destruction, then Lessor may at Lessor's
option either (i) repair such damage of destruction as soon as reasonably
possible at Lessor's expense (to the extent the required materials are readily
available through usual commercial channels) to its condition existing at the
time of the damage, but not Lessee's fixtures, equipment or tenant improvements,
and this shall continue in full force and effect, or (ii) given written notice
to Lessee within thirty (30) days after the date of occurrence of such damage of
Lessor's intention to cancel and terminate this Lease, in which case this Lease
shall terminate as of the date of the occurrence of such damage.
9.4 Damage Near End of Term.
(a) Subject to paragraph 9.4(b), if at any time during the last
twelve (12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor or Lessee's option cancel and terminate this
Lease as of the date of occurrence of such damage by giving written notice to
the other of such party's election to do so within 30 days after the date of
occurrence of such damage.
(b) Notwithstanding paragraph (.4(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option
maybe exercised has not yet expired, Lessee shall exercise such option, if it is
to be exercised at all, no later than twenty (20) days after the occurrence of
an Insured Loss falling within the classification of Premises Damage during the
last twelve (12) months of the terms of this Lease. If Lessee duly exercises
such option during said twenty (20) day period, Lessor shall, at Lessor's
expense, repair such damage, but not Lessee's fixtures, equipment or tenant
improvements, as soon as reasonably possible and this Lease shall continue in
full force and effect. If Lessee fails to exercise such option during said
twenty (20) day period, then Lessor may at Lessor's option terminate and cancel
this Lease as of the expiration of said twenty (20) day period by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of said twenty (20) day period notwithstanding any term or provision
in the grant of option to the contrary.
9.5 Abatement of Rent; Lessee's Remedies.
(a) In the event Lessor repairs or resolves the Building or Premises
pursuant to the provisions of this paragraph 9, and any part of the Premises are
not usable (including loss of use due to loss of access or essential services),
the rent payable hereunder (including Lessee's Share of Operating Expense
Increase) for the period during which such damage, repair or restoration
continues shall be abated, provided (1) the damage was not the result of the
negligence of Lessee, and (2) such abatement shall only be to the extent the
operation and profitability of Lessee's business as operated from the Premises
is adversely affected. Except for said abatement of rent, if any, Lessee shall
have no claim against Lessor for any damage suffered by reason of any such
damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises or
the Building under the provisions of this paragraph 9 and shall not commence
such repair or restoration within ninety (90) days after such occurrence, or if
Lessor shall not complete the restoration and repair within six (6) months after
such occurrence, Lessee may at Lessee's option cancel and terminate this lease
by giving Lessor written notice of Lessee's election to do so at any time prior
to the commencement or completion, respectively, of such repair or restoration.
In such event this Lease shall terminate as of the date of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with any
such restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.
9.6 Termination--Advance Payments. Upon termination of this Lease pursuant
to this paragraph 9, an equitable adjustment shall be made concerning advance
rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 Waiver. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1. Payment of Taxes. Lessor shall pay the real property tax, as defined
in paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 Additional Improvements. Lessor shall not be responsible for paying
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the premises by Lessee or at Lessee's request.
10.3 Definition of "Real Property Tax" As used herein, the term "real
property tax" shall include any form of
9
<PAGE>
real estate tax or assessment, general special, ordinary or extraordinary, and
any license fee, commercial rental tax, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Office Building Project or any
portion thereof by any authority having the direct or indirect power to tax
including any city, county, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof as against any legal or equitable interest of Lessor in the Office
Building Project. The term "real property tax" shall also include any tax, fee,
levy, assessment of charge (i) in substitution of, partially or totally, any
tax, fee, levy, assessment or charge hereinabove included within the definition
of "real property tax," or (ii) the nature of which was hereinbefore included
within the definition of "real property tax,", or (iii) which is imposed for a
service or right not charged prior to June 1, 1978, or, if previously charged,
has been increased since June 1, 1978, or (iv) which is imposed as a result of a
change in ownership, as defined by applicable local statutes for property tax
purposes, of the Office Building Project or which is added to a tax or charge
hereinbefore included within the definition of real property tax by reason of
such change of ownership, or (v) which is imposed by reason of this transaction,
any modifications or changes hereto, or any transfers hereof.
10.4 Joint Assessment. If the Improvements or property, the taxes for which
are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not
separately assessed, Lessee's portion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessor's work sheets
or such other information (which may include the cost of construction) as may be
reasonably available. Lessor's reasonable determination thereof, in good, faith,
shall be conclusive.
10.5. Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assess against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
11.1 Services Provided by Lessor. Lessor shall provide heating,
ventilation, air conditioning, and janitorial service as reasonably required,
reasonable amounts of electricity for normal lighting and office machines, water
for reasonable and normal drinking and lavatory use, and replacement light bulbs
and/or fluorescent lubes and ballasts for standard overhead fixtures.
11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Lessee shall pay Lessee's share.
11.3 Hours of Service. Said services and utilities shall be provided during
generally accepted business days and hours or such other days or hours as may
hereafter be set forth. Utilities and services required at other times shall be
subject to advance request and reimbursement by Lessee to Lessor of the cost
thereof. See Addendum 11.3(a)
11.4 Excess Usage by lessee. Lessee shall not make connection to the
utilities except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water, lighting
or power, or suffer or permit any act that causes extra burden upon utilities or
services including but not limited to security services over standard office
usage for the Office Building Project. Lessor shall require Lessee to reimburse
Lessor for any excess expenses or costs that may arise out of a breach of this
subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's
expense supplemental equipment and/or separate metering applicable to Lessee's
excess usage or loading.
11.5 Interruptions. There shall be no abatement of rent and Lessor shall
not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises
without Lessor's prior written consent which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need to notice Lessee under
paragraph 13.1 "Transfer" within the meaning of this paragraph 12 shall include
the transfer or transfers aggregating: (a) Lessee is a corporation more than
fifty percent (50%) of
10
<PAGE>
the voting stock of such corporation, or (b) if Lessee is a partnership, more
than fifty percent (50%) of the profit and loss participation in such
partnership.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof without
Lessor's consent to any corporation which controls, is controlled by or is under
common control with Lessee or to any corporation resulting from the merger of
consolidation with Lessee or to any person or entity which acquires all the
assets of Lessee as a going concern of the business that is being conducted on
the Premises, all of which are referred to as "Lessee Affiliate"; provided that
before such assignment shall be effective (a) said assignee shall assume, in
full, the obligations of Lessee under this Lease and (b) Lessor shall be given
written notice of such assignment and assumption. Any such assignment shall not,
in any way, affect or limit the liability of Lessee under the terms of this
Lease even if after such assignment or subletting the terms of this Lease are
materially changed or altered without the consent of Lessee, the consent of whom
shall not be necessary.
12.3 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, no assignment or subletting shall
release Lessee of Lessee's obligations hereunder or alter the primary liability
of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's
Share of Operating Expense Increase, and to perform any other obligations to be
performed by Lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee pending
approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such assignment
or subletting, nor the acceptance of rent, shall constitute a waiver of estoppel
of Lessor's right to exercise its remedies for the breach of any of the terms or
conditions of this paragraph 12 of this Lease.
(d) If Lessee's obligations under this Lease have been guaranteed by
third parties, then an assignment or sublease, and Lessor's consent thereto,
shall not be effective unless said guarantors give their written consent to such
sublease and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent and such
action shall not relieve such persons from liability under this Lease or said
sublease: however, such persons shall not be responsible to the extent any such
amendment or modification enlarges or increases the obligations of the Lessee or
sublessee under this Lease or such sublease.
(f) In the event of any default under this Lease, Lessor may proceed
directly against Lessee, any guarantors or any one else responsible for the
performance of this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no default then
exists under this Lease of the obligations to be performed by Lessee nor shall
such consent be deemed a waiver of any then existing default, except as may be
otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent null
and void.
12.4 Additional Terms and Conditions Applicable to Subletting. Regardless
of Lessor's consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not expressly incorporated
therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
hereafter made by Lessee and Lessor may collect such rent and income and apply
same toward Lessee's obligations under this Lease: provided, however, that until
a default shall occur in the performance of Lessee's obligations under this
Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under such
sublease. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a default exists in
the performance of Lessee's obligations under this Lease, to pay to Lessor the
rents due and to
11
<PAGE>
become due under the sublease. Lessee agrees that such sublessee shall have the
right to rely upon any such statement and request from Lessor, and that such
sublessee shall pay such rents to Lessor without any obligation or right to
inquire as to whether such default exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee or Lessor for any such rents so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective unless and
until it has been approved in writing by Lessor. In entering into any sublease,
Lessee shall use only such form of sublease as is satisfactory to Lessor, and
once approved by Lessor, such sublease shall not be changed or modified without
Lessor's prior written consent. Any such sublease shall by reason of entering
into a sublease under this Lease, be deemed, for the benefit of Lessor, to have
assured and agreed to conform and comply with each and every obligation herein
to be performed by Lessee other than such obligations as are contrary to or
inconsistent with provisions contained in a sublease to which Lessor has
expressly consented in writing.
(c) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor at its option and without any obligation to
do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of Lessee under such sublease from the time of
the exercise of said option to the termination of such sublease: provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to Lessee or for any other prior defaults of Lessee under
such sublease.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such defaults cured by the sublessee.
12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees.
12.6 Conditions to Consent. Lessor reserves the right to condition any
approval to assign or sublet upon Lessor's determination that (a) the proposed
assignee or sublessee shall conduct a business on the Premises of a quality
substantially equal to that of Lessee and consistent with the general character
of the other occupants of the Office Building Project and not in violation of
any exclusives or rights then held by other tenants, and (b) the proposed
assignee or sublessee be at least as financially responsible as Lessee was
expected to be at the time of the execution of this Lease or of such assignment
or subletting, whichever is greater.
13. Default; Remedies.
13.1 Default. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee combined
with a failure to pay rent.
(b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment of
subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.2(f)
(false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33
(auctions), or 411 (easements), all of which are hereby deemed to be material,
non-curable defaults without the necessity of any notice by Lessor to Lessee
thereof.
(c) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(d) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee
other than those referenced in subparagraphs (b) and (c), above, where such
failure shall continue for a period of thirty (30) days after written notice
thereof from Lessor to Lessee: provided, however, that if the nature of Lessee's
noncompliance is such that more than thirty (30) days are reasonably required
for its cure, then Lessee shall not be deemed to be in default if Lessee
commenced such cure within said thirty (30) day period and thereafter diligently
pursues such cure to completion. To the extent permitted by law, such thirty
(30) day notice shall constitute the sole and exclusive notice required to be
given to Lessee under applicable Unlawful Detainer statutes.
12
<PAGE>
(e) (i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors: (ii) Lessee becoming a "debtor" as
defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the
case of a petition filed against Lessee, the same is dismissed within sixty (60)
days; (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interests in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or at Lessee's
interests in this Lease, where such seizure is not discharged within thirty (30)
days. In the event that any provision of this paragraph 13.1(e) is contrary to
any applicable law, such provision shall be of no force or effect.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's
obligation hereunder was materially false.
13.2 Remedies. In the event of any material default or breach of this Lease
by Lessee, Lessor may at any time thereafter, with or without notice or demand
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means. In which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee all direct damages
incurred by Lessor by reason of Lessee's default including, but not limited to,
the cost of recovering possession of the Premises: reasonable expenses of
reletting including necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and any real estate commission actually paid: the
worth at the time of award by the court having jurisdiction thereof of the
amount by which the unpaid rent for the balance of the term after the time of
such award exceeds the amount of such rental loss for the same period that
Lessee proves could be reasonably avoided; that portion of the leasing
commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired
term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have vacated or abandon the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease. Including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Lessee in writing,
specifying wherein Lessor has failed to perform such obligation: provided,
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days are required for performance then Lessor shall not be in default if
Lessor commences performance within such 30-day period and thereafter diligently
pursues the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other
sums due hereunder will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to, processing and accounting charges, and
late charges which may be imposed on Lessor by the terms of any mortgage or
trust deed covering the Office Building Project. Accordingly, if any installment
of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to 6% of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof or the Office Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs: provided that if so
much of the Premises or the Office Building Project are taken by such
condemnation as would substantially and adversely affect the operation and
profitability of Lessee's business conducted from the Premises, Lessee shall
have the option, to be exercised only in writing within thirty (30) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within thirty (30) days after the condemning authority shall
have taken possession), to terminate this Lease as of the date
13
<PAGE>
the condemning authority takes such possession. If Lessee does not terminate
this Lease in accordance with the foregoing, this Lease shall remain in full
force and effect as to the portion of the Premises remaining, except that the
rent and Lessee's Share of Operating Expense Increase shall be reduced in the
proportion that the floor area of the Premises taken bears to the total floor
area of the Premises. Common Areas taken shall be excluded from the Common Areas
usable by Lessee and no reduction of rent shall occur with respect thereto or by
reason thereof. Lessor shall have the option in its sole discretion to terminate
this Lease as of the taking of possession by the condemning authority, by giving
written notice to Lessee of such election within thirty (30) days after receipt
of notice of a taking by condemnation of any part of the Premises or the Office
Building Project. Any award for the taking of all or any part of the Premises or
the Office Building Project under the power of eminent domain or any payment
made under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages: provided,
however, that Lessee shall be entitled to any separate award for loss of or
damage to Lessee's trade fixtures, removable personal property and unamortized
tenant improvements that have been paid for by Lessee. For that purpose the cost
of such improvements shall be amortized over the original term of this Lease
excluding any options. In the event that this Lease is not terminated by reason
of such condemnation, Lessor shall to the extent of severance damages received
by Lessor in connection with such condemnation, repair any damage to the
Premises caused by such condemnation except to the extent that Lessee has been
reimbursed therefore by the condemning authority. Lessee shall pay any amount in
excess of such severance damages required to complete such repair.
15. Broker's Fee.
(a) The brokers involved in this transaction are JULIAN J. STUDLEY, INC. as
"listing broker" and Estmac Commercial Brokerage & Fred Sands Commercial as
"cooperating broker," licensed real estate broker(s). A "cooperating broker" is
defined as any broker other than the listing broker entitled to a share of any
commission arising under this Lease. Upon execution of this Lease by both
parties, Lessor shall pay to said brokers jointly, or in such separate shares as
they may mutually designate in writing, a fee as set forth in a separate
agreement between Lessor and said broker(s).
(b) (Intentionally Omitted)
(c) (Intentionally Omitted)
(d) Lessee and Lessor each represent and warrant to the other that neither
has had any dealings with any person, firm, broker or finder (other than the
person(s). If any, whose names are set forth in paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
party.
16. Estoppel Certificate.
(a) Each party (as "responding party") shall at any time upon not less than
ten (10) days' prior written notice from the other party ("requesting party")
executed, acknowledge and deliver to the requesting party a statement in writing
(i) certifying that the Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect) and the date to which the
rent and other charges are paid in advance, if any, and (ii) acknowledging that
there are not, to the responding party's knowledge, any uncured defaults on the
part of the requesting party, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Office Building Project or of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such statement
within such time shall be a material default of this Lease by the party who is
to respond, without any further notice to such party, or it shall be conclusive
upon such party that (i) this Lease is in full force and effect without
modification except as may be represented by the requesting party, (ii) there
are no uncured defaults in the requesting party's performance and (iii) if
Lessor is the requesting party, not more than one month's rent has been paid in
advance.
(c) If Lessor desires to finance, refinance, or sell the Office Building
Project, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Guarantors as may be
reasonably required by such lender or purchaser. Such statement shall include
the past three (3) years' financial statements of Guarantors. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17.Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in
14
<PAGE>
question, of the fee title or a lessee's interest in a ground lease of the
Office Building Project to the extent all obligations, past and present, and all
liabilities are assumed by a successor Lessor. In the event of any transfer of
such title or interest, Lessor herein named (and in case of any subsequent
transfers than the grantor) shall be relieved from and after the date of such
transfer of all liability as respects Lessor's obligations thereafter to be
performed, provided that any funds in the hands of Lessor or the then grantor at
the time of such transfer, in which Lessee has an interest, shall be delivered
to the grantee. The obligations contained in this Lease to be performed by
Lessor shall, subject as aforesaid, be binding on Lessor's successors and
assigns, only during their respective periods of ownership.
18. Severability. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
than allowable by lay or judgments from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease: provided,
however, that interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence with respect to the obligations to
be performed under this Lease.
21. Additional Rent. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to lessee's Share of Operating
Expense Increase and any other expenses payable by Lessee hereunder shall be
deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction nor
the Lessor or any employee or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises of the Office Building Project and Lessee acknowledges
that Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal use and adaptability of the Premises and the compliance thereof
with all applicable laws and regulations in effect during the term of this
Lease.
23. Notices. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal delivery or by certified or
registered mail, and shall be deemed sufficiently given if delivered or
addressed to Lessee or to Lessor at the address noted below or adjacent to the
signature of the respective parties, as the case may be. Mailed notices shall be
deemed given upon actual receipt at the address required, or forty-eight hours
following deposit in the mail, postage prepaid, whichever first occurs. Either
party may by notice to the other specify a different address for notice purposes
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice of Lessee.
24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. (Intentionally omitted)
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the
Premises or any party thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be one hundred fifty percent (150%) of the rent payable immediately
preceding the termination date of this Lease, and all Options, if any, granted
under the terms of this Lease shall be deemed terminated and be of no further
effect during said month to month tenancy.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. Each provision of this Lease performable
by Lessee shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting
assignment or subletting by Lessee
15
<PAGE>
and subject to the provisions of paragraph 17, this Lease shall bind the
parties, their personal representatives, successors and assigns. This Lease
shall be governed by the laws of the State where the Office Building Project is
located and any litigation concerning this Lease between the parties hereto
shall be initiated in the County in which the Office Building Project is
located.
30. Subordination.
(a) This Lease, and any Option or right of first refusal granted hereby, at
Lessor's option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
Office Building Project and to any and all advances made on the security thereof
and to all renewals, modifications, consolidations, replacements and extensions
thereof. Notwithstanding such subordination, Lessee's right to quiet possession
of the Premises shall not be disturbed if Lessee is not in default and so long
as Lessee shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms. If
any mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be provided such documents contain a non-disturbance provision in form and
substance reasonably acceptable to Lessee. Lessee's failure to execute such
documents within ____ days after written demand shall constitute a material
default by Lessee hereunder without further notice to Lessee or, at Lessor's
option, Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this paragraph 30(b). 31. Attorney's
Fees.
31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the same
or a separate suit, and whether or not such action is pursued to decision or
judgment.
31.2 The attorneys' fee award shall not be computed in accordance with any
court fee schedule, but shall be such as to fully reimburse all attorney's fees
reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all other
costs and expenses incurred in the preparation and service of notice of default
and consultations in connection therewith, whether or not a legal transaction is
subsequently commenced in connection with such default.
32. Lessor's Access.
32.1 Lessor and Lessor's agents after prior notice to Lessee, except in the
case of emergency shall have the right to enter the Premises at reasonable times
for the purpose of inspecting the same, performing any services required of
Lessor, showing the same to prospective purchasers, lenders, or lessees, taking
such safety measures, erecting such scaffolding or other necessary structures,
making such alterations, repairs, improvements or additions to the Premises or
to the Office Building Project as Lessor may reasonably deem necessary or
desirable and the erecting, using and maintaining of utilities, services, pipes
and conduits through the Premises and/or other premises as long as there is no
material adverse effect to Lessee's use of the Premises. Lessor may at any time
place on or about the Premises or the Building any ordinary "For Sale" signs and
Lessor may at any time during the last 120 days of the term hereof place on or
about the Premises any ordinary "For Lease" signs.
32.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the same.
32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and safes
and in the case of emergency to enter the Premises by any reasonably appropriate
means, and any such entry shall not be deemed a foreseeable unlawful entry or
detainer of the Premises or an eviction. Lessee waives any charges for damages
or injuries or interference with Lessee's property or business in connection
therewith.
33. Auctions. Lessee shall not conduct, nor permit to be conducted either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises
16
<PAGE>
or Common Areas in violation of this paragraph shall constitute a material
default of this Lease.
34. Signs. Lessee shall not place any sign upon the Premises or the
Office Building Project without Lessor's prior written consent. Under no
circumstances shall Lessee place a sign on any roof of the Office Building
Project.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor shall not work merger,
and shall, at the option of Lessor, terminate all or any existing subtenancies
or may, at the option of Lessor, operate as an assignment to Lessor of any or
all of such subtenancies.
36. (Intentionally omitted)
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet
Possession. Upon Lessee paying the rent for the Premises and observing and
performing all of the Covenants, conditions and provisions of Lessee's part to
be observed and performed hereunder, Lessee shall have quite possession of the
Premises for the entire term hereof subject to a ____ of the provisions of this
Lease. The individuals executing this Lease on behalf of Lessor represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Office Building Project. 39.
Options.
39.1 Definition. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option of right of first refusal to lease in
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor; (3) the right or option to
purchase the Premises or the Office Building Project, or the right of first
refusal to purchase the Premises or the Office Building Project or the right of
first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor or the right of first offer to
purchase other property of Lessor.
39.2 Options Personal. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of
this Lease. The Options, if any, herein granted to lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple options to
extend or renew this Lease a later option cannot be exercised unless the prior
option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in
said notice of default is cured, or (ii) during the period of time commencing on
the day after a monetary obligation to Lessor is due from Lessee and unpaid
(without any necessity for notice thereof to Lessee) and continuing until the
obligation is paid, or (iii) in the event that Lessor has given to Lessee three
or more notices of default under paragraph 13.1(c), or paragraph 13.1(d),
whether or not the defaults are cured, during the 12 month period of time
immediately prior to the time that Lessee attempts to exercise the subject
Option, (iv) if Lessee has committed any non-curable breach. Including without
limitation those described in paragraph 13.1(b), or is otherwise in default of
any of the terms, covenants or conditions of this Lease.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1(d) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessor gives to Lessee three or more notices of default under paragraph
13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if
Lessee has committed any non-curable breach, including without limitation
17
<PAGE>
those described in paragraph 13.1(b), or is otherwise in default of any of the
terms, covenants and conditions of this Lease.
40. Security Measures--Lessor's Reservations.
40.1 Lessee hereby acknowledges that Lessor shall provide guard service or
other security measures for the benefit of the Premises or the Office Building
Project. The cost thereof shall be included within the definition of Operating
Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office Building
Project or building in which the Premises are located upon not less than 90 days
prior written notice;
(b) To, at Lessee's expense, provide and install Building standard
graphics on the door of the Premises and such portions of the Common Areas as
Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any business
as long as such exclusive does not conflict with any rights expressly given
herein;
(d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas;
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the Building
or the Office Building Project or their name(s) in connection with Lessee's
business;
(b) Suffer or permit anyone, except in emergency, to go upon the roof
of the Building.
41. Easements.
41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable, and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
42. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
43. Authority. If Lessee is a corporation, individual or general or limited
partnership, Lessee or Lessor and an individual executing this Lease on behalf
of such entity represents and warrants that such individual is authorized to
execute and deliver this Lease on behalf of said entity. If Lessee is a
corporation, trust or partnership, Lessee shall, within thirty (30) days after
execution of this Lease, deliver to the other party evidence of such authority
satisfactory to the other party.
44. Conflict. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the typewritten or handwritten provisions, if any, shall be
controlled by the typewritten or handwritten provisions.
45. No Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
46. Intentionally Omitted.
47. Multiple Parties. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or lessee,
respectively.
48. Work Letter. This Lease is supplemented by that certain Work Letter of even
date executed by Lessor and Lessee, attached hereto as Exhibit C.
49. Attachments. Attached hereto are the following documents which constitute a
part of this Lease:
EXHIBIT A: FLOOR PLAN
EXHIBIT B: RULES AND REGULATIONS
EXHIBIT C: SPACE PLAN AND SPECIFICATIONS
18
<PAGE>
EXHIBIT D: Signage
Addendum
19
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND BE EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF
THIS LESE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND
TAX CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
ENCINO TERRACE CENTER POSITIVE RESPONSE TELEVISION, INC.,
a Delaware corporation
By: /s/ W.G. Wells By: /s/ Val Levy
--------------------------- ----------------------------------
W. G. Wells Val Levy
its President its Director
DIRECT AMERICA CORPORATION,
a Delaware corporation
By: /s/ Gary Quint
--------------------------------
Gary Quint
its Vice President & General Manager
20
<PAGE>
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
Dated:
---------------------------------------------
BY and
between:
---------------------------------------------------------------
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in good
faith judges to be a threat to the safety, reputation, or property of the Office
Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or interfere
with other lessees or persons having business within the Office Building
Project.
4. Lessee shall not keep animals or birds within the Office Building Project,
and shall not bring bicycles, motorcycles or other vehicles into areas not
designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Lessee shall not altar any lock or install new or additional locks or bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet rooms,
plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of the
premises of Office Building Project.
9. Lessee shall not suffer or permit any thing in or around the Premises or
Building that causes excessive vibration or floor loading in any part of the
Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or out of
the Building only with the Lessor's knowledge and consent, and subject to such
reasonable limitations, techniques and timing, as may be designated by Lessor.
Lessee shall be responsible for any damage to the Office Building Project
arising from any such activity.
11. Lessee shall not employ any service or contractor for services or work to be
performed in the Building, except as approved by Lessor.
12. Lessor reserves the right to close and lock the Building on Saturdays and
legal holidays, and on other days between the hours of _____ p.m. and _____ a.m.
of the following day. If Lessee uses the Premises during such periods, Lessee
shall be responsible for securely locking any doors it may have opened for
entry.
13. Lessee shall return all keys at the termination of its tenancy and shall be
responsible for the cost of replacing any keys that are lost.
14. No window coverings, shades or awnings shall be installed or used by Lessee.
15. No Lessee, employee or invites shall go upon the roof of the Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or
cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
17. Lessee shall not use any method of heating or air conditioning other than as
provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines upon the
Premises without Lessor's written consent.
19. The Premises shall not be used for lodging or manufacturing, cooking or food
preparation.
1
<PAGE>
20. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or regulations,
and/or as to any particular Lessee, and any such waiver shall not constitute a
waiver or any other rule or regulation or any subsequent application thereof to
such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rues and regulations
as it may from time to time deem necessary for the appropriate operation and
safety of the Office Building Project and its occupants. Lessee agrees to abide
by these and such rules and regulations.
24. Lessee shall not place any furniture or equipment on any terrace that does
not conform to Lessor's furniture or equipment standards.
25. Lessee shall not offer any lottery tickets for public sale on the Premises
or in the Building.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer than full
size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles
other than Permitted Size Vehicles are herein referred to as "Oversized
Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee's employees, suppliers, shippers, customers or invitees to
be loaded, unloaded, or parked in areas other than those designated by Lessor
for such activities.
3. Parking stickers or identification devices shall be the property of Lessor
and be returned to Lessor by the holder thereof upon termination of the holder's
parking privileges. Lessee will pay such replacement charge as is reasonably
established by Lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking spaces from
floor to floor, within one floor, and/or to reasonably adjacent offsite
location(s), and to reasonably allocate them between compact and standard size
spaces, as long as the same complies with applicable laws, ordinances and
regulations.
6. Users of the parking area will obey all posted signs and park only in the
areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is required
to park and lock his own vehicle. Lessor will not be responsible for any damage
to vehicles, injury to persons or loss of property, all of which risks are
assumed by the party using the parking area.
8. Validation, if established, will be permissible only by such method or
methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the parking
structure or Common Areas is prohibited.
10. Lessee shall be responsible for seeing that all of its employees, agents and
invitees comply with the applicable parking rules, regulations, laws and
agreements.
11. Lessor reserves the right to modify these rules and/or adopt such other
reasonable and non-discriminatory rules and regulations as it may deem necessary
for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a license only
and no bailment is intended or shall be created hereby.
2
<PAGE>
GUARANTY AGREEMENT
THIS AGREEMENT is made on the date signed below between Encino Terrace Center
("ETC") and National Media Corporation, a Delaware Corporation herein called
"Guarantor."
RECITALS
A. Positive Response Television, Inc. and Direct America Corp. ("Lessee")
is, or is about to become, the Lessee of certain premises in the County of Los
Angeles, State of California (the "Property"), located at 15821 Ventura blvd.,
Encino, California.
B. Lessee has sought a lease from ETC, to be evidenced by a written lease
(the "Lease").
C. Guarantor, at the solicitation of Lessee, requests that ETC execute the
Lease. ETC is willing to make the Lease on the condition that Guarantor execute
this Guaranty Agreement.
AGREEMENT
Therefore, in consideration of the above and of the making of the Lease by ETC,
Guarantor unconditionally guarantees and promises to pay ETC or order, in lawful
money of the United States, any and all indebtedness of Lessee to ETC evidenced
by or growing out of, o in any way connected with the Lease. Guarantor further
unconditionally guarantees and promises ETC to perform all agreements to be
performed by Lessee under the Lease, and any other agreement executed by Lessee
to ETC pertaining to or additionally securing the Lease. Guarantor further
agrees as follows:
1. The obligations of Guarantor hereunder are independent of the
obligations of Lessee, and a separate action or actions may be brought and
prosecuted against Guarantor, whether action is brought against lessee or
whether Lessee by joined in any such action or actions.
2. In giving ETC this Guaranty, Guarantor is not concerned with Lessee's
financial condition or with the condition of title of or the value of the
Leasehold and waives any right that ETC disclose any information it may now have
or hereafter acquire concerning Lessee's character, credit, or financial
condition or any information affecting or concerning the condition of title of
the Property or the value of the Lease. Guarantor assumes the responsibility for
being and keeping informed of the financial condition of Lessee and of all
circumstances bearing upon the risk of nonpayment or non-performance of the
Lease hereunder. If Lessee is a corporation or a partnership or a trust, ETC
need not inquire into the power of Lessee or the authority of its officers,
directors, partners, trustees or agents acting or purporting to act on its
behalf and the Lease granted in reliance upon the purported exercise of such
power or authority is hereby guaranteed. Guarantor waives any and all notices of
any type whatsoever, whether relating to any act or condition of ETC, or Lessee
or of others, or relating in any other way to the subject matter of this
Guaranty.
3. ETC is authorized at any time, without notice or demand and in such
manner, upon such terms and for such time as it deems fit to alter, accelerate,
extend or change the time or manner for the payment or performance of the Lease
or any part thereof; or to release, substitute or add assignee, subtenants or
guarantors; or to add, exchange, release, substitute or waive any security; and
no action by ETC shall affect Guarantor's liability hereunder in any manner.
4. Until the Lease has been paid and performed in full, Guarantor shall not
have any right of subrogation. Guarantor waives any benefit of and any right to
participate in security, and authorized and empowers ETC, at its sole
discretion, to exercise any right or remedy which it may have including, but not
limited to, unlawful detainer, exercise of rights, or taking a possession or an
assignment in lieu of unlawful detainer as to the Leasehold and as to any other
security interest in real or personal property which ETC may hold for the Lease,
and Guarantor shall be liable for any deficiency existing after the exercise of
any such remedy, even though rights which Guarantor may have against other s
might be destroyed or diminished by the exercise of such remedy.
1
<PAGE>
5. Any indebtedness of Lessee now or hereafter owing to Guarantor is hereby
subordinated to the Lease. Guarantor shall not accept any payment of or on
account of any such indebtedness at any time while any part of the Lease is in
default and unpaid. At the request of ETC, Lessee shall pay ETC all or any part
of any such indebtedness and any amount so paid to ETC at its request shall be
applied to the Lease obligation. Payment on any indebtedness of Lessee to
Guarantor received in violation of any of the provisions of this agreement shall
be deemed to have been received by Guarantor as trustee for ETC and shall be
paid over to ETC immediately. Notwithstanding these provision, Guarantor
reserves the right to collect and accept payment of salary for personal services
which Guarantor may become entitled to receive from Lessee so long as Lessee is
not then in default.
6. Guarantor's liability shall continue notwithstanding the incapacity,
lack of authority, death or disability of, or revocation hereof, by any others.
The failure by ETC to file or enforce a claim against the estate (either in
administration, bankruptcy or other proceedings) of any others shall not release
Guarantor from liability hereunder. Guarantor shall not be released from
liability hereunder if recovery from Lessee or from any other guarantor is or
hereafter becomes barred by any statute of limitations or if such liability is
or becomes otherwise unenforceable. Guarantor agrees that this Guaranty shall be
reinstated if and to the extent that for any reason any payment by or on behalf
of Lessee is rescinded or must be otherwise restored by ETC whether as a result
of any proceedings in bankruptcy or reorganization or otherwise.
7. Guarantor waives any right to require ETC (a) to proceed against Lessee
or any other person or entity; (b) to proceed against or exhaust any security
held from Lessee; (c) to foreclose on the Property; (d) to pursue any other
remedy. Guarantor further waives (a) any right to participate in any security
now or hereafter held by ETC; (b) the right of subrogation against Lessee; (c)
any defense based upon Sections 580 and 726 of the Code of Civil Procedure of
the State of California, or either of them; (d) any defense based upon, or
involving the assertion of, the invalidity or unenforceability, in whole or in
part, of the Lease, or any security or the lack of legal capacity of any party
thereto or the nonexistence or cessation of the liability of any party thereon;
(e) all presentments, demands for performance and notices of nonperformance,
notices of dishonor, and of the existence, creation or incurring of new or
additional indebtedness.
8. ETC may apply any payment or recovery from or for the benefit of Lessee
to any obligation of Lessee as it deems fit and in such order of priority as it
deems fit, whether or not such obligation relates to the Lease or is secured or
is due at the time.
9. Any married person who sighs this Guaranty hereby agrees that recourse
may be had against his or her separate property for all obligations under this
Guaranty. If this Guaranty be signed by more than one person, form or
corporation, then all obligations thereof hereunder shall be joint and several.
10. As used herein, the term "Lessee" means and includes the Lessee of the
lease agreement, and all successors and assignees thereof, and all present and
subsequent owners of the Leasehold. This Guaranty shall inure to the benefit of
and bind ETC, its successors and assigns, including the assignees of the Lease,
and Guarantor's heirs, executors, administrators, successors and assigns.
11. No delay or failure on the part of ETC in exercising any right,
privilege or remedy hereunder shall operate as waiver of such or any other
right, privilege or remedy, and no waiver whatsoever shall be valid unless in
writing, signed by ETC, and then only to the extent set forth therein.
12. All rights, powers and remedies of ETC hereunder shall be cumulative
and not alternative and shall be in addition to all rights, powers and remedies
given by law.
13. All words used herein in the singular shall be deemed to have been used
in the plural when the context and construction so require.
14. Guarantor agrees without demand to pay and reimburse ETC for all costs.
attorneys' fees (whether or not for the services of salaried employees in the
regular employ of ETC) and other expenses which it expends or incurs in the
collection of the Lease or in the enforcement of this Guaranty or the Lease
agreement.
2
<PAGE>
First Addendum
This First Addendum is made as of December 9, 1996 to the Lease dated November
26, 1996 by and between Encino Terrace Center, as Lessor, and Positive Response
Television, Inc. and Direct America Corporation, as Lessees, for a portion of
the Building located at 15821 Ventura Boulevard, Encino, California as follows:
Section 1.8: Insert "$43,346.60"
Section 1.9: Insert "0"
Section 1.10: Insert "5.877%"
Section 2.2: Insert "70"
LESSOR LESSEE
ENCINO TERRACE CENTER POSITIVE RESPONSE TELEVISION, INC.
A DELAWARE CORPORATION
By: /s/ Mike Levey
--------------------------------
DIRECTAMERICA CORPORATION,
A DELAWARE CORPORATION
By: /s/ Gary Quint
--------------------------------
ACCEPTED AND AGREED BY GUARANTOR
NATIONAL MEDIA CORPORATION
By: /s/ Brian Sisko
--------------------------------
Brian Sisko, Vice President
Corporate Development
<PAGE>
Addendum
This Addendum to the Lease dated November 26, 1996 by and between Encino Terrace
Center, as Lessor, and Positive Response Television, Inc. and Direct America
Corporation, as Lessee, for a portion of the Building located at 15821 Ventura
Boulevard, Encino, California, shall be attached and made a part thereto. To the
extent of any conflicts between the Lease and the Addendum, the Addendum shall
control.
1.4 Use.
Lessee's use shall include those activities related to the conduct of
Lessee's direct television and radio business including, but not
limited to, telemarketing, video editing and production and radio
broadcasting. In no event shall the Lessee use the Premises or any part
thereof for auctions, religious activities, dating services,
liquidation sales, warehousing, manufacturing, day care centers,
schools, public lectures, retail sales (other than direct marketing) or
public invitees without the express prior written consent of Lessor.
1.6.1 Base Rent (cont'd)
Notwithstanding the provisions of Paragraph 1.6 hereof, the monthly
Base Rent payable hereunder shall be adjusted as follows:
Months 1- 30: $43,346.60 per month ($1.87 per rentable square foot per
month)
Months 31- 60: $45,896.40 per month ($1.98 per rentable square foot
per month)
Months 61- 90: $50,532.40 per month ($2.18 per rentable square foot
per month)
Months 91-126: $55,168.40 per month ($2.38 per rentable square foot
per month)
2.2.3 Vehicle Parking (cont'd)
Notwithstanding the provisions of the Lease to the contrary: all of
Lessee's cars shall be parked in unreserved parking areas as designated
by Lessor, at an initial monthly rental of $70.00 per car, plus
applicable parking taxes. Up to ten (10) of the cars provided for in
Paragraph 2.2 of the Lease may, at Lessee's option, park in single
reserved parking spaces in locations designated by Lessor, at a monthly
rental of $120.00 per car, plus applicable parking taxes. Increases to
the initial parking rates, exclusive of city taxes, shall be capped at
five percent (5%) per annum.
There are no garage attendants or supervision during non-Building
hours.
3.2 Possession Tendered (cont'd)
The definition of "Tender of Possession" shall also include (iv) Lessor
has obtained a Final Inspection for Tenant Improvements on the
Premises. The ten (IO) day notice specified in 3.2.1 shall apply to
this item.
3.2.3 Failure to Deliver. Notwithstanding anything to the contrary contained
in this Section 3.2, in the event Lessor does not deliver possession of
the Premises to Lessee on or before the scheduled Commencement Date as
may be extended, Lessee shall be entitled to one day's free rent for
each day after the Commencement Date that the Premises are not
delivered to Lessee until Tender of Possession. Such free rent shall
commence after the date possession of the Premises is tendered to
Lessee.
4.2(f) Operating Expense Increases (cont'd)
It is agreed that any cost allocable to the items specified below shall
be excluded from Additional Rent and Operating Expenses:
<PAGE>
(a) the cost of correcting structural defects (latent or otherwise) in
the design, construction or equipping of the Building or in the
Building equipment;
(b) salaries or other employee benefits of officers and executives of
Lessor, above the grade of building or property manager;
(c) the cost of any items for which Lessor is reimbursed by insurance
or otherwise;
(d) the cost of any repairs, alterations, additions, changes,
replacements and other items which under sound accounting principles
are properly classified as capital expenditures or which are made in
order to prepare for a new lessee's occupancy;
(e) interest on debt or amortization payments on any mortgage and
rental under any ground lease or other underlying lease;
(f) any real estate brokerage commissions or other costs incurred in
procuring other lessees;
(g) any costs or expenses arising from Lessor's repair, cleanup,
remediation, or detoxification of Hazardous Materials in, on, or about
the Premises, the Building, or the Common Areas, for which Lessor is
responsible by law or pursuant to the terms of this Lease;
(h) repairs and construction work for specific tenants;
(i) legal fees for tenant disputes;
(j) brokers commissions; and
(k) repairs, alterations, replacements, or additions to the Building
(other than the Premises) relating to compliance with any governmental
laws, codes, orders or regulations.
4.2(h) Operating Expenses (cont'd)
Lessor shall use reasonable efforts to reduce operating expenses to the
minimum which is reasonably possible, commensurate with the standards
of operation and maintenance provided for in this Lease and of similar
A buildings in the immediate vicinity. All estimates of Operating
Expenses shall be determined in good faith.
4.2(i) Audit.
Lessee shall have the right upon request and at reasonable times, to
examine and copy Lessor's books and records relating to items referred
to in this Section 4 and Lessee may recover any overcharges of
Operating Expenses.
6.2(c) Compliance with Law (cont'd)
Lessor represents that, to the best of its actual knowledge: 1) Lessor
has received no notice of violation of environmental law from any
applicable governmental authority, and 2) the Building contains no
asbestos insulation or fireproofing. Lessor shall comply with all
statutes, orders and rules now in effect or which may hereafter come
into effect in the future including, but not limited to, the Americans
With Disabilities Act, the Clean Air Act and all environmental laws.
7.1 Lessor's Obligations.
<PAGE>
Lessor shall be responsible for the repair and replacement of all
plumbing, lighting, air conditioning, heating systems, mechanical
systems, electrical systems, the Common Areas and all structural
components of the Office Building Project. Lessor shall maintain the
Building in a condition comparable to other first class A office
buildings in the immediate vicinity.
7.3 Alterations and Additions (cont'd)
Lessee shall have the right to remove all Tenant's telephone and data
systems, computer systems and audio and video equipment from the
Premises, providing that the Premises are restored to prior condition.
8.7 and
8.8 Indemnity and Exemption of Lessor from Liability (cont'd)
Lessee's indemnity pursuant to Paragraph 8.7 and Lessor's exemption
from liability pursuant to Paragraph 8.8 shall not apply to damage or
injury caused by Lessor's negligence or willful misconduct or
emissions.
9. Premises Building Total Destruction; Office Building Project Total
Destruction.
Subject to the provisions of paragraphs 9.4 and 9.5, if at any time
during the term of this Lease there is damage, whether or not it is an
insured loss, which falls into the classifications of either (i)
Premises Building Total Destruction, or (ii) Office Building Project
Total Destruction, then Lessee may, at Lessee's option, terminate this
lease by giving written notice to Lessor within thirty (30) days after
the date of the occurrence of such damage, in which case this Lease
shall terminate as of the occurrence of such damage.
10.3 Real Property Taxes.
Real property taxes shall also not include transfer taxes or penalties
or interest caused by the failure to pay taxes.
11.1 Services Provided by Lessor.
Lessor shall also provide maintenance of all Common Areas including
cleaning, landscaping and illumination; extermination and pest control;
and freight elevators and passenger elevators service.
11.3(a) Hours of Service (cont'd)
Notwithstanding the provisions of Paragraph 11.3 to the contrary,
Lessee shall have access to the Building, the Premises, elevator
service and the Building parking structure 24 hours per day, 365 days
per year, subject to Lessor's security measures for the Building.
Lessee's access shall not require Lessor to station garage attendants
in the Building or the Building garage 24 hours per day. Heating,
ventilating and air conditioning shall be provided 7:00 a.m. to
7:00 p.m. Monday through Friday, and 9:00 a.m. to 1:00 p.m. Saturdays,
holidays excepted. HVAC services furnished after these hours will be
charges to Lessee at Lessor's actual cost, which cost shall not exceed,
$45.00 per hour for the first twelve (12) months of the Lease Term.
Lessee's use of separate HVAC package unit(s) for Lessee's phone/data
room or other rooms within the Premises shall be separately metered and
billed directly to Lessee.
11.5(a) Interruption of Services (cont'd)
3
<PAGE>
In the event that any utilities or services to be furnished by Lessor
to the Premises are interrupted, disrupted, or terminated due to the
gross negligence or willful misconduct of Lessor, or due to Lessor's
failure to pay for such services or utilities and thereby prevents the
normal conduct of Lessee's business at the Premises, then the base rent
and any other amounts owing as rent hereunder shall abate, based upon
the portion or portions of the Premises so affected by the
interruption, disruption, or termination until normal business at the
Premises may be resumed.
13.4 Late Charges (cont'd)
Notwithstanding anything to the contrary contained in Section 13.4, if
Lessee pays any amounts due under this Lease within twelve days after
such amount shall be due, Lessee shall not be required to pay to Lessor
a late charge of more than $500.00.
23. Notices (cont'd)
Notwithstanding the provisions of Paragraph 23 hereof, it is hereby
agreed that all notices to Lessee shall include a copy to: National
Media Corporation, 11th Floor, 1818 Market Street, Philadelphia,
Pennsylvania 19103, Attention: Controller.
32.1 Lessor's Access (cont'd)
Except in the case of an emergency, Lessor shall provide prior
reasonable notice to Lessee of Lessor's intent to enter the Premises.
34.1 Signage (cont'd)
Notwithstanding the provisions of Paragraph 34 hereof, Lessee, at
Lessee's sole cost and expense, shall have the right to install one
sign in the Building's sign monument, as shown in Exhibit "D"
reflecting the names of Lessee and/or Guarantor. All such signage shall
be in accordance with Building signage regulations and the signage
specifications shown on Exhibit "D", and subject to all applicable
governmental regulations. Lessee shall not have the right to change
said signage without Lessor's prior written approval.
50. Lessee Improvements.
Lessor shall provide a total allowance of up to $692,852.00 ($34.00 per
usable square foot initially leased by Lessee), ( hereinafter
"Improvement Allowance"), based upon 20,378 usable square feet, for any
and all Lessee improvement costs, including, but not limited to, space
planning, design and architectural fees, a Lessor supervision and
coordination fee, construction drawings, mechanical and electrical
engineering, permits and other fees, plan check and construction of
Lessee's real property improvements in the Premises. The Improvement
Allowance shall not be utilized for personal property improvement items
(i.e. furniture, removable fixtures, computers, phone systems and
related equipment, and cabling). All costs to complete Lessee's
Improvements (as set forth in the lump sum construction contract) in
excess of said Improvement Allowance and all costs incurred by Lessor
as a result of Lessee's additions or modifications to said mutually
approved construction drawings shall be paid by Lessee to Lessor after
completion of such Lessee Improvements within fifteen (15) calendar
days of Lessor's written notice.
Except for this Paragraph 50 and the Improvement Allowance provided
herein, and the provisions provided for in Paragraph 6, and Paragraph
7.1 or otherwise specifically set forth in the Lease, Lessor shall have
no obligation whatsoever to modify, construct, or otherwise alter the
Premises or the Office Building Project for Lessee's occupancy.
4
<PAGE>
Lessee shall have the right to enhance the tiled floor in the elevator
lobby on the western portion of 5th floor of the Building, subject to
Lessor's prior written approval. The cost of such enhancement may be
deducted from the Improvement Allowance by the Lessor.
Lessor shall utilize the Lessor's Building standard ceiling grid,
lights, hardware, locksets, doors and window coverings for the
Premises. Attached as Exhibit "C" is a preliminary space plan and
specifications, prepared by Lessor's architect for the improvements to
Lessee's Premises, which shall be mutually approved by Lessee and
Lessor prior to the commencement of construction drawings ("Lessee's
Improvements"), which approval shall not be unreasonably withheld.
Construction documents shall be completed by Chelsea Design. Lessee
shall approve a final space plan for the Premises by December 10, 1996.
Lessor shall promptly deliver to Lessee working drawings and
specifications for the interior finishes to the Premises. Lessee shall
notify Lessor of any required changes to such working drawings within
five (5) calendar days following Lessee's receipt of same and, if
applicable, Lessor shall cause its architect and engineers to make such
changes and deliver the revised final working drawings to Lessee for
its approval within five (5) calendar days of Lessor's receipt of
notice of such required changes. Lessee shall provide approval of the
revised working drawings within two (2) business days of its receipt.
Upon Lessee's approval of the final working drawings, Lessor shall
instruct its approved mechanical and electrical engineers to commence
engineering for Lessee's Improvements. Upon completion of engineering,
Lessor shall submit the completed set of plans to the list of approved
general contractors for the Building.
Lessee's space plans and working drawings shall not conflict with the
building codes for the City of Los Angeles, or with any other
applicable governmental law or regulation, or with applicable insurance
regulations. All space plans and working drawings shall be in a form
satisfactory to appropriate governmental authorities responsible for
issuing permits and licenses required for construction.
Lessee hereby designates Brooks E. Pickering as its representative with
respect to the construction of the Lessee Improvements, to act on
behalf of and in the name of Lessee and may make all decisions and give
all approvals required of Lessee with respect to such construction. All
notices shall be sent to Brooks E. Pickering at the following address:
649 South Olive Street, Suite 400, Los Angeles, CA. 90014, by hand
delivery or overnight delivery. Lessor shall competitively bid the
project to at least three (3) qualified general contractors reasonably
approved by Lessee. Lessee may name a fourth (4th) general contractor,
subject to Lessor's prior reasonable approval of said general
contractor.
Lessor shall enter into a lump sum construction contract (subject to
Lessee's reasonable approval which approval or denial must be made
within 72 hours or such contract shall be deemed approved) with the
selected contractor for the installation of the Lessee Improvements in
accordance with the approved plans and working drawings. Lessor shall
supervise the completion of such work and shall use commercially
reasonable efforts to secure substantial completion of the work in
accordance with a work schedule, to be defined prior to finalizing the
constriction contract. There shall be a Lessor coordination,
supervision and observation fee of $13,857.00, which shall be deducted
from the Improvement Allowance defined above.
Lessor shall obtain permits for Lessee's Improvements, and shall
construct and complete Lessee's Improvements in the Premises in
accordance with the approved plans.
Lessor's approved mechanical contractors, Preferred Mechanical or
Westco Air Conditioning, and Lessor's approved electrical contractor
which is Hye-line Electric,
5
<PAGE>
may be utilized by the approved general contractor. Lessor agrees to
competitively bid the mechanical and electrical components of the
project to at least two other qualified mechanical and electrical
contractors reasonably approved by Lessee. All telephone line
installation shall be undertaken by Lessee at its expense. Such
expense shall not constitute Tenant Improvement. The general
contractor shall coordinate such installation with Lessee's Tenant
Improvements.
Prior to any contractor entering the Building, said contractors shall
provide Lessor with a waiver of any and all mechanic and lien rights,
and the contractors shall name Lessor as additional insured in its
liability policy (which shall be for not less than $1,000,000 per
occurrence) and in Lessee's workmen's compensation insurance policy.
All contractors shall schedule all work and deliveries, including the
use of loading docks and elevators, through Lessor (Lessor's contact is
Scott Flanagin (818-990-8410)), and shall comply with all construction
regulations established by Lessor for the Building. All contractor and
subcontractors shall use service elevators only, shall park and load in
designated areas only, and shall protect the Building, its Common
Areas, and Lessor's property (i.e. carpeting, walls, tile, finishes,
etc.). In no event shall any construction personnel use tenant
restrooms or enter tenant offices. The general contractor shall provide
construction toilets and dumpsters per Lessor's direction.
In the event: (i) of any Lessee requested additions, modifications, or
changes to said approved plans or drawings, (ii) Lessee's failure to
approve any item or perform any other obligation within the timelines
contained herein, (iii) Lessee's request to materials, finishes or
installations which are not part of the Building standards or which are
not readily available of which Lessor shall provide Lessee written
notice following Lessor's receipt of the approved working drawings,
cause a delay in the construction of Lessee's Improvements, then
notwithstanding the provisions of Paragraph 1.5 hereof, the
Commencement Date under this Lease shall be the date that Tender of
Possession should have occurred were it not for such Lessee caused
delay(s).
If Lessor shall be delayed at any time in the progress of the
construction of Lessee's Improvements or any portion thereof by
strikes, lockouts, fire, delay in transportation, unavoidable
casualties, severe weather conditions, unforeseeable government delays,
then the Commencement Date established in Paragraph 1.5 of the Lease
shall be extended by the period of such delay.
The term "Completion," as used in the Lease, is hereby defined to mean
the date the building department of the municipality having
jurisdiction of the Premises shall have made a final inspection of
Lessee's Improvements and Lessee's punchlist has been substantially
completed.
51. Directory Board and Identity.
Lessor, at Lessee's sole cost and expense, shall install Lessee's
and/or Guarantor's name on all ground floor Building directories.
Lessee shall have the right to two (2) Directory Board strips on the
west Directory Board for Lessee's and/or Guarantor's name only, two (2)
Directory Board strips on the east Directory Board for Lessee's and/or
Guarantor's name only, and ten (10) Directory Board strips on the
center Directory Board for Lessee's and/or Guarantor's name and
executives.
52. Jury Waiver.
The parties waive their respective right to trial by jury of any cause
whatsoever in any action, proceeding or hearing by either party against
the other on any subject whatsoever arising out of this lease, the use
or occupancy of the Premises, the relationship of the parties or for
any claim for injury or damage or enforcement of any remedy under any
law, statute, regulation, or otherwise, now or hereafter in effect.
6
<PAGE>
53. Extension Options.
In the event and on the condition that Lessee has timely performed each
and every, all and singular, of the terms, covenants and conditions on
Lessee's part to be performed, then Lessee shall have two (2) options
to renew this lease for a period of five (5) years ("Renewal Term")
each, exercisable by written notice to Lessor not less than nine (9)
months and not more than twelve (12) months prior to the expiration of
the initial Lease Term or subsequent Renewal Term. The initial Base
Rent for the Renewal Term shall be Ninety-Five percent (95%) of the
then prevailing market rental rates, as of the commencement of the
applicable Renewal Term, for comparable class buildings in the
Encino/Sherman Oaks area.
54. Expansion Space.
Lessee shall have the right of first refusal to lease Suites 567 and
550, hereinafter the "Option Space". Such right of first refusal shall
expire on December 31, 1997. The right of first refusal shall be
exercised under the following terms and conditions. In the event that a
bonafide written proposal or request for proposal has been received by
Lessor from a prospective third party tenant, for the lease of all or a
portion of the Option Space, Lessee shall have ten (IO) calendar days
from Lessor's written notice to Lessee of the receipt of the written
proposal or request for proposal for all or a portion of the Option
Space to either, (i) lease the premises described in Lessor's written
notice at the Option Space Terms described below, or (ii) not lease the
premises described in Lessor's written notice. In the event Lessee sd
notifies Lessor in writing of Lessee's intent to exercise said right of
first refusal, within said ten (10) calendar day period, then Lessor
and Lessee shall promptly thereafter execute an amendment to the Lease
incorporating the Option Space into the Lease, at the Option Space
Terms described below. All such Option Space leased by Lessee will be
coterminous with the initial Lease Term. In the event Lessee fails to
notify Lessor within said ten (10) calendar day period, then Lessor
shall have the right to proceed with the lease of said Option Space to
the prospective third party tenant.
Option Space Terms.
The Lease Term for the Option Space shall be coterminous with the
initial Premises.
The Base Rental Rate for the Option Space shall be the Base Rental
Rates stated in Addendum Paragraph 1.6 hereof, subject to the
expiration of the right of first refusal.
Lessee shall have the right to rent additional parking for the
Expansion Space per Paragraph 2.2 of the Lease, based upon the terms
and vehicle parking ratios contained in Paragraph 2.2 of the Lease and
Addendum Paragraph 2.2.3.
55. Load Factor.
The usable to rentable add-on factor for the Building is 1.1375.
56. Patios.
Lessee, at Lessee's sole cost and expense, may utilize the Building's
standard patio furniture manufactured by Brown Jordan. Umbrellas and
other objects shall not be placed upon the terraces.
57. Cable TV.
Lessor shall cooperate with Lessee in effectuating the installation of
cable TV in the
7
<PAGE>
Building, however, Lessor shall not be responsible for any costs
involved with the installation or maintenance of cable TV in the
Building.
58. Temporary Premises.
Suite 520, consisting of approximately 3,914 rentable square feet, on
the 5th floor of the Building shall be made available upon fall Lease
execution. The Temporary Space shall be provided to Lessee on an
"as-is" basis. Lessee may, at Lessee's option, apply a portion of the
Improvement Allowance towards the costs of stripping the wallcovering
and repainting the walls in Suite 520. Base Rent for said Temporary
Space shall be $1.75 per rentable square foot per month, full service
gross, prorated for any partial month.
59. Ground Floor Option Space.
Lessee shall have the option to lease Suite 165 consisting of 3,530
rentable square feet, located on the First Floor of the Building (the
"Suite 165") for (i) a term commencing on January 1, 1998 and expiring
on the Fifth (5th) anniversary of the Commencement Date (the "Initial
Space Term"); and (ii) a Tenn of an addition Five (5) years (the
"Second Space Term"). The option for the Initial Space Term must be
exercised by written notice by Lessee to Lessor on or prior to 5:00
P.M. Pacific Standard Time on October 31, 1997. The Option for the
Second Space Term must be executed in writing no later than Ninety (90)
days prior to the expiration of the Initial Space Term. The Base Rent
for Suite 165 during the Initial Space Term shall be $5,295.00 per
month (based upon 3,530 rentable square feet.) The Base Rent for the
Second Space Term shall be Ninety-Five (95%) percent of the then
prevailing market rental rates for similar space in comparable class
buildings in the Encino/Sherman Oaks area.
8
<PAGE>
December 4, 1996
Mr. Brooks Pickering
NATIONAL MEDIA CORP.
c/o FPM Group
649 S. Olive St., Suite 400
Los Angeles, CA 90014
RE: National Media Temporary Space
Dear Brooks:
You have brought to my attention National Media's desire to occupy as Temporary
Space Suite 530, consisting of approximately 4,231 rentable square feet on the
5th floor of the building, rather than Suite 520 as specified in Paragraph 58 of
the lease.
Encino Terrace Center is agreeable to this change under the same terms and
conditions as outlined in the lease. The monthly rental rate shall be
$7,404.25/month.
This letter shall also confirm the agreement which was made at the time of lease
execution (via coin toss) whereby National Media will be allowed to occupy the
Temporary Space as early as December 7, 1996, yet the rental charges will begin
on December 15, 1996.
Sincerely,
ENCINO TERRACE CENTER
By: /s/ Scott H. Flanagin
-----------------------------
Scott H. Flanagin
Manager of Operations
SHF/md
cc: Brian Sisko
Gary Quint
Val Levy
<PAGE>
SECOND LEASE AMENDMENT
DATED FOR REFERENCE PURPOSES ONLY, JANUARY 28,1997
Reference is made to that certain lease dated November 26, 1996 and the First
Addendum dated December 9, 1996 between Encino Terrace Center ("Lessor") and
Positive Response Television, Inc. and Direct America Corporation ("Lessee") for
Suite Number 570 in the building located at 15821 Ventura Boulevard, Los
Angeles, California.
It is hereby agreed that all terms and conditions of the Lease shall remain in
full force and effect except for the following:
1) Addendum Paragraph 58 (Temporary Premises) shall be amended by adding
the following terms:
"On February 15, 1997, Lessor shall make available that portion of
Suite 275, outlined in attached Exhibit 1 consisting of approximately
6,673 rentable square feet, on the 2nd floor of the building. Lessee
will be allowed to move from current Temporary Space (Suite 530) to new
Temporary Space (portion of Suite 275) and shall thereafter not be
responsible for payment of any rent or other amount pertaining to the
initial temporary space. The new Temporary Space shall be provided on
an "as-is" basis. Base Rent for said new Temporary Space shall be $1.75
per rentable square foot per month, full service gross, prorated for
any partial month. Any tenant improvements to said Temporary Space must
be submitted in writing to and approved by building management."
Agreed and Accepted: Agreed and Accepted
ENCINO TERRACE CENTER ("Lessor") POSITIVE RESPONSE TELEVISION, INC.,
A DELAWARE CORPORATION
By: /s/ Scott Flanagin, Vice President By: /s/ Val Levy
---------------------------------- -------------------------------
Scott Flanagin, Vice President
Dated: 3/5/97 Dated: 2/10/97
---------------------------------- -------------------------------
DIRECTAMERICA CORPORATION,
A DELAWARE CORPORATION
By: /s/ Gary Quint
-------------------------------
Dated: /2/10/97
-------------------------------
Agreed and Accepted by Guarantor:
NATIONAL MEDIA CORPORATION
By: /s/ Brian J. Sisko
-------------------------------
Dated: 2/10/97
-------------------------------
<PAGE>
Exhibit 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
----------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
1998 1997 1996
--------------- --------------- ----------------
Basic
Average common shares outstanding 24,904 21,905 15,411
--------------- --------------- ----------------
--------------- --------------- ----------------
Net (loss) income $(56,769) $(45,691) $16,579
Adjustments to net (loss) income:
Deemed dividend on convertible preferred stock (643) -- --
--------------- --------------- ----------------
Adjusted net (loss) income $(57,412) $(45,691) $16,579
--------------- --------------- ----------------
--------------- --------------- ----------------
Per share (loss) earnings:
Net (loss) income $(2.31) $(2.09) $ 1.08
--------------- --------------- ----------------
--------------- --------------- ----------------
Diluted
Average common shares outstanding 24,904 21,905 15,411
Assumed conversion of preferred stock 0 0 2,248
Net effect of common stock equivalents (1) 0 0 5,015
--------------- --------------- ----------------
Total shares 24,904 21,905 22,674
--------------- --------------- ----------------
--------------- --------------- ----------------
Net (loss) income $(56,769) $(45,691) $16,579
Adjustments to net (loss) income:
Deemed dividend on convertible preferred stock (643) -- --
--------------- --------------- ----------------
Adjusted net (loss) income $(57,412) $(45,691) $16,579
--------------- --------------- ----------------
--------------- --------------- ----------------
Per share (loss) earnings:
Net (loss) income (1) $(2.31) $(2.09) $ .73
--------------- --------------- ----------------
--------------- --------------- ----------------
</TABLE>
- -------------------
(1) Common stock equivalents include the effect of the exercise of dilutive
stock options and warrants using the Treasury Stock Method.
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Dignity Prestige SDN BHD, a Malaysia corporation
2. DirectAmerica Corporation, a Delaware corporation
3. Multi-Media Distribution Center, Inc., a Delaware corporation
4. Nancy Langston & Associates, Inc., a Delaware corporation
5. National Media Holdings, Inc., a Delaware corporation
6. National Media Marketing Corporation, a Delaware corporation
7. National Media Media Corp., a Delaware corporation
8. NPA Realty Corp., a New York corporation
9. Positive Response Media, Inc., a California corporation
10. Positive Response Seminars, Inc., a California corporation
11. Positive Response Telemarketing, Inc., a California corporation
12. Positive Response Television, Inc., a Delaware corporation
13. PRDISC, Inc., a California corporation
14. Prestige Marketing Limited, a New Zealand corporation
15. Quantum Asia, a Hong Kong joint venture
16. Quantum Far East Ltd., a New Zealand corporation
17. Quantum International Japan Company Ltd., a Japanese corporation
18. Quantum International Limited, a United Kingdom corporation
19. Quantum Marketing International, Inc., a Delaware corporation
20. Quantum Marketing Mexico S.A. de C.V., a Mexico corporation
21. Quantum North America, Inc., a Delaware corporation
22. Quantum Polska Sp. Z.o.o., a Poland corporation
23. Quantum Productions AG, a Switzerland corporation
24. Suzanne Paul Holdings Pty Limited, an Australian corporation
25. Suzanne Paul (Australia) Pty Limited, an Australian corporation
26. Telemall Shopping Pty Ltd., an Australian corporation
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-06007, Form S-8 No. 333-08323, Form S-3 No. 33-53252, Form
S-3 No. 33-34303, Form S-3 No. 33-35301, Form S-3 No. 33-41916, Form S-3 No.
33-82618, Form S-3 No. 33-63841, Form S-8 No. 33-34304, Form S-8 No. 33,
60969, Form S-8 No. 63537, Form S-3 No. 333-36637, Form S-3 No. 333-48205 and
Form S-3 No. 333-48217) of National Media Corporation and the related
prospectuses of our report dated June 29, 1998 with respect to the
consolidated financial statements and schedule of National Media Corporation
included in this Annual Report (Form 10-K) for the year ended March 31, 1998.
Ernst & Young LLP
Philadelphia, Pennsylvania
July 7, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000070412
<NAME> NATIONAL MEDIA
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 17,915
<SECURITIES> 0
<RECEIVABLES> 42,725
<ALLOWANCES> (5,440)
<INVENTORY> 21,228
<CURRENT-ASSETS> 92,926
<PP&E> 12,338
<DEPRECIATION> 4,107
<TOTAL-ASSETS> 143,091
<CURRENT-LIABILITIES> 83,484
<BONDS> 0
0
1
<COMMON> 263
<OTHER-SE> 54,063
<TOTAL-LIABILITY-AND-EQUITY> 143,091
<SALES> 278,474
<TOTAL-REVENUES> 278,474
<CGS> 259,442
<TOTAL-COSTS> 331,086
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,457
<INCOME-PRETAX> (56,069)
<INCOME-TAX> 700
<INCOME-CONTINUING> (56,769)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56,769)
<EPS-PRIMARY> (2.31)
<EPS-DILUTED> (2.31)
</TABLE>
