-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WvXngbz3QB6mMaPb/ZFBjIBrngnp1oO1KCGZXw+m2ckhIQBx1t4/2BPEGpY49quA Cri5/40FB17NNrRmAdc0vg== 0001047469-98-006134.txt : 19980218 0001047469-98-006134.hdr.sgml : 19980218 ACCESSION NUMBER: 0001047469-98-006134 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL MEDIA CORP CENTRAL INDEX KEY: 0000070412 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 132658741 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06715 FILM NUMBER: 98539671 BUSINESS ADDRESS: STREET 1: ELEVEN PENN CTR STE 1100 STREET 2: 1835 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2159884600 MAIL ADDRESS: STREET 1: ELEVEN PENN CENTER SUITE 1100 STREET 2: 1835 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL PARAGON CORP DATE OF NAME CHANGE: 19870827 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ________________. Commission file number 1-6715 NATIONAL MEDIA CORPORATION ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-2658741 - ----------------------------- ------------------- (State or Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Eleven Penn Center 1835 Market Street, Suite 1100 Philadelphia, PA 19103 -------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (215) 988-4600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / There were 25,325,487 issued and outstanding shares of the registrant's common stock, par value $.01 per share, at January 31, 1998. In addition, there were 887,229 shares of treasury stock as of such date. NATIONAL MEDIA CORPORATION AND SUBSIDIARIES INDEX
PAGE ---- Facing Sheet............................................................................................... 1 Index...................................................................................................... 2 Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets at December 31, 1997 and March 31, 1997........................ 3 Condensed Consolidated Statements of Operations Three months ended December 31, 1997 and 1996........ 4 Condensed Consolidated Statements of Operations Nine months ended December 31, 1997 and 1996......... 5 Condensed Consolidated Statements of Cash Flows Nine months ended December 31, 1997 and 1996......... 6 Notes to Condensed Consolidated Financial Statements................................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 14 Part II. Other Information Item 1. Legal Proceedings............................................................................... 22 Item 6. Exhibits and Reports on Form 8-K................................................................ 22 Signatures.............................................................................................. 23
-2- Part I. Financial Information ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) NATIONAL MEDIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except number of shares and per share amounts)
DECEMBER 31, MARCH 31, 1997 1997 ------------ ---------------- (UNAUDITED) (SEE NOTE BELOW) ASSETS ------- Current assets: Cash and cash equivalents....................................................... $ 11,834 $ 4,058 Accounts receivable, net........................................................ 28,412 40,179 Inventories, net................................................................ 24,836 30,919 Prepaid media................................................................... 4,130 3,563 Prepaid show production......................................................... 5,504 6,765 Deferred costs.................................................................. 5,638 3,318 Prepaid expenses and other current assets....................................... 1,736 2,505 Deferred income taxes........................................................... 2,571 2,591 ------------ -------- Total current assets.......................................................... 84,661 93,898 Property and equipment, net....................................................... 12,925 14,182 Excess of cost over net assets of acquired businesses and other intangible assets, net............................................................................. 50,874 50,732 Other assets...................................................................... 2,530 6,820 ------------ -------- Total assets.................................................................. $ 150,990 $ 165,632 ------------ -------- ------------ -------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable................................................................ $ 17,657 $ 21,810 Accrued expenses................................................................ 24,650 30,830 Deferred revenue................................................................ 1,561 686 Income taxes payable............................................................ -- 552 Deferred income taxes........................................................... 2,351 2,351 Current portion of long-term debt and capital lease obligations................. 23,433 17,901 ------------ -------- Total current liabilities..................................................... 69,652 74,130 Long-term debt and capital lease obligations...................................... 2,529 959 Deferred income taxes............................................................. 240 240 Other liabilities................................................................. 3,764 1,743 Shareholders' equity: Preferred stock, $.01 par value; authorized 10,000,000 shares; issued 86,250 and 95,000 shares Series B convertible preferred stock, respectively, and 20,000 and 0 shares Series C convertible preferred stock, respectively............... 1 1 Common stock, $.01 par value; authorized 75,000,000 shares; issued 26,212,716 and 24,752,792 shares, respectively............................................... 262 248 Additional paid-in capital...................................................... 155,643 127,764 Retained earnings............................................................... (64,615) (29,122) ------------ -------- 91,291 98,891 Treasury stock, 887,229 and 707,311 shares, respectively, at cost............... (6,802) (4,244) Notes receivable, officer....................................................... (139) -- Foreign currency translation adjustment......................................... (9,545) (6,087) ------------ -------- Total shareholders' equity.................................................... 74,805 88,560 Total liabilities and shareholders' equity.................................... $ 150,990 $ 165,632 ------------ -------- ------------ --------
Note: The balance sheet at March 31, 1997 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. -3- NATIONAL MEDIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except per share amounts)
THREE MONTHS ENDED DECEMBER 31, -------------------- 1997 1996 --------- --------- Revenues: Product sales............................................................................. $ 63,182 $ 68,979 Retail royalties.......................................................................... -- 354 Sales commissions and other revenues...................................................... 1,735 1,509 --------- --------- Net revenues.......................................................................... 64,917 70,842 Operating costs and expenses: Media purchases........................................................................... 20,532 28,112 Direct costs.............................................................................. 38,157 38,934 Selling, general and administrative....................................................... 13,475 11,486 Severance expense......................................................................... -- 1,100 Interest expense.......................................................................... 910 414 --------- --------- Total operating costs and expenses.................................................... 73,074 80,046 --------- --------- Loss before income taxes.................................................................. (8,157) (9,204) Income tax benefit........................................................................ (11) (3,220) --------- --------- Net loss................................................................................. $ (8,146) $ (5,984) --------- --------- --------- --------- Net loss per common share................................................................ $ (0.34) $ (0.26) --------- --------- --------- --------- Net loss per common share-assuming dilution............................................... $ (0.34) $ (0.26) --------- --------- --------- --------- Weighted average number of common shares outstanding: Basic.................................................................................... 25,324 23,268 --------- --------- --------- --------- Diluted.................................................................................. 25,324 23,268 --------- --------- --------- ---------
See notes to condensed consolidated financial statements. -4- NATIONAL MEDIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except per share amounts)
NINE MONTHS ENDED DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- Revenues: Product sales........................................................................... $ 182,959 $ 261,643 Retail royalties........................................................................ -- 14,119 Sales commissions and other revenues.................................................... 3,676 4,036 ---------- ---------- Net revenues.......................................................................... 186,635 279,798 Operating costs and expenses: Media purchases......................................................................... 61,332 99,748 Direct costs............................................................................ 116,272 137,732 Selling, general and administrative..................................................... 41,925 34,611 Severance expense....................................................................... -- 1,100 Interest expense........................................................................ 2,299 1,127 ---------- ---------- Total operating costs and expenses.................................................... 221,828 274,318 ---------- ---------- (Loss) income before income taxes......................................................... (35,193) 5,480 Income taxes.............................................................................. 300 1,920 ---------- ---------- Net (loss) income......................................................................... $ (35,493) $ 3,560 ---------- ---------- ---------- ---------- Net (loss) income per common share...................................................... $ (1.45) $ 0.17 ---------- ---------- ---------- ---------- Net (loss) income per common share-assuming dilution.................................... $ (1.45) $ 0.13 ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding: Basic................................................................................... 24,736 21,415 ---------- ---------- ---------- ---------- Diluted................................................................................. 24,736 27,043 ---------- ---------- ---------- ----------
See notes to condensed consolidated financial statements. -5- NATIONAL MEDIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
NINE MONTHS ENDED DECEMBER 31, --------------------- 1997 1996 ---------- --------- Cash flows from operating activities: Net (loss) income......................................................................... $ (35,493) $ 3,560 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization............................................................ 5,355 3,318 Amortization of loan discount............................................................ 286 379 Non-cash executive compensation.......................................................... 750 -- Changes in operating assets and liabilities, net of effects from acquisitions............ 4,298 (30,948) Other.................................................................................... 5,304 (4,438) ---------- --------- Net cash used in operating activities....................................................... (19,500) (28,129) Cash flows from investing activities: Additions to property and equipment....................................................... (1,805) (5,343) Cost of companies acquired, net of cash acquired.......................................... -- (615) Proceeds from sale of common stock investment............................................. 1,025 -- Investment in common stock................................................................ -- (1,250) ---------- --------- Net cash used in investing activities....................................................... (780) (7,208) Cash flows from financing activities: Net proceeds from issuance of preferred stock............................................. 19,708 -- Proceeds from borrowings.................................................................. 8,759 9,400 Payments on long-term debt, notes payable and capital lease obligations................... (1,857) (15,294) Exercise of stock options and warrants.................................................... 1,602 6,027 Net proceeds from issuance of common stock................................................ -- 28,869 ---------- --------- Net cash provided by financing activities................................................... 28,212 29,002 Effect of exchange rate changes on cash and cash equivalents................................ (156) (2,100) ---------- --------- Net increase (decrease) in cash and cash equivalents........................................ 7,776 (8,435) Cash and cash equivalents at beginning of period............................................ 4,058 18,405 ---------- --------- Cash and cash equivalents at end of period.................................................. $ 11,834 $ 9,970 ---------- --------- ---------- ---------
See notes to condensed consolidated financial statements. -6- NATIONAL MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) December 31, 1997 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934 (the "Exchange Act"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended December 31, 1997 are not necessarily indicative of the results that may be expected for the year ending March 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended March 31, 1997, as amended on Form 10-K/A. Certain prior-year amounts have been reclassified to conform to current presentation. 2. PER SHARE AMOUNTS In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share. Statement 128 replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. Earnings per share is computed on the basis of the weighted average number of shares outstanding during the periods presented. Earnings per share-assuming dilution is computed on the basis of the weighted average number of shares outstanding during the period plus the dilutive effect of stock options, warrants and preferred stock. 3. INCOME TAXES The Company recorded income tax expense of $300,000 for the nine months ended December 31, 1997 due to tax liabilities relating to its Asian and South Pacific operations. Income tax benefits on domestic and European losses have been fully reserved until realized. 4. CONTINGENT MATTERS NATIONAL MEDIA LITIGATION AB ROLLER PLUS PATENT LITIGATION On March 1, 1996, Precise Exercise Equipment ("Precise") filed suit in the United States District Court for the Central District of California against certain parties, including the Company, alleging patent infringement, unfair competition and other intellectual property claims. Such claims related to an alleged infringement of Precise's initial US patent for an exercise device. The suit claimed that a product marketed by the Company pursuant to a license granted by a third party violated Precise's initial US patent. The suit sought an injunction and treble damages. On July 16, 1997, the Company and certain of the other defendants to the action entered into a settlement 7 agreement with the plaintiffs. The Company recorded a charge of approximately $6.0 million in the fourth quarter of the fiscal year ended March 31, 1997 ("fiscal 1997") in connection with this matter. WWOR LITIGATION In March 1997, WWOR-TV filed a breach of contract action in the United States District Court for New Jersey against one of the Company's operating subsidiaries alleging that the subsidiary wrongfully terminated a contract for the purchase of media time, and seeking in excess of $1,000,000 in compensatory damages. The Company is contesting the action and believes it has meritorious defenses to the plaintiff's claims for damages. At this stage, the Company cannot predict the outcome of this matter; however, even if plaintiffs were to succeed on all of their claims, the Company does not believe that such result would have a material adverse impact on the Company's financial condition or results of operations. PARKIN In early October 1997, John Parkin, an on air personality appearing in certain of the Company's infomercials, brought an action for injunctive relief and unspecified damages in the United States District Court for the Eastern District of Pennsylvania, alleging principally breach of contract and intellectual property based claims. Following court hearings, plaintiff's claims for injunctive relief were dismissed. While at this stage the Company cannot predict the outcome of this matter, the Company believes that any resolution of this matter will not have a material adverse effect on the Company's results of operations. PRTV LITIGATION PRTV SHAREHOLDERS' CALIFORNIA CLASS ACTION On May 1, 1995, prior to the acquisition of Positive Response Television, Inc. ("PRTV") by the Company in May 1996, a purported class action suit was filed in the United States District Court for the Central District of California against PRTV and its principal executive officers alleging that PRTV made false and misleading statements in its public filings, press releases and other public statements with respect to its business and financial prospects. The suit was filed on behalf of all persons who purchased PRTV common stock during the period from January 4, 1995 to April 28, 1995. The suit sought unspecified compensatory damages and other equitable relief. On or about September 25, 1995, the plaintiffs filed a second amended complaint which added additional officers as defendants and attempted to set forth new facts to support plaintiff's entitlement to legal relief. The Company reached an agreement in principle to settle this action in fiscal 1997 which provides for the payment of $550,000 to the class, 66% of which has been paid by PRTV's insurance carrier. The Company recorded a charge of $187,000 during fiscal 1997 in connection with this matter. Such settlement is contingent upon final court approval. SUNTIGER In late March 1997, Suntiger, Inc., a distributor of sunglasses, filed suit against PRTV and certain other parties in the United States District Court for the Eastern District of Virginia alleging patent infringement. The Company has reached a settlement with the plaintiffs involving a going-forward business relationship that will have no material adverse impact upon the Company's financial condition or results of operations. REGULATORY MATTERS As a result of prior settlements with the Federal Trade Commission ("FTC"), the Company has agreed to two consent orders. Prior to the Company's May 1996 acquisition of PRTV, PRTV and its Chief Executive Officer, Michael S. Levey, also agreed to a consent order with the FTC. Among other things, such consent orders require the Company, PRTV and Mr. Levey to submit compliance reports to the FTC staff. The Company, PRTV and Mr. Levey submitted compliance reports as well as additional information requested by the FTC staff. In June 1996, the Company received a request from the FTC for additional information regarding two of the Company's infomercials in order to determine whether the Company is operating in compliance with the 8 consent orders referred to above. The Company responded to such request. The FTC later advised the Company that it believed the Company had violated one of the consent orders by allegedly failing to substantiate certain claims made in one of its infomercials which it no longer airs in the United States. The Company, which is now indemnified against any damages sustained as a result of any action taken by the FTC in connection with such infomercial, has provided information to the FTC to demonstrate substantiation. If the Company's substantiation is deemed to be insufficient by the FTC, the FTC has a variety of enforcement mechanisms available to it, including, but not limited to, monetary penalties. While no assurances can be given, the Company does not believe that, especially given the indemnification protection available to it, any remedies to which it may become subject will have a material adverse effect on the Company's results of operations or financial condition. The Company and PRTV have, pursuant to the terms of the above-referenced consent orders, notified the FTC of the proposed merger (the "Merger") with ValueVision International,, Inc. ("ValueVision"). The FTC may request additional information about the Merger. In addition, in Spring 1997, in accordance with applicable regulations, the Company notified the Consumer Product Safety Commission ("CPSC") of breakages which were occurring in its Fitness Strider product. The Company also notified the CPSC of its replacement of certain parts of the product with upgraded components. The CPSC reviewed the Company's testing results in order to assess the adequacy of the Company's upgraded components. The CPSC also undertook its own testing of the product and, in November 1997, informed the Company that the CPSC compliance staff had made a preliminary determination that the product and the upgraded components present a substantial product hazard, as defined under applicable law. The Company and the staff are discussing voluntary action to address the CPSC's concerns, including replacement of the affected components. At present, management of the Company does not anticipate that any action agreed upon, or action required by the CPSC, will have any material adverse impact on the Company's financial condition or results of operations. The Company has also been contacted by Australian consumer protection regulatory authorities regarding the safety and fitness of the Fitness Strider product. At this point, the Company cannot predict whether the outcome of these matters regarding the Fitness Strider will have a material adverse impact upon the Company's financial condition or results of operations. OTHER MATTERS The Company, in the normal course of business, is a party to litigation relating to trademark and copyright infringement, product liability, contract-related disputes, and other actions. It is the Company's policy to vigorously defend all such claims and enforce its rights in these areas. Except as disclosed herein, the Company does not believe any of these other miscellaneous actions, either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. 5. DEBT In June, 1996, the Company increased its revolving line of credit (the "Line") from $5,000,000 to $20,000,000. The Line was available pursuant to its terms until September 30, 1997. In September 1997, the Company and its principal lender (the "Bank") signed a Loan Modification Agreement (the "September Agreement"). The September Agreement limited the maximum outstanding amount of cash advances under the Line to $19,000,000 less the amount of permitted outstanding letters of credit; the maximum amount of outstanding standby letters of credit to an additional $475,000; the maximum amount of outstanding commercial letters of credit to $5,000,000 and the maximum amount of cash advances combined with the maximum amount of standby letters of credit, in the aggregate, to $19,475,000. In addition, the Line was extended until December 31, 1998, and the payment terms of the Company's $4.0 million Term Loan (the "Term Loan") were revised as follows: $50,000 per month on the first day of each month from December 1997 through March 1998; $800,000 on April 1, 1998; and $1,000,000 on each of December 1, 1998, 1999 and 2000. The September Agreement increased the interest rates on the Line from prime to prime plus 3%, and the rate on the Term Loan from prime plus 0.5% to prime plus 3%. Interest was payable at the rate of prime plus 1.5% on the first day of each month through May 31, 1998. The remaining 1.5% was to be accrued and repaid in seven equal installments starting June 1, 1998. As of and after June 1, 1998 interest was to be payable monthly at the 9 rate of prime plus 3.0%. The September Agreement provides for an interest rate increase of 1.0% during any period during which the Company fails to be in compliance with certain financial covenants, including tangible net worth and working capital minimums and other financial ratios. The Company is also required to pay a loan restructuring fee of $304,000, payable in equal installments over 16 months starting September 18, 1997, the date of the September Agreement. On a monthly basis, the Company must compute a borrowing base (as defined in the September Agreement) which must be greater than the outstanding amount of debt owed under the September Agreement, and submit certain financial information. In addition, the Company is subject to certain restrictions including payment of dividends, and must be in compliance with various financial covenants, including tangible net worth and working capital minimums and other financial ratios on a quarterly basis through December 31, 1997 and on a continuous monthly basis during the remaining term of the Line. At December 31, 1997, the Company was in compliance with these requirements. The Term Loan and the Line are secured by a lien on substantially all the assets of the Company except a lien on the assets pledged in connection with the ASB Bank credit facility and the subordination of lien on approximately $1.0 million of certain non-domestic assets pledged to Barclays Bank PLC. At December 31, 1997, the Company had outstanding cash advances of $18,600,000 and $875,000 in stand-by and commercial letters of credit under the Line. On January 5, 1998, the Company executed a further agreement with the Bank in connection with the execution of the Agreement and Plan of Reorganization and Merger (the "Merger Agreement") between the Company and ValueVision and V-L Holdings Corp. (discussed in note 9 below). This amendment changed the interest payment terms to the extent that the entire 3% above prime is payable on a monthly basis and the previous 1.5% accrued interest from September 18, 1997 to January 5, 1998 was due and paid immediately. In this most recent agreement, the Bank waived a "due on sale" clause otherwise applicable to the Line and accommodated certain other terms of the Merger Agreement, in consideration of a guaranty of the Loan by ValueVision upon consummation of the Merger and certain other concessions by the Company, including, granting the Bank a security interest in the assets of its Prestige Marketing Limited subsidiary (collectively with Prestige Marketing International Limited, "Prestige") upon the termination of the Company's credit facility with ASB Bank (discussed below). In connection with the September Agreement, the Company granted to the Bank warrants to acquire 125,000 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), at a price of $5.1875 per share, the market price of the Company's Common Stock as of the date of the grant. These warrants have a term of five years from the date of grant and contain standard antidilution provisions. The value accorded the warrants has been accounted for as a loan discount and is being amortized over the remaining term of the Line (15 months) and included in interest expense. In July 1997, the Bank notified the Company that the foreign currency line being provided by the Bank had been reduced to cover only the then current outstanding amount of the Company's forward contracts of $6.0 million. Pursuant to the Agreement, the Company and the Bank agreed that, thereafter, the Bank would not extend any new, or rollover any existing, forward contract under such facility, effectively terminating the facility on a rolloff basis. The Company had $1.5 million in outstanding forward contracts at December 31, 1997. The Company had no borrowings outstanding under its $1.0 million overdraft line with Barclays Bank PLC as of December 31, 1997. In July 1997, the Company obtained a credit facility from ASB Bank through Prestige consisting of a working capital facility (overdraft and letter of credit) of $1.0 million New Zealand dollars (approximately $0.6 million US dollars at December 31, 1997) and a short term loan of $4.3 million New Zealand dollars (approximately $2.5 million US dollars at December 31, 1997). At December 31, 1997, the Company had no amounts outstanding under the working capital facility and $4.3 million New Zealand dollars outstanding under the short term loan. The working capital facility is due on demand, bears interest at the ASB Bank Banking Business Rate (the "BBBR Rate"), plus 1% payable monthly, and expires on February 15, 1998. The short term loan bore interest at the BBBR Rate plus 2% and was paid in full pursuant to its terms on January 24, 1998. Under the credit facility, Prestige is subject to certain financial covenants including tangible net worth and working capital minimums and various financial ratios and the Company is limited in its ability to obtain future financing from Prestige. The Company is presently in discussions with ASB Bank to extend and increase the working capital facility. Such extension is subject to Bank approval. 10 The Company's remaining debt includes a note payable to Edmark Industries in the amount of $900,000 (original amount of $1,400,000) relating to the settlement of litigation which occurred in fiscal 1997. Payment terms are $50,000 per month, plus 8% interest. The remaining debt of approximately $700,000 relates to capital leases and two notes payable in connection with various prior year acquisitions. 6. EQUITY FINANCING On September 18, 1997, the Company sold to two institutional investors (the "Series C Investors") 20,000 shares of its Series C Convertible Preferred Stock, $.01 par value per share (the "Series C Preferred Stock"), with a face value of $1,000 per share, for an aggregate purchase price of $20.0 million. The Series C Preferred Stock has a four year term and is automatically converted into the Company's Common Stock at maturity, if not converted prior thereto. By its original terms, each share of Series C Preferred Stock is convertible at the holder's option into such number of shares of the Company's Common Stock, as is determined by dividing the face value ($1,000) of the Series C Preferred Stock (plus a 6% per annum premium accrued as of the conversion date) by (i) if the conversion occurs on or before March 17, 1998, a conversion price equal to $6.06 per share (subject to adjustment), or (ii) in the case of conversion after March 18, 1998, a conversion price equal to the lower of $6.06 per share or the lowest daily volume weighted average sale price during the five days immediately prior to such conversion. The $6.06 conversion price was based on 120% of the volume weighted average sales price on the date of the initial announcement of the transaction in which the Series C Preferred Stock was issued. If converted at December 31, 1997, the Series C Preferred Stock would have been convertible into approximately 3,300,330 shares of the Company's Common Stock. Depending on market conditions at the time of conversion, the number of shares issuable could prove to be significantly greater, based upon the then prevailing trading price of the Company's Common Stock. In connection with the execution of the Agreement related to the Series C Preferred Stock, the Company issued warrants (the "Series C Warrants") to purchase an aggregate of 989,413 shares of the Company's Common Stock to the Series C Investors. The Series C Warrants are exercisable until September 17, 2002 at an exercise price of $6.82 per share of the Company's Common Stock (subject to adjustment). The exercise price of $6.82 per share represents 135% of the volume weighted average sales price at the date of initial announcement of the transaction. The Series C Preferred Stock carries a 6% annual premium, payable in cash or the Company's Common Stock, at the Company's option, at the time of conversion. The premium is being recorded as a deemed dividend from the date of issuance to the date of conversion, solely for the purpose of calculating earnings per share. Except under limited circumstances, no holder of the Series C Preferred Stock and Series C Warrants is entitled to convert or exercise such securities to the extent that the shares to be received by such holder upon such conversion or exercise would cause such holder to beneficially own more than 4.9% of the Company's Common Stock. The Series C Preferred Stock carries no voting power except as otherwise provided by Delaware General Corporation Law. Its liquidation preference is equal to the face amount ($1,000 per share) plus any accrued premiums, and it ranks prior to the Company's Common Stock and Series A Junior Participating Preferred Stock and junior to the Company's Series B Convertible Preferred Stock. The Company has reserved 10.0 million shares of Common Stock for issuance in connection with the conversion of the Series C Preferred Stock and exercise of the Series C Warrants. See "Note 9-Subsequent Events" below concerning a subsequent transaction concerning the Series C investors. 7. ACQUISITION-POSITIVE RESPONSE TELEVISION, INC. The Company, in connection with its May 17, 1996 acquisition of PRTV, issued 211,146 shares of the Company's Common Stock, valued at $2,982,000, into an escrow account for possible future delivery to PRTV shareholders based on the realization of certain assets by September 30, 1997. The Company included these escrow shares in the original $25.9 million purchase price of PRTV. Based on the Company's calculation, PRTV shareholders will receive 29,197 shares from the escrow account. The Company has accounted for the remaining unissued escrow shares of 181,949 as treasury stock and accordingly recorded an adjustment to increase treasury stock and decrease 11 goodwill by $2,570,000 during the three months ended December 31, 1997. The actual shares will be delivered upon approval of the PRTV shareholder representative. 8. EXECUTIVE COMPENSATION Subsequent to December 31, 1997, the Company and its Chief Executive Officer executed an agreement concerning the terms of his continuing employment. The agreement reaffirms the issuance to the executive of options to acquire 700,000 shares of the Company's Common Stock with an initial exercise price of $4.75. In addition, the agreement provides that, upon the occurrence of certain triggering events (such as a sale or merger of the Company, or significant investment), including the consummation of the Merger Agreement, the executive can realize a reduction of up to an aggregate of approximately $3.0 million in the exercise price of his options. The current quarter includes a $750,000 non-cash charge in connection with this matter. The charge is being amortized from November 13, 1997, the date of the agreement in principal, through June 30, 1998. The ultimate aggregate non-cash charge, if any, will be determined based upon whether a triggering event occurs by June 30, 1998, the expiration date for that provision of the agreement, and the market price or sale price of the Company's Common Stock upon the occurrence of the triggering event. 9. SUBSEQUENT EVENTS On January 5, 1998, the Company announced that it had entered into the Merger Agreement, dated as of January 5, 1998, by and among the Company, ValueVision and V-L Holdings Corp. ("Newco"), a newly-formed Delaware corporation to be renamed upon consummation of the Merger Agreement. ValueVision is a Minnesota-based integrated electronic and print media direct marketing company which operates the third largest telelvision home shopping network in the United States. Following consummation of the transactions contemplated by the Merger Agreement, the Company and ValueVision will be wholly-owned subsidiaries of Newco (the "Merger"). Subject to the satisfaction of certain conditions set forth below, the Merger Agreement is expected to be consummated in the second calendar quarter of 1998. The Merger will be accounted for as a purchase for accounting and financial reporting purposes with ValueVision as the acquiror. As a result, approximately $80 million in goodwill will have to be recognized by Newco and amortized over a 25-year period. Newco will apply to have its common stock listed for trading on a national exchange or market. Pursuant to the terms of the Merger Agreement, each outstanding share of the Company's Common Stock will be converted into the right to receive one share of common stock in Newco and each outstanding share of common stock, $.01 par value per share ("ValueVision Common Stock") of ValueVision, will be converted into the right to receive 1.19 shares of common stock in Newco. Following consummation of the Merger, Newco will have an aggregate of approximately 57 million shares of common stock issued and outstanding (based upon 25.3 million shares of the Company's Common Stock and 26.8 million shares of ValueVision Common Stock issued and outstanding as of January 19, 1998). The Company's stockholders will own approximately 45% of the common stock of Newco after the Merger. ValueVision's shareholders will own approximately 55% of the common stock of Newco after the Merger. Concurrently with the execution of the Merger Agreement, the Company entered into an agreement with the Series C Investors (the "Redemption and Consent Agreement") in which the Company agreed to exchange the Series C Preferred Stock for a to be newly created Series D Convertible Preferred Stock of the Company (the "Series D Preferred Stock") and redeem all of the Series D Preferred Stock for approximately $23.5 million upon consummation of the Merger. Pursuant to the terms of the Redemption and Consent Agreement, the Series C Investors agreed, among other things, not to request the Company to convert the Series C Preferred Stock or Series D Preferred Stock into Common Stock at a per share price below $6.06 prior to the earliest of (i) June 1, 1998 (which date may be extended until August 31, 1998 in certain circumstances set forth in the Redemption and Consent Agreement), (ii) the date upon which it is publicly announced that ValueVision is unwilling to proceed with the Merger on the terms set forth in the Merger Agreement, or (iii) the date upon which demand is made to the Company to repay the Loan (as defined below). In order to make the required amendments to the terms of the Series C Preferred Stock, the Company agreed to exchange the Series C Preferred Stock for a class of newly designated preferred stock, Series D Preferred Stock, which would contain 12 terms substantially similar to those set forth in the Series C Certificate of Designations, Preferences and Rights. As further consideration for executing the Redemption and Consent Agreement, the Company issued to the Series C Investors warrants to acquire 500,000 shares of the Company's Common Stock at an exercise price of $6.82 per share. Such warrants are exercisable at any time prior to January 5, 2003. Pursuant to the terms of the Merger Agreement, ValueVision extended to the Company a working capital loan (the "Loan") of up to $10.0 million to be utilized pending consummation of the Merger Agreement. $7.0 million was advanced under the Loan upon execution of the Merger Agreement. The Loan proceeds will be used by the Company for various purposes, including funding of inventory and media purchases. The Loan bears interest at prime rate plus 1.5% per annum and is due on the earlier of January 1, 1999 or upon termination of the Merger Agreement in certain circumstances. In the event the Company is unable to repay the Loan when due, ValueVision may elect to receive payment in shares of the Company's Common Stock at the then present market value. In consideration for providing the Loan, the Company issued to ValueVision warrants to acquire 250,000 shares of the Company's Common Stock with an exercise price per share equal to $2.74. The warrants are exercisable until the earlier of (i) January 5, 2003 and (ii) the occurrence of one of the following termination events: (x) the consummation of the Merger or (y) the termination by the Company of the Merger Agreement, if such termination results from a breach of a covenant by ValueVision or in the event ValueVision's shareholders do not approve the Merger Agreement; provided, however, that if, within 75 days after such termination event, the Company has not repaid the Loan in full or if during such 75 days, the Company defaults under its obligations pursuant to the Loan, no termination event will be deemed to have occurred and the warrants shall remain exercisable. The Company also granted registration rights in connection with the shares of the Company's Common Stock issuable in connection with the Loan and the warrants issued to ValueVision. The Company is currently in the process of valuing these warrants. The value accorded the warrants will be accounted for as a loan discount which will be amortized over the term of the loan and included in interest expense. Consummation of the Merger is subject to the satisfaction (or waiver) of a number of conditions, including, but not limited to: (i) approval by holders of a majority of the issued and outstanding shares of the Company's Common Stock and ValueVision Common Stock; (ii) redemption of the Company's Series D Stock for approximately $23.5 million; and (iii) the receipt of certain regulatory and other approvals. In the event of the termination of the Merger Agreement under certain circumstances, such as the proposal of an Alternative Transaction (as defined in the Merger Agreement), the Company is obligated to pay to ValueVision, or ValueVision is obligated to pay to the Company, a termination fee equal to $5.0 million. In addition, the Company has granted to ValueVision an option to purchase up to 19.9% (5,075,979 shares of the Company's Common Stock based upon the number of shares of the Company's Common Stock issued and outstanding on the date of execution of the Merger Agreement) of the Company's Common Stock at a per share cash purchase price of $3.4375. Similarly, ValueVision has granted to the Company an option to purchase up to 19.9% (5,579,119 shares of ValueVision Common Stock based upon the number of shares of ValueVision Common Stock issued and outstanding as of the date of execution of the Merger Agreement) of ValueVision's Common Stock at a per share cash purchase price of $3.875. Such options (each, a "Termination Option") are exercisable by the respective party, in whole or in part, at any time after the occurrence of an event which would entitle such party to the termination fee described above; provided, however, that neither party may exercise the Termination Option if such party is in material breach of any of its material representations, warranties, covenants or agreements contained in the Merger Agreement or in the Termination Option. Neither party may receive in excess of $7.5 million in connection with the receipt of the termination fee and the exercise of such party's Termination Option. CAUTIONARY STATEMENT FOR FORWARD--LOOKING STATEMENTS This Report contains "forward-looking" statements regarding potential future events and developments affecting the business of the Company. Such statements relate to, among other things, (i) the operations of the Company following consummation of the Merger; (ii) competition for customers for its products and services; (iii) the uncertainty of developing or obtaining rights to new products that will be accepted by the market and the timing of the introduction of new products into the market; (iv) the limited market life of the Company's products; and (v) other statements about the Company or the direct response industry. The Company's ability to predict results or the effect of any pending events, including the Merger, on the Company's operating results is inherently subject to various risks and uncertainties, including competition for products, customers and media access; the risks of doing business abroad; the uncertainty of developing or obtaining rights to new products that will be accepted by the market; the limited market life of the Company's products; and the effects of government regulations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following does not attempt to give effect to the consummation of the Merger or to the business or prospects of ValueVision. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is engaged in the direct marketing of consumer products, primarily through the use of infomercials. The Company continually attempts to diversify and expand its product offerings to generate increased revenues. The Company's diversification efforts are designed to reduce the risk associated with relying on a limited number of successful products for a disproportionate amount of its revenues. Such efforts include the expansion of its presence in the global marketplace, thereby creating new markets for its products and joining forces with strategic partners to increase its product base. As the Company enters new markets, it is able to air shows from its existing library, thus reducing its dependence on new products and new show productions. The Company takes advantage of the product awareness created by its infomercials by extending the sales life of its infomercial products through non-infomercial distribution channels, such as retail arrangements and by entering into agreements with manufacturers of consumer products in which the Company's strategic partners supply new products and retail distribution channels for product sales. RESULTS OF OPERATIONS The Company's operating results for the nine months ended December 31, 1996 included the operating results of certain of the Company's operating subsidiaries for only a portion of the period, as follows: Positive Response Television, Inc. ("PRTV") from May 17, 1996 (date of acquisition) to December 31, 1996 and Prestige Marketing Limited and Prestige Marketing International Limited (collectively, "Prestige") and Suzanne Paul Holdings Pty Limited and its operating subdivisions (collectively, "Suzanne Paul") from July 2, 1996 (date of acquisition) to December 31, 1996. The following table sets forth the operating data of the Company as a percentage of net revenues for the periods indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Statement of Operations Data: Net revenues................................................................... 100.0% 100.0% 100.0% 100.0% -14- Operating costs and expenses: Media purchases................................................................ 31.6% 39.7% 32.9% 35.7% Direct costs................................................................... 58.8% 55.0% 62.3% 49.2% Selling, general and administrative............................................ 20.8% 16.2% 22.5% 12.4% Severance expense.............................................................. -- 1.6% -- 0.4% Interest expense............................................................... 1.4% 0.6% 1.2% 0.4% --------- --------- --------- --------- Total operating costs and expenses........................................... 112.6% 113.1% 118.9% 98.1% (Loss) income before income taxes............................................... (12.6%) (13.1%) (18.9%) 1.9% Income taxes (benefit).......................................................... -- (4.5%) 0.2% 0.7% --------- --------- --------- --------- Net (loss) income............................................................... (12.6%) (8.6%) (19.1%) 1.2% --------- --------- --------- --------- --------- --------- --------- ---------
Three months ended December 31, 1997 compared to three months ended December 31, 1996 NET REVENUES Net revenues were $64.9 million for the three months ended December 31, 1997, as compared to $70.8 million for the three months ended December 31, 1996, a decrease of $5.9 million or 8.4%. The Company aired three new shows in the domestic marketplace in the quarter ended December 31, 1997. These shows did not have a significant impact on the revenues for the current year quarter due to the timing of their airings and the buildup of a backlog of orders created by timing issues related to manufacturing and sourcing for the related products. As of December 31, 1997, the Company's North American operation had a backlog of approximately $13.0 million in gross revenues due in part to these new shows as compared to a backlog of $10.5 million at December 31, 1996. The Company believes it has created a pipeline of new shows to support its domestic operations on an ongoing basis and to add to its library of shows. Domestic net revenues for the three months ended December 31, 1997 were $27.8 million as compared to $26.7 million for the three months ended December 31, 1996, an increase of $1.1 million or 4.1%. The revenues remained relatively flat as a result of the Company's inability to fully realize the benefits of the three new shows that tested and aired successfully during the current period. Due to timing issues related to manufacturing and sourcing, these shows did not contribute significantly to revenues until very late in the quarter ended December 31, 1997. Approximately 41.7% of net revenues for the three months ended December 31, 1997 were generated by sales of the Company's PVA 10X Mop product. International net revenues for the three months ended December 31, 1997 were $37.1 million as compared to $44.1 million for the three months ended December 31, 1996, a decrease of $7.0 million or 15.9%. The majority of this decrease was due to the approximate 52% decline in revenues earned in the Japanese marketplace, of which approximately 5% was due directly to currency devaluation. The Company believes that this decline was the result of increased competition from traditional programming and other infomercial competitors and the fact that additional productive airtime was not obtained. In addition, the entire Asian marketplace, including Japan, continued to experience the negative impact of the economic downturn being experienced throughout that region, which resulted in a significant decline in the consumer spending ability. The Company's South Pacific revenues and operating results were negatively impacted in the three months ended December 31, 1997 by the current poor economy, as well as, significant returns associated with its Fitness Strider product. In addition, revenues for the current three month period as compared to the prior year three month period declined approximately 13.7% directly as a result of currency devaluation. All of these factors are expected to have a continuing impact on fourth quarter revenues in these regions. OPERATING COSTS Total operating costs and expenses were $73.0 million for the three months ended December 31, 1997 as compared to $80.0 million for the three months ended December 31, 1996, a decrease of $7.0 million or 8.7%. This was -15- principally due to a lower advertising to sales ratio and was directly related to a 8.4% decline in revenues. MEDIA PURCHASES Media purchases were $20.5 million for the three months ended December 31, 1997 as compared to $28.1 million for the three months ended December 31, 1996, a decrease of $7.6 million or 27.0%. The ratio of media purchases to net revenues decreased from 39.7% for the three months ended December 31, 1996 to 31.6% for the three months ended December 31, 1997. This was attributable to a significant reduction in the domestic advertising to sales ratio primarily due to the successful airings of several new shows. This was partially offset by a slight increase in the international advertising to sales ratio. Recent trends indicate an increase in international media ratios due to increased competition and a trend towards minimum guarantee of media purchases. The Company recently was notified that the Eutelsal Hot Bird Satellite, on which it leases a 24 hour transponder, will launch in April 1998 at which time the Company will begin making monthly payments for the use of the transponder. While potentially providing the Company with expanded media coverage in Europe, if viewership and/or viewer response is not obtained at the desired levels and/or within the desired timeframe, the Company could experience an increase in its overall European advertising to sales ratio (taking into account the cost of the transponder lease and the cost of uplinking) starting in the first quarter of fiscal 1999. DIRECT COSTS Direct costs consist of the cost of materials, freight, infomercial production, commissions and royalties, order fulfillment, in-bound telemarketing, credit card authorization, warehousing and profit participation payments. Direct costs were $38.2 million for the three months ended December 31, 1997 as compared to $38.9 million for the three months ended December 31, 1996, a decrease of $0.7 million or 2.0%, primarily related to the decrease in net revenues. As a percentage of net revenues, direct costs were 58.8% for the three months ended December 31, 1997 and 55.0% for the three months ended December 31, 1996. A decline in domestic direct costs was more than offset by an increase in international direct costs. Domestically, the Company benefited primarily from a reduction in production and telemarketing expense. Internationally, the increase in direct costs was a result of higher product cost and lower sales volume (international revenues declined 15.9% from the comparable fiscal 1997 quarter). A significant contributing factor was the economic downturn, including the significant currency devaluation, experienced in the Far East and South Pacific rim countries. The Company was not able to adjust its prices to the extent or level required to offset the rapid deterioration in these countries' currencies. In addition, such poor economic conditions negatively impacted consumers' purchasing power in these regions, resulting in lower sales volume, and a higher negative impact from certain fixed and semi-fixed costs. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $13.5 million for the three months ended December 31, 1997 as compared to $11.5 million for the three months ended December 31, 1996, an increase of $2.0 million or 17.3%. The increase was primarily a result of higher professional fees, increased depreciation primarily associated with the Company's MIS system, higher occupancy expense, primarily due to the Company's new California office and costs associated with the reduction of the Company's presence in Russia. In addition, the current period includes non-cash compensation expense of $750,000 associated with options granted to an executive officer (See Note 8 to the financial statements). Selling, general and administrative expenses as a percentage of net revenues increased from 16.2% for the three months ended December 31, 1996 to 20.8% for the three months ended December 31, 1997 due to the aforementioned cost increases combined with the 8.4% decrease in net revenues. SEVERANCE During the three months ended December 31, 1996, the Company recorded a $1.1 million charge against earnings relating to severance expense associated with the restructuring of management. No such charge was recorded in the current quarter. INTEREST EXPENSE Interest expense was approximately $0.9 million for the three months ended December 31, 1997 compared to $.4 million for the three months ended December 31, 1996, an increase of $.5 million. This increase was primarily due to an increase in the Company's average outstanding indebtedness from approximately $7.4 million during the third quarter of fiscal 1997 to approximately $26.6 million during the third quarter of fiscal 1998, as well as the increased interest rate to prime plus 3% which took effect in connection with Company's Loan Modification Agreement -16- discussed elsewhere herein. INCOME TAXES The Company recorded a minimal income tax benefit for the three months ended December 31, 1997 resulting from a decrease in its Asian and South Pacific profits during the period. Income tax benefits have not been recorded during the current quarter on domestic and European losses. These benefits will be recorded when realized, reducing the effective tax rate on future domestic and European earnings. This compares to approximately $3.2 million of income tax benefit recorded for the third quarter of fiscal 1997 in order to reflect a 35.0% effective tax rate for the Company as a whole. NET INCOME The Company incurred a net loss of $8.1 million for the three months ended December 31, 1997, compared to a net loss of $6.0 million for the three months ended December 31, 1996. The current quarter reflected the negative impact of the economic downturn being experienced in the Far East and Pacific Rim countries on the Company's international revenues and margins. Nine months ended December 31, 1997 compared to nine months ended December 31, 1996 NET REVENUES Net revenues were $186.6 million for the nine months ended December 31, 1997, as compared to $279.8 million for the nine months ended December 31, 1996, a decrease of $93.2 million or 33.3%. Retail royalties were negligible for the nine months ended December 31, 1997 versus $14.1 million for the nine months ended December 31, 1996. The fiscal 1997 period royalties principally reflected the royalties generated from retail sales of the Ab Roller Plus product. Domestic net revenues for the nine months ended December 31, 1997 were $70.0 million as compared to $154.9 million for the nine months ended December 31, 1996, a decrease of $84.9 million or 54.8%. This decrease was due primarily to the Ab Roller Plus performing strongly in the nine months ended December 31, 1996 on television and in print and retail. The Ab Roller Plus accounted for approximately 61% of domestic net revenues for the nine months ended December 31, 1996. Approximately 49% of net revenues for the nine months ended December 31, 1997 were generated by sales of the Company's Great North American Slim Down (29.9%) and PVA 10X Mop (19.1%) products. The decrease in net revenues was also due to the Company's inability to roll out enough new successful shows during the period to match the success of the Company's Ab Roller Plus show during the same period in the prior fiscal year. The rollout of a number of shows was postponed due to show production delays, to timing issues related to product manufacturing and sourcing, and to the Company's tight cash position which affected, among other things, inventory purchasing and media acquisition. Current period domestic revenues were also unfavorably impacted by an increased return rate primarily due to a change in product mix. The Company started benefiting from the infusion of new shows beginning late in the second quarter of fiscal 1998. In addition, the Company has built a backlog of approximately $13.0 million in gross revenues at December 31, 1997 primarily as a result of the introduction of three new shows in the third quarter of fiscal 1998. International net revenues for the nine months ended December 31, 1997 were $116.6 million as compared to $124.9 million for the nine months ended December 31, 1996, a decrease of $8.3 million or 6.6%. The current year included nine months of revenues from the Prestige and Suzanne Paul acquisitions compared to approximately six months in the prior year; as well as a 2.3% increase in European net revenues due to expansion in Eastern Europe. These increases offset the approximate 49.4% decline in revenues generated in the Asian marketplace. This decline is a result of increased competition from traditional programming and other infomercial competitors and the fact that additional productive airtime was not obtained. In addition, the Company's Asian and South Pacific revenues were negatively impacted by the recent economic downturn in these regions, especially in the third quarter when these regions experienced significant currency devaluations. This downturn is expected to have a continuing adverse impact on these regions in the fourth fiscal quarter. -17- OPERATING COSTS Total operating costs and expenses were $221.8 million for the nine months ended December 31, 1997, as compared to $274.3 million for the nine months ended December 31, 1996, a decrease of $52.5 million or 19.1%, due to the 33.3% decline in revenue. MEDIA PURCHASES Media purchases were $61.3 million for the nine months ended December 31, 1997 as compared to $99.7 million for the nine months ended December 31, 1996, a decrease of $38.4 million or 38.5%. This decrease was directly related to the 33.3% decline in net revenues. The ratio of media purchases to net revenues improved slightly to 32.9% for the nine months ended December 31, 1997 as compared to 35.7% for the nine months ended December 31, 1996. This was due to the favorable impact of a higher percentages of revenues being earned in the international marketplace in which media rates are generally more favorable. The domestic ratio in the current nine months remained consistent with the prior year nine month ratio despite the prior year period benefiting from significant retail royalties. Retail royalties carry no direct media costs and therefore produce a more favorable ratio. The ability to maintain a consistent domestic advertising to sales ratio was mainly due to a significant improvement in the domestic advertising to sales ratio in the current quarter. DIRECT COSTS Direct costs were $116.2 million for the nine months ended December 31, 1997 as compared to $137.7 million for the nine months ended December 31, 1996, a decrease of $21.5 million or 15.6%, primarily related to the decrease in net revenues. As a percentage of net revenues, direct costs were 62.3% for the nine months ended December 31, 1997 and 49.2% for the nine months ended December 31, 1996. Direct costs as a percentage of net revenues increased in both the domestic and international marketplace. Domestically, the ratio was unfavorably impacted by the 54.8% decrease in net revenues. The lower volume, coupled with certain fixed costs associated with the Company's fulfillment operations and a significant increase in the domestic return rate due to product mix, negatively impacted the ratio. The nine months ended December 31, 1996 benefited from retail royalties ($0 for December 31, 1997 as compared to $14.1 million for December 31, 1996) which carry minimal direct costs. Internationally, the current economic downturn and currency devaluation in the Far East and South Pacific regions (especially in the three months ended December 31, 1997), a change in product mix, and increased show customization costs adversely affected the ratio. The currency devaluation, particularly in the three months ended December 31, 1997, resulted in higher product costs due to the Company's inability to increase pricing to a level to offset the full impact of the significant decline in currency. In Japan, fulfillment and warehousing costs increased as a percentage of revenues as a result of the lower sales volume and higher inventory levels, respectively. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $41.9 million for the nine months ended December 31, 1997 as compared to $34.6 million for the nine months ended December 31, 1996, an increase of $7.3 million or 21.1%. Approximately $2.4 million of the increase related to selling, general and administrative expenses associated with the operations of Prestige which was acquired in July of 1996 resulting in six months of expense in the nine month period of fiscal year 1997 compared to the nine months during the current fiscal period. In addition, the current period includes non-cash compensation expense of $750,000 associated with options granted to an executive officer as well as $2.3 million of goodwill amortization, as compared to only $1.7 million in the prior period. The increase is due to the current year containing a full nine months of expense compared to partial expense during the prior nine months period during which the Company purchased PRTV and Prestige. The remainder of the increase was primarily a result of higher professional fees, increased depreciation expense primarily associated with the Company's MIS system, and higher occupancy expense. Selling, general and administrative expenses as a percentage of net revenues increased from 12.4% for the nine months ended December 31, 1996 to 22.5% for the nine months ended December 31, 1997 due to the aforementioned cost increases, combined with the 33.3% decrease in net revenues. -18- SEVERANCE EXPENSE The nine months ended December 31, 1996 includes a $1.1 million charge to earnings related to severance expense associated with the restructuring of management. No such charge was recorded in the nine months ended December 31, 1997. INTEREST EXPENSE Interest expense was approximately $2.3 million for the nine months ended December 31, 1997 compared to $1.1 million for the nine months ended December 31, 1996, an increase of $1.2 million. This increase was due to an increase in the Company's average outstanding indebtedness from approximately $7.9 million during the nine months ended December 31, 1996 to approximately $25.3 million during the nine months ended December 31, 1997, and higher interest rates, primarily as a result of the Loan Modification Agreement in fiscal 1998 versus fiscal 1997. INCOME TAXES The Company recorded income tax expense of approximately $.3 million for the nine months ended December 31, 1997 resulting from tax liabilities generated on its Asian and South Pacific profits. Income tax benefits have not been recorded during the current period on domestic and European losses. These benefits will be recorded when realized, reducing the effective tax rate on future domestic and European earnings. This compares to approximately $1.9 million of income tax expense recorded for the nine months ended December 31, 1996, a 35.0% effective tax rate. NET INCOME The Company incurred a net loss of $35.5 million for the nine months ended December 31, 1997, compared to a net income of $3.6 million for the nine months ended December 31, 1996 primarily as a result of the 33.3% decrease in net revenues and higher direct costs and selling, general and administrative expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital was $15.0 million at December 31, 1997 compared to working capital of $19.8 million at March 31, 1997, a decrease of $4.8 million. The Company met its current period cash needs primarily through its cash flow from borrowings, liquidation of accounts receivable and inventory and an equity infusion of $20.0 million which occurred late in the second fiscal quarter. Operating activities for the nine months ended December 31, 1997 resulted in a use of cash of $19.5 million. The Company's cash flow from operations in the nine months ended December 31, 1997 was adversely affected by the net loss of approximately $35.5 million. Consolidated accounts receivable decreased by $11.8 million, or 29.3%, primarily due to the decrease in both domestic and Far East and South Pacific rim accounts receivables. This decrease was principally due to the 16.8% and 25.7% decreases in domestic and certain international (Far East and South Pacific rim) revenues, respectively, during the month of December 1997 as compared to the month of March 1997, and a significant reduction in the domestic installment receivables balance due to a greater percentage of the March 1997 quarter's revenues being earned from products sold under multi-pay arrangements. On September 18, 1997 the Company sold 20,000 shares of the Company's Series C Preferred Stock to two institutional investors (as more fully described in Note 6 to the financial statements), which included the issuance of warrants to acquire 989,413 shares of the Company's Common Stock. This transaction generated proceeds, net of offering costs, of approximately $19.7 million. At the present date, the Series C Preferred Stock would be convertible into 3,300,330 shares of the Company's Common Stock. The proceeds from this transaction are primarily being used for working capital purposes. In September 1997, the Company also executed the September Agreement (as more fully described in Note 5 to the -19- financial statements) with its principal lender for the extension of its principal credit facility through December 31, 1998. The Company's $20.0 million Line was thereby reduced to $19.475 million, with the maximum amount of cash advances outstanding under the Line limited to $19.0 million, and the maximum amount of outstanding letters of credit limited to $5.0 million. The interest rate on the Company's Line and Term Loan were increased from prime and prime plus .5%, respectively, to prime plus 3.0%. The payment of the Company's Term Loan was restructured on a basis more favorable to the Company as follows: $50,000 per month from December 1, 1997 to March 1, 1998; $800,000 on April 1, 1998; and $1.0 million on each of December 1, 1998, 1999 and 2000. The September Agreement also contains certain financial covenants including tangible net worth and working capital minimums and other financial ratios with which the Company must be in compliance on a quarterly basis through December 31, 1997 and on a continuous basis during the remainder of the term. Certain violations may trigger an increase in the interest rate of 1.0% and/or an event of default. As previous defaults under the old facility have been waived, $2.0 million of the $3.95 million Term Loan has been classified as long term debt at December 31, 1997. The Line and Term Loan are secured by a lien on substantially all the assets of the Company and its subsidiaries. Such lien on certain non-domestic assets of the Company is subordinated to a lien held by Barclays Bank PLC. The Company has an overdraft line of approximately $1.0 million with Barclays, which was unused at December 31, 1997. In July 1997, the Company obtained a credit facility from ASB Bank through its Prestige subsidiary consisting of a working capital facility (overdraft and letter of credit) of $1.0 million New Zealand dollars (approximately $0.6 million US dollars at December 31, 1997) and a short term loan of $4.3 million New Zealand dollars (approximately $2.5 million US dollars at December 31, 1997). The working capital facility is due on demand, bears interest at the ASB Bank Banking Business Rate (the "BBBR Rate") plus 1% payable monthly, and expires on February 15, 1998. The short term loan bore interest at the BBBR Rate plus 2% and was paid in full on January 24, 1998. Amounts outstanding under short term loan totaled $4.3 million New Zealand dollars at December 31, 1997. The working capital facility was not utilized at December 31, 1997. Under the credit facility, Prestige is subject to certain financial covenants including tangible net worth and working capital minimums and various financial ratios and the Company is limited in its ability to obtain future financing from Prestige. The Company is currently in negotiations with ASB to extend and increase the working capital facility; however there can be no assurance that the Company will be successful in its efforts. On January 5, 1998, in connection with the execution of the Merger Agreement, the Company received a $7.0 million advance against a $10.0 million loan extended by ValueVision (as more fully discussed in Note 9). This loan will be used primarily for working capital purposes. The loan bears interest at prime plus 1.5 % and is due on the earlier of January 1, 1999 or upon termination of the Merger Agreement in certain circumstances. In the event that the Company is unable to repay the loan when due, ValueVision may elect to receive payment in shares of the Company's Common Stock at the then present market value. In consideration for providing this loan, the Company issued to ValueVision warrants to purchase 250,000 of the Company's Common Stock with an exercise price per share equal to $2.74. The Company's international revenues are subject to foreign exchange risk. To the extent that the Company incurs local currency expenses that are based on locally denominated sales volume (order fulfillment and media costs), this exposure is reduced significantly. The Company monitors exchange rate movements and can protect short term cash flows through the use of options and/or forward contracts when appropriate. Until July 1997, the Company maintained a foreign exchange line with the Bank for such purposes. Pursuant to the September Agreement described in Note 5 to the financial statements, the Company and the Bank agreed to terminate the foreign exchange line on a run off basis. The results of the Company's foreign hedge did not have a material impact in the current nine month period. The Company's future ability to hedge may be negatively impacted as a result of its current tight cash position. All forward contracts must now be cash collateralized. In the long term, the Company has the ability to change prices to a certain extent in a timely manner in order to react to major currency fluctuations; thus reducing a portion of the risk associated with local currency movements. The Company has and is currently further revising its pricing in the Far East and South Pacific rim in an effort to offset some of the recent significant currency devaluation. However, the Company still expects that the significant currency devaluation and the economic downturn being experienced in these regions will have a negative impact on the Company's operating results and cash flows in its fourth fiscal quarter. Currently, the Company's two major foreign currencies are the German deutsch mark and the Japanese yen, each of which has been subject to large recent fluctuations; however, its certain other currencies -20- (Australia, New Zealand, Indonesia, Malaysia, Philippines) have recently experienced more significant devaluations. During July 1996, the Company acquired two direct response marketing companies, Prestige and Suzanne Paul. The aggregate consideration paid by the Company for Prestige and Suzanne Paul was approximately $21.7 million in a combination of cash, a note payable and Common Stock. Included in the Prestige and Suzanne Paul acquisition agreements were provisions concerning the future payment of additional purchase price, up to an aggregate of an additional $5.0 million in the Company's Common Stock, valued at then present market prices, in 1997 and 1998, contingent upon the levels of net income achieved in those years by Prestige and Suzanne Paul. During the nine months ended December 31, 1997, the Company amended the acquisition agreements accelerating the $5.0 million contingent purchase price amount and revising certain other provisions of the agreements. In connection with such amendments, the Company issued 909,091 shares of the Company's Common Stock to the former principals of these entities based on the closing price of the Company's Common Stock on the New York Stock Exchange on July 16, 1997. This additional amount represents an increase in the purchase price for the Prestige and Suzanne Paul entities and is included in goodwill. The decrease in other assets at December 31, 1997 was a result of payment of $3.0 million from an escrow account in connection with the Ab Roller settlement (as more fully described in Note 4 to the financial statements) and the sale of the Company's investment in a public company for approximately $1.0 million. On January 5, 1998, the Company announced that it had entered into a Merger Agreement by and among the Company, ValueVision and V-L Holdings Corp. ("Newco") (as more fully described in Note 9). The Merger will be accounted for as a purchase for accounting and financial reporting purposes with ValueVision being the acquiror. Each share of the Company's Common Stock will be converted into one share of Newco common stock while each share of ValueVision's common stock will be converted into 1.19 shares of Newco common stock. Newco is expected to have an aggregate of approximately 57 million shares of common stock issued and outstanding following the consummation of the Merger. Concurrently with the Merger Agreement, the Company entered into an agreement with the Series C Investors to exchange the Series C Preferred Stock for a newly created Series D Preferred Stock and to redeem all of the Series D Preferred Stock for approximately $23.5 million in connection with the Merger. The Company's cash position continues to be pressured as a result of the losses incurred in the first nine months of fiscal 1998 and the continued downturn in Asian revenues. While benefiting from the proceeds of the recent preferred stock sale, the extension of its credit facility with its principal lender, the Loan from ValueVision, its strategy which focuses on cost reductions, the restructuring of PRTV and the re-negotiation of a number of its media contracts to terms that are more favorable to the Company, the Company's ability to continue as a going concern is dependent on its ability to implement certain plans and actions designed to rebuild its business, including the continued introduction of successful new shows, to return the Company to profitability, to improve its liquidity and to realize the benefits from its recently announced Merger with ValueVision. No assurance can be given that any of these actions will be successful. -21- PART II. Other Information ITEM 1. LEGAL PROCEEDINGS The information contained in Note 4 (Contingent Matters) to the Condensed Consolidated Financial Statements in Part I of this report is incorporated herein by reference. Certain of the matters referred to in Note 4 (Contingent Matters) have been the subject of disclosure in prior reports on Form 10-Q and/or Form 10-K. OTHER MATTERS The Company, in the normal course of business, is a party to litigation relating to trademark and copyright infringement, product liability, contract-related disputes and other actions. It is the Company's policy to vigorously defend all such claims and to enforce its rights in these areas. Except as disclosed herein, the Company does not believe any of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: 10.1 Amendment No. 2 to Employment Agreement dated April 28, 1997 between the Company and Constantinos I. Costalas, dated as of January 5, 1998. 10.2 Amendment No. 1 to Employment Agreement dated February 27, 1997 between the Company and Frederick S. Hammer, dated as of January 5, 1998. 10.3 Amended and Restated Employment Agreement between the Company and Robert N. Verratti dated as of January 28, 1998. 10.4 Amended and Restated Non-Incentive Stock Option Agreement between the Company and Robert N. Verratt dated as of January 28, 1998. 11.1 Statement Re: Computation of Per Share Earnings. 27.1 FINANCIAL DATA SCHEDULE. (b) The Company did not file any Current Reports on Form 8-K during the three month period ended December 31, 1997. -22- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL MEDIA CORPORATION REGISTRANT Date: February 13, 1998 /s/ Robert N. Verratti ---------------------------------------- Robert N. Verratti CHIEF EXECUTIVE OFFICER AND DIRECTOR /s/ John J. Sullivan ----------------------------------------- John J. Sullivan SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
EXHIBIT INDEX Exhibit No. - ----------- 10.1 Amendment No. 2 to Employment Agreement dated April 28, 1997 between the Company and Constantinos I. Costalas, dated as of January 5, 1998. 10.2 Amendment No. 1 to Employment Agreement dated February 27, 1997 between the Company and Frederick S. Hammer, dated as of January 5, 1998. 10.3 Amended and Restated Employment Agreement between the Company and Robert N. Verratti, dated as of January 28, 1998. 10.4 Amended and Restated Non-Incentive Stock Option Agreement between the Company and Robert N. Verratti, dated as of January 28, 1998. 11.1 Statement Re: Computation of Per Share Earnings. 27.1 Financial Data Schedule. EX-10.1 2 EXHIBIT-10.1 EXHIBIT 10.1 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT This Amendment No. 2 (the "Amendment") to the Employment Agreement dated April 28, 1997 (as previously amended by Amendment No. 1 to the Employment Agreement dated as of July 23, 1997, the "Employment Agreement") between NATIONAL MEDIA CORPORATION, a Delaware corporation (the "Company") and CONSTANTINOS I. COSTALAS (the "Executive") is hereby entered into as of January 5, 1998 by and between the Company, Executive and V-L Holdings Corp. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Employment Agreement. WHEREAS, in connection with the proposed merger between the Company and ValueVision International, Inc., a Minnesota corporation ("ValueVision"), pursuant to the Agreement and Plan of Reorganization and Merger dated as of the date hereof by and among the Company, ValueVision and V-L Holdings Corp. ("V-L Holdings") (the "Merger Agreement"), the Company and the Executive wish to modify certain provision of the Employment Agreement (which modifications will be null and void if the transactions contemplated by the Merger Agreement are not consummated); WHEREAS, the Company, the Executive and V-L Holdings agree that the terms of this Amendment shall only become effective immediately preceding consummation of the transactions contemplated by the Merger Agreement; and WHEREAS, V-L Holdings is a party to this Amendment only for purposes of paragraph 8 below. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto agree to the following amendments to the Employment Agreement, subject to Paragraph 8 of this Amendment: 1. Term. Section 3 is hereby amended to delete the first sentence and replace it with the following: "The Executive's employment under this Agreement shall commence as of the date of this Agreement (the "Commencement Date") and shall, unless sooner terminated in accordance with the provisions hereof, continue uninterrupted for a term expiring on the date (the "Termination Date") that is eighteen (18) months after the Effective Time (as defined in the Merger Agreement), unless sooner terminated in accordance with the provisions herein." 2. Change in Control. Section 10(a) is hereby amended to insert the following sentence at the end of the paragraph: "; provided, however, that a "Change in Control" shall not include any of the transactions contemplated by, or taken in connection with, the Merger Agreement." 3. Change in Control. Section 10(a)(iii) is hereby amended to read as follows: "All allowances and benefits, as contained in Sections 4(c)-(d), 5 and 7 of this Agreement, shall be continued for the full Term of this Agreement, as defined in Section 3 of this Agreement; and" 4. Change in Control. Section 10(b) of the Agreement is hereby deleted. 5. Change in Control. Following the Effective Time (as defined in the Merger Agreement), Section 10(d) is hereby amended in its entirely to read: 1 "As used in this Section 10, a "Change in Control" shall be deemed to have taken place if: (i) subsequent to the date of this Agreement, any "Person" (including any individual, firm, corporation, partnership or other entity except the Executive, V-L Holdings, the Company or any employee benefit plan of V-L Holdings or the Company or of any Affiliate or Associate (each as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended), and any Person or entity organized, appointed or established by V-L Holdings or the Company for or pursuant to the terms of any such employee benefit plan), together with all Affiliates and Associates of such Person, shall become the beneficial owner in the aggregate of twenty percent (20%) or more of the Common Stock of V-L Holdings then outstanding; or (ii) during the Term of this Agreement, individuals who, as of the date of the Effective Time (as defined in the Merger Agreement), constituted the Board of V-L Holdings cease for any reason to constitute a majority thereof." 6. Retention Payment. Section 10 is hereby amended to include the following new subparagraph (f): "Notwithstanding anything to the contrary herein, if the Executive maintains continuous employment with the Company on the terms and conditions hereunder for the period commencing on the date hereof and ending on the Termination Date, the Executive shall be entitled to receive a lump sum payment in the amount of $975,000 on the Termination Date (the "Retention Payment"), provided that if the Executive's employment is terminated at any time during the period commencing on the Effective Time and ending on the Termination Date by reason of (and only by reason of) the Executive's death or Total Disability, by the Company without "Cause" or by the Executive's resignation for "Good Reason", then the Executive (or the Executive's estate, as the case may be) shall be entitled to receive the Retention Payment within thirty (30) days from the date of such termination of employment. If, as a result of any of the foregoing events, the Executive is entitled to receive the Retention Payment, the Company shall have no further liability or obligations hereunder to the Executive (other than to make the Retention Payment and to provide the allowances and benefits in accordance with Section 4(c)-(d), Section 5 and Section 7 to Executive) (including with respect to any of the payments and benefits set forth in Section 9). Notwithstanding anything to the contrary herein, if a "Change in Control" occurs at any time prior to the Termination Date, this Section 10(f) shall be null and void upon the occurrence of such Change in Control and the Executive shall under no circumstances be entitled to receive the Retention Payment (or any portion thereof); provided, however, that Executive shall be entitled to receive all benefits to which Executive is then entitled to under Section 10(a) hereof. 7. Section 280G of the Tax Code. Section 10(e) is hereby amended to insert the words "and Section 10(f)" after every reference to "Section 10(a)." 8. Guaranty. The following Section 15 is hereby added to the Agreement: "15. Guaranty. Effective only in the event of the consummation of the transactions contemplated by the Merger Agreement, V-L Holdings shall guaranty in full the payment of all amounts due to Executive under the Employment Agreement." 9. Entire Agreement. The Employment Agreement, as amended by this Amendment, constitutes the entire agreement between the parties pertaining to the subject matter hereof and fully 2 supersedes any and all prior or contemporaneous agreements or understandings between the parties hereto pertaining to the subject matter hereof. 10. Full Force and Effect. Except as expressly amended in this Amendment, the Employment Agreement shall remain in full force and effect. 11. Termination of Amendment. Notwithstanding anything to the contrary herein, this Amendment shall immediately and automatically terminate and have no further force and effect upon the termination or expiration, if any, of the Merger Agreement, in accordance with the provisions thereunder. In the event of any such termination of this Amendment, the Employment Agreement shall remain in full force and effect. 12. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 3 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. NATIONAL MEDIA CORPORATION By: /s/ Brian J. Sisko ---------------------------------------------- Name: Brian J. Sisko Title: Senior Vice President V-L HOLDINGS CORP. By: /s/ Robert L. Johander ---------------------------------------------- Name: Robert L. Johander Title: President /s/ Constantinos I. Costalas ---------------------------------------------- CONSTANTINOS I. COSTALAS 4 EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 (the "Amendment") to the Employment Agreement dated February 27, 1997 (the "Employment Agreement") between NATIONAL MEDIA CORPORATION, a Delaware corporation (the "Company") and FREDERICK S. HAMMER ("Hammer") is hereby entered into as of January 5, 1998 by and between the Company, Hammer and V-L Holdings Corp. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Employment Agreement. WHEREAS, in connection with the proposed merger between the Company and ValueVision International, Inc., a Minnesota corporation ("ValueVision"), pursuant to the Agreement and Plan of Reorganization and Merger dated as of the date hereof by and among the Company, ValueVision and V-L Holdings Corp. ("V-L Holdings") (the "Merger Agreement"), the Company and the Hammer wish to modify certain provision of the Employment Agreement (which modifications will be null and void if the transactions contemplated by the Merger Agreement are not consummated); WHEREAS, the Company, Hammer and V-L Holdings agree that the terms of this Amendment shall only become effective immediately preceding consummation of the transactions contemplated by the Merger Agreement; and WHEREAS, V-L Holdings is a party for this Agreement only for purposes paragraph 7 below. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto agree to the following amendments to the Employment Agreement, subject to Paragraph 8 of this Amendment: 1. Term. The first sentence of Section 2 is hereby deleted and replaced by the following sentence: "Hammer's employment under this Agreement shall commence as of February 27, 1997 (the "Commencement Date") and terminate on the date (the "Termination Date") that is six (6) months after the Effective Time (as defined in the Merger Agreement), unless sooner terminated in accordance with the provisions herein." 2. Change in Control. Section 7(a) is hereby amended to insert the following at the end of the paragraph: "; provided, however, that a "Change in Control" shall not include any of the transactions contemplated by, or taken in connection with, the Merger Agreement." 3. Change in Control. Section 7(a)(ii) is hereby amended to read as follows: "All allowances and benefits, as contained in Sections 3(b)-(c), 4 and 5(b) of this Agreement, shall be continued for the full Term of this Agreement, as defined in Section 2 of this Agreement; and" 4. Change in Control. Following the Effective Time (as defined in the Merger Agreement), Section 7(c) is hereby amended in its entirely to read: "As used in this Section 7, a "Change in Control" shall be deemed to have taken place if: (i) subsequent to the date of this Agreement, any "Person" (including any individual, firm, corporation, partnership or other entity except Hammer, V-L Holdings, the Company or any employee benefit plan of V-L Holdings or the Company or of any Affiliate or Associate (each as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended), and any Person or entity organized, appointed or established by V-L Holdings or the Company for or pursuant to the terms of any such employee benefit plan), together with all Affiliates and Associates of such Person, shall become the beneficial owner in the aggregate of twenty percent (20%) or more of the Common Stock of V-L Holdings then outstanding; or (ii) during the Term of this Agreement, individuals who, as of the date of the Effective Time (as defined in the Merger Agreement), constituted the Board of V-L Holdings cease for any reason to constitute a majority thereof." 5. Retention Payment. Section 7 is hereby amended to include the following new subparagraph (e): "Notwithstanding anything to the contrary herein, if Hammer maintains continuous employment with the Company on the terms and conditions hereunder for the period commencing on the date hereof and ending on the Termination Date, Hammer shall be entitled to receive a lump sum payment in the amount of $200,000 on the Termination Date (the "Retention Payment"), provided that if Hammer's employment is terminated at any time during the period commencing on the Effective Time and ending on the Termination Date by reason of (and only by reason of) Hammer's death, by the Company without "Cause" or by Hammer's resignation for "Good Reason", then Hammer (or Hammer's estate, as the case may be) shall be entitled to receive the Retention Payment within thirty (30) days from the date of such termination of employment. If, as a result of any of the foregoing events, Hammer is entitled to receive the Retention Payment, the Company shall have no further liability or obligations hereunder to Hammer (other than to make the Retention Payment and to provide the allowances and benefits in accordance with Section 3(b)-(c), Section 4 and Section 5(b) to Hammer) (including with respect to any of the payments and benefits set forth in Section 6). Notwithstanding anything to the contrary herein, if a "Change in Control" occurs at any time prior to the Termination Date, this Section 7(e) shall be null and void upon the occurrence of such Change in Control and Hammer shall under no circumstances be entitled to receive the Retention Payment (or any portion thereof); provided, however, that Hammer shall be entitled to receive all benefits to which Hammer is then entitled to under Section 7(a) hereof. 6. Section 280G of the Tax Code. Section 7(d) is hereby amended to insert the words "and Section 7(e)" after every reference to "Section 7(a)." 7. Guaranty. The following Section 12 is hereby added to the Agreement: "12. Guaranty. Effective only in the event of the consummation of the transactions contemplated by the Merger Agreement, V-L Holdings shall guaranty in full the payment of all amounts due to Executive under the Employment Agreement." 8. Entire Agreement. The Employment Agreement, as amended by this Amendment, constitutes the entire agreement between the parties pertaining to the subject matter hereof and fully supercedes any and all prior or contemporaneous agreements or understandings between the parties hereto pertaining to the subject matter hereof. 9. Full Force and Effect. Except as expressly amended in this Amendment, the Employment Agreement shall remain in full force and effect. 2 10. Termination of Amendment. Notwithstanding anything to the contrary herein, this Amendment shall immediately and automatically terminate and have no further force and effect upon the termination or expiration, if any, of the Merger Agreement, in accordance with the provisions thereunder. In the event of any such termination of this Amendment, the Employment Agreement shall remain in full force and effect. 11. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. NATIONAL MEDIA CORPORATION By: /s/ Brian J. Sisko ----------------------------------- Name: Brian J. Sisko Title: Senior Vice President V-L HOLDINGS CORP. By: /s/ Robert L. Johander ----------------------------------- Name: Robert L. Johander Title: President /s/ Frederick S. Hammer ----------------------------------- FREDERICK S. HAMMER 3 EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement")as of January 28, 1998 by and between NATIONAL MEDIA CORPORATION (the "Company"), a Delaware corporation and ROBERT N. VERRATTI (the "Executive"). Background WHEREAS, the Company desires to continue to employ the Executive and the Executive desires to continue such employment, all on the terms and conditions set forth herein. WHEREAS, the Company and the Executive, based on circumstances that have arisen concerning the Company and the Executive and on the Company's and the Executive's mutual desire to revise previously discussed terms of employment, wish to amend and restate any prior verbal or written agreements concerning the terms of Executive's employment by the Company. Accordingly, in consideration of the mutual covenants and agreements set forth herein and the mutual benefits to be derived herefrom, and intending to be legally bound hereby, the Company and the Executive agree as follows: 1. Employment. a. Duties. During the Term, as hereinafter defined, the Company shall employ the Executive, on the terms set forth in this Agreement, as its Chief Executive Officer. The Executive accepts such employment with the Company and shall perform and fulfill such duties as are reasonably assigned to him hereunder by the Chairman of the Board or the Board of Directors of the Company (the "Board"), devoting his best efforts and a portion of his professional time and attention to the performance and fulfillment of his duties and to the advancement of the interests of the Company, subject only to the direction, approval, control and directives of the Chairman of the Board and the Board. Nothing contained herein shall be construed, however, to prevent the Executive from investing, trading in or managing, for his own account and benefit, stocks, bonds, securities, real estate, commodities or other forms of investments (subject to law and Company policy with respect to trading in Company securities), or serving on noncompetitive corporate boards; or holding any other position with any entity not in competition with the Company. b. Place of Performance. In connection with his employment by the Company, the Executive shall be based in the Philadelphia, Pennsylvania or Los Angeles, California metropolitan areas (or at such other location as the Company and Executive may mutually agree) except for required travel on Company business. Company shall furnish Executive with office space, stenographic assistance and such other facilities and services as shall be suitable to Executive's position and sufficient and satisfactory to the Executive for the performance of his duties as Chief Executive Officer. 2. Term. The Executive's employment under this Agreement shall, unless sooner terminated in accordance with the provisions hereof, continue uninterrupted for a term expiring December 31, 1998, As used herein, the term "Term" shall refer to such initial term subject to earlier termination of employment in accordance with Section 8 hereof. 1 3. Compensation. a. Salary. During the Term unless this Agreement is sooner terminated in accordance with the provisions hereof, the Executive shall be paid an annual salary of at least $200,000 (the "Base Salary"), payable in installments at such times as the Company customarily pays its other senior executive employees (but in any event no less often than monthly). The Base Salary may be increased (but not decreased) from time to time by the Board of Directors as conditions warrant including, but not limited to, Executive's performance as determined by the Board of Directors. In no event shall Executive's Base Salary be less than $200,000 in any full year during the Term. b. Incentive Pay. (1) In addition to the Base Salary provided for in Section 3(a) of this Agreement, the Executive shall during the Term, unless this Agreement is sooner terminated in accordance with the provisions hereof, participate in the Company's 1995 Management Incentive Plan ("MIP"), or such successor plan of bonus, incentive or additional compensation as the Company may hereafter implement. c. Options. On July 23, 1997, in connection with the solicitation of Executive's employment with the Company, the Company granted and issued Executive options to purchase 750,000 shares of the Company's Common Stock. The option price per share for such options was established at $4.75 per share. Which was established based upon the lowest closing price of the Company's common stock on the New York Stock Exchange for the ten (10) trading days ending on July 22, 1997. Subject to the Company's agreement set forth in the following paragraph, Executive hereby relinquishes 50,000 of such options. Furthermore, the terms of Executive's options are hereby amended and restated as set forth in the attached form of Amended and Restated Non-Incentive Stock Option Agreement (Non-Plan). d. In consideration of Executive's option relinquishment described in c. above, the Company hereby agrees to issue 50,000 new options, out of its 1991 Stock Option Plan, divided equally between Brian J. Sisko and John J. Sullivan, upon substantially the same terms as Mr. Verratti's options referred to in c. above. e. Health Insurance and Other Benefits. During the Term, unless this Agreement is sooner terminated in accordance with the provisions hereof, the Executive shall receive all employee benefits offered by the Company to its senior executives and key management employees, including, without limitation, all pension, profit sharing, retirement, salary continuation, deferred compensation, disability insurance, hospitalization insurance, major medical insurance, medical reimbursement, survivor income, life insurance and any other benefit plan or arrangement established and maintained by the Company, subject to the rules and regulations then in effect regarding participation therein. Unless such change is required by federal, state or local law, the Company shall not make any changes in any employee benefit plan or arrangement that would result in a disproportionately greater reduction in the rights of, or benefits to, the Executive compared with any other senior executive of the Company. f. Withholding. The Company may withhold from any compensation, bonus or benefits payable or otherwise conferred by this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 4. Life Insurance. a. Generally. At the Executive's option, the Executive may obtain up to $1,000,000 in face amount of term life insurance to be carried on the Executive's life. During the Term, unless 2 this Agreement is sooner terminated in accordance with the provisions hereof, the Company shall reimburse, on a semi-annual basis, the premiums paid by the Executive for periods covered by the Term for such insurance upon presentation of invoices duly reflecting such premiums (subject, however, to the limitations on reimbursement set forth in Section 4(b) hereof). The Executive shall be the owner of such life insurance policy and shall have the absolute right to designate the beneficiaries thereunder. The Executive shall be solely responsible for procuring any such life insurance. The Company shall have no independent obligation to procure such life insurance or any other insurance on the life of the Executive (excepting only such insurance as the Company may offer to its executives and key management employees as part of its standard benefit package). b. Limitation on Reimbursement Obligation. Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to reimburse premium payments under Section 4(a) hereof or otherwise to the extent that such payments exceed the rates which would be obtainable for such insurance on persons of similar age and position who are nonsmokers and otherwise in good health. 5. Reimbursement of Expenses. During the Term, unless the Agreement is sooner terminated in accordance with the provisions hereof, the Executive shall be reimbursed for all items of travel, entertainment and miscellaneous expenses which the Executive reasonably incurs in connection with the performance of his duties hereunder, provided that the Executive shall submit to the Company such statements and other evidence supporting said expenses as the Company may reasonably require. 6. Automobile Allowance. During the Term, unless the Agreement is sooner terminated in accordance with the provisions hereof, the Company shall pay Executive a monthly automobile allowance of $600.00. 7. Vacations. During the Term, unless the Agreement is sooner terminated in accordance with the provisions hereof, the Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, but not less than three (3) weeks in any calendar year. The Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers. 8. Termination of Employment. a. Death or Total Disability. In the event of the death of the Executive during the Term, this Agreement shall terminate, and the Company shall have no further obligation hereunder except as provided in this Section 8(a). The terms of the option agreements issued pursuant to Section 3 shall control as to the vesting and expiration thereof upon the death of Executive. In the event of the Total Disability (as that term is defined below) of the Executive for one hundred eighty (180) days in the aggregate during any consecutive twelve (12) month period during the Term, the Company shall have the right to terminate this Agreement by giving the Executive thirty (30) days' prior written notice thereof, and upon the expiration of such thirty (30) day period, the Executive's employment under this Agreement shall terminate. If the Executive shall resume his duties within thirty (30) days after receipt of such a notice of termination and continue to perform such duties for four (4) consecutive weeks thereafter, this Agreement shall continue in full force and effect, without any reduction in Base Salary, other compensation and other benefits, and the notice of termination shall be considered null and void and of no effect. Upon termination of this Agreement under this Section 8(a), the Company shall have no further obligations or liabilities under this Agreement, except to pay to the Executive's estate or the Executive, as the case may be, the portion, if any, that remains unpaid of the Base Salary for the period prior to termination. 3 The term "Total Disability," as used herein, shall mean a mental or physical condition which, in the reasonable opinion of an independent medical doctor mutually selected by the Company and the Executive, renders the Executive unable or incompetent to carry out the material duties and responsibilities of the Executive under this Agreement at the time the disabling condition was incurred. b. Discharge for Cause. The Company may discharge the Executive for Cause and thereby immediately terminate his employment under this Agreement. For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment if the Executive, in the reasonable judgment of the Company, (i) materially breaches any of his agreements, duties or obligations under this Agreement and has not cured or commenced in good faith to cure such breach within thirty (30) days after notice; (ii) embezzles or converts to his own use any funds of the Company or any client or customer of the Company; (iii) converts to his own use or unreasonably destroys any property of the Company, without the Company's consent; (iv) is convicted of a felony; (v) is adjudicated as mentally incompetent; (vi) is habitually intoxicated or is diagnosed by an independent medical doctor to be addicted to a controlled substance or any drug whatsoever; or (vii) appropriates or usurps any client, customer or opportunity of the Company for his own use without the Company's consent. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until the Executive has received thirty (30) days' prior written notice ("Dismissal Notice") of such termination. In the event the Executive does not dispute such determination within thirty (30) days after receipt of the Dismissal Notice, the Executive shall not have the remedies provided pursuant to Section 8(e) of this Agreement. c. Termination Prior to Expiration of Term. Either party may terminate this Agreement upon sixty (60) days' prior written notice. Except as provided in Section 8(d) of this Agreement, such termination shall be without liability to either party. d. Termination without Cause or for Good Reason. (1) In the event that the Executive's employment is terminated by the Company without Cause, as defined in Section 8(b) of this Agreement, or the Executive shall resign for "Good Reason," as defined in Section 8(d)(ii) of this Agreement, then, to the extent provided below, the Company shall: (i) pay the Executive in lieu of other damages, except as specifically provided herein, $300,000. Such amounts shall be payable in installments in accordance with the Company's normal payroll practices until such amount is paid in full. During such period of payments, the restrictions contained in Section 11(a)(i) of this Agreement shall be applicable to Executive. In addition, Executive may accept employment he might not otherwise accept under Section 11(a)(i) of this Agreement, in which event payment of salary received from such other employment shall not be deducted from payments made hereunder; and (ii) maintain in full force and effect, for the continued benefit of the Executive for a period of one year after termination or for the balance of the Term, whichever is greater, all employee benefit plans and programs, except option plans and except bonus plans to the extent the Executive is not employed by the Company for all or a portion of the period of measurement for the bonus, in which the Executive was entitled to participate immediately prior to the Executive's discharge or resignation, provided that the Executive's continued participation is possible under the general terms and provisions of such benefit plans and programs, and provided further that any Options unvested and unexercisable at the date of termination shall then become vested and exercisable. In the event that the Executive's participation in any such benefit plan or program is barred, the Company shall arrange to provide the 4 Executive with benefits substantially similar to those which the Executive is entitled to receive under such plans and programs. At the end of the period of coverage, the Executive shall have the option to have assigned to him at no cost and with no apportionment of prepaid premiums any assignable insurance policy owned by the Company which relates specifically to the Executive. (2) For purposes of this Section 8(d), "Good Reason" shall mean the failure by the Company to comply with the material provisions of this Agreement which failure is not cured within thirty (30) days after notice. Notwithstanding the foregoing, the Executive shall not be deemed to terminate this Agreement for Good Reason unless and until the Company has received five (5) days prior written notice of termination ("Notice of Termination for Good Reason"). In the event the Company does not dispute such termination within thirty (30) days after receipt of such Notice of Termination for Good Reason, the Company shall not have the remedies provided pursuant to Section 8(e) of this Agreement. e. Arbitration. In the event that the Executive disputes a determination that Cause exists for terminating his employment pursuant to Section 8(b) of this Agreement, or the Company disputes Executive's determination that Good Reason exists for Executive's termination of his Employment pursuant to Section 8(d)of this Agreement, either party disputing this determination shall serve the other with written notice of such dispute ("Dispute Notice") within thirty (30) days after receipt of the Dismissal Notice or Notice of Termination for Good Reason. Within fifteen (15) days thereafter, the Executive may, in accordance with the Rules of the American Arbitration Association ("AAA"), file a petition with the AAA for arbitration of the dispute, the costs thereof to be shared equally by the Executive and the Company unless an order of the AAA provides otherwise and, in such arbitration, each party shall be responsible for his or its legal fees. If Executive files such a petition for arbitration, such proceeding shall also determine all other disputes between the parties relating to Executive's employment, and the parties covenant and agree that the decision of the AAA shall be final and binding and hereby waive their rights to appeal therefrom. 9. Change in Control. Upon a Change in Control, as hereinafter defined, notwithstanding anything in this Agreement to the contrary, the following terms and provisions shall apply: a. If, within thirty (30) days following the Change in Control, there is a Termination of Employment (as defined below), the Executive shall receive an immediate lump sum payment (within thirty (30) days following the Termination of Employment), of $600,000; b. If a Termination of Employment does not occur within thirty (30) days following the Change in Control, then the Term of this Agreement shall continue as aforesaid and all of the terms and conditions of this Agreement shall remain in full force and effect until the end of such Term. c. As used in this Section 9, "Termination of Employment" shall mean termination of the Executive's employment (i) by the Company for any reason, or (ii) by the Executive's death, Total Disability or resignation. d. As used in this Section 9, a "Change in Control" shall be deemed to have taken place if: (i) subsequent to the date hereof, any "Person" (including any individual, firm, corporation, partnership or other entity except the Executive, the Company or any employee benefit plan of the Company or of any Affiliate or Associate (each as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended), and any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such employee benefit plan), together with all Affiliates and Associates of such Person, shall become the beneficial owner in the aggregate of twenty percent (20%) 5 or more of the Common Stock of the Company then outstanding; or (ii) during the Term of this Agreement, individuals who, as of the date of this Agreement, constituted the Board cease for any reason to constitute a majority thereof; or (iii) a combinative transaction with ValueVision International, Inc. is consummated. 10. No Mitigation. The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by the Executive as the result of his employment by another employer. 11. Restrictive Covenant. a. Competition. (i) Executive will not compete, directly or indirectly, as a compensated or non-compensated director, officer, employee, consultant, agent, representative or otherwise, or as a stockholder, partner or joint venturer, or have any direct or indirect financial interest, including, without limitation, the interest of a creditor, in any business competing directly with the infomercial direct response business of Company or any of its subsidiaries within any geographical area in which the business of Company or its subsidiaries is being conducted during Executive's employment during the "Covenant Period." The Covenant Period shall be (1) the Term of this Agreement or (2) for a period of six (6) months after termination of this Agreement pursuant to Section 8(a) or 8(b) of this Agreement; provided that the Covenant Period shall expire on the date of Executive's termination pursuant to Section 8(c) or 8(d) of this Agreement. (ii) Executive further undertakes and agrees that during the Covenant Period he will not, directly or indirectly, employ, cause to be employed, or solicit for employment any of Company's or its subsidiaries' employees. b. Confidential Information. (i) Duty of Care. The Executive shall not, directly or indirectly, disclose to any person or entity for any reason or use for the Executive's own personal benefit any Confidential Information (as defined in Section 11(b)(3) hereof) either during the Term or thereafter, despite any early termination of this Agreement, and shall at all times take all precautions reasonably necessary to protect Confidential Information from loss or disclosure to third parties. (ii) Return of Confidential Information. Upon the expiration or earlier termination of this Agreement, the Executive shall promptly return to the Company all documents and other tangible property in the Executive's possession or control which constitute, contain or incorporate Confidential Information, whether prepared by the Executive or others. (iii) "Confidential Information" Defined. For purposes of this Agreement, "Confidential Information" shall mean all information, whether in written, electronic or oral form, disclosed or known to the Executive in the course of the Executive's employment by the Company, concerning the operations or business of the Company or any of its subsidiaries, including, without limitation, (i) marketing and promotional plans and strategies, (ii) information relating to products conceived, developed in the process of development, (iii) information, including names and addresses, relating to with licensors, suppliers, producers performers and program providers, (iv) information relating to the purchase and placement of media, results of media deployment or media monitoring and tracking 6 systems, (v) information relating to rates, costs and facilities for telemarketing, order processing, fulfillment or credit card processing services, (vi) financial information beyond that which is publicly reported by the Company, and (vii) all other proprietary and competitively sensitive information. Notwithstanding the foregoing, Confidential Information shall not include any information which (a) is or becomes within the public domain through no act of the Executive in breach of this Agreement, (b) was lawfully in the possession of the Executive without any restriction on use or disclosure prior to its disclosure hereunder, (c) is lawfully received from another source subsequent to the date of this Agreement without any restriction on use or disclosure, (d) is deemed in writing by the Company no longer to be Confidential Information, or (e) is required to be disclosed by order of any court of competent jurisdiction or other governmental authority. c. Injunctive Relief. The parties hereto agree that the remedy at law for any breach of the provisions of this Section 11 will be inadequate and that the Company or any of its subsidiaries or other successors or assigns shall be entitled to injunctive relief without bond. Such injunctive relief shall not be exclusive, but shall be in addition to any other rights and remedies Company or any of its subsidiaries or their successors or assigns might have for such breach. d. Scope of Covenant. Should the duration, geographical area or range of prescribed activities in Section 11(a) of this Agreement be held unreasonable by any court of competent jurisdiction, then such duration, geographical area or range of prescribed activities shall be modified to such degree as to make it or them reasonable and enforceable. 12. Counsel Fees and Indemnification. a. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any and all of his rights under this Agreement, including participation in any proceeding contesting the validity or enforceability of this Agreement and any arbitration proceeding pursuant to Section 8(e) of this Agreement, the Executive shall be entitled to recover from the Company his reasonable attorney's fees and costs and expenses in connection with the enforcement of his rights. No fees shall be payable if the Company is successful on the merits. b. The Company shall indemnify and hold Executive harmless to the maximum extent permitted by law against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees incurred by Executive, in connection with the defense of, or as a result of, any action or proceeding (or any appeal from any action or, proceeding) in which Executive is made or is threatened to be made a party by reason of any act or omission of Executive in his capacity as an officer, director or employee of the Company, regardless of whether such action or proceeding is one brought by or in the right of the Company to procure a judgment in its favor. Expenses (including attorneys' fees) incurred by the Executive in defending any civil, criminal, administrative, or investigative action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Executive to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized in this Section 12(b). 13. Miscellaneous. a. Notices. Any notice, demand or communication required or permitted under this Agreement shall be in writing and shall either be hand-delivered to the other party or mailed to the addresses set forth below by registered or certified mail, return receipt requested or sent by overnight 7 express mail or courier or facsimile to such address, if a party has a facsimile machine. Notice shall be deemed to have been given and received when so hand- delivered or after three business days when so deposited in the U.S. Mail, or when transmitted and received by facsimile or sent by express mail properly addressed to the other party. The addresses are: To the Company: National Media Corporation 1835 Market Street Philadelphia, PA 19103 FAX #: (215) 988-4900 Attn: Corporate Secretary To the Executive: Mr. Robert N. Verratti 100 Grays Lane Unit 200 Haverford, PA 19014 The foregoing addresses may be changed at any time by notice given in the manner herein provided. b. Integration; Modification. This Agreement dated the date hereof constitutes the entire understanding and agreement between the Company and the Executive regarding its subject matter and supersedes all prior negotiations and agreements, whether oral or written, between them with respect to its subject matter. This Agreement may not be modified except by a written agreement signed by Executive and a duly authorized officer of the Company. c. Enforceability. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. d. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties, including their respective heirs, executors, successors and assigns, except that this Agreement may not be assigned by the Executive. This Agreement supersedes the Prior Employment Agreement, which is hereby deemed null and void and of no further force or effect. e. Waiver of Breach. No waiver by either party of any condition or of the breach by the other of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition, or the breach of any other term or covenant set forth in this Agreement. Moreover, the failure of either party to exercise any right hereunder shall not bar the later exercise thereof. f. Governing Law and Interpretation. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania without regard to its conflict of laws rules. Each of the parties 8 agrees that he or it, as the case may be, shall deal fairly and in good faith with the other party in performing, observing and complying with the covenants, promises, duties, obligations, terms and conditions to be performed, observed or complied with by him or it, as the case may be, hereunder; and that this Agreement shall be interpreted, construed and enforced in accordance with the foregoing covenant notwithstanding any law to the contrary. g. Headings. The headings of the various sections and paragraphs have been included herein for convenience only and shall not be considered in interpreting this Agreement. h. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been executed by the Executive and on behalf of the Company by its duly authorized officers and approved by its Compensation, Committee, as of the date first above written. Attest: NATIONAL MEDIA CORPORATION By: /s/ Frederick S. Hammer - ------------------------ ------------------------------ Secretary Frederick S. Hammer, Chairman /s/ Robert N. Verratti ------------------------------- Robert N. Verratti 9 EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 AMENDED AND RESTATED NON-INCENTIVE STOCK OPTION AGREEMENT (non-Plan) THIS AMENDED AND RESTATED NON-INCENTIVE STOCK OPTION AGREEMENT ("Agreement") is dated as of July 23, 1997, as amended and restated as of January 28, 1998, and is by and between NATIONAL MEDIA CORPORATION, a Delaware corporation with its principal office located at Eleven Penn Center, Suite 1100, 1835 Market Street, Philadelphia, Pennsylvania 19103 (the "Company"), and Robert N. Verratti. On July 23, 1997, the Compensation Committee of the Board of Directors of the Company (the "Committee") determined to grant to the Optionee an option to purchase 750,000 shares of the Company's Common Stock in order to provide the Optionee with an added incentive to contribute to the Company's future success and prosperity. The option granted was issued outside of the Plan (as hereinafter defined) in connection with the solicitation and commencement of the Optionee's employment but, except as provided herein, subject to such terms and conditions as if it were issued under the Company's Amended and Restated Stock Option Plan, as it may be amended from time to time hereafter (the "Plan"). The option granted is hereby amended and restated, as of January 28, 1998, in its entirety as set forth herein. This option agreement replaces and is in lieu of any and all prior option agreements between the Company and Optionee. Capitalized terms contained herein and not otherwise defined shall have the meanings ascribed to such terms in the Plan. In consideration of the premises set forth herein, and for other good an valuable consideration, receipt of which is hereby acknowledged, the Company has granted the Optionee the option to acquire shares of the common stock of the Company upon the following terms and conditions: 1. Grant of Option. (a) In connection with Optionee's relinquishment and waiver of 50,000 of the 750,000 options referred to above, the Company hereby reaffirms its grant to the Optionee of the right and option (the "Option") to purchase up to Seven Hundred Thousand (700,000) fully paid and non-assessable shares of common stock, par value $.01 per share, of the Company (the "Shares"), to be issued upon the exercise hereof. (b) The Option may be exercised during the period ("Option Period") commencing on the date hereof and, unless sooner terminated as provided herein, expiring and terminating at 5:00 p.m. Eastern Standard Time on July 22, 2007, at which time the Optionee shall have no further right to purchase any Shares not then purchased. The Company shall at all time during the term of this Agreement reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of this Agreement. (c) It is not intended that the Option qualify as an Incentive Stock Option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). 1 2. Exercise Price. The exercise price of the Option (the "Exercise Price") shall be lesser of (a) $4.75 per share or (b) if there is a Triggering Event (as hereinafter defined) occurring between January 28, 1998 and June 30, 1998, the "Triggering Event Price" (as hereinafter defined) per share less $4.00, but in no event less than $.01 per share. For purposes of this paragraph, a "Triggering Event" shall be defined as (i) a sale of substantially all of the assets of the Company, (ii) a merger of the Company into another company, or a merger of another company into the Company or some other combinative transaction with another company after which the shareholders of such other company have the right to elect a majority of the board of directors of the Company or the resulting entity, or (iii) an investment by another company , which under the rules of the NYSE requires shareholder approval (whether or not such requirement is waived). "Triggering Event Price" shall be deemed to be the closing price of the Company's stock on the NYSE on the day of the closing of such sale, merger, combination or investment. The exercise price shall be payable by certified or bank check payable to the order of the Company in full at the time of the exercise in cash or, with the consent of the Committee in its sole discretion, by delivering (i) shares of Common Stock already owned by the Optionee and having a fair market value (as determined under the Plan) on the date of exercise equal to the Exercise Price, or (ii) a combination of cash and shares of Common Stock with a fair market value equal to the Exercise Price. 3. Exercise of Option. The Optionee may exercise this Option to purchase Shares by providing notice to the Company by registered or certified mail, return receipt requested, addressed to its principal office, or by hand delivery, signed by the Optionee, indicating the number of whole Shares which Optionee desire to purchase under the Option. The notice shall be accompanied by payment of the Exercise Price therefor as specified in Paragraph 2 above, any amounts payable pursuant to Paragraph 10 below and any required written representation as specified pursuant to Paragraph 7 below. As soon as practicable after the receipt of such notice of exercise, payments and written representation, the Company shall issue to the Optionee a certificate(s) issued in the Optionee's name evidencing the Shares purchased by the Optionee hereunder, subject to the Company's right to require that Optionee hereunder, subject to the Company's right to require that Optionee execute such other documents as it deems reasonably necessary. 4. Limitations on Right to Exercise. Should the Optionee cease to be an Eligible Participant for any reason other than the Optionee's death or disability, the Option shall be exercisable for a period of two years after the Optionee ceases to be an Eligible Participant or until the expiration of the Option Period, whichever shall occur first. 5. Death or Disability of Optionee. In the event of the death or disability of the Optionee while the Optionee is an Eligible Participant (or the death of the Optionee within two years after the date on which the Optionee ceases to be an Eligible Participant), any unexercised portion of the Option shall be exercisable for a period of one year after the Optionee's death or disability or upon the expiration of the Option Period, whichever shall occur first, and, in the event of the death of the Optionee, shall be exerciseable only by the Optionee's personal representative or such person or persons to whom the Optionee's rights pass under the Optionee's will or by the Laws of descent and distribution. 2 6. Non-Transferability of Option. Except as provided in Paragraph 5 herein, the Option shall be exercisable only the Optionee. The Optionee may not give, grant, sell, exchange, transfer legal title, pledge, assign or otherwise encumber or dispose of the Option herein granted or any interest therein, otherwise than by will or the laws of the descent and distribution or, if permitted under Rule 16b-3 promulgated under the Securities Exchange Act of 1934 and by the Committee in its sole discretion pursuant to a qualified domestic relations order as defined in the Code or Title 1 of ERISA or the rules promulgated thereunder. Upon any attempt to so transfer the Option, or upon the levy or attachment or similar process of the Option, the Option shall automatically become null and void. 7. Restriction on Issuance of Shares-Investment Representation. The Optionee agreed for himself, his heirs and legatees that, unless the time of exercise there exists an effective registration statement under the Securities Act of 1933 concerning the Shares issuable pursuant to the Option providing for the issuance of such Shares to the Optionee and/or the subsequent transfer of the shares by Optionee, any and all Shares purchased upon the exercise of the Option shall be acquired for investment and not for distribution. Upon the issuance of any or all of the Shares subject to the Option, the Company, in its discretion and in accordance with the foregoing, may require the Optionee, or his heirs or legatees receiving such Shares, to deliver to the Company a representation in writing, in a form satisfactory to the Board, that such Shares are being acquired in good faith for investment and not for distribution. In accordance with the foregoing, (i) the Company may place with its transfer agent a "stop transfer" order with respect to such Shares and may place an appropriate restrictive legend on the certificate(s) evidencing such Shares; and (ii) any stock certificates issued upon the exercise of the Option may bear an appropriate restrictive legend, if deemed necessary by the Company. 8. No Rights as Shareholder. The Optionee shall have no rights as a shareholder of the Company in respect of the Shares as to which the Option shall not have been exercised and payment made as herein provided. 9. No Obligation Relating to Engagement of Optionee. Nothing herein shall obligate the Company or any of its subsidiaries to engage the Optionee, nor shall this Agreement constitute an agreement of employment or for services, nor confer upon the Optionee any right to continue to render services to the Company or any of its subsidiaries or interfere in any way with the right of the Company or any of its subsidiaries to terminate the services of the Optionee at any time without liability to the Company or the subsidiary. 10. Taxes. The Company may make such provisions as it may deem appropriate for the withholding of any taxes which it determines is required in connection with any options granted under the Plan. The Company may further require notification from the Optionee upon any disposition of Shares acquired pursuant to the exercise of the Option. 11. Conflict between Option Agreement and Plan. In the event of any conflicts between this Agreement and the Terms and Condition of the Plan, the terms and conditions of the Plan shall control. 3 12. Binding Effect. Except as herein otherwise expressly provided, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their legal representatives and assigns. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed wholly within the State of Delaware. 4 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. NATIONAL MEDIA CORPORATION By: /s/ Frederick S. Hammer --------------------------- Frederick S. Hammer Chairman of the Board /s/ Robert N. Verratti ------------------------- Robert N. Verratti 5 EX-11.1 6 EXHIBIT 11.1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- --------------------- BASIC 1997 1996 1997 1996 --------- --------- ---------- --------- Average common shares outstanding...................................... 25,324 23,268 24,736 21,415 --------- --------- ---------- --------- --------- --------- ---------- --------- Net (loss) income...................................................... $ (8,146) $ (5,984) $ (35,493) $ 3,560 Adjustments to net (loss) income: Deemed dividend on convertible preferred stock......................... (358) -- (401) -- --------- --------- ---------- --------- Adjusted net (loss) income............................................. $ (8,504) $ (5,984) $ (35,894) $ 3,560 --------- --------- ---------- --------- --------- --------- ---------- --------- Per share (loss) earnings: Net (loss) income...................................................... $ (0.34) $ (0.26) $ (1.45) $ 0.17 --------- --------- ---------- --------- --------- --------- ---------- --------- Diluted Average common shares outstanding...................................... 25,324 23,268 24,736 21,415 Conversion of preferred stock.......................................... -- -- -- 1,248 Net effect of common stock equivalents (1)............................. -- -- -- 4,380 --------- --------- ---------- --------- Total.................................................................. 25,324 23,268 24,736 27,043 --------- --------- ---------- --------- --------- --------- ---------- --------- Net (loss) income...................................................... $ (8,146) $ (5,984) $ (35,493) $ 3,560 Adjustments to net (loss) income: Deemed dividend on convertible preferred stock......................... (358) -- (401) -- --------- --------- ---------- --------- Adjusted net income.................................................... $ (8,504) $ (5,984) $ (35,894) $ 3,560 --------- --------- ---------- --------- --------- --------- ---------- --------- Per share (loss) earnings: Net (loss) income (1).................................................. $ (0.34) $ (0.26) $ (1.45) $ 0.13 --------- --------- ---------- --------- --------- --------- ---------- ---------
- ------------------------ (1) Common stock equivalents include the effect of the exercise of dilutive stock options and warrants using the treasury stock method. EX-27.1 7 EXHIBIT 27.1
5 9-MOS MAR-31-1998 DEC-31-1997 11,834 0 31,629 (3,217) 24,836 84,661 12,925 3,085 150,990 68,652 0 0 1 262 74,542 150,990 186,635 186,635 177,604 219,529 0 0 2,299 (35,193) 300 (35,493) 0 0 0 (35,493) (1.45) (1.45)
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