-----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, UnFB8yatgwax3hUkh2edN5wHsBaMwCmS2VC7R/nRJb6WeQGdyHejAQNi/8DnAuAI A9SDYyisac5oT7ZSj1Yptw== 0001047469-98-026649.txt : 19980709 0001047469-98-026649.hdr.sgml : 19980709 ACCESSION NUMBER: 0001047469-98-026649 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980708 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-K405 SEC ACT: SEC FILE NUMBER: 001-06715 FILM NUMBER: 98661952 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-K405 1 10-K 405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended MARCH 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]. For the transition period from ________________ to ________________ Commission file number 1-6715 NATIONAL MEDIA CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-2658741 (State of Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.)
ELEVEN PENN CENTER, SUITE 1100, 1835 MARKET 19103 STREET, PHILADELPHIA, PA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: 215-988-4600 Securities registered pursuant to Section 12(b) Name of each exchange of the Act: on which registered: Title of each class: NEW YORK STOCK EXCHANGE COMMON STOCK, PAR VALUE $.01 PER SHARE PHILADELPHIA STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant as of June 15, 1998 was approximately $32,560,733.* There were approximately 25,453,752 issued and outstanding shares of the Registrant's common stock, par value $.01 per share, at June 15, 1998. In addition, there were 887,229 shares of treasury stock as of such date. *Calculated by excluding all shares that may be deemed to be beneficially owned by executive officers and directors of the Registrant, without conceding that all such persons are "affiliates" of the Registrant for purposes of the federal securities laws, but including the shares beneficially owned by others listed on the "Security Ownership of Certain Beneficial Owners" table included in Registrant's proxy statement. Based upon a market value per share of $1.3125, which was the closing price of the Company's Common Stock on the New York Stock Exchange on June 15, 1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NATIONAL MEDIA CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1998 TABLE OF CONTENTS
PAGE ----- PART I Cautionary Statement Regarding Forward-Looking Statements..................................... 3 Item 1. Business...................................................................................... 3 Item 2. Properties.................................................................................... 13 Item 3. Legal Proceedings............................................................................. 13 Item 4. Submission of Matters to a Vote of Security Holders........................................... 15 PART II Item 5. Market Price of and Dividends on the Registrant's Common Stock and Related Stockholder Matters....................................................................................... 16 Item 6. Selected Consolidated Financial Data.......................................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 18 Item 8. Financial Statements and Supplementary Data................................................... 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 27 PART III Item 10. Directors and Executive Officers of the Registrant............................................ 28 Item 11. Executive Compensation........................................................................ 28 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 28 Item 13. Certain Relationships and Related Transactions................................................ 28 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 29 SIGNATURES
2 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS THIS REPORT CONTAINS "FORWARD-LOOKING" STATEMENTS REGARDING POTENTIAL FUTURE EVENTS AND DEVELOPMENTS AFFECTING THE BUSINESS OF THE COMPANY. SUCH STATEMENTS RELATE TO, AMONG OTHER THINGS, (I) FUTURE OPERATIONS OF THE COMPANY, INCLUDING POTENTIAL STRATEGIC TRANSACTIONS AND THE DEVELOPMENT OF NEW PRODUCT SALES MEDIA; (II) COMPETITION FOR CUSTOMERS FOR THE COMPANY'S PRODUCTS; (III) THE UNCERTAINTY OF DEVELOPING OR OBTAINING RIGHTS TO NEW PRODUCTS THAT WILL BE ACCEPTED BY THE MARKET AND THE TIMING OF THE INTRODUCTION OF NEW PRODUCTS INTO THE MARKET; (IV) THE LIMITED MARKET LIFE OF THE COMPANY'S PRODUCTS; AND (V) OTHER STATEMENTS ABOUT THE COMPANY OR THE DIRECT RESPONSE INDUSTRY. FORWARD-LOOKING STATEMENTS MAY BE INDICATED BY THE WORDS "EXPECTS," "ESTIMATES," "ANTICIPATES," "INTENDS," "PREDICTS," "BELIEVES" OR OTHER SIMILAR EXPRESSIONS. FORWARD-LOOKING STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS REPORT AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS DIRECTORS AND OFFICERS WITH RESPECT TO NUMEROUS ASPECTS OF THE COMPANY AND ITS BUSINESS. THE COMPANY'S ABILITY TO PREDICT RESULTS OR THE EFFECT OF ANY PENDING EVENTS ON THE COMPANY'S OPERATING RESULTS IS INHERENTLY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THE RISKS ATTENDANT TO COMPETITION FOR PRODUCTS, CUSTOMERS AND MEDIA ACCESS; THE RISKS OF DOING BUSINESS ABROAD; THE UNCERTAINTY OF DEVELOPING OR OBTAINING RIGHTS TO NEW PRODUCTS THAT WILL BE ACCEPTED BY THE MARKET; THE LIMITED MARKET LIFE OF THE COMPANY'S PRODUCTS; AND THE EFFECTS OF GOVERNMENT REGULATIONS. SEE "RECENT DEVELOPMENTS"; "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." PART I ITEM 1. BUSINESS National Media Corporation ("National Media" or the "Company") is a global leader in the use of direct response transactional television programming, known as infomercials, to market consumer products. National Media makes infomercial programming available to more than 370 million households in over 70 countries worldwide. BACKGROUND The infomercial industry was first developed in the United States after the Federal Communications Commission (the "FCC") rescinded its limitations on advertising minutes per hour in 1984, thereby permitting 30-minute blocks of television advertising. The deregulation of the cable television industry and the resulting proliferation of cable channels increased the available media time and led to the growth of the United States infomercial industry. Producers of infomercials combined direct response marketing and retailing principles within a television talk show-type format and purchased media time from cable channels to air their infomercials. After an initial growth period, the industry consolidated through the end of the 1980s. At the same time, increased attention from the Federal Trade Commission (the "FTC") and federal and state consumer protection agencies led to greater regulation of the industry and to the development of the National Infomercial Marketing Association as a self-regulatory organization. By the early 1990s, infomercials and home shopping cable channels had become a more accepted forum for obtaining information about products and services and making purchases from home. As the infomercial industry has matured, the variety of products marketed through infomercials has steadily increased. Today, offerings as diverse as car care products and weight loss programs are marketed through infomercials. The development of the international infomercial industry began in Western Europe following the initial industry development in the United States. Quantum Marketing International, which was acquired by the Company in 1991, was one of the pioneers in the international infomercial industry's development, commencing operations in 1990. The industry expanded throughout Europe and then into non-European markets through the early 1990s and continues to expand into other worldwide markets today. Whereas domestically, distribution of products through infomercials is viewed as an alternative to retail, mail order and other means of distribution, in many international markets distribution through traditional channels is 3 not readily accessible to many consumers. As a result of these factors, the Company believes that it has an opportunity to be a primary distributor of innovative consumer products in the international marketplace. RECENT DEVELOPMENTS On January 5, 1998, the Company entered into an Agreement and Plan of Reorganization and Merger (the "Merger Agreement"), by and among the Company, ValueVision International ("ValueVision") and Quantum Direct Corporation, formerly known as V-L Holdings Corp. ("Quantum Direct"), a newly-formed Delaware corporation. On April 8, 1998, it was announced that ValueVision had received preliminary notification from holders of more than 5% of ValueVision's common stock that they intended to exercise their dissenter's rights with respect to the proposed transaction and that the Company and ValueVision had therefore postponed the previously scheduled shareholder meetings regarding the proposed merger and were going to try to reach a mutually acceptable restructuring. On June 2, 1998 the Company announced that the Company and ValueVision had mutually terminated the Merger Agreement after not having been able to reach agreement on a restructured transaction. Certain actual and potential effects of the termination of the Merger Agreement are described in Note 16 to the financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." STRATEGY National Media's goal is to be recognized as a worldwide leader in direct marketing. Through direct response transactional television programming and integrated consumer marketing techniques, the Company is pursuing a business strategy focusing on: (i) increasing the effective utilization and leveraging of its global presence and its media access (ii) continuing to develop and market innovative consumer products and (iii) engineering the most efficient business model for the conduct of its worldwide direct response business. LEVERAGING GLOBAL PRESENCE AND MEDIA ACCESS. The Company is continuing its efforts to expand its position as a worldwide leader in infomercial programming and to become a more complete direct marketing company. Through its existing media access and order fulfillment operations, the Company has the ability to deliver infomercial or other product programming/advertising and products to over 370 million households worldwide. The Company intends to continue to explore new ways to effectively utilize and leverage this worldwide distribution reach and capability and its media access, possibly, by offering such reach and capability to other consumer distributors; by entering into alliances with companies that need or desire to reach the households that the Company's programming reaches; and by taking advantage of the product/brand awareness created by its programming in other methods of consumer distribution (i.e., retail, internet and continuity). In addition, the Company intends to more aggressively utilize its assets such as its customer lists in order to realize the true value thereof. CONTINUE TO DEVELOP AND MARKET INNOVATIVE PRODUCTS. The Company continually seeks out innovative consumer products which it can market and distribute profitably. The Company has an in-house product development/marketing department responsible for researching, developing and analyzing products and product ideas. The Company augments its product development activities through relationships with third parties. The Company believes that its library of infomercial programs, together with its extensive international operations and experience in product sourcing, telemarketing, order fulfillment and customer service, gives it a significant competitive advantage over others desiring to enter its existing or new markets. While the Company incurs certain initial and ongoing costs in connection with adapting a product and infomercial for specific markets, the primary expenses are incurred when the product/infomercial is first developed for its initial target market. Thus, as the Company decides to introduce a product into additional markets, it can do so quickly, efficiently and relatively inexpensively. 4 ENGINEERING THE MOST EFFICIENT BUSINESS MODEL FOR THE COMPANY. The Company continues to explore methods to improve each step in the development and life cycle of a product/infomercial and to develop its expertise in, and refine its approach with regards to, among other things, product sourcing, in-bound telemarketing, order fulfillment, non-infomercial revenue production and customer service. National Media believes that its current competitive advantages of international media access, multi-country coverage and fully-integrated program production, product sourcing and order fulfillment, as well as the development of new partnership relationships, provide it with a strong base from which it can lower its costs and engineer a business model which is the most efficient for a worldwide direct response business. PRODUCT DEVELOPMENT The Company's product development/marketing department researches and develops new products that may be suited for direct response television marketing and subsequent marketing through non-infomercial distribution channels. The Company's product development staff develops new product offering ideas from or with a variety of sources, including inventors, suppliers, trade show participants, industry conference contacts, manufacturing and consumer product companies and the Company's ongoing review of new developments within its targeted product categories. The Company does not invent new products but, as a result of the Company's prominence in the infomercial industry, it often receives and reviews new product proposals from independent third parties who have invented or patented a product which they wish to market through the Company. During the evaluation phase of product development, the Company evaluates the suitability of the product for television demonstration and explanation as well as the anticipated perceived value of the product to consumers, determines whether an adequate and timely supply of the product can be obtained, and analyzes whether the estimated profitability of the product satisfies the Company's criteria. The Company oversees the enhancement of products brought to it by these parties for purposes of targeting the products for a direct marketing audience. This effort may include actual changes to the product itself as well as alterations of tradename, packaging, etc. In order to develop or acquire the rights to distribute or market new products, the Company sometimes works with consumer product companies. A clear advantage of these relationships is that the Company's partner typically will underwrite the research and development function, thereby reducing the Company's financial risk as well as its working capital requirements. The Company reviews its products on an ongoing basis to select those products which it believes will be successful in Europe, Asia and/or one of its other international markets. When a product which was initially sold domestically is selected for international distribution, the infomercial is dubbed, if necessary, and product literature is created in the appropriate foreign languages. In addition, a review of the product's and the infomercial's compliance with local laws is completed, as necessary. The Company then begins airing the infomercial internationally. As competition in the international marketplace has increased, the Company has begun introducing domestically originated products internationally on a much more rapid basis. Internationally, the Company airs shows which it produces and also distributes products of other independent domestic infomercial companies. The Company brought approximately 64 new products to market globally during fiscal 1998, 11 of which were products marketed through infomercials produced by the Company. The Company obtains the rights to new products created by third parties through various licensing arrangements generally involving royalties related to sales of the product. The amount of the royalty is negotiated and generally depends upon the level of involvement of the third party in the development and marketing of the product. The Company generally pays the smallest royalty to a third party that only provides a product concept. A somewhat higher royalty is paid to a third party that has fully developed and manufactured a product. The Company also obtains the rights to sell products which have already been developed, manufactured and marketed through infomercials produced by other companies. In such cases, the Company generally pays a higher royalty rate to the third party because of the relatively small amount of the Company's resources required to develop the product. The Company generally seeks exclusive 5 worldwide rights to all products in all means of distribution. In some cases, the Company does not obtain all marketing and distribution rights, but seeks to receive a royalty on sales made by the licensor pursuant to the rights retained by the licensor. INFOMERCIAL DEVELOPMENT AND TEST MARKETING Once the Company decides to bring a product to market, it arranges for the production of an infomercial that will provide in-depth demonstrations and explanations of the product. The Company's infomercials have historically been 28 minutes in length. The Company attempts to present a product in an entertaining and informative manner utilizing a variety of program formats, including live talk shows and live paid studio audience programs. The Company's infomercials are currently produced in-house or by independent production companies with experience in the Company's product categories in the United States and other countries. The cost of producing an infomercial generally ranges from $200,000 to $400,000. In addition, producers, hosts and spokespersons generally receive fees based upon sales of the product. Following completion of the production of an infomercial, the program is then tested in the United States in specific time slots on both national cable networks and targeted broadcast stations. If a show achieves acceptable results in the market tests and a supply of product is available, it is generally aired on a rapidly increasing schedule on cable networks and broadcast channels. During this initial phase, the Company may modify the creative presentation of the infomercial and/or the retail pricing, depending upon viewer response. After the initial marketing phase, the Company may adjust the frequency of a program's airings to achieve a schedule of programs that it believes maximizes the profitability of all of the Company's products being marketed through infomercial programming at a given time. In the past, the Company generally aired each successful infomercial domestically for 4 to 10 months or more, before international airings were begun. International airings then would range from 12 to 24 months, or longer in some instances. The Company has more recently begun introducing products internationally soon after, or simultaneously with, its domestic introduction of the products. The Company believes that it has the largest library of infomercials and associated products in the world. The Company believes that this library is a significant asset when it negotiates to gain access to media time, particularly in new markets where media sources require that a variety of programming be aired over given periods of time. MEDIA ACCESS An important part of the Company's ability to successfully market products is its access to media time. An integral part of the Company's results of operations is its ability to purchase media time at a price which allows it to sell sufficient product units to make a profit. Many factors, such as changing viewer patterns, cable company practices and competition impact on the Company's ability to properly manage this function. The Company's infomercial programming is presently available to more than 370 million households in over 70 countries worldwide. In peak periods, the Company utilizes upwards of 1000 hours of cable and broadcast television time per week in the United States and upwards of 650 hours per week internationally, most of which is satellite and terrestrial broadcast time, to air its infomercials. For the most part, cable broadcast technology is not as prevalent internationally as it is in North America. Historically, approximately one-half of the Company's cable air time in the United States and a majority of the Company's satellite and terrestrial air time internationally has been purchased under long-term contracts that provide for specific time slots over the life of the respective contracts. Over the past 18 months, the Company has effectuated an intentional reduction in the United States market to the point where, only one-quarter of its time is now purchased pursuant to longer term contracts. The Company's current strategy in North America is to avoid long-term commitments unless they include a variable rate pricing feature. 6 DOMESTIC Domestically, the Company purchases most of its cable television time directly from cable networks and their respective media representatives, rather than from multi system operators, and presently has commitments for cable television time slots for periods ranging from two weeks to six months. Such commitments for cable television access are generally longer in duration than broadcast television time, which is often purchased on an "as available" basis. The Company believes that its programming is seen on at least one network which is carried by every local cable system carrier throughout the United States. In addition to domestic air time purchased on cable networks, the Company also purchases broadcast television time from network affiliates and independent stations. Broadcast television time segments are purchased primarily in 30-minute spots. The Company also purchases 60 and 120-second spots where economically feasible and adapts portions of its infomercials for airings in such spots. The time segments on broadcast television are purchased primarily on a quarterly basis based on the availability of programming time. In the event that the Company determines that such time slots are not advantageous to the Company, the Company is able to terminate such agreements quickly. The Company believes that there is currently more than an adequate supply of broadcast television time available from these sources in the United States to satisfy the Company's needs. In fiscal 1998 in the United States, approximately 49.6% (in dollar terms) of the media time purchased by the Company for airings its infomercials came from cable television and approximately 50.4% came from network affiliates and independent television. The Company's infomercials generally are aired in the United States between the hours of 3:00 a.m. and 2:00 p.m., Eastern time, seven days a week. The Company generally has the right to resell any media time it may have the right to use. During fiscal 1998, the Company maintained a broker relationship with several companies to which it sold air time. This ability to resell excess time can reduce some of the risk associated with large or longer term purchases of media time. As discussed above, the Company purchases a significant amount of its media time from cable television and satellite networks. These cable television and satellite networks assemble programming for transmission to multiple and local cable system operators. These operators may not be required to carry all the network's programming. The Company currently does not pay and is not paid for the "privilege" of being broadcast by these operators. It is possible that, if demand for air time grows in the United States, these operators will begin to charge the Company to continue broadcasting the Company's infomercials or limit the amount of air time available to the Company. The Company is dependent on having access to media time to televise its infomercials on cable networks, satellite networks, network affiliates and local stations. INTERNATIONAL Internationally, the Company's infomercials are aired on one or more of three technologies in its market territories: (i) satellite transmission direct to homes with satellite reception dishes, (ii) cable operators who retransmit satellite broadcasts to cable-ready homes and (iii) terrestrial broadcast television. The Company's satellite air time has historically been obtained through long-term agreements with companies that own or lease satellite transponder time. The Company at present is a party to contracts with pan-European satellite channels such as Eurosport, Flextech (Starstream) and The NBC Super Channel. During the term of these contracts, the Company is generally entitled to broadcast programming continuously for a specified period of time daily. Under some of these arrangements, the Company has rights of first refusal for any additional infomercial air time that becomes available. In April, 1998 the Company began a direct lease of a twenty four hour per day transponder on a newly-launched Eutelstat satellite, the "Hotbird IV" (the "Eutelstat Satellite") the coverage of which reaches across the European continent. It remains to be seen how many households will actually access the Company's programming via the Eutelstat Satellite. The Company expects to incur significant start up costs, especially in the first half of 7 fiscal 1999, associated with the Eutelstat Satellite which will adversely effect its media costs. However, the Company believes that in the long term the Eutelstat Satellite will be beneficial to its European operations. At present, in Japan and throughout most of Asia, the Company purchases the majority of its media time through its partner, Mitsui & Co., Ltd. ("Mitsui"). The Company's existing agreement with Mitsui regarding its operations in Japan will terminate on January 1, 1999. The Company and Mitsui are involved in negotiations to restructure their relationships in Japan and throughout Asia in order to address changes in that market and other circumstances which have arisen. As a result of its media relationships, the Company's transactional television programming can be seen in the Middle East, South Africa, Asia and in virtually every country in Europe, and its products are available for purchase in over 70 countries. As the Company's media contracts expire, the Company expects that it will face increases in costs associated with the renewal of certain of such media contracts, which may or may not have a material adverse effect on the Company. The Eutelstat Satellite lease expires in 2010. SOURCING AND MANUFACTURING The Company uses sources in the United States and several countries in Europe and Asia to manufacture products sold through its infomercials and otherwise. The Company monitors the availability of supplies of products and adjusts the amount of air time on which an infomercial for a particular product which cannot be adequately supplied will be aired. Additionally, the Company uses the services of a technical/engineering firm in Hong Kong and Taiwan to assist in the coordination of the manufacturing of some of the Company's products in Asia and to assist in the monitoring of the quality of the products manufactured in such countries. The same product manufacturing sources are generally utilized irrespective of whether an infomercial is being aired in the United States or internationally. In general, when possible, before the Company takes any sizeable inventory position in a product, the Company test markets the product. The Company then purchases additional inventory for a future roll-out of the product infomercial. Sometimes, due to issues of timing and payment relating to sourcing, the Company does take an inventory position in a product before testing is completed. IN-BOUND TELEMARKETING The Company strives to create a problem-free fulfillment process for its customers. This process consists of in-bound telemarketing, order fulfillment and customer services. The first step in this process is the order-taking function known as in-bound telemarketing. Customers may order products marketed through infomercials during or after the infomercial by calling a telephone number (toll-free in the United States), which is shown periodically on the television screen during the broadcast. Both domestically and, in most cases, internationally, the Company currently subcontracts its telemarketing function to one of various third parties that provide this service for a fee based principally on the number of telephone calls answered. In Australia and New Zealand, the Company operates its own in-bound telemarketing. In all instances domestically and in most instances internationally, in-bound telemarketers electronically transmit orders to the Company's order fulfillment centers where the product is packaged and shipped. In certain cases, at the time of purchase, the in-bound telemarketers also promote, cross-sell and upsell complementary and/or additional products or services. Such sales efforts are orchestrated by the Company's marketing personnel who script the sales approaches of the telemarketing personnel. The large majority of customer payments in the United States are made by credit cards over the telephone with the remainder paid by check. The trend in the infomercial industry, especially over the last few years, has been to sell products on a multi-pay basis whereby customers make installment payments over some predetermined period after having received the product. This practice is prevalent in the United States and the South Pacific Rim regions. In Europe and Asia, products are generally delivered to consumers on a "cash on delivery" basis. In other areas of the world, payment by check at the time of delivery is not uncommon. In fiscal 1998, the Company introduced domestically the direct debit method of 8 payment (i.e., use of customer's checking account as a credit card), a method utilized previously in the South Pacific Rim region. ORDER FULFILLMENT At present the Company's North American order fulfillment center is operated by the Company out of a leased facility located in Phoenix, Arizona. Activities at this facility include receiving merchandise from manufacturers, inspecting merchandise for damages or defects, storing and assembling product for later delivery, packaging and shipping of products and processing of customer returns. The Company's Phoenix fulfillment center, an approximately 188,000 square foot facility, processes substantially all orders for the Company's products sold in North America. The Company primarily uses bulk shippers to deliver products to customers in the United States. Each customer is charged a shipping and handling fee, which varies among products. The Company is presently analyzing whether it should reduce the size of its Phoenix operation and/or, outsource some or all of the functions currently being performed there. Throughout most of Europe and Asia, the Company operates the warehousing, order fulfillment, distribution and customer service functions of its business through independent third parties, each of which is responsible for a particular territory. In New Zealand and Australia, the Company performs these functions internally. European products are shipped by the Company or the manufacturer to an independent warehouse in Rotterdam, The Netherlands. Products are then shipped to independent fulfillment centers throughout Europe that process the Company's European sales orders. The Company is currently expanding direct shipments of European products to all independent fulfillment centers throughout Europe. In Asia, the Company's partner, Mitsui, plays a key role in the warehousing and distribution of the Company's products. Outside of Europe, the Company generally contracts with independent licensees who buy the Company's products outright and then sell them to consumers, both through infomercials and through other local distribution channels, under conditions and standards prescribed and monitored by the Company. In many international countries, the Company's products are delivered to purchasers through the postal system on a "cash on delivery" basis. In some countries, consumers who order products in response to an infomercial pick up their product at a central warehouse facility. CUSTOMER SERVICE An important aspect of the Company's marketing strategy is to maintain and improve the quality of customer service. Domestically, the Company operates toll-free customer service telephone numbers and maintains its own customer service department in Phoenix, Arizona to respond to customer inquiries, provide product information to customers and process product returns. Outside of the United States and Canada, customer service is generally provided on a contract basis through third parties whose operations are monitored by the Company. The Company's New Zealand and Australian subsidiaries perform these functions internally. The Company generally offers an unconditional 30-day money back return policy to purchasers of any of its products. In addition, products are generally covered by warranties offered by the manufacturer for defective products. The terms of such warranties vary depending upon the product and the manufacturer. The average return rate of the Company's products for each of fiscal 1998, 1997 and 1996 was 15.7%, 10.3% and 9.2%, respectively. The Company believes that its overall return rate has increased as a result of the following factors: 1) a higher percentage of international sales; 2) more larger product (i.e., fitness equipment) sales; and 3) more book and tape type products. International sales carry a higher average return rate due to the "cash on delivery" terms of a significant portion of this business. In countries where the Company depends upon the postal system for deliveries on a "cash on delivery" basis, official return rates include instances where there is no answer at the attempted delivery site and where a person at the delivery site does not have the cash on hand at the time of delivery. The Company believes that its return experience is within the customary range for direct marketing businesses. 9 NON-INFOMERCIAL MARKETING Based on the success of certain of its products in traditional retail markets and the evolution of its business, the Company believes that its transactional television programming is effective in building consumer awareness of its products, as well as in positioning the Company to act as the media marketing partner for manufacturers of consumer products. The Company attempts to capitalize on its ability to create product awareness and its ability to act as a media marketing partner to extend the sales life of its products by shifting products from infomercial programming to non-infomercial marketing channels such as continuity sales, retail distribution, catalogs, direct mail, direct response print ads, television home shopping programs, credit card statement inserts and other channels resulting from the development of strategic partnerships. The Company believes that established manufacturers are increasingly regarding infomercials as a desirable vehicle to showcase their products to create and build brand awareness and generate follow-up product sales through traditional retail outlets. Prior to fiscal 1992, a limited amount of the Company's sales had been through non-infomercial distribution channels that did not include retail distribution. In fiscal 1992, the Company began selling products through traditional retail channels, such as mass merchandisers, specialty retailers and wholesale clubs. During fiscal 1994, the Company began entering into agreements with partners who handle the retail marketing and pay a royalty to the Company based on retail sales in consideration of the television advertising for the product funded by the Company. In fiscal 1998, 1997 and 1996, non-infomercial distribution channels accounted for 9.3%, 6.6% and 3.3%, respectively, of the Company's net revenues. The increased percentage in fiscal 1998 was primarily due to increased retail sales in the Far East and South Pacific Rim Regions. Fiscal 1997 included significant royalties earned from the sale of the Ab Roller Plus product in the retail marketplace. The Company intends to pursue further expansion of its retail operations in order to capitalize on the consumer brand-awareness created by the Company's infomercials and reinforced by the "As Seen On TV" in-store signage. The Company believes that the product exposure created by the Company's transactional television programming enables the Company and its partners to utilize traditional retail distribution channels without incurring any of the additional advertisement costs that other consumer product companies may incur. In this manner, the Company believes that it will be able to market products to consumers who view its programming, but do not traditionally purchase products through direct response marketing. In New Zealand, Australia and parts of Asia, the Company operates small retail locations of its own. PRODUCTS The Company markets consumer products in a variety of categories. In fiscal 1998, the Company offered a total of over 125 products to consumers in one or more geographic markets worldwide, of which, on a revenue basis, approximately 80.0% were products sold through the Company's infomercials and approximately 20.0% were products sold through infomercials produced by other companies and aired by the Company. Of the products sold through the Company's infomercials in fiscal 1998, approximately 11 were products first introduced by the Company in fiscal 1998 and approximately 49 were products that were originally offered in previous years. Through its international programming, the Company has brought to the international marketplace many of its products that had been successfully marketed in the United States. The Company's five most successful products in each of fiscal 1998, 1997 and 1996 accounted for approximately 40.3%, 41.2% and 46.0%, respectively, of the Company's net revenues for such periods. The Company continues to be dependent, in significant part, upon its ability to develop or obtain rights to new products to supplement and replace existing products as they mature through their product life cycles. The Company's international operations lengthen the potential duration of the life cycle of programs that comprise the Company's infomercial library. Historically, the majority of the Company's products generate 10 their most significant domestic revenues in the first 6 months following initial airing of the product's infomercial. Internationally, however, products typically generate revenues more evenly over a longer period due, in part, to the introduction of such products into new markets each year. Based on the fact that the Company already markets its products in over 70 countries, the Company's ability to continue to expand into new markets each year will be limited. To illustrate an infomercial's life cycle, the Company derived fiscal 1998 net infomercial revenue as follows: approximately 43.9% from products introduced during fiscal 1998, approximately 46.3% from products introduced during fiscal 1997 and 1996 and approximately 9.8% from products introduced prior to fiscal 1996. BACKLOG Backlog orders for the Company at April 30, 1998 and 1997 were approximately $12.1 million and $12.0 million, respectively. Average monthly backlog orders for fiscal 1998 were approximately $12.5 million as compared to $11.6 million in fiscal 1997. The consumer is notified upon placement of an order that normal shipping time is four to six weeks. Orders in excess of anticipated production capacity are included in backlog figures. However, product shortages, cancellations, returns and allowances may reduce the amount of sales realized from the fulfillment of backlog orders. Backlogs of orders may result from unexpectedly large volumes of product orders, inventory supply delays, other matters affecting the ability of the Company to fulfill orders, etc, some of which are outside the Company's control. The Company does not make an effort to intentionally create backlog situations because delays in delivering product typically increase product rejection/return rates. COMPETITION The Company competes directly with many other companies, large and small, which generate sales from infomercials. The Company also competes with a large number of consumer product companies and retailers which have substantially greater financial, marketing and other resources than the Company, some of which presently conduct, or indicated their intent to conduct, direct response marketing. The Company also competes with companies that make imitations of the Company's products at substantially lower prices. Companies which "knockoff" the Company's products take advantage of the product category awareness, product development, etc. which the Company pays for when it develops a product and an infomercial. The Company seeks to protects itself from "knockoffs" through establishment and enforcement of its intellectual property rights. Products similar to the Company's products may be sold in department stores, pharmacies, general merchandise stores and through magazines, newspapers, direct mail advertising and catalogs. MANAGEMENT INFORMATION SYSTEMS The Company's computer system features programs which allow the Company to manage its media time purchases and program scheduling, the flow of product order information among its telemarketers, its order fulfillment center, its credit card clearing house and the flow of shipping, billing and payment information. The Company believes that its management information systems are in need of improvement and it is currently in the process of doing so including discussions regarding the outsourcing of portions of this function. YEAR 2000 ISSUES The efficient operation of the Company's business is dependent in part on its computer hardware, software programs and operating systems (collectively, "Programs and Systems"). These Programs and Systems are used in key areas of the Company's business, including merchandise purchasing, inventory management, pricing, sales, shipping and financial reporting, as well as in various administrative functions. The Company has been evaluating its Programs and Systems to identify potential Year 2000 compliance issues. These actions are necessary to ensure that the Programs and Systems will recognize and process the 11 Year 2000 and beyond. It is anticipated that modification or replacement of some of the Company's Programs and Systems will be necessary to make such Programs and Systems Year 2000 compliant. The Company is also communicating with suppliers, financial institutions and others to coordinate Year 2000 conversion. Based on present information, the Company believes that it will be able to achieve such Year 2000 compliance through a combination of modification of some existing Programs and Systems, and the replacement or upgrade of other Programs and Systems that are already Year 2000 compliant. However, no assurance can be given that these efforts will be successful. The Company currently believes that the expenses and capital expenditures associated with achieving Year 2000 compliance will be in the range of $1.0 to $2.0 million. GOVERNMENT REGULATION Various aspects of the Company's business are subject to regulation and ongoing review by a variety of federal, state, and local agencies, including the FTC, the United States Post Office, the CPSC, the FCC, FDA, various States' Attorneys General and other state and local consumer protection and health agencies. The statutes, rules and regulations applicable to the Company's operations, and to various products marketed by it, are numerous, complex and subject to change. As a result of prior settlements with the FTC, the Company has agreed to two consent orders. Prior to the Company's May 1996 acquisition of Positive Response Television, Inc. ("PRTV"), PRTV and its Chief Executive Officer, Michael S. Levey, also agreed to a consent order with the FTC. For further discussion, see Item 3 -Legal Proceedings, Regulatory Matters. The Company's international business is subject to the laws and regulations of England, the European Union, Japan and other countries in which the Company sells its products, including, but not limited to, the various consumer and health protection laws and regulations in the countries in which the programming is broadcast, where applicable. If any significant actions were brought against the Company or any of its subsidiaries in connection with a breach of such laws or regulations, including the imposition of fines or other penalties, or against one of the entities through which the Company obtains a significant portion of its media access, the Company could be materially adversely affected. There can be no assurance that changes in the laws and regulations of any territory which forms a significant portion of the Company's market will not adversely affect the Company's business or results of operations. The Company collects and remits sales tax in the states in which it has a physical presence. Certain states in which the Company's only activity is direct marketing have attempted to require direct marketers, such as the Company, to collect and remit sales tax on sales to customers residing in such states. A 1995 United States Supreme Court decision held that Congress can legislate such a change. Thus far, Congress has taken no action to that effect. The Company is prepared to collect sales taxes for other states, if laws are passed requiring such collection. The Company does not believe that a change in the tax laws requiring the collecting of sales tax will have a material adverse effect on the Company's financial condition or results of operations. EMPLOYEES As of May 31, 1998, the Company had approximately 430 full-time employees. The Company also utilizes contract/part-time laborers at its order fulfillment center in Phoenix, Arizona on an as needed basis. None of the Company's employees are covered by collective bargaining agreements and management considers relations with its employees to be good. 12 TRADEMARKS/PATENTS The Company has a number of registered trademarks and other common law trademark rights for certain of its products and marketing programs. It is the Company's policy that it will seek to fully protect and vigorously defend its trademark rights in its products and programs, although the Company often will not actively seek to register certain trademarks in all jurisdictions where its sells its products. The Company does not hold any patents, but the products which the Company markets are often protected by patents (or the subject of pending patent applications) held by the Company's product partners. The Company seeks to have its product partners indemnify the Company against claims that the product marketed by the Company with such partner infringe some third party's patent rights. ITEM 2. PROPERTIES The Company currently leases approximately 25,200 square feet of office space pursuant to an eleven-year lease for its principal executive offices in Philadelphia, Pennsylvania. The lease, which commenced in December 1996, provides for annual rent payments of $479,000 in years one through five, and $568,000 in years 6 through 11. Pursuant to the terms of such lease, the Company's rent was abated from inception of the lease through November 1, 1997. On May 1, 1997, the Company began leasing approximately 23,000 square feet in Los Angeles, California for its new production facility and offices. The Company does not maintain any studio space. The lease runs for 126 months and requires payments at varying rates from $520,000 in year one to $662,000 in the final year. In January 1998, the Company exercised a five year option to lease an additional 3,530 square feet for approximately $63,500 per year. The Company leases approximately 188,000 square feet in Phoenix, Arizona for warehousing, order fulfillment and customer service operations. The Company currently has approximately 30,000 square feet of office space available for subletting or expansion. The annual lease payments for this lease range from approximately $565,000 for fiscal year 1998 to $1.1 million for fiscal years 2010 through 2014. The Company leases approximately 10,800 square feet of office space in London, England, approximately 3,600 square feet of which it currently sublets. The lease expires in February 2001. The lease requires annual rent payments of L269,433 ($450,500 as of March 31, 1998). Additionally, pursuant to the terms of such lease, the Company must pay a basic service charge for services provided by the landlord. For the fiscal year ended March 31, 1998, the Company paid a basic service charge of approximately L73,800 ($126,000 as of March 31, 1998). The Company leases an office building, warehouse, showroom facility and retail stores in Auckland, New Zealand. The main lease, which commenced on April 1, 1996, runs for ten years and currently requires annual payments of NZ$376,000 per year ($207,500 as of March 31, 1998). In addition, the Company entered into a three year lease, beginning in August 1997, for its primary offices and warehouse in New South Wales, Australia. The lease requires annual payments of AUS$571,000 ($378,500 as of March 31, 1998). This amount includes AUS$78,000 ($51,500 as of March 31, 1998) per year for general area charges and maintenance. ITEM 3. LEGAL PROCEEDINGS NATIONAL MEDIA LITIGATION AB ROLLER PLUS PATENT LITIGATION On March 1, 1996, Precise Exercise Equipment ("Precise") filed suit in the United States District Court for the Central District of California against certain parties, including the Company, alleging patent infringement, unfair competition and other intellectual property claims. Such claims related to an alleged 13 infringement of Precise's initial US patent for an exercise device. The suit claimed that a product marketed by the Company pursuant to a license granted by a third party violated Precise's initial US patent. The suit sought an injunction and treble damages. On July 16, 1997, the Company and certain of the other defendants to the action entered into a settlement agreement with the plaintiffs. The Company recorded a charge of approximately $6.0 million in the fourth quarter of the fiscal year ended March 31, 1997 in connection with this matter. WWOR LITIGATION In March 1997, WWOR-TV filed a breach of contract action in the United States District Court for New Jersey against one of the Company's operating subsidiaries alleging that the subsidiary wrongfully terminated a contract for the purchase of media time, seeking in excess of $1,000,000 in compensatory damages. The Company is contesting the action. At this stage, the Company cannot predict the outcome of this matter; however, even if plaintiffs were to succeed on all of their claims, the Company does not believe that such result would have a material adverse impact on the Company's results of operations. PARKIN LITIGATION In early October 1997, John Parkin, an on air personality appearing in certain of the Company's infomercials, brought an action for injunctive relief and unspecified damages in the United States District Court for the Eastern District of Pennsylvania, alleging principally breach of contract and intellectual property based claims. The Company and Mr. Parkin settled the action through a mutually beneficial business arrangement which is not expected to have any material adverse impact on the Company's results of operations. PRTV LITIGATION PRTV SHAREHOLDERS' CALIFORNIA CLASS ACTION LITIGATION On May 1, 1995, prior to the acquisition of PRTV by the Company in May 1996, a purported class action suit was filed in the United States District Court for the Central District of California against PRTV and its principal executive officers. The suit sought unspecified compensatory damages and other equitable relief. The Company reached an agreement in principle to settle this action in fiscal 1997 which provided for the payment of $550,000 to the class, 66% of which was paid by PRTV's insurance carrier. The Company recorded a charge of $187,000 during fiscal 1997 in connection with this matter. Such settlement received final court approval in April 1998. SUNTIGER LITIGATION In late March 1997, Suntiger, Inc., a distributor of sunglasses, filed suit against PRTV and certain other parties in the United States District Court for the Eastern District of Virginia alleging patent infringement. The Company has reached a settlement with the plaintiffs involving a going-forward business relationship that is not expected to have any material adverse impact upon the Company's financial condition or results of operations. REGULATORY MATTERS As a result of prior settlements with the FTC, the Company has agreed to two consent orders. Prior to the Company's acquisition of PRTV, PRTV and its Chief Executive Officer, Michael S. Levey, also agreed to a consent order with the FTC. Among other things, such consent orders require PRTV and Mr. Levey to submit compliance reports to the FTC staff. The Company and Mr. Levey submitted compliance reports as well as additional information requested by the FTC staff. In June 1996, the Company received a request from the FTC for additional information regarding certain of the Company's informercials in order to 14 determine whether the Company was operating in compliance with the consent orders referred to above. The FTC later advised the Company that it believed the Company had violated one of the consent orders by allegedly failing to substantiate certain claims made in one of its infomercials which it no longer airs in the United States. The Company, which is now indemnified against damages sustained as a result of any action taken by the FTC in connection with such infomercial, has provided information to the FTC to demonstrate substantiation. If the Company's substantiation is deemed to be insufficient by the FTC, the FTC has a variety of enforcement mechanisms available to it, including, but not limited to, monetary penalties. While no assurances can be given, especially given the applicable indemnification, the Company does not believe that any remedies to which it may become subject will have a material adverse effect on the Company's results of operations or financial condition. The FTC recently notified the Company that it had concerns about claims being made in one of the Company's current infomercials and also raised questions concerning certain aspects of the Company's pricing practices in certain of its current infomercials. The Company is responding to the FTC's inquiries. In addition, in Spring 1997, in accordance with applicable regulations, The Company notified the CPSC of breakages which were occurring in its Fitness Strider product. The Company also notified the CPSC of its replacement of certain parts of the product with upgraded components. The CPSC reviewed the Company's testing results in order to assess the adequacy of the Company's upgraded components. The CPSC also undertook its own testing of the product and, in November 1997, informed the Company that the CPSC compliance staff had made a preliminary determination that the Fitness Strider product and upgraded component present a substantial product hazard, as defined under applicable law. The Company and the CPSC staff are discussing voluntary action to address the CPSC's concerns, including replacement of the affected components. At present, management of the Company does not anticipate that any action agreed upon, or action required by the CPSC, will have any material adverse impact on the Company's financial condition or results of operations. The Company has also been contacted by Australian consumer protection regulatory authorities regarding the safety and fitness of the Fitness Strider product and an exercise rider product marketed only in Australia and New Zealand. At this point, the Company cannot predict whether the outcome of these matters regarding the Fitness Strider will have a material adverse impact upon the Company's financial condition or results of operations. OTHER MATTERS The Company, in the normal course of business, is a party to litigation relating to trademark and copyright infringement, product liability, contract-related disputes, and other actions. It is the Company's policy to vigorously defend all such claims and enforce its rights in these areas. The Company does not believe any of these actions either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. The Company has also received letters and telephone calls from persons purporting to be stockholders of the Company, concerning their stated intention to commence legal action against the Company and its officers and directors relating to the Company's financial performance over the recent past as well as the decline in the market price of the Company's Common Stock. No specific allegations have been communicated to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year ended March 31, 1998. 15 PART II ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange and the Philadelphia Stock Exchange under the symbol "NM". Based on the Company's present financial condition, the Company may be in violation of the listing criteria required for trading of the Company's Common Stock on the New York Stock Exchange and Philadelphia Stock Exchange. Failure to maintain such criteria could result in the de-listing of the Company's Common Stock on such exchanges and, therefore, cause the Company to fail to meet its obligations under certain of its financing arrangements. The following table sets forth the quarterly high and low last sales prices as reported on the New York Stock Exchange and dividends declared for the last two fiscal years. The Company's common stock has been traded on the New York Stock Exchange since September 14, 1990.
FISCAL 1998 FISCAL 1997 ------------------------------------- -------------------- CASH DIVIDENDS QUARTER ENDED HIGH LOW DECLARED HIGH LOW - ------------------------------------------------------------------- --------- --------- --------------- --------- --------- June 30............................................................ 9 3/8 5 15/16 -- 20 5/8 16 September 30....................................................... 7 9/16 4 7/16 -- 18 14 5/8 December 31........................................................ 7 3/16 2 1/2 -- 15 3/8 5 3/4 March 31........................................................... 3 7/16 2 1/8 -- 10 1/8 6 1/2 CASH DIVIDENDS QUARTER ENDED DECLARED - ------------------------------------------------------------------- --------------- June 30............................................................ -- September 30....................................................... -- December 31........................................................ -- March 31........................................................... --
The number of record holders of the Company's Common Stock on June 15, 1998 was approximately 840. The Company is currently restricted in its ability to pay dividends under the terms of its debt financing as more fully described in Note 5 to the financial statements. 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEAR ENDED MARCH 31, ---------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Operating Data: Net revenues......................................... $ 278,474 $ 358,179 $ 292,607 $ 176,167 $ 172,602 (Loss) income before income taxes (3),(4)............ (56,069) (43,794) 20,104 (372) (8,699) Net (loss) income (3),(4)............................ (56,769) (45,691) 16,579 (672) (8,699) ---------- ---------- ---------- ---------- ---------- Net (loss) income per common share: Basic.............................................. $ (2.31) $ (2.09) $ 1.08 $ (.05) $ (.72) Diluted............................................ (2.31) (2.09) .73 (.05) (.72) Cash dividends....................................... -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares Basic.............................................. 24,904 21,905 15,411 14,024 12,078 Diluted............................................ 24,904 21,905 22,674 14,024 12,078 ---------- ---------- ---------- ---------- ---------- Balance Sheet Information: Working capital...................................... $ 9,442 $ 19,768 $ 38,722 $ 22,081 $ 1,377 Total assets......................................... 143,091 165,632 116,548 64,143 47,475 Short-term debt(1)................................... 30,812 17,901 876 184 4,770 Long-term debt(2).................................... 469 959 4,054 3,613 448 Shareholders' equity................................. 54,327 88,560 56,462 26,625 10,571 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------ (1) Net of loan discount of $900 and $768 as of March 31, 1998 and 1997, respectively. (2) Net of loan discount of $1,251 and $1,650 as of March 31, 1996 and 1995, respectively. (3) Fiscal 1998 includes a charge of $14.5 million related to the write-off of the remaining PRTV goodwill which was determined to be unrecoverable. In addition, fiscal 1998 includes $6.5 million in provisions for inventory obsolence. (4) Fiscal 1997 includes the operating results of certain of the Company's operating subsidiaries as follows: PRTV, from May 17, 1996 forward and Prestige and Suzanne Paul (as defined below) from July 1, 1996 forward. In addition, the fiscal 1997 loss included $8.7 million in provisions for inventory obsolescence; $5.7 million in bad debt expense; $13.3 million in legal fees and settlements; $2.5 million of amortization primarily related to the new acquisitions; $4.4 million related to a write-off of additional PRTV goodwill; and PRTV's significant operating loss, all as discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations. Fiscal 1995 included $5.3 million in expenses related to certain legal settlements and associated fees; $1.0 million in relocation costs; and $1.8 million in anti-takeover and aborted stock offering costs. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As more fully described elsewhere herein, the Company is engaged in the direct marketing of consumer products, primarily through the use of infomercials, in both domestic and international markets. Domestically, the Company has historically been dependent on a limited number of successful products to generate a significant portion of its net revenue. The Company's strategies for future periods are being designed to reduce the risk associated with relying on a limited number of successful products for a disproportionate amount of its revenues and tailoring the Company's domestic operations to more efficiently deal with the cyclical nature of the Company's domestic business. These include the more effective utilization and leveraging of its global presence and media access, the continued development and marketing of innovative products to enhance its existing infomercial programs, and engineering the most efficient business model for the Company's future operations. International expansion over the last five (5) years, has resulted in approximately one-half of the Company's revenues being generated from the international infomercial marketplace. The Company takes advantage of product awareness created by its infomercials and also extends the sales life of its products through non-infomercial distribution channels. These include retail arrangements as well as continuity sales efforts; and internet marketing, among others. RESULTS OF OPERATIONS The operating results for certain of the Company's operating subsidiaries, namely PRTV, Prestige Marketing Limited ("Prestige") and Suzanne Paul Holdings Pty Limited and its subsidiaries (collectively, "Suzanne Paul") are included in the Company's results from the date of each respective acquisition during fiscal 1997. The following table sets forth operating data of the Company as a percentage of net revenues for the periods indicated below.
YEARS ENDED MARCH 31, --------------------------- 1998 1997 1996 ------- ------- ------- Net Revenues..................................................... 100.0% 100.0% 100.0% Operating costs and expenses: Media purchases.................................................. 33.0 36.6 29.6 Direct costs..................................................... 60.2 55.0 51.7 Selling, general and administrative.............................. 20.5 18.3 11.5 Write-off of impaired goodwill................................... 5.2 1.2 -- Severance expense for former executive officers.................. -- 0.7 -- Interest expense................................................. 1.2 0.4 0.3 ------- ------- ------- Total operating costs and expenses............................... 120.1 112.2 93.1 ------- ------- ------- (Loss) income before income taxes................................ (20.1) (12.2) 6.9 Net (loss) income................................................ (20.4)% (12.8)% 5.7% ------- ------- ------- ------- ------- -------
COMPARISON OF FISCAL 1998 WITH FISCAL 1997 NET REVENUES Net revenues were $278.5 million in fiscal 1998 as compared to $358.2 million in fiscal 1997, a decrease of $79.7 million or 22.3%. Retail royalties were negligible in fiscal 1998 versus $16.3 million in fiscal 1997. The fiscal 1997 royalties principally reflected the royalties generated from retail sales of the Ab Roller Plus product. Domestic net revenues were $123.6 million in fiscal 1998 as compared to $188.5 million in fiscal 1997, a decrease of $64.9 million or 34.4%. This decrease was due primarily to the lack of a product or products to replace the revenues generated by the Ab Roller Plus which performed strongly in fiscal 1997 in 18 television and in print and retail. The Ab Roller Plus accounted for approximately 41.9% of domestic net revenues in fiscal 1997. The rollout of a number of shows during fiscal 1998 was postponed due to show production delays, to timing issues related to product manufacturing and sourcing, and the Company's tight cash position which affected, among other things, inventory purchasing and media acquisition. Approximately 63% of net revenues for fiscal 1998 were generated by sales of the Company's Great North American Slim Down (16.8%), Cyclone (16.6%), T-Fal (14.7%) and PVA 10X Mop (14.1%) products. Current year domestic revenues were also unfavorably impacted by an increased return rate primarily due to a change in product mix. In fiscal 1998, the Company offered more high priced products and book and audio or video tape type products, which traditionally carry higher return rates. The Company started benefiting from the rollout of new shows beginning late in the second quarter of fiscal 1998. International net revenues in fiscal 1998 were $154.9 million as compared to $169.7 million in fiscal 1997, a decrease of $14.8 million or 8.7%. The current year included a full year of revenues from the Prestige and Suzanne Paul acquisitions compared to approximately nine months in the prior year; as well as a 12.6% increase in European net revenues due to expansion into Eastern Europe. These increases only partially offset the approximate 40.3% decline in revenues generated in the Asian marketplace. Japan, the Company's principal Asian market, experienced a 49.7% decline in fiscal 1998 revenues from fiscal 1997. Approximately 4.6% was due to currency devaluation. This decline was the result of extreme downturns in general economic conditions in this marketplace, increased competition from traditional programming and other infomercial competitors and the fact that the Company was unable to acquire additional productive airtime. In addition, the Company's Asian and South Pacific Rim revenues were negatively impacted by the significant currency devaluations experienced in these markets. These factors are expected to have a continuing adverse impact on these regions, and the Company's results of operations, in fiscal 1999. The Company's South Pacific Rim revenues and operating results were also negatively impacted in fiscal 1998 by significant returns associated with its Fitness Strider product. OPERATING COSTS Total operating costs and expenses were $334.5 million in fiscal 1998, as compared to $402.0 million in fiscal 1997, a decrease of $67.5 million or 16.8%, principally due to the 22.3% decline in net revenue. Excluding the write-offs in fiscal 1998 and 1997 of impaired goodwill of $14.5 million and $4.4 million, respectively, total operating costs and expenses decreased by 19.5% during fiscal 1998 as compared to fiscal 1997. MEDIA PURCHASES Media purchases were $91.9 million in fiscal 1998 compared to $131.1 million in fiscal 1997, a decrease of $39.2 million or 29.9%. This decrease correlates in large part to the 22.3% decline in net revenues. During periods where the Company was lacking in successful new shows, less media was purchased for airings. The ratio of media purchases to net revenues improved to 33.0% as compared to 36.6% in fiscal 1997. This was due to a significant improvement in the domestic ratio of media purchases to net revenues. The Company sold more products per dollar of media purchased in fiscal 1998 compared to fiscal 1997. The current year domestic ratio decreased in excess of five percentage points over the prior year ratio. This decrease was achieved in spite of the prior year ratio benefiting from higher retail royalties than in fiscal 1998. Retail royalties carry no direct media costs and therefore contribute to a more favorable ratio. In addition, the fiscal 1998 ratio benefited from a higher percentage of revenues being earned in the international marketplace in which media rates are generally more favorable. The international ratio increased slightly in fiscal 1998 as compared to fiscal 1997. Recent trends indicate an increase in international media costs due to increased competition and a trend towards minimum guarantees of media purchases. Higher costs could result in higher ratios of media expenditures to revenues. The Eutelstat Satellite, on which the Company leases a 24 hour transponder, launched in April 1998 at which time the Company began making monthly payments for the use of the transponder. While potentially 19 providing the Company with expanded media coverage in Europe, if viewership and/or viewer response is not obtained at the desired levels or within the desired timeframe, the Company could experience an increase in its European advertising to sales ratio (taking into account the cost of the transponder lease and the cost of uplinking to the satellite). Based on preliminary results, the cost of the Eutelstat Satellite will contribute to an increase in its European advertising to sales ratio in fiscal 1999, especially during the first six months of the fiscal year. DIRECT COSTS Direct costs consist of the cost of materials, freight, infomercial production, commissions and royalties, order fulfillment, in-bound telemarketing, credit card authorization, warehousing and profit participation payments. Direct costs were $167.5 million in fiscal 1998 as compared to $197.0 million in fiscal 1997, a decrease of $29.5 million or 14.9%, primarily related to the decrease in net revenues. As a percentage of net revenues, direct costs were 60.2% in fiscal 1998 as compared to 55.0% in fiscal 1997. Direct costs as a percentage of net revenues increased in both the domestic and international marketplaces. The expense for inventory obsolescence was $6.5 million (2.3% of net revenues) and $8.7 million (2.4% of net revenues) in fiscal 1998 and 1997, respectively. Domestically, the ratio was unfavorably impacted by the 34.4% decrease in net revenues. The lower sales volume, especially in the first six months of fiscal 1998, coupled with certain fixed costs associated with the Company's fulfillment operations and a significant increase in the domestic return rate, negatively impacted the ratio. In addition, fiscal 1997 benefited from retail royalties ($.7 million for fiscal 1998 as compared to $16.3 million for fiscal 1997) which carry minimal direct costs. Internationally, the economic downturn and currency devaluation in the Far East and South Pacific Rim regions, a change in product mix and increased show customization costs adversely affected the ratio. The currency devaluation, particularly in the six months ended March 31, 1998, resulted in higher product costs due to the Company's inability to increase pricing sufficiently to offset the full impact of the significant decline in local currency values. In Japan, fulfillment and warehousing costs increased as a percentage of revenues as a result of the lower sales volume and higher inventory levels. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $57.1 million in fiscal 1998 as compared to $69.8 million in fiscal 1997, a decrease of $12.7 million or 18.2%. Fiscal 1998 included approximately $2.0 million of additional selling, general and administrative expenses associated with the operations of Prestige and Suzanne Paul which were acquired in July of 1996, resulting in nine months of expense in fiscal 1997 compared to a full year of expense in fiscal 1998. In addition, the current period includes non-cash compensation expense of $1.9 million associated with options granted to an executive officer. Fiscal 1998 benefited from a decrease in legal settlements and legal fees of in excess of $10.0 million. Fiscal 1997 included $9.4 million of legal settlements, including $6.0 million related to the Ab Roller settlement. In addition, fiscal 1998 included bad debt expense of $2.2 million as compared to $5.7 million in fiscal 1997. This decrease was due to fiscal 1997 including $2.1 million for two specific customers. Fiscal 1998 also included cost reductions associated with PRTV in the first half of fiscal 1998. The above reductions more than offset higher consulting fees, increased depreciation expense (primarily associated with the Company's MIS system), and higher occupancy expense. Selling, general and administrative expenses as a percentage of net revenues increased from 19.5% to 20.5% in fiscal 1998 due primarily to the 22.3% decrease in net revenues. WRITE-OFF OF IMPAIRED GOODWILL Fiscal 1998 included the write-off of the remaining goodwill related to the acquisition of PRTV in the amount of $14.5 million. This write-off was based on an recent re-valuation of PRTV. Management determined its business strategy for PRTV has not been successful. The Company does not anticipate any future benefit or cash flows from PRTV. As a result, the Company has determined that there is no value to 20 the goodwill. Fiscal 1997 included the write-off of approximately $4.4 million of PRTV goodwill based on an evaluation performed by an independent appraiser. SEVERANCE EXPENSE Fiscal 1997 included a $2.5 million charge to earnings related to severance expense associated with the discontinuance of employment of five executive officers. No such charges were recorded in fiscal 1998. INTEREST EXPENSE Interest expense was approximately $3.5 million in fiscal 1998 compared to $1.5 million in fiscal 1997, an increase of $2.0 million. This increase was due to an increase in the Company's average outstanding indebtedness from approximately $10.0 million in fiscal 1997 to approximately $26.6 million in fiscal 1998, and higher interest rates, primarily as a result of the Loan Modification Agreement (as defined below) signed in fiscal 1998. INCOME TAXES The Company recorded income tax expense of approximately $.7 million in fiscal 1998 resulting from tax liabilities related to its Asian and South Pacific rim operating results. Income tax benefits have not been recorded during the current period on domestic and European losses. These benefits will be recorded when it is more likely than not that they will be realized, reducing the effective tax rate on future domestic and European earnings. This compares to approximately $1.9 million of income tax expense recorded in fiscal 1997 resulting from tax liabilities generated relating to Asian and South Pacific rim profits. NET LOSS The Company incurred a net loss of $56.8 million in fiscal 1998, compared to a net loss of $45.7 million in fiscal 1997. As discussed above, fiscal 1998 included a write-off of impaired goodwill related to PRTV in the amount of $14.5 million. COMPARISON OF FISCAL 1997 WITH FISCAL 1996 NET REVENUES Net revenues were $358.2 million in fiscal 1997 as compared to $292.6 million in fiscal 1996, an increase of $65.6 million or 22.4%. This increase was primarily a result of an increase in net revenues generated from the acquisitions in July 1996 of Prestige and Suzanne Paul which operate in New Zealand and Australia (approximately $39.7 million) and an increase in the Company's North American net revenues. Domestic net revenues in fiscal 1997 were $188.5 million as compared to $141.6 million in fiscal 1996, an increase of $46.9 million or 33.1%. This increase was primarily a result of 1) the acquisition in May 1996 of PRTV, which generated $35.7 million in net revenues and 2) retail royalties which were $16.3 million in fiscal 1997 versus $5.6 million in fiscal 1996. These royalties were principally generated from sales of the Ab Roller Plus product into the retail marketplace. The Ab Roller Plus product represented approximately 41.9% of domestic net revenues in fiscal 1997. Domestically, the Company aired new infomercials during the latter part of fiscal 1997 which did not perform as anticipated, especially in the fourth quarter, which had a negative impact on revenue generation. Additionally, domestic net revenues were unfavorably impacted by an increase in the average infomercial return rate as a percentage of gross revenues from 6.4% in fiscal 1996 to 9.9% in fiscal 1997. This increase resulted primarily from sales of higher-priced products in the current year. Higher priced products historically have higher return rates. In the international marketplace, the Company's Japanese revenues declined due to increased competition from traditional programming and other infomercial competitors; the fact that Japanese airtime was not obtained in the quantity or speed anticipated; and the effect of currency fluctuations. Japanese revenues in 21 fiscal 1997 decreased approximately 30.3% as compared to fiscal 1996. This included a 19.9% decline on a local currency basis. Japanese revenues were $11.6 million in the fourth quarter of fiscal 1997 as compared to $22.2 million in the fourth quarter of fiscal 1996, a decrease of 47.9%. On a local currency basis, Japanese fiscal 1997 fourth quarter revenues decreased by 40.4%. This trend continued in the first quarter of fiscal 1998. As to other sectors of the Company's international business, European revenues, excluding Eastern Europe, remained relatively constant from fiscal 1996 to fiscal 1997. Net revenues in non-Japanese countries in the Pacific Rim (including New Zealand and Australia), Eastern Europe, the Middle East, Canada, Africa and Latin America, were $62.7 million in fiscal 1997 as compared to $11.8 million in fiscal 1996, an increase of $50.9 million or 430%. Approximately $39.7 million of the increase was generated from the Prestige and Suzanne Paul acquisitions. The remaining increase was principally a result of ongoing expansion of the Company's operations into new marketplaces. OPERATING COSTS Total operating costs and expenses were $402.0 million in fiscal 1997 as compared to $272.5 million in fiscal 1996, an increase of $129.5 million or 47.5%. MEDIA PURCHASES Media purchases were $131.1 million in fiscal 1997 as compared to $86.5 million in fiscal 1996, an increase of $44.6 million or 51.6%, principally as a result of growth in revenues, higher U.S. media costs and the acquisitions completed in fiscal 1997. The ratio of media purchases to net revenues increased substantially from 29.6% in fiscal 1996 to 36.6% in fiscal 1997. This was primarily due to higher U.S. media costs; a higher percentage of the current year's net revenues being earned in the domestic marketplace where media costs are typically higher; the acquisitions of PRTV and Nancy Langston & Associates, Inc. ("Nancy Langston") which added significant blocks of media time which could not be sold or used profitably during the 1996 pre-holiday period; the inability of the Company to deliver effective new shows on a timely basis and higher European media costs, primarily associated with the Eurosport satellite contract. In addition to the impact of the Eurosport contract, the Company's European operations were also negatively affected by a change in product mix to products with a lower average selling price, higher production costs and currency fluctuations. Fourth quarter domestic media management was negatively impacted by: a decline in the success rate of current year infomercials; loss of Fitness Flyer and Fitness Strider product airings due to litigation with Guthy Renker which was taking place during key fitness product sales months of January and February; increased domestic cancellation and return rates due to the aforementioned litigation and manufacturing/sourcing difficulties related to certain products; the lack of successful new shows; and the effect of the Company airing lead generation type shows, which typically have a higher advertising to sales ratio. DIRECT COSTS Direct costs were $197.0 million in fiscal 1997 as compared to $151.2 million in fiscal 1996, an increase of $45.8 million or 30.3%. This increase was primarily a result of increased revenues and higher domestic direct costs in the second half of fiscal 1997. As a percentage of net revenues, direct costs were 55.0% in fiscal 1997 and 51.7% in fiscal 1996. Domestically, direct costs as a percentage of net revenues increased by 3.6 percentage points primarily due to an increased provision for obsolete stock of approximately $8.7 million in fiscal 1997 and a substantial increase in production expense during fiscal 1997. This was a result of a decline in the effectiveness of the Company's new shows which generated lower than expected revenues and profit margins, especially in the fourth quarter of fiscal 1997. Contributing factors to the reduced success rate on new shows were the failure of some new format type shows and the less than expected success of the introduction of new product categories. Of the 19 new or revised shows aired during the fourth quarter and late third quarter of fiscal 1997, 16 did not perform up to expectations. This resulted in approximately $3.3 million in write-offs of show production costs associated with PRTV. In addition, the lower domestic sales volume and higher backlog in the second half of fiscal 1997 resulted in 22 an increase in domestic fulfillment costs. Telemarketing expenses also increased in the second half of fiscal 1997 as a result of new show formats being tested such as lead generation shows which require longer and more complicated telemarketing scripts and, therefore, higher telemarketing costs per inquiry. On an annual basis, these increases were partially offset by the favorable impact of retail royalties earned in fiscal 1997. These retail royalties carry very low cost of sales. Internationally, direct costs as a percentage of net revenues increased approximately 3.3 percentage points, primarily due to higher product costs in Europe and Asia resulting from a change in product mix; increased provisions for obsolete stock, especially in the fourth quarter of fiscal 1997; and increased production expense resulting from an increase in the number of countries for which show customization was required. The increased provision for obsolete stock, especially in the Asian markets, was a result of the decline in revenues experienced in the latter portion of fiscal 1997. The lower than expected revenues resulted in the Company's existing inventory levels of multiple products being in excess of quantities needed to meet revised sales forecasts and thus required an addition to the obsolescence provision. Lower sales volume levels and higher inventory levels in Japan, particularly in the fourth quarter had a negative impact on certain minimum fulfillment and warehousing costs. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $69.8 million in fiscal 1997 as compared to $33.8 million in fiscal 1996, an increase of $36.0 million or 106.7%, primarily due to increases in compensation expense, legal fees and legal settlements, bad debt expense and amortization of goodwill. Compensation expense increased primarily to support the Company's continued global expansion. Current year acquisitions accounted for approximately 52.0% of the current year compensation expense increase. Legal expenses were $4.0 million and legal settlements were $9.3 million in fiscal 1997 as compared to $1.8 million and $0.1 million in fiscal 1996, respectively. The fourth quarter of fiscal 1997 included $2.6 million of legal fees and $9.3 million of legal settlements or reserves for legal settlements. This included significant amounts of PRTV legal fees and legal settlements related to matters prior to the Company's acquisition of PRTV. The fourth quarter also included legal fees incurred in connection with the Fitness Flyer litigation. Bad debt expense was $5.7 million in fiscal 1997 as compared to $1.2 million in fiscal 1996 and included approximately $3.8 million in the fourth quarter of fiscal year 1997, including a substantial portion related to the write-off of two specific customer accounts. During the fourth quarter of fiscal 1997, it became clear that the collectability of these receivables was impaired. The increase in bad debt expense in fiscal 1997 was primarily due to a provision of approximately $2.1 million made for the aforementioned two specific customers, higher write-offs of media receivables due to a change in credit terms and increased average multi-pay receivable balances. Amortization of goodwill increased from approximately $1.0 million in fiscal 1996 to $2.5 million in fiscal 1997, primarily due to the current year acquisitions of PRTV, Prestige, Suzanne Paul and Nancy Langston. Selling, general and administrative expenses as a percentage of net revenues increased from 11.5% in fiscal 1996 to 19.5% in fiscal 1997. Selling, general and administrative expenses as a percentage of net revenues were 44.9% in the fourth quarter of fiscal 1997 as compared to 11.5% in the fourth quarter of fiscal 1996. This increase was primarily a result of the aforementioned fourth quarter items and the 22.9% decrease in fourth quarter net revenues from fiscal 1997 to fiscal 1996. WRITE-OFF OF IMPAIRED GOODWILL The fourth quarter of fiscal 1997 included a write-down of goodwill related to PRTV in the approximate amount of $4.4 million based on an evaluation performed by an independent appraiser. SEVERANCE EXPENSE In fiscal year 1997, the Company recorded severance expense related to discontinuance of employment of five executive officers. Total severance charges related to these officers are $2,500,000 and include salary, insurance, and other benefits. 23 INTEREST EXPENSE Interest expense was approximately $1.5 million in fiscal 1997 as compared to $1.0 million in fiscal 1996, an increase of $527,000. This increase was primarily due to an increase in the Company's average outstanding indebtedness from approximately $4.2 million in fiscal 1996 to approximately $10.0 million in fiscal 1997. INCOME TAXES The Company recorded income tax expense of approximately $1.9 million for fiscal 1997 resulting from tax liabilities relating to its profitable Asian and South Pacific operations. Income tax benefits have not been recorded in fiscal 1997 on domestic losses and fully reserved until realized. These benefits will be recorded when realized, reducing the effective tax rate on future domestic earnings. Income tax benefits have been recorded on European losses without being reserved. This compares to approximately $3.5 million of income tax expense recorded for fiscal 1996, a 17.5% effective tax rate. NET LOSS The Company had a net loss of $45.7 million in fiscal 1997 as compared to net income of $16.6 million in fiscal 1996. This variance was primarily a result of losses incurred by its PRTV subsidiary and charges related to the following: excess and/or obsolete inventory; write-downs of production costs; legal fees; legal settlements; severance; and increased media costs. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital was $9.4 million at March 31, 1998 compared to working capital of $19.8 million at March 31, 1997, a decrease of $10.4 million. The Company met its current period cash needs primarily through its cash flow from borrowings (from its principal lender, certain foreign bank lenders and from ValueVision), liquidation of accounts receivable and inventory and an equity infusion of $20.0 million which occurred late in the second quarter of fiscal 1998. Operating activities for the year ended March 31, 1998 resulted in a use of cash of $19.6 million. The Company's cash flow from operations in the year ended March 31, 1998 was adversely affected by the net loss of approximately $56.8 million. Consolidated accounts receivable decreased by $2.9 million, or 7.2%, primarily due to the decrease in Far East and South Pacific Rim accounts receivables. This decrease was principally due to the 29.6% and 53.5% decreases in Far East and South Pacific Rim revenues, respectively, during the month of March 1998 as compared to the month of March 1997 and the effect of currency devaluations which occurred in that region. Consolidated inventories decreased $9.7 million or 31.3% primarily due to a decrease in international inventory, especially in the European and South Pacific Rim areas. This is reflective of management's efforts to reduce global inventory levels. This was partially offset by an increase in domestic inventories of $2.2 million due to the Company currently having a higher number of active infomercials(5) at March 31, 1998 as compared to March 31, 1997. On September 18, 1997, the Company sold 20,000 shares of a series of preferred stock to two institutional investors (as more fully described in Note 6 to the financial statements), which included the issuance of warrants to acquire 989,413 shares of the Company's Common Stock. This transaction generated proceeds, net of offering costs, of approximately $19.7 million. The proceeds from this transaction were primarily used for working capital purposes. In September 1997, the Company also executed an agreement (the "Loan Modification Agreement") (as more fully described in Note 5 to the financial statements) with its principal lender concerning, among other things, the extension of its principal credit facility through December 31, 1998. The Company's $20.0 million line of credit (the "Line") was thereby reduced to $19.475 million, with the maximum amount of cash advances outstanding under the Line limited to $19.0 million, and the maximum amount of outstanding letters of credit limited to $5.0 million. The interest rate on the Company's Line and Term 24 Loan (as defined in Note 5 to the financial statements) were increased from prime and prime plus .5%, respectively, to prime plus 3.0%. The payment of the Company's Term Loan was restructured on a basis more favorable to the Company as follows: $50,000 per month from December 1, 1997 to March 1, 1998; $800,000 on April 1, 1998; and $1.0 million on each of December 1, 1998, 1999 and 2000. The Company has made all payments related to its Term Loan, including the April 1, 1998 payment, on a timely basis. The Loan Modification Agreement also contains certain financial covenants including tangible net worth and working capital minimums and other financial ratios with which the Company must be in compliance on a continuous basis. In certain cases, failure to meet required ratios triggers an increase in the interest rate of 1.0%. In certain other cases, failure to meet required ratios constitutes an event of default. At March 31, 1998, the Company's failure to maintain one of its financial ratios within required parameters not only triggered an interest rate increase at 1.0% but also constituted an event of default. As a result, the Company's long term debt has been reclassified to current debt in the March 31, 1998 balance sheet and, effective April 1, 1998, the interest rate on the Company's Line and Term Loan became prime plus 4.0%. The Line and Term Loan are secured by a lien on substantially all of the assets of the Company and its subsidiaries. Such lien on certain non-domestic assets of the Company is subordinated to a lien held by Barclays Bank PLC ("Barclays"). The Company has an overdraft line of approximately $1.0 million with Barclays, which was unused at March 31, 1998. This line expired at June 30, 1998. In July 1997, the Company obtained a credit facility from ASB Bank through its Prestige subsidiary consisting of a working capital facility (overdraft and letter of credit) of $1.0 million New Zealand dollars (approximately $0.6 million US dollars at March 31, 1998) and a short term loan of $4.3 million New Zealand dollars (approximately $2.4 million US dollars at March 31, 1998). The working capital facility bore interest at the ASB Bank Banking Business Rate (the "BBBR Rate") plus 1%. The short term loan bore interest at the BBBR Rate plus 2%. All amounts under this facility were repaid in full as of March 31, 1998. On January 5, 1998, in connection with the execution of the Merger Agreement, the Company received a $7.0 million advance against a $10.0 million loan extended by ValueVision (as more fully discussed in Note 5 to the financial statements). The Company subsequently received the remaining $3.0 million in available proceeds under the $10.0 million loan, $1.5 million of which was received subsequent to March 31, 1998. This loan was used primarily for working capital purposes. Approximately $545,000 of this amount was used to provide a loan to an executive officer funded subsequent to March 31, 1998 in connection with his employment agreement. The ValueVision loan bears interest at prime plus 1.5%, payable quarterly and is due on any demand made after the earlier of January 1, 1999 or upon the occurrence of certain triggering events, including, but not limited to a change in control of the Company, a sale of the Company's assets or a default under the Line or Term Loan. The Company anticipates that one or more of these triggering events may occur in fiscal 1999. In the event that the Company is unable to repay the loan when due, ValueVision may elect to receive payment in shares of the Company's Common Stock at the lower of $1.07 per share or the then present market value. In consideration for providing this loan, the Company issued to ValueVision warrants to purchase 250,000 of the Company's Common Stock with an exercise price per share equal to $2.74. The Company's international revenues are subject to foreign exchange risk. To the extent that the Company incurs local currency expenses that are based on locally denominated sales volume (order fulfillment and media costs), this exposure is reduced significantly. The Company monitors exchange rate and/or forward contracts when appropriate. Until July 1997, the Company maintained a foreign exchange line with its principal lender for such purposes. Pursuant to the Loan Modification Agreement described in Note 5 to the financial statements, the Company and its principal lender agreed to terminate the foreign exchange line on a run off basis. The results of the Company's foreign currency hedge did not have a material impact in the twelve month period ended March 31, 1998. The Company's future ability to hedge may be negatively impacted as a result of its current tight cash position. All forward contracts must now be cash collateralized. At March 31, 1998 the Company pledged $400,000 in cash against $2.0 million in outstanding future contracts. In the long term, the Company has the ability to change prices to a certain 25 extent in a timely manner in order to react to major currency fluctuations; thus possibly reducing a portion of the risk associated with local currency movements. The Company has and is currently further revising its pricing in the Far East and South Pacific Rim in an effort to offset some of the recent significant currency devaluations in that region. However, the Company still expects that the significant currency devaluation and the economic downturn being experienced in these regions will have a negative impact on the Company's operating results and cash flows in fiscal 1999. Currently, the Company's two major foreign currencies are the German deutsch mark and the Japanese yen, each of which has been subject to large recent fluctuations. In addition, certain other currencies utilized by the Company (Australia, New Zealand, Indonesia, Malaysia, Philippines) have recently experienced more significant devaluations. During July 1996, the Company acquired two direct response marketing companies, Prestige and Suzanne Paul. The aggregate consideration paid by the Company for Prestige and Suzanne Paul was approximately $21.7 million in a combination of cash, a note payable and the Company's Common Stock. Included in the Prestige and Suzanne Paul acquisition agreements were provisions concerning the future payment of additional purchase price, up to an aggregate of an additional $5.0 million in the Company's Common Stock, valued at then present market prices, in 1997 and 1998, contingent upon the levels of net income achieved in those years by Prestige and Suzanne Paul. During fiscal 1998, the Company amended the acquisition agreements, thereby accelerating the $5.0 million contingent purchase price amount and revising certain other provisions of the agreements. In connection with such amendments, the Company issued 909,091 shares of the Company's Common Stock to the former principals of these entities, based on the closing price of the Company's Common Stock on the New York Stock Exchange on July 16, 1997. This additional amount represents an increase in the purchase price for Prestige and Suzanne Paul entities and is included in goodwill. The decrease in other assets at March 31, 1998 was primarily a result of the payment of $3.0 million from an escrow account in connection with the Ab Roller settlement (as more fully described in Note 12 to the financial statements) and the sale of the Company's investment in a public company for approximately $1.0 million. In January 1998, the Company announced that it had entered into a Merger Agreement with ValueVision and (as more fully described in Note 16 to the financial statements). Concurrently with the Merger Agreement, the Company entered into an agreement with the holders of the series of its preferred stock issued in September 1997 to exchange such preferred stock for a newly created series of preferred stock with similar terms, to redeem all of the new preferred stock for approximately $23.5 million in connection with the consummation of the Merger and to issue warrants to acquire 500,000 shares of the Company's Common Stock at $6.82 per share (subject to adjustment). On June 2, 1998 the Company announced the termination of the Merger Agreement. As a result, the new preferred stock and the exercise price of the 1,489,413 warrants (500,000 warrants referred to above plus 989,413 received in connection with the original funding) were automatically adjusted to $1.07 per share, 101% of the closing bid price of the Company's Common Stock at said date. The conversion price of the preferred stock may decrease if the Company's Common Stock price falls below $1.07 per share. Based on the market value of the Company's Common Stock at June 15, 1998 the Series D preferred stock is convertible into a minimum of 18,543,972 shares of the Company's Common Stock, not including shares of the Company's Common Stock issuable upon conversion of any accrued premium. The Company's cash position continues to be pressured as a result of the losses incurred in fiscal 1998 and the continued downturn in its Asian and South Pacific Rim operations. While benefiting from the proceeds of the September 1997 preferred stock sale, the extension of its credit facility with its principal lender, the loan from ValueVision, its strategy which focuses on cost reductions and the re-negotiation of a number of its media contracts to terms that are more favorable to the Company, the Company's ability to continue as a going concern is dependent on its ability to implement certain plans and actions designed to rebuild its business, including the continued introduction of successful new shows, to return the Company to profitability, to improve its liquidity and to successfully extend its current credit facility or obtain new 26 financing to replace its existing facility. No assurance can be given that any of these actions will be successful. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FISCAL 1998 QUARTERS ENDED ---------------------------------------------------- 1998 FISCAL YEAR JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31(1) - ----------------------------------------------------------- ---------- ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues............................................... $ 67,155 $ 54,563 $ 64,917 $ 91,839 Operating costs and expenses Media purchases.......................................... 23,218 17,582 20,532 30,572 Direct costs............................................. 41,228 36,887 38,157 51,266 Selling, general and administrative...................... 14,769 13,681 13,475 15,173 Write-off of impaired goodwill........................... -- -- -- 14,546 Interest expense......................................... 625 764 910 1,158 Total operating costs and expenses....................... 79,840 68,914 73,074 112,715 Loss before income taxes................................... (12,685) (14,351) (8,157) (20,876) Net loss $ (12,989) $ (14,358) $ (8,146) $ (21,276) Net loss per share Basic.................................................... $ (.54) $ (.58) $ (.34) $ (.85) Diluted.................................................. $ (.54) $ (.58) $ (.34) $ (.85)
FISCAL 1997 QUARTERS ENDED ---------------------------------------------------- 1997 FISCAL YEAR JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31(2) - ----------------------------------------------------------- ---------- ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues............................................... $ 109,300 $ 99,656 $ 70,842 $ 78,381 Operating costs and expenses Media purchases.......................................... 37,576 34,060 28,112 31,388 Direct costs............................................. 53,241 45,557 38,934 59,240 Selling, general and administrative...................... 11,128 11,997 11,486 30,820 Write-off of impaired goodwill........................... -- -- -- 4,392 Severance expense........................................ -- -- 1,100 1,400 Interest expense......................................... 305 408 414 415 Total operating costs and expenses....................... 102,250 92,022 80,046 127,655 (Loss) income before income taxes.......................... 7,050 7,634 (9,204) (49,274) Net (loss) income.......................................... $ 4,550 $ 4,994 $ (5,984) $ (49,251) Net (loss) income per share Basic.................................................... $ .25 $ .22 $ (.26) $ (2.10) Diluted.................................................. $ .18 $ .18 $ (.26) $ (2.10)
- ------------------------ (1) The quarter ended March 31, 1998 included a charge of $14.5 million related to the write-off of the remaining PRTV goodwill which was determined to be unrecoverable. (2) The quarter ended March 31, 1997 included a charge of $4.4 million related to the write-off of PRTV goodwill, legal settlements and fees of $11.9 million, provisions for bad debts of $3.8 million and $6.4 million for inventory obsolescence. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is submitted in a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 PART III The information required by Items 10, 11, 12 and 13 is hereby incorporated by reference from the Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year. 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements and Schedules The following is a list of the consolidated financial statements of the Company and its subsidiaries and supplementary data submitted in a separate section of this report. - Report of Independent Auditors. - Consolidated Balance Sheets--March 31, 1998 and 1997. - Consolidated Statements of Operations--Years ended March 31, 1998, 1997 and 1996. - Consolidated Statements of Shareholders' Equity--Years ended March 31, 1998, 1997 and 1996. - Consolidated Statements of Cash Flows--Years ended March 31, 1998, 1997 and 1996. - Notes to Consolidated Financial Statements The following is a list of the schedules filed as part of this Form 10-K. Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) Reports on Form 8-K filed in the fourth quarter of 1998: (i) Current Report on Form 8-K, dated January 5, 1998 and filed January 7, 1998 and Current Report on Form 8-K/A, dated January 5, 1998 and filed January 16, 1998. The Company filed the foregoing Current Reports on Form 8-K reporting, under Item 5, the execution of the Agreement and Plan of Reorganization and Merger (the "Merger Agreement"), dated January 5, 1998, by and among ValueVision, the Company and Quantum Direct Corporation (formerly known as V-L Holdings Corp.). (ii) Current Report on Form 8-K, dated March 30, 1998. The Company filed the foregoing Current Report on Form 8-K reporting, under Item 5, the selection of veteran marketing, direct response and retail executive, Gene McCaffery, as Chief Executive Officer of Quantum Direct Corporation, the international electronic commerce company to be formed by the proposed merger of the Company and ValueVision. (iii) Current Report on Form 8-K, dated April 8, 1998. The Company filed the foregoing Current Report on Form 8-K reporting, under item 5, the mutual postponement of the shareholder meetings regarding the Merger. (iv) Current Report on Form 8-K, dated June 1, 1998. The Company filed the foregoing Current Report on Form 8-K reporting, under Item 5, the termination of the Merger Agreement. 29 INDEX TO EXHIBITS
EXHIBIT NO. - ------------- 2.1 (12) Agreement and Plan of Merger and Reorganization, dated as of October 24, 1995, by and among the Registrant, DA Acquisition Corp., DirectAmerica Corporation, California Production Group, Inc. and other parties thereto 2.2 (13) Agreement and Plan of Merger and Reorganization, dated as of January 17, 1996 and amended as of April 4, 1996, by and among the Registrant, PRT Acquisition Corp. and Positive Response Television, Inc. 2.3 (18) Acquisition Agreement, dated as of May 29, 1996, by and among Registrant, Paul Meier, Susan Barnes and Prestige Marketing Holdings Limited 2.4 (19) Agreement and Plan of Merger and Reorganization, dated as of August 7, 1996, by and among Registrant, NLA Acquisition Corp., Nancy Langston & Associates, Inc. and Nancy Langston. 2.5 (18) Acquisition Agreement, dated as of May 30, 1996, by and among Registrant, Paul Meier, Susan Barnes, Alan Meier and Tancot Pty Limited 2.6 (26) Agreement and Plan of Reorganization, dated January 5, 1998, by and among ValueVision International, Inc., the Registrant and V-L Holdings Corp. 3.1 (1) Certificate of Incorporation 3.2 (2) By-laws 3.3 (3) Amendment to By-laws dated February 1992 3.4 (6) Amendment to By-laws dated April 1995 4.1 (1) Specimen copy of stock certificate for shares of Common Stock of the Registrant 4.2 (6) Specimen copy of stock certificate for shares of Series B Convertible Preferred Stock of the Registrant 4.3 (5) Rights Agreement dated as of January 3, 1994 4.4 (5) Amendment No. 1 to Rights Agreement, dated as of March 6, 1994 4.5 (6) Amendment No. 2 to Rights Agreement, dated as of September 26, 1994 4.6 (6) Amendment No. 3 to Rights Agreement, dated as of September 30, 1994 4.7 (6) Amendment No. 4 to Rights Agreement, dated as of November 30, 1994 4.8 (24) Amendment No. 5 to Rights Agreement, dated as of August 14, 1997 4.9 (29) Amendment No. 6 to Rights Agreement, dated as of January 5, 1998 4.10(6) Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock 4.11(16) Director's Stock Grant Plan 4.12(9) Form of Warrant to Purchase Common Stock of the Registrant, dated November 24, 1995, issued to Value Vision International, Inc. concerning an aggregate of 500,000 shares at an exercise price of $8.865 per share 4.13(9) Form of Warrant to Purchase Common Stock of the Registrant, dated November 24, 1995,
30
EXHIBIT NO. - ------------- issued to various persons concerning an aggregate of 500,000 shares at an exercise price of $10.00 per share 4.14(24) Certificate of Designations, Preferences and Rights of the Series C Convertible Preferred Stock 4.15(24) Form of Warrant issued in connection with the Series C Convertible Preferred Stock 4.16(28) Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock 4.17(28) Form of Warrant issued in connection with the Series D Convertible Preferred Stock 4.18(28) Amendment to Form of Warrant issued in connection with the Series C Convertible Preferred Stock 10.1 (15) Amended and Restated 1991 Stock Option Plan 10.2 (4) 401(k) Plan Document 10.3 (15) 1995 Management Incentive Plan 10.4 (7) Lease for 7822 S. 46th Street, Phoenix, Arizona 10.5 (10) Securities Purchase Agreement between the Registrant and certain purchasers dated September 30, 1994 10.6 (6) Amendment to Securities Purchase Agreement dated as of December 19, 1994 10.7 (10) Note and Warrant Purchase Agreement between the Registrant, Media Arts International, Ltd., Quantum International Limited and Safeguard Scientifics (Delaware), Inc. dated October 19, 1994 10.8 (11) Securities Purchase Agreement between the Registrant and certain purchasers dated as of November 30, 1994 10.9 (14) Telemarketing, Production and Post-Production Agreement between the Registrant and ValueVision International, Inc., dated April 13, 1995 10.10(14) Joint Venture Agreement between the Registrant and ValueVision International, Inc., dated April 13, 1995 10.11(6) Registration Rights Agreement dated as of December 19, 1994 by and among Registrant and certain other parties 10.12(8) Modification Agreement between the Registrant, Media Arts International, Ltd., Quantum International Limited, Safeguard Scientifics (Delaware), Inc. and Meridian Bank dated as of April 20, 1995 10.13(12) DirectAmerica Corporation Employee Bonus Plan 10.14(9) Loan and Security Agreement, dated November 28, 1995, by and between the Registrant, certain of its subsidiaries and Meridian Bank 10.15(9) Allonge, dated November 28, 1995, by the Registrant and certain of its subsidiaries for the benefit of Meridian Bank 10.16(13) Employment Agreement, dated as of May 17, 1996, by and between Positive Response Television, Inc., the Registrant and Michael Levey 10.17(13) Escrow Agreement, dated as of May 17, 1996, by and among Registrant, Positive Response Television, Inc., the Shareholders' Representative and Escrow Agent
31
EXHIBIT NO. - ------------- 10.18(17) Lease, dated March 6, 1996, by and between Stoll Moss Theaters Limited and Quantum International Limited 10.19(19) Lease Agreement, dated 1996, between Registrant and Eleven Colonial Penn Plaza Associates 10.20(21) Consulting Agreement, dated as of December 19, 1996, by and between Brian McAdams and Registrant 10.21(22) Amended and Restated Employment Agreement, dated April 28, 1997, between Registrant and Constantinos I. Costalas 10.22(22) Amendment No. 1 to Employment Agreement, dated July 23, 1997, between Registrant and Constantinos I. Costalas 10.23(22) Employment Agreement, dated February 28, 1997, between Registrant and Frederick S. Hammer 10.24(23) Agreement, dated April 24, 1997, between Mark P. Hershhorn and the Registrant 10.25(24) Registration Rights Agreement, dated September 4, 1997, among the Registrant and the Series C Investors 10.26(24) Securities Purchase Agreement, dated September 4, 1997, among the Registrant and the Series C Investors 10.27(18) Employment Agreement, dated as of July 2, 1996, by and between Prestige Marketing Limited and Paul Meier 10.28(18) Employment Agreement, dated as of July 2, 1996, by and between Prestige Marketing Limited and Susan Barnes 10.29(18) Employment Agreement, dated as of July 3, 1996, by and between Suzanne Paul (Australia) Pty Limited and Alan Meier 10.30(25) Employment Agreement, dated May 12, 1997, by and between Registrant and Paul R. Brazina 10.31(25) Facility Agreement, dated July 23, 1997, between ASB Bank Limited and Prestige Marketing Limited 10.32(25) Short Term Facility, dated May 19, 1997, between Quantum International Limited and Barclays Bank PLC 10.33(25) Amended and Restated Loan and Security Agreement, dated June 26, 1996, by and between Registrant, Quantum North America, Inc., Quantum International Limited, Positive Response Television, Inc. and DirectAmerica Corporation and Meridian Bank 10.34(25) Loan Modification Agreement, dated September 18, 1997, by and between Registrant, Quantum North America, Inc., Quantum International Limited, Positive Response Television, Inc. and DirectAmerica Corporation and CoreStates Bank, N.A. 10.35(25) Agreement, dated as of July 16, 1997, by and among Registrant, Paul Meier, Suzanne Kilworth, Alan Meier and Tancot Pty Limited 10.36(25) Agreement, dated as of July 16, 1997, by and among Registrant, Paul Meier, Suzanne Kilworth, Alan Meier, P&S Holdings Limited (formerly known as Prestige Marketing Holdings Limited)
32
EXHIBIT NO. - ------------- 10.37(26) Stock Option Agreement (ValueVision), dated as of January 5, 1998 between ValueVision and the Registrant 10.38(26) Stock Option Agreement (National Media), dated as of January 5, 1998 between the Registrant and ValueVision 10.39(26) Redemption and Consent Agreement, dated January 5, 1998, by and between the Registrant, ValueVision, Capital Ventures International and RGC International Investors, LDC 10.40(26) Consent Waiver and Amendment, dated as of January 5, 1998, by and between CoreStates Bank, N.A., the Registrant, Quantum North America, Inc., Quantum International Limited, Positive Response Television, Inc. and DirectAmerica Corporation 10.41(26) $10,000,000 Demand Promissory Note, dated January 5, 1998 issued by the Registrant to ValueVision 10.42(26) Subsidiary Guaranty, dated as of January 5, 1998, by Quantum North America, Inc., Quantum International Limited, Quantum Far East Ltd., Quantum Marketing International, Inc., Quantum International Japan Company Ltd., DirectAmerica Corporation, Positive Response Television, Inc., Quantum Productions AG, Suzanne Paul (Australia) Pty Limited and National Media Holdings, Inc., for the benefit of ValueVision 10.43(26) Warrant Agreement by and between the Registrant and ValueVision, dated as of January 5, 1998 10.44(26) Warrant Certificate No. 1, dated January 5, 1998, issued by the Registrant to ValueVision to purchase 250,000 shares of the Registrant's common stock 10.45(26) Registration Rights Agreement by and between the Registrant and ValueVision, dated as of January 5, 1998 10.46(27) Amendment No. 2 to Employment Agreement dated April 28, 1997 between the Company and Constantinos I. Costalas, dated as of January 5, 1998 10.47(27) Amendment No. 1 to Employment Agreement dated February 27, 1997 between the Company and Frederick S. Hammer, dated as of January 5, 1998 10.48(27) Amended and Restated Employment Agreement between the Company and Robert N. Verratti, dated as of January 28, 1998 10.49(27) Amended and Restated Non-Incentive Stock Option Agreement between the Company and Robert N. Verratti, dated as of January 28, 1998 10.50(28) Amendment No. 1 to Registration Rights Agreement by and among the Company and the Series D Investors 10.51(29) Employment Agreement, dated as of March 20, 1998, between the Company and John W. Kirby. 10.52(29) Loan Agreement, dated as of March 31, 1998, by and between the Company and John W. Kirby. 10.53(29) Non-Incentive Stock Option Agreement, dated as of January 28, 1998, by and between the Company and John W. Kirby. 10.54(29) Lease, dated November 26, 1996, by and between Encino Terrace Center and Positive Response Television, Inc. and DirectAmerica Corporation.
33
EXHIBIT NO. - ------------- 11.1 (29) Statement Re: Computation of Per Share Earnings 21.1 (29) Subsidiaries of the Company 23.1 (29) Consent of Independent Auditors 27.1 (29) Financial Data Schedule
- ------------------------ (1) Incorporated by reference to Registrant's Registration Statement on Form S-1 (Reg. No. 33-26778) filed January 31, 1989 (2) Incorporated by reference to Registrant's Registration Statement on Form S-3 (Reg. No. 33-35301) filed June 8, 1990 (3) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended March 31, 1992 filed June 26, 1992 (4) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended March 31, 1991 filed June 20, 1991 (5) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended March 31, 1994 filed July 14, 1994 (6) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended March 31, 1995 filed June 29, 1995. (7) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1993 filed November 12, 1993. (8) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1995 filed August 14, 1995. (9) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended December 31, 1995 filed February 15, 1996. (10) Incorporated by reference to Registrant's Current Report on Form 8-K dated October 5, 1994. (11) Incorporated by reference to Registrant's Current Report on Form 8-K dated December 8, 1994. (12) Incorporated by reference to Registrant's Current Report on Form 8-K dated October 19, 1995. (13) Incorporated by reference to Registrant's Current Report on Form 8-K dated May 17, 1996. (14) Incorporated by reference to Registrant's Current Report on Form 8-K dated April 13, 1995. (15) Incorporated by reference to Registrant's Proxy Statement in connection with Annual Meeting of Stockholders held on February 22, 1995. (16) Incorporated by reference to Registrant's Registration Statement on Form S-8 filed October 19, 1995. (17) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1996. (18) Incorporated by reference to Registrant's Current Report on Form 8-K dated July 1, 1996. (19) Incorporated by reference to Registrant's Current Report on Form 8-K dated August 7, 1996. (20) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1996. 34 (21) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended December 31, 1996. (22) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended March 31, 1997, as amended. (23) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997. (24) Incorporated by reference to Registrant's Current Report on Form 8-K dated September 18, 1997. (25) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997, as amended. (26) Incorporated by reference to Registrant's Current Report on Form 8-K/A dated January 5, 1998. (27) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the period ended December 31, 1997. (28) Incorporated by reference to Registrant's Registration Statement on Form S-3 (Reg. No. 333-48217) filed January 31, 1998. (29) Filed herewith. 35 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(A)(1) AND (2), (C) AND (D) CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED MARCH 31, 1998 NATIONAL MEDIA CORPORATION PHILADELPHIA, PA National Media Corporation Consolidated Financial Statements Years ended March 31, 1998 and 1997 Contents Report of Independent Auditors........................................................ 37 Audited Consolidated Financial Statements Consolidated Balance Sheets........................................................... 38 Consolidated Statements of Operations................................................. 39 Consolidated Statements of Shareholders' Equity....................................... 40 Consolidated Statements of Cash Flows................................................. 42 Notes to Consolidated Financial Statements............................................ 44
36 REPORT OF INDEPENDENT AUDITORS Board of Directors National Media Corporation We have audited the accompanying consolidated balance sheets of National Media Corporation as of March 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1998. Our audits also included the financial statement schedule included in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Media Corporation at March 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the years ended March 31, 1998 and 1997, the Company incurred losses of $56,769,000 and $45,691,000, respectively, experienced negative cash flows from operations and is party to significant pending litigation. In addition, the Company has not complied with certain covenants of its loan agreements. These conditions have impaired the Company's liquidity and may cause it to be unable to meet its obligations as they become due. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. Management's plans regarding these conditions are discussed in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible outcome of these uncertainties. Ernst & Young LLP Philadelphia, Pennsylvania June 29, 1998 37 NATIONAL MEDIA CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
MARCH 31 -------------------- 1998 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents.................................................................. $ 17,915 $ 4,058 Restricted cash............................................................................ 400 -- Accounts receivable, net................................................................... 37,285 40,179 Income tax receivable...................................................................... 341 -- Inventories, net........................................................................... 21,228 30,919 Prepaid media.............................................................................. 1,872 3,563 Prepaid show production.................................................................... 4,845 6,765 Deferred costs............................................................................. 4,191 3,318 Prepaid expenses and other current assets.................................................. 2,014 2,505 Deferred income taxes...................................................................... 2,835 2,591 --------- --------- Total current assets................................................................... 92,926 93,898 Property and equipment, net.................................................................. 12,338 14,182 Excess of cost over net assets of acquired businesses and other intangible assets, less accumulated amortization of $6,977 and $9,472, respectively................................ 35,877 51,022 Other assets................................................................................. 1,950 6,530 --------- --------- Total assets........................................................................... $ 143,091 $ 165,632 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................... $ 21,167 $ 21,810 Accrued expenses........................................................................... 29,598 30,830 Deferred revenue........................................................................... 115 686 Income taxes payable....................................................................... -- 552 Deferred income taxes...................................................................... 1,792 2,351 Current portion of long-term debt and capital lease obligations............................ 30,812 17,901 --------- --------- Total current liabilities.............................................................. 83,484 74,130 Long-term debt and capital lease obligations................................................. 469 959 Deferred income taxes........................................................................ 1,043 240 Other liabilities............................................................................ 3,768 1,743 Shareholders' equity: Preferred stock, $.01 par value; authorized 10,000,000 shares; issued 81,250 and 95,000 shares Series B convertible preferred stock, respectively, and 20,000 and 0 shares Series D convertible preferred stock, respectively (liquidation preference of $3,250 and $20,643 for Series B and D, respectively, as of March 31, 1998).................................. 1 1 Common stock, $.01 par value; authorized 75,000,000 shares; issued 26,262,716 and 24,752,792 shares, respectively.......................................................... 263 248 Additional paid-in capital................................................................. 156,975 127,764 Retained earnings.......................................................................... (85,891) (29,122) --------- --------- 71,348 98,891 Treasury stock, 887,229 and 707,311 shares, respectively, at cost.......................... (6,802) (4,244) Notes receivable, officer.................................................................. (139) -- Foreign currency translation adjustment.................................................... (10,080) (6,087) --------- --------- Total shareholders' equity............................................................. 54,327 88,560 --------- --------- Total liabilities and shareholders' equity............................................. $ 143,091 $ 165,632 --------- --------- --------- ---------
See accompanying notes. 38 NATIONAL MEDIA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
YEAR ENDED MARCH 31 ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Revenues: Product sales......................................................... $ 272,710 $ 337,508 $ 285,676 Retail royalties...................................................... 679 16,337 5,597 Sales commissions and other revenues.................................. 5,085 4,334 1,334 ------------ ------------ ------------ Net revenues............................................................ 278,474 358,179 292,607 Operating costs and expenses: Media purchases....................................................... 91,904 131,136 86,518 Direct costs.......................................................... 167,538 196,972 151,198 Selling, general, and administrative.................................. 57,098 65,431 33,772 Write-off of impaired goodwill........................................ 14,546 4,392 -- Severance expense for former Executive Officers....................... -- 2,500 -- Interest expense...................................................... 3,457 1,542 1,015 ------------ ------------ ------------ Total operating costs and expenses...................................... 334,543 401,973 272,503 ------------ ------------ ------------ (Loss) income before income taxes....................................... (56,069) (43,794) 20,104 Income taxes............................................................ 700 1,897 3,525 ------------ ------------ ------------ Net (loss) income....................................................... $ (56,769) $ (45,691) $ 16,579 ------------ ------------ ------------ ------------ ------------ ------------ Net (loss) income per common share...................................... $ (2.31) $ (2.09) $ 1.08 ------------ ------------ ------------ ------------ ------------ ------------ Net (loss) income per common share--assuming dilution................... $ (2.31) $ (2.09) $ .73 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of common shares outstanding: Basic............................................................... 24,904,000 21,905,000 15,411,000 ------------ ------------ ------------ ------------ ------------ ------------ Diluted............................................................. 24,904,000 21,905,000 22,674,000 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. 39 NATIONAL MEDIA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
YEAR ENDED MARCH 31 --------------------------------- 1998 1997 1996 ---------- ---------- --------- Preferred stock: Beginning balance............................................................ $ 1 $ 1 $ 3 Issuance of Series D preferred stock (20,000 shares)......................... -- -- -- Conversion to common stock (13,750; 41,375; and 119,421 shares).............. -- -- (2) ---------- ---------- --------- Ending balance................................................................. 1 1 1 Common stock: Beginning balance............................................................ 248 182 149 Conversion of preferred stock (137,500; 413,750; and 1,194,210 shares)....... 1 4 12 Exercise of stock options (33,333; 1,215,099; and 1,219,099 shares).......... 1 12 12 Exercise of warrants (330,000; 162,552; and 198,985 shares).................. 3 2 2 Issuance of shares for acquisitions (909,091; 2,651,239; and 554,456 shares).................................................................... 9 27 6 Issuance of shares in secondary offering (2,000,000 shares).................. -- 20 -- Issuance of shares for management incentive plan (102,860 shares)............ -- 1 -- Issuance of shares to settle litigation (100,000; 0; and 106,000 shares)..... 1 -- 1 Stock grant (0; 30,000; and 25,000 shares)................................... -- -- -- ---------- ---------- --------- Ending balance................................................................. 263 248 182 Additional paid-in capital: Beginning balance............................................................ 127,764 48,135 31,877 Issuance of Series D preferred stock, net of costs........................... 19,690 -- -- Conversion of preferred stock................................................ (1) (4) (11) Exercise of stock options.................................................... 157 7,016 5,123 Exercise of warrants......................................................... 1,580 790 1,033 Issuance of shares for acquisitions.......................................... 4,991 41,191 6,994 Issuance of shares in secondary offering, net of costs....................... (14) 28,734 -- Amortization of executive compensation....................................... 1,875 -- -- Series D preferred stock 6% premium.......................................... (643) -- -- Issuance of warrants in connection with debt................................. 688 -- -- Issuance of warrants to settle litigation.................................... 89 -- -- Issuance of shares for management incentive plan............................. -- 1,707 -- Issuance of shares to settle litigation...................................... 799 -- 724 Stock grant.................................................................. -- 542 344 Tax (cost) benefit from exercise of stock options............................ -- (347) 2,051 ---------- ---------- --------- Ending balance................................................................. 156,975 127,764 48,135 Retained earnings: Beginning balance............................................................ $ (29,122) $ 16,569 $ (10) Net (loss) income............................................................ (56,769) (45,691) 16,579 ---------- ---------- --------- Ending balance................................................................. (85,891) (29,122) 16,569
40 NATIONAL MEDIA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
YEAR ENDED MARCH 31 --------------------------------- 1998 1997 1996 ---------- ---------- --------- Treasury stock: Beginning balance............................................................ (4,244) (3,791) (3,791) Repurchase of treasury shares (181,949 and 25,220 shares).................... (2,570) (482) -- Issuance of shares for 401(k) match (2,031 and 4,619 shares)................. 12 29 -- ---------- ---------- --------- Ending balance................................................................. (6,802) (4,244) (3,791) Notes receivable: Beginning balance............................................................ -- (473) (1,868) Exercise of stock options.................................................... (139) -- (1,088) Collection of notes receivable............................................... -- 473 2,483 ---------- ---------- --------- Ending balance................................................................. (139) -- (473) Foreign currency translation adjustment: Beginning balance............................................................ (6,087) (4,161) 265 Translation adjustment for the year.......................................... (3,993) (1,926) (4,426) ---------- ---------- --------- Ending balance................................................................. (10,080) (6,087) (4,161) ---------- ---------- --------- Total shareholders' equity..................................................... $ 54,327 $ 88,560 $ 56,462 ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes. 41 NATIONAL MEDIA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED MARCH 31 --------------------------------- 1998 1997 1996 ---------- ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income.............................................................. $ (56,769) $ (45,691) $ 16,579 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization................................................ 7,073 5,574 2,099 Write-off of impaired goodwill............................................... 14,546 4,392 -- Amortization of loan discount................................................ 555 484 399 Provision for deferred rent expense.......................................... 497 328 384 Noncash executive compensation............................................... 1,875 -- -- Tax (cost) benefit from exercise of stock options............................ -- (347) 2,051 Decrease (increase) in: Accounts receivable, net................................................... 846 1,721 (18,242) Income tax receivable...................................................... (341) -- -- Inventories, net........................................................... 7,882 (3,057) (8,591) Prepaid cable and advertising costs........................................ 3,634 1,374 (3,936) Deferred costs............................................................. (873) 4,233 (2,282) Other current assets....................................................... 247 855 (1,060) Increase (decrease) in: Accounts payable........................................................... (1,111) (2,358) 8,569 Accrued expenses........................................................... (1,547) (6,007) 9,505 Deferred revenue........................................................... (571) (1,583) 1,236 Income taxes payable....................................................... (552) (3,405) 1,044 Notes payable.............................................................. -- 1,400 -- Other...................................................................... 5,031 (3,480) (2,225) ---------- ---------- --------- Net cash (used in) provided by operating activities............................ (19,578) (45,567) 5,530 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment............................................ (2,244) (8,439) (3,923) Investment in common stock..................................................... -- (1,250) -- Proceeds from sale of common stock investment.................................. 1,025 -- -- Cost of companies acquired, net of cash acquired............................... -- (1,236) (897) ---------- ---------- --------- Net cash used in investing activities.......................................... (1,219) (10,925) (4,820) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of preferred stock.................................. 19,690 -- -- Proceeds from long-term debt................................................... 17,259 22,400 -- Principal payments on long-term debt and capital lease obligations............. (5,122) (15,493) (166) Net proceeds from issuance of common stock..................................... -- 28,754 -- Exercise of stock options and warrants......................................... 1,602 7,820 5,085 Payments received on notes receivable.......................................... -- 473 2,483 ---------- ---------- --------- Net cash provided by financing activities...................................... 33,429 43,954 7,402
42 NATIONAL MEDIA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
YEAR ENDED MARCH 31 --------------------------------- 1998 1997 1996 ---------- ---------- --------- Effect of exchange rate changes on cash and cash equivalents................... $ 1,225 $ (1,809) $ (3,174) ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents........................... 13,857 (14,347) 4,938 Cash and cash equivalents at beginning of year................................. 4,058 18,405 13,467 ---------- ---------- --------- Cash and cash equivalents at end of year....................................... $ 17,915 $ 4,058 $ 18,405 ---------- ---------- --------- ---------- ---------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest..................................................................... $ 3,201 $ 774 $ 528 ---------- ---------- --------- ---------- ---------- --------- Taxes on income.............................................................. $ 1,456 $ 5,105 $ 430 ---------- ---------- --------- ---------- ---------- --------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Common stock issued for acquisitions........................................... $ 5,000 $ 41,218 $ 7,000 ---------- ---------- --------- ---------- ---------- --------- Reacquired escrow shares from acquisition...................................... $ 2,570 $ -- $ -- ---------- ---------- --------- ---------- ---------- --------- Note payable and other liabilities used to finance acquisitions................ $ -- $ 3,190 $ 1,496 ---------- ---------- --------- ---------- ---------- --------- Common stock issued upon exercise of stock options for notes receivable........ $ 139 $ -- $ 1,088 ---------- ---------- --------- ---------- ---------- --------- Common stock issued for management incentive plan, 401(k) match, and directors' stock grant.................................................................. $ 13 $ 2,279 $ -- ---------- ---------- --------- ---------- ---------- --------- Issuance of stock to settle litigation......................................... $ 800 $ -- $ 725 ---------- ---------- --------- ---------- ---------- --------- Deemed dividend on preferred stock............................................. $ 643 $ -- $ -- ---------- ---------- --------- ---------- ---------- --------- Issuance of loan warrants...................................................... $ 688 $ -- $ -- ---------- ---------- --------- ---------- ---------- --------- Purchase of equipment financed by capital leases............................... $ 416 $ -- $ -- ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes. 43 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION National Media Corporation (the "Company") incurred a net loss of $56,769,000 during the year ended March 31, 1998, primarily as a result of reduced sales volume in its key market areas due to its inability to timely deliver successful new shows in the first half of fiscal 1998, the economic downturn in the Far East and South Pacific Rim markets, and a $14,546,000 write-off of the remaining goodwill related to the Company's May 1996 acquisition of Positive Response Television, Inc. ("PRTV"). The Company recently announced that it had mutually terminated its January 5, 1998 merger agreement (the "Merger Agreement") with ValueVision International, Inc. ("ValueVision"). As a result, a $10.0 million loan from ValueVision made in connection with the execution of the Merger Agreement and discussed in Note 5 is due January 1, 1999, subject to acceleration in certain circumstances. In addition, the Company's revolving credit facility with its principal lender expires on December 31, 1998. Negotiations with the principal lender are ongoing. The Company is currently in technical default of a loan covenant as of March 31, 1998. The principal lender has been notified, and a waiver for this violation has not been granted, but the lender has not indicated an intention to act on such default. There can be no assurance that the ValueVision loan and/or the revolving credit facility/term loan will be successfully modified or extended. The Company is currently continuing its evaluation of its strategic options, including continued implementation of plans to reduce operating expenses, identifying a strategic partner or the sale of the business. The Company is currently pursuing a business strategy which concentrates on targeted expansion and cost reduction and has taken the following steps to rebuild its business including: - Leveraging the Company's media expenditures and customer base to generate incremental revenues through continuity programs, list rentals and internet revenues. - A reevaluation of its global partnerships, particularly in Asia. - Continued discussions with potential strategic partners. - Continued discussions with the Company's primary lender. - Downsizing of the global workforce, the initiation of a plan to reduce global office space and other cost-cutting measures. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company's ability to continue as a going concern is dependent upon its ability to successfully implement the plans and actions described above and return to profitability and improve its liquidity. There can be no assurance that the Company will be able to extend or replace the ValueVision loan and/or its existing revolving credit facility/term loan, or return its operations to profitability. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. Management of the Company believes that its plans to address the issues described above will be successful and that sufficient cash will be obtained to meet its obligations as they become due, however, no such assurance can be given. The financial statements do not include any adjustments relating to the recoverability of recorded assets, or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 44 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. DESCRIPTION OF BUSINESS The Company is engaged in the direct marketing of consumer products, principally through television media. The Company currently brings infomercial programming to more than 70 countries. C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of National Media Corporation and its wholly-owned subsidiaries which include Quantum North America, Inc., PRTV, DirectAmerica Corporation, Quantum International Limited, Quantum Far East Limited, Quantum International Japan Company Limited, Prestige Marketing Limited, Suzanne Paul Pty Limited, and Nancy Langston & Associates, Inc. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes to the consolidated financial statements. Estimates are routinely made for inventory obsolescence, goodwill, sales returns and allowances, stock warrant valuations, allowances for bad debts, show production amortization, and contingencies. Actual results could differ from those estimates. REVENUE RECOGNITION AND RESERVE FOR RETURNED MERCHANDISE Product sales and retail royalty revenue are generally recognized when the product is shipped. Generally, it is the Company's policy to refund unconditionally the total price of merchandise returned within 30 days of the customer's receipt of the merchandise. The Company provides an allowance, based upon experience, for returned merchandise. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. RESTRICTED CASH Restricted cash represents cash pledged as collateral for two outstanding foreign exchange forward contracts. ACCOUNTS RECEIVABLE The allowance for doubtful accounts was $5,440,000 and $6,907,000 at March 31, 1998 and 1997, respectively. 45 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories consist principally of products purchased for resale, and are stated at the lower of cost (determined by the first-in, first-out method) or market. The reserve for obsolete inventory was $6,519,000 and $11,739,000 at March 31, 1998 and 1997, respectively. The reduction in the reserve is due mainly to worldwide disposal and liquidation of the Company's unprofitable inventory. PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method based on the estimated useful lives of the assets or lease terms, generally 3 to 10 years. EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS Excess of cost over net assets of acquired businesses ("goodwill") is being amortized by the straight-line method over 10 to 40 years. Other intangible assets are being amortized by the straight-line method over 2 to 5 years. Amortization expense for excess of cost over net assets acquired and other intangible assets was $3,015,000, $2,532,000, and $629,000 for the years ended March 31, 1998, 1997, and 1996, respectively, and is included in selling, general, and administrative expenses. The recoverability of goodwill is evaluated annually by an analysis of operating results for each acquired business, significant events or changes in the business environment, synergies with other operating units, and, if necessary, independent appraisals. In 1997, because indicators of impairment (losses, asset writeoffs, etc.) did exist, the Company engaged an independent appraiser to evaluate the carrying value of the assets of PRTV. The appraiser used a combination of the income and market approaches and determined that the goodwill balance fairly stated the goodwill related to PRTV. Based on this evaluation, the Company wrote-off an additional $4,392,000 of PRTV goodwill during the year ended March 31, 1997. Based on a recent re-valuation of PRTV, management has determined its business strategy for PRTV has not been successful. The Company does not anticipate any future benefit or cash flows from PRTV. As a result, the Company has determined that there is no value to the goodwill. The Company wrote-off the remaining $14,546,000 of goodwill during the fourth quarter of fiscal year 1998. SHOW PRODUCTION COSTS Costs related to the production of the Company's direct response televised advertising programs are capitalized and amortized over the estimated useful life of the production, generally 12 to 24 months. The useful life of each production is initially estimated and regularly evaluated and adjusted as sales response information becomes available. Show production expense was $14,845,000, $21,406,000 and $8,630,000 for the years ended March 31, 1998, 1997 and 1996, respectively. Production expense for the years ended March 31, 1998, 1997 and 1996 included $1,608,000, $10,811,000 and $1,900,000, respectively, for amounts written down related to unsuccessful shows for which sales response did not meet expectations. Contributing factors to the reduced success rate on new shows in fiscal 1997 were the failure of some new format type shows and the less-than-expected success of the introduction of new product categories. 46 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED REVENUE AND COSTS Deferred revenue consists of funds received by the Company for items ordered, but not shipped, and product sales subject to a free trial period. The related costs are deferred and expensed as orders are shipped. The Company also defers direct costs on product orders for which the funds are not yet received and expenses these costs as orders are shipped. INCOME TAXES The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income tax benefits have not been recorded during the current period on domestic and European losses. These benefits will be recorded when it is more likely than not that they will be realized, reducing the effective tax rate on future domestic and European earnings. PER SHARE AMOUNTS In 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE, which replaced the primary and fully diluted earnings per share measures with basic and diluted earnings per share. Basic earnings per share is computed on the basis of the weighted average number of shares outstanding during the periods presented. Diluted earnings per share is computed on the basis of the weighted average number of shares outstanding during the period plus the dilutive effect of stock options, warrants, and preferred stock. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. In computing per share amounts, deemed dividends on preferred stock have been deducted from net income to arrive at net income applicable to common shareholders. FOREIGN CURRENCY TRANSLATION Results of operations for the Company's foreign subsidiaries are translated using the average exchange rates during the period, while assets and liabilities are translated into U.S. dollars using the rate at the balance sheet date. Resulting translation adjustments are recorded as a component of shareholders' equity. The Company from time to time uses forward contracts to hedge the foreign exchange exposure related to revenues generated in their foreign operations. STOCK OPTION PLANS The Company accounts for stock options in accordance with Accounting Principles Board ("APB") Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related interpretations. No compensation expense is recognized for the Company's options which have an exercise price equal to or above the market price on the date of the grant. The Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (FAS 123), as of the fiscal year ended March 31, 1997 (see Note 7). 47 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform to current presentation. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. These statements are required to be adopted by the Company as of the beginning of fiscal 1999. SFAS No. 130 requires disclosure of transactions from non-owner sources which affect stockholder's equity in a separate financial statement for the period in which they are recognized. SFAS No. 131 requires disclosure of certain information about operating segments, products and services, geographic areas of operations and major customers and the factors used by management to determine reportable segments. The adoption of these statements will not affect the Company's financial position or results of operations. Management has not completed its determination of the effect these statements will have on its financial statement disclosures. 2. ACQUISITIONS The value of the common stock issued in all acquisitions was based on the market price of the Company's common stock during the periods in which agreements were reached (i.e., the date of the signing of the letter of intent or definitive agreement) to undertake the relevant transactions, which the Company believes is indicative of the fair value of the acquired businesses. FISCAL 1997 ACQUISITIONS On May 17, 1996, the Company acquired all of the issued and outstanding capital stock of PRTV, a publicly traded direct marketing company and producer of infomercials, for 1,836,773 shares of the Company's common stock then valued at $25.9 million. The acquisition was accounted for as a purchase and the results of PRTV are included in the Company's financial statements from the date of acquisition. A total of $39.1 million in assets were acquired and included goodwill of $18.6 million, which was initially being amortized over 20 years. Under the terms of the purchase agreement, 181,949 of the shares were returned to the Company because certain assets were not realized. During the third quarter of fiscal 1998, the Company accounted for these shares as treasury stock and a reduction in goodwill of $2.6 million. In March 1998, the Company wrote-off the remaining goodwill associated with PRTV as more fully described in Note 1. On July 2, 1996, the Company also acquired two direct response marketing companies, Prestige Marketing Limited and Prestige Marketing International Limited (collectively, "Prestige") and Suzanne Paul Holdings Pty Limited and its operating subsidiaries (collectively, "Suzanne Paul"). The aggregate consideration initially paid by the Company for Prestige and Suzanne Paul was approximately $4.2 million in cash, $2.8 million in a note payable due and paid on December 5, 1996, and 787,879 shares of the Company's common stock then valued at $14.7 million. The acquisition was accounted for as a purchase and the results of Prestige and Suzanne Paul are included in the Company's financial statements from the date of acquisition. A total of $33.8 million in assets were acquired and included goodwill of approximately $18.7 million, which is being amortized over 20 years. In addition, included in the Prestige and Suzanne 48 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 2. ACQUISITIONS (CONTINUED) Paul acquisition agreements were provisions concerning the future payment of additional purchase price, up to an aggregate of an additional $5.0 million in the Company's common stock, valued at then-present market prices, in 1997 and 1998, contingent upon the levels of net income achieved in those years by Prestige and Suzanne Paul. During fiscal year 1998, the Company amended the acquisition agreements accelerating the $5.0 million contingent purchase price amount and revising certain other provisions of the agreements. In connection with such amendments, the Company issued 909,091 shares of the Company's common stock to the former principals of these entities based on the closing price of the Company's common stock on the New York Stock Exchange on July 16, 1997. This additional amount represents an increase in the purchase price for the Prestige and Suzanne Paul entities and is included in goodwill. On August 7, 1996, the Company acquired all of the issued and outstanding capital stock of Nancy Langston & Associates, Inc. ("Langston"), a media agency. The aggregate consideration paid by the Company was 26,587 shares of the Company's common stock then valued at $500,000, and a $390,000 promissory note payable in equal installments over 2 years which began on September 1, 1996. A total of $904,600 in assets were acquired and included goodwill of approximately $880,000, which is being amortized over 10 years. FISCAL 1996 ACQUISITIONS On October 25, 1995, the Company acquired all of the issued and outstanding capital stock of DirectAmerica Corporation and California Production Group, Inc. (collectively, "DirectAmerica") for 554,456 shares of the Company's common stock then valued at $7.0 million. The acquisition was accounted for as a purchase and the results of DirectAmerica are included in the Company's financial statements from the date of acquisition. A total of $8.5 million in assets were acquired and included goodwill of $7.8 million, which is being amortized over 20 years. On October 16, 1995, the Company acquired the assets related to the "Flying Lure" product from United Brands International Corp. and Langer Technologies, Inc. The purchase price of $1.9 million included a $1.0 million cash payment and a two-year promissory note bearing interest at 9.0% in the principal amount of $900,000. In addition, the Company agreed to pay $596,000 over three years for a covenant not to compete. The Company may be required to make additional payments of up to $6.0 million if worldwide sales of "Flying Lure" products exceed certain targeted levels. Any such additional amounts will be recognized as additional cost of the "Flying Lure" assets. Total assets acquired, principally the brand name and product rights, the noncompete agreement and product development talent, were approximately $2.5 million. These amounts are included in goodwill and other intangible assets and are being amortized over 20 years. PRO FORMA INFORMATION The purchase price allocations for DirectAmerica, PRTV, Prestige, Suzanne Paul, and Langston were based on management's estimates of the fair value of assets acquired and liabilities assumed. Had the DirectAmerica, PRTV, Prestige, Suzanne Paul, and Langston acquisitions been made at April 1, 1996 and 49 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 2. ACQUISITIONS (CONTINUED) April 1, 1995, respectively, pro forma unaudited condensed results from operations for the years ended March 31, 1997 and 1996 would have been as follows (in thousands, except per share data):
YEAR ENDED MARCH 31 ---------------------- 1997 1996 ---------- ---------- Net revenues.......................................................... $ 372,694 $ 374,889 Net (loss) income..................................................... $ (45,468) $ 16,024 Basic (loss) income per share......................................... $ (2.07) $ .84 Diluted (loss) income per share....................................... $ (2.07) $ .61
The pro forma information does not purport to be indicative of the combined results of operations that would have been reported had the transactions taken place on April 1, 1995 or of future results of operations. 3. ACCRUED EXPENSES Accrued expenses include the following (in thousands):
YEAR ENDED MARCH 31 ---------------------- 1998 1997 ---------- ---------- Allowance for product refunds and returns............................. $ 7,870 $ 4,771 Accrual for legal settlements......................................... 2,100 7,512
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands):
YEAR ENDED MARCH 31 -------------------- 1998 1997 --------- --------- Furniture, fixtures, and office equipment............................... $ 21,359 $ 20,745 Leasehold improvements.................................................. 1,854 1,931 Equipment under capital leases.......................................... 1,316 923 --------- --------- 24,529 23,599 Less accumulated depreciation and amortization.......................... (12,191) (9,417) --------- --------- Total............................................................. $ 12,338 $ 14,182 --------- --------- --------- ---------
Depreciation and amortization expense for property and equipment, including equipment under capital lease, was $4,058,000, $3,042,000 and $1,470,000 for the years ended March 31, 1998, 1997 and 1996, respectively. 50 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consist of the following (in thousands):
YEAR ENDED MARCH 31 -------------------- 1998 1997 --------- --------- Line of credit, net of discount......................................... $ 18,377 $ 13,000 Term loan, net of discount.............................................. 3,373 3,232 Notes payable--ValueVision, net of discount............................. 8,172 -- Notes payable--other.................................................... 832 2,326 Obligations under capital leases........................................ 527 302 --------- --------- 31,281 18,860 Less current portion.................................................... 30,812 17,901 --------- --------- Long-term portion....................................................... $ 469 $ 959 --------- --------- --------- ---------
The Company believes the carrying value of long-term debt and capital lease obligations approximates fair value. In September 1997, the Company and its principal lender signed a loan modification agreement which limited the maximum outstanding amount of cash advances under its line of credit to $19,000,000 less the amount of permitted outstanding letters of credit (maximum of $5,000,000). The Company's line of credit also provides for a standby letter of credit in the amount of $475,000 which was outstanding at March 31, 1998 and expires on September 30, 1998. The line of credit was extended until December 31, 1998 and the payment terms of the Company's term loan were revised. The term loan is payable as follows: $800,000 was due and paid on April 1, 1998 and $1,000,000 on each of December 1, 1998, 1999 and 2000. As of March 31, 1998, interest under the line of credit and term loan accrued at prime plus 3% and is payable monthly. The discount on the term loan of $427,000 represents the remaining unamortized balance of the $1,800,000 value assigned to warrants to purchase 2,250,000 shares of the Company's common stock at an exercise price of $4.80 per share issued in October 1994 in connection with the making of the term loan. 2,025,000 of these warrants remain outstanding at March 31, 1998 and are exercisable until September 30, 2004. The valuation was based an independent analysis. The discount is being amortized over the extended life of the term loan and is included in interest expense. Under the loan modification agreement, the Company is required to maintain certain financial covenants, including tangible net worth and working capital minimums and other financial ratios. The Company is in technical default of one of its loan covenants as of March 31, 1998 as described in Note 1. As a result, the $2,000,000 long-term portion of the term loan has been classified as current as of March 31, 1998. The loan modification agreement provides for an interest rate increase of 1% at any period during which the Company fails to be in compliance with certain of its financial covenants. At March 31, 1998, the Company was in violation of a certain financial covenant triggering the interest rate increase. As a result, effective April 1, 1998, the Company's line of credit and term loan began accruing interest at a rate of prime plus 4%. The loan modification agreement also subjects the Company to certain restrictions, including the payment of dividends and incurrence of additional indebtedness. Borrowings under the line are subject to a monthly borrowing base computation comprised of a percentage of domestic cash, inventory and global receivables. The loan modification agreement requires the Company to pay an annual fee of .25% on the unused portion of the line of credit, maintain an average 51 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED) quarterly compensating balance of $2,500,000 subject to a .25% deficiency fee, and pay a loan restructuring fee of $304,000 in 16 equal monthly installments. In connection with the loan modification agreement, the Company granted to its principal lender warrants to acquire 125,000 shares of the Company's common stock at a price of $5.1875 per share, the market price of the Company's common stock as of the date of the grant. These warrants have a term of five years from the date of grant and contain standard antidilution provisions. The value accorded the warrants has been accounted for as a loan discount and is being amortized over the then remaining term of the line of credit (15 months) and is included in interest expense. The line of credit and the term loan are secured by a lien on substantially all of the assets of the Company. Such lien on certain nondomestic assets of the Company is subordinate to a lien held by Barclays Bank PLC. At March 31, 1998, the Company had an overdraft line with Barclays in the amount of approximately $1,000,000 which expired June 30, 1998. Under its agreements with Barclays, the Company is subject to certain restrictions in respect to the repayment of intercompany loans. There were no borrowings outstanding under the Barclays' line at March 31, 1998. In July 1997, the Company obtained a working capital credit facility from ASB Bank through Prestige consisting of a working capital facility (overdraft and letter of credit) of $1,000,000 New Zealand dollars (approximately $550,000 US dollars at March 31, 1998) and a short-term loan of $4,300,000 New Zealand dollars (approximately $2,400,000 US dollars at March 31, 1998). The working capital facility bore interest at the ASB Bank Banking Business Rate (the "BBBR"), plus 1% and the short-term loan bore interest at the BBBR Rate plus 2%. All amounts under this agreement were paid in full as of March 31, 1998. In connection with a Merger Agreement, dated as of January 5, 1998, by and among the Company, ValueVision, and Quantum Direct Corporation which was subsequently terminated on June 2, 1998, ValueVision extended to the Company a working capital loan of up to $10,000,000 to be utilized pending consummation of the Merger Agreement. There was $8,500,000 outstanding at March 31, 1998 with the remaining $1,500,000 having been advanced during April 1998. The loan bears interest at prime plus 1.5%, payable quarterly, and is due on January 1, 1999, subject to acceleration in certain circumstances. The Company is required to maintain compliance with certain financial covenants under this agreement. The Company anticipates that it may not be in compliance with certain of these covenants in fiscal 1999. In the event the Company is unable to repay the loan when due, ValueVision may elect to receive payment in shares of the Company's common stock at the lower of $1.07 per share or the then present market value. The Company has reserved approximately 9.4 million shares of the Company's common stock for this purpose. In consideration for providing the loan, the Company issued to ValueVision warrants to acquire 250,000 shares of the Company's common stock with an exercise price equal to $2.74 per share. The warrants are exercisable until the earlier of January 5, 2003, or on the date of repayment of the loan by the Company, if repaid by August 14, 1998. The Company also granted registration rights in connection with the shares of the Company's common stock issuable pursuant to the loan and the warrants issued to ValueVision. The value accorded the warrants has been accounted for as a loan discount which is being amortized over the term of the loan (12 months) and is included in interest expense. The Company's remaining debt includes a note payable to Edmark Industries in the amount of $750,000 (original amount of $1,400,000) relating to the settlement of litigation which occurred in fiscal 52 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED) 1997. Payment terms are $50,000 per month, plus 8% interest. Additionally, approximately $82,000 relates to a note payable in connection with a prior-year acquisition. The effective interest rate on the Company's debt was approximately 13.0% and 15.5% for the years ended March 31, 1998 and 1997, respectively. Long-term debt maturities and payments due under capital lease obligations are as follows (in thousands):
LONG-TERM CAPITAL LEASE YEAR ENDING MARCH 31 DEBT OBLIGATIONS - ----------------------------------------------- ----------- --------------- 1999........................................... $ 31,504 $ 268 2000........................................... 150 192 2001........................................... -- 108 2002........................................... -- 39 2003........................................... -- 6 ----------- ----- 31,654 613 Less: Interest portion......................... -- 86 Loan discount............................ 900 -- ----------- ----- Total.................................. $ 30,754 $ 527 ----------- ----- ----------- -----
6. CAPITAL TRANSACTIONS STOCK PURCHASE RIGHTS On January 13, 1994, the Company distributed one preferred share purchase right on each outstanding share of its common stock. The rights will become exercisable only if, without the Company's consent or waiver, a person or group acquires 15% or more of the Company's outstanding common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the Company's outstanding common stock. Each right will entitle shareholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $40. In addition, upon the occurrence of certain events, the holders of rights will thereafter have the right to receive, upon exercise at the then-current exercise price, common stock (or, in certain circumstances, cash, property, or other securities of the Company) having a value equal to two times the exercise price of the right. In the event that the Company is acquired in a merger or other business combination, or 50% or more of the Company's assets or earning power is sold, proper provision will be made so that each holder of a right will thereafter have the right to receive, upon exercise at the then- current exercise price of the right, common stock of the acquiring or surviving company having a value equal to two times the exercise price of the right. Any rights that are, or were, under certain circumstances, beneficially owned by such a 15% owner will immediately become null and void. The holders of rights, as such, have no rights as stockholders of the Company. The Company has the ability to redeem the rights at $.001 per right until the occurrence of certain specified events. 53 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 6. CAPITAL TRANSACTIONS (CONTINUED) SERIES D CONVERTIBLE PREFERRED STOCK On September 18, 1997, the Company sold to two institutional investors (the "Series C Investors") 20,000 shares of its Series C Convertible Preferred Stock, $.01 par value per share (the "Series C Preferred Stock"), with a face value of $1,000 per share, for an aggregate purchase price of $20,000,000, net of costs of $310,000. The Series C Preferred Stock had a four-year term and was to be automatically converted into the Company's common stock at maturity, if not converted prior thereto. Immediately upon issuance, each share of Series C Preferred Stock was convertible at the holder's option into such number of shares of the Company's common stock, as determined by dividing the face value ($1,000) of the Series C Preferred Stock (plus a 6% per annum premium accrued as of the conversion date) by (i) if conversion occurred on or before March 17, 1998, a conversion price equal to $6.06 per share (subject to adjustment), or (ii) if conversion occurred after March 18, 1998, a conversion price equal to the lower of $6.06 per share (the "Fixed Conversion Price") or the lowest daily volume weighted average sale price during the five days immediately prior to such conversion. The $6.06 conversion price was equal to 120% of the volume weighted average sales price of the Company's common stock on the date of the initial announcement of the transaction in which the Series C Preferred Stock was issued (the "Announcement Date Price"). In connection with this investment, the Company also issued warrants to the Series C Investors to acquire an aggregate of 989,413 shares of the Company's common stock at an initial exercise price of $6.82 which was equal to 135% of the Announcement Date Price. Such warrants are exercisable until January 5, 2003. In January 1998, in connection with the Merger Agreement, the Company entered into a Redemption and Consent Agreement with the Series C Investors, in which the Company agreed to exchange the Series C Preferred Stock for a newly created Series D Convertible Preferred Stock containing terms substantially similar to those of the Series C Preferred Stock but with a mechanism by which the fixed conversion price could be adjusted downward in certain circumstances. In addition, the Company's granted warrants to acquire 500,000 shares of the Company's Common Stock to the Series C investors. These warrants had an exercise price of $6.82 but contained a mechanism by which the exercise price could be adjusted downward in certain circumstances. In exchange, the Series C Investors agreed, among other things, to waive their right to convert their Series C or D Preferred Stock into the Company's common stock at a per share price below $6.06 prior to the earliest of the termination of the Merger Agreement or June 1, 1998. The actual exchange of Series C for Series D Preferred Stock took place on April 14, 1998. Upon termination of the Merger Agreement on June 1, 1998. The fixed conversion price of the Series D Preferred Stock and the exercise price of the all of the warrants were automatically adjusted to $1.07 per share, 101% of the closing bid price of the Company's common stock at said date. In addition, the standstill provision under the Redemption and Consent Agreement expired. Based on the current fixed common price, the Series D Preferred Stock is convertible into a minimum of 18,637,157 shares of common stock, not including shares issuable upon conversion of any accrued premium. Depending on market conditions at the time of conversion, the number of shares issuable could be significantly greater, based upon the then-prevailing trading price of the Company's common stock. The Series D Preferred Stock carries a 6% annual premium payable, at the Company's option in cash or the Company's common stock, at the time of conversion. The premium is being recorded as a deemed dividend from the date of issuance to the date of conversion, solely for the purpose of calculating earnings per share. 54 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 6. CAPITAL TRANSACTIONS (CONTINUED) Except under certain circumstances, no holder of the Series D Preferred Stock or the related warrants is entitled to convert or exercise such securities to the extent that the shares to be received by such holder upon such conversion or exercise would cause such holder to beneficially own more than 4.9% of the Company's common stock. The Series D Preferred Stock carries no voting power except as otherwise provided by Delaware General Corporation Law. Its liquidation preference is equal to the face amount ($1,000 per share) plus any accrued premiums, and is senior to the Company's common stock and Series A Junior Participating Preferred Stock and junior to the Company's Series B Convertible Preferred Stock. SERIES B CONVERTIBLE PREFERRED STOCK In October 1994, the Company authorized the issuance of a series of preferred stock designated "Series B Convertible Preferred Stock," par value $.01 per share, consisting of 400,000 shares, of which a total of 255,796 shares were issued, as described below. At March 31, 1998, there were 81,250 shares outstanding. Each share of Series B Preferred Stock is valued at $40.00 per share for conversion purposes and is presently convertible at the option of the holder into shares of the Company's common stock at a price of $4.00 per share of the Company's common stock (subject to adjustment). The holders of shares of Series B Preferred Stock shall be entitled to receive dividends declared on the Company's common stock as if the shares of Series B Preferred Stock had been converted into shares of the Company's common stock. Except as to the election of directors, each share of Series B Preferred Stock has voting rights equivalent to the total number of shares of Company's common stock into which the share of the Series B Preferred Stock is convertible. The holders of the Series B Preferred Stock, voting as a class, originally had the right to elect two directors; the holders of the Company's common stock, voting as a class, had the right to elect the remaining directors. The Series B Preferred stockholders' right to elect two directors has since terminated. In connection with the sale, in privately negotiated transactions of investment units in fiscal 1995, the Company issued 255,796 warrants, each of which represent the right to purchase twelve (12) shares (subject to adjustment) of the Company's common stock. The warrants are exercisable at a price of $4.80 per share of the Company's common stock, except for those applicable to 3,546 warrants which are exercisable at a price of $5.74 per share of the Company's common stock. At March 31, 1998, 221,000 warrants to acquire 2,652,000 shares of the Company's common stock were outstanding and exercisable, and expire between October 5, 2004 and December 19, 2004. At March 31, 1998, there were approximately 20,400,000 shares of the Company's common stock reserved for conversion of preferred stock, for exercise of stock options and warrants, for issuance under the Company's Management Incentive Plan, and for matching contributions under the Company's 401(k) plan. Based on the various conversion/exercise price events described above, this number has increased to approximately 41,750,000 as of June 15, 1998. In addition, based on the stock price of $1.3125 per share at June 15, 1998, only 2,239,413 outstanding options and warrants had an exercise price below the market price of the stock at June 15, 1998. 55 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 6. CAPITAL TRANSACTIONS (CONTINUED) PUBLIC OFFERING On August 6, 1996, the Company completed a public offering of 2,000,000 shares of its common stock with net proceeds to the Company of approximately $28.9 million. If these shares had been outstanding for the entire years ended March 31, 1997 and 1996 and the DirectAmerica, PRTV, Prestige, Suzanne Paul, and Langston acquisitions had been made at the beginning of these periods, basic and diluted loss per share would have been $1.90 for the year ended March 31, 1997. For the year ended March 31, 1996, basic income per share would have been $.76 and diluted income per share would have been $.57. 56 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 7. STOCK OPTIONS The Company has various stock option plans, which are described below. The Company applies the provisions of APB Opinion 25, and related interpretations in accounting for its plans. Accordingly, no compensation has been recognized in the financial statements, except as related to the 750,000 options granted to the Chief Executive Officer and two other senior executive officers discussed below, for the options issued under such plans as the majority of options are granted at an exercise price equal to or related to the market price of the Company's common stock at the date of grant. Had compensation cost for the Company's stock option plans been determined using fair values at the grant dates for awards under those plans as defined by SFAS No. 123, the Company's net (loss) income and net (loss) income per share would have changed to the pro forma amounts shown below:
YEAR ENDED MARCH 31 --------------------------------- 1998 1997 1996 ---------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma net (loss) income................................ $ (62,316) $ (56,323) $ 15,929 Pro forma (loss) earnings per share: Basic...................................................... $ (2.50) $ (2.57) $ 1.07 Diluted.................................................... $ (2.50) $ (2.57) $ .70
Option valuation models use highly subjective assumptions to determine fair value of traded options with no vesting or trading restrictions. Because options granted under the Company's stock option plans have vesting requirements and cannot be traded, and because changes in the assumptions can materially affect the fair value estimate, in management's opinion, the existing valuation models do not necessarily provide a reliable measure of the fair value of its employee stock options. For purposes of determining the pro forma disclosures, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for each year presented: dividend yield of 0%; and expected lives of 5 years. Expected volatility of 50.0%, 51.8% and 51.8%, and risk-free interest rates of 6.4%, 6.1% and 6.1% have been used in fiscal 1998, 1997 and 1996 respectively. In accordance with the transition provisions of SFAS No. 123, the pro forma disclosures presented above reflect the statement's application only to option grants and stock awards dated on or after April 1, 1995. Therefore, because option grants and awards generally vest over several years and additional awards are expected to be made in the future, the pro forma results should not be considered to be representative of the effects on reported results for future years. Under the above-mentioned stock option plans, as amended, a maximum of 8,065,000 shares of common stock may be issued upon exercise of incentive or nonincentive stock options, special options, or stock appreciation rights granted pursuant to such plans. All employees of the Company, as well as directors, officers, and third parties providing services to the Company are eligible to participate in the stock option plans. During fiscal 1997 and 1996, the Company recognized $491,000 and $344,000, respectively, in compensation expense related to the issuance of 30,000 and 25,000 shares of the Company's common stock to non-employee directors under its Director Stock Grant Plan in each year. No such amounts were made in fiscal 1998 as the Director Stock Grant Plan was terminated as of March 31, 1997. The shares were valued at closing price of the Company's common stock on the New York Stock Exchange at the date of grant. 56 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 7. STOCK OPTIONS (CONTINUED) In addition, in fiscal 1996 the Company recognized approximately $1.5 million in compensation expense related to the issuance of 93,007 shares of its common stock to officers, directors and other employees in connection with its Management Incentive Plan at a weighted average fair value of $16.50 per share. As an inducement to the execution of employment agreements employment agreements with various officers of the Company who entered into employment agreements after August 31, 1991, as well as certain other agreements, the Board of Directors has authorized the grant of options to purchase up to 2,686,750 shares of the Company's common stock at exercise prices equal to at least the market price at the time of grant with the exception of 700,000 options granted to the Company's Chief Executive Officer and 50,000 plan options granted to two other senior executive officers. These 750,000 options contain a provision which provides that, upon the occurrence of certain triggering events (such as a sale or merger of the Company, or significant investment), the executives could realize a reduction of up to an aggregate of approximately $3.0 million in the exercise price of their options. This $3.0 million charge is being amortized from November 13, 1997, the date of the agreement in principal with the CEO, through June 30, 1998. Fiscal 1998 includes $1.9 million in noncash compensation expense in connection with these grants. The ultimate aggregate expense, if any, will be determined based upon whether a triggering event occurs by June 30, 1998, the expiration date for that provision of the agreement, and the market price or sale price of the Company's common stock upon the occurrence of the triggering event. This charge will be reversed in the first quarter of fiscal 1999 as no triggering events have occurred as of the June 30, 1998 expiration date. Options granted generally vest over a period ranging from the date of grant up to a maximum of five years. Options may be exercised up to a maximum of 10 years from date of grant. The weighted-average remaining contractual life of all outstanding options at March 31, 1998 is 8 years (9 years for options with an exercise price less than $10.00, and 5 years for options with an exercise price greater than $10.00). In fiscal 1997, 1,129,000 stock options originally issued to Company employees at an exercise price of $16.375 were canceled and 564,500 stock options with an exercise price of $8.325 were issued. In fiscal 1998, 716,500 stock options originally issued to Company employees, officers and directors were canceled and 358,250 stock options with exercise prices ranging from $7.00 to $8.325 were issued. 57 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 7. STOCK OPTIONS (CONTINUED)
SHARES UNDER WEIGHTED OPTION AVERAGE ------------- ----------- Outstanding at April 1, 1995........................................ 2,908,096 $ 5.06 Granted............................................................. 350,000 12.99 Exercised........................................................... (1,219,099) 4.22 Expired and canceled................................................ (116,665) 5.82 ------------- ----------- Outstanding at March 31, 1996....................................... 1,922,332 6.90 Granted............................................................. 3,921,250 15.18 Exercised........................................................... (1,215,099) 5.78 Expired and canceled................................................ (1,543,979) 16.40 ------------- ----------- Outstanding at March 31, 1997....................................... 3,084,504 13.11 Granted............................................................. 2,686,250 5.29 Exercised........................................................... (33,333) 4.70 Expired and canceled................................................ (1,265,559) 13.92 ------------- ----------- Outstanding at March 31, 1998....................................... 4,471,862 $ 8.10 ------------- ----------- ------------- ----------- Exercisable at March 31, 1998....................................... 2,612,279 $ 7.74 ------------- ----------- ------------- ----------- Non-exercisable at March 31, 1998................................... 1,859,583 $ 8.61 ------------- ----------- ------------- ----------- Exercisable at March 31, 1997 1,213,591 $ 12.19 ------------- ----------- ------------- ----------- Nonexercisable at March 31, 1997 1,870,913 $ 13.70 ------------- ----------- ------------- ----------- Shares available for future grant at March 31, 1998................. 560,932 ------------- ------------- Shares available for future grant at March 31, 1997................. 1,068,430 ------------- -------------
Of the outstanding options, 3,451,749 have exercise prices ranging from $2.69 to $10.00 with a weighted average price of $5.70, and 1,020,113 have exercise prices ranging from $10.01 to $20.00 with a weighted average price of $16.24. The weighted average fair value of options granted during the years ended March 31, 1998, 1997 and 1996 was $2.58, $7.59 and $7.68, respectively. 58 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
YEAR ENDED MARCH 31 --------------------------------- 1998 1997 1996 ---------- ---------- --------- Net (loss) income.......................................... $ (56,769) $ (45,691) $ 16,579 Deemed dividend on convertible preferred stock............. (643) -- -- ---------- ---------- --------- Adjusted net (loss) income for basic and diluted earnings per share................................................ $ (57,412) $ (45,691) $ 16,579 ---------- ---------- --------- ---------- ---------- --------- Weighted average shares outstanding--basic................. 24,904 21,905 15,411 Effect of dilutive securities: Convertible preferred stock................................ -- -- 2,248 Stock options and warrants................................. -- -- 5,015 ---------- ---------- --------- Dilutive potential common shares........................... -- -- 7,263 Adjusted weighted average and assumed conversions.............................................. 24,904 21,905 22,674 ---------- ---------- --------- ---------- ---------- --------- Basic earnings per share................................. $ (2.31) $ (2.09) $ 1.08 ---------- ---------- --------- ---------- ---------- --------- Diluted earnings per share............................... $ (2.31) $ (2.09) $ .73 ---------- ---------- --------- ---------- ---------- ---------
Convertible preferred stock to purchase 4,112,830 and 950,000 shares of common stock and stock options and warrants to purchase of 11,565,000 and 8,592,000 shares of common stock for the years ended March 31, 1998 and 1997 were not included in the computation of diluted earnings per share because of losses incurred by the Company in those years, therefore, the effect would be antidilutive. Diluted earnings per share for the year ended March 31, 1998 does not include 3,400,000 shares of common stock which would be issuable in the event that the Company was unable to repay the ValueVision loan in cash. Stock option and warrants to purchase 3,067,000 shares of common stock were outstanding during the year ended March 31, 1996 but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. As a result of the termination of the Merger Agreement on June 1, 1998 the Series D Preferred Stock, not including shares issuable upon conversion of any accrued premium is convertible into a minimum of 18,637,157 shares of the Company's common stock as compared to 3,300,330 shares at March 31, 1998. In addition, potential shares issuable in connection with repayment of the ValueVision loan increased to approximately 9,400,000. 59 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 9. INCOME TAXES The components of income tax expense are as follows (in thousands):
FEDERAL STATE FOREIGN TOTAL --------- --------- --------- --------- 1998 Current............................................ $ -- $ -- $ 700 $ 700 Deferred........................................... -- -- -- -- --------- --------- --------- --------- Provision for income taxes......................... $ -- $ -- $ 700 $ 700 --------- --------- --------- --------- --------- --------- --------- --------- 1997 Current............................................ $ -- $ -- $ 1,897 $ 1,897 Deferred........................................... 1,201 -- (1,201) -- --------- --------- --------- --------- Provision for income taxes......................... $ 1,201 $ -- $ 696 $ 1,897 --------- --------- --------- --------- --------- --------- --------- --------- 1996 Current (1)........................................ $ 9,722 $ 1,174 $ 1,258 $ 12,154 Deferred........................................... (4,825) (761) 1,324 (4,262) Benefit of net operating loss carryforward......... (4,367) -- -- (4,367) --------- --------- --------- --------- Provision for income taxes......................... $ 530 $ 413 $ 2,582 $ 3,525 --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) In 1996, current income taxes payable were reduced by approximately $2,100,000 due to the exercise of employee stock options that are deductible for income tax purposes but do not affect net income. Pretax (loss) income was taxed under the following jurisdictions (in thousands):
1998 1997 1996 ---------- ---------- --------- United States.............................................. $ (37,682) $ (44,794) $ 15,525 Foreign.................................................... (18,387) 1,000 4,579 ---------- ---------- --------- Total................................................ $ (56,069) $ (43,794) $ 20,104 ---------- ---------- --------- ---------- ---------- ---------
60 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 9. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
MARCH 31 ---------------------- 1998 1997 ---------- ---------- Deferred tax assets: Net operating loss carryforwards.................................... $ 31,150 $ 14,371 Alternative minimum tax credit carryforward......................... 835 835 Accrued vacation and severance pay.................................. 542 901 Inventory and accounts receivable reserves.......................... 5,240 7,162 Reserve for legal settlements....................................... 2,043 2,811 Other................................................................. 1,504 701 ---------- ---------- Total deferred tax assets....................................... 41,314 26,781 Valuation allowance................................................... (38,118) (23,171) ---------- ---------- Deferred tax assets................................................... 3,196 3,610 Deferred tax liabilities: Prepaid media and other costs....................................... 361 769 Tax over book depreciation.......................................... 1,043 240 Deferred production costs........................................... 703 703 Deferred sales...................................................... 1,089 1,898 ---------- ---------- Total deferred tax liabilities.................................. 3,196 3,610 ---------- ---------- Net deferred tax asset................................................ $ -- $ -- ---------- ---------- ---------- ----------
The increase in the valuation allowance relates to the increase in U.S. and foreign net operating loss carryforwards and other deferred tax assets from March 31, 1997 to March 31, 1998. A reconciliation of the Company's provision for income taxes to the provision for income taxes at the U.S. federal statutory rate of 35% is as follows (in thousands):
YEAR ENDED MARCH 31 --------------------------------- 1998 1997 1996 ---------- ---------- --------- Tax (benefit) expense at statutory rate..................... $ (19,624) $ (15,328) $ 7,036 Tax effect of: Net operating loss not benefited.......................... 14,394 14,449 -- Utilization of net operating loss carryforward............ -- -- (4,367) Foreign income taxes in excess of U.S. Federal statutory rate............................... 700 97 980 State and local income taxes.............................. -- -- 268 Nondeductible items, principally goodwill................. 5,230 2,679 301 Other..................................................... -- -- (693) ---------- ---------- --------- Income tax expense.......................................... $ 700 $ 1,897 $ 3,525 ---------- ---------- --------- ---------- ---------- ---------
61 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 9. INCOME TAXES (CONTINUED) At March 31, 1998, the Company has the following loss and credit carryforwards for tax purposes (in thousands):
AMOUNT EXPIRATION --------- ------------- U.S. net operating loss............................................. $ 62,700 2009-2018 Foreign net operating loss.......................................... 19,703 Unlimited Alternative minimum tax credit...................................... 835 Unlimited
A portion of the U.S. net operating loss carryforward is related to the exercise of employee stock options. If that portion of the loss carryforward related to the exercise of stock options is realized, the resulting tax benefit will be recorded directly to shareholders' equity. For financial reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to the entire U.S. net operating loss carryforward, because utilization of net operating loss carryforwards cannot be reasonably assumed. Due to certain collateral requirements in the Company's credit facilities (as discussed in Note 5), the majority of earnings from its foreign subsidiaries have been deemed distributed for tax purposes. All appropriate U.S. federal and state income taxes have been provided thereon. Foreign withholding taxes on actual distributions of these earnings would be immaterial. 10. SEVERANCE TO FORMER EXECUTIVE OFFICERS In fiscal 1997, the Company recorded severance expense related to the discontinuance of employment of five executive officers. Total severance charges related to these officers were $2,500,000 and included salary, insurance and other benefits. 11. COMMITMENTS AND CONTINGENCIES The Company rents warehouses, retail stores and office space under various operating leases which expire through December 2013 including leases with related parties as described in Note 13. Future minimum lease payments (exclusive of real estate taxes and other operating expenditures) as of March 31, 1998 under noncancelable operating leases with initial or remaining terms of one year or more are as follows for the years ended March 31 (in thousands): 1999............................................... $ 5,163 2000............................................... 4,095 2001............................................... 2,991 2002............................................... 2,204 2003............................................... 2,231 Thereafter......................................... 16,813 --------- $ 33,497 --------- ---------
Rent expense under various operating leases aggregated $4,833,000, $4,233,000 and $2,335,000 in 1998, 1997 and 1996, respectively. Subleased building space rental income aggregated $136,800, $106,300 and $85,300 for 1998, 1997 and 1996, respectively. During fiscal year 1998, the Company expended $91,904,000 on media purchases, a portion of which were made under long-term agreements. The largest domestic agreement runs through December 1998 62 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) and requires a fixed monthly payment of approximately $1.8 million per month. In addition, the Company has long-term agreements with certain Pan-European satellite channels to purchase a specific number of television hours per week at a minimum guaranteed amount. These contracts expire at various dates over the next 3 years. In addition, the Company has a contract to lease a transponder which continues through the year 2010. Total commitments under these media contracts are; $27,122,000 in 1999; $4,843,000 in 2000; $4,456,000 in 2001, 2002 and 2003; and $26,609,000 thereafter. 12. LITIGATION AND REGULATORY MATTERS NATIONAL MEDIA LITIGATION SHAREHOLDERS' FEDERAL CLASS ACTIONS In fiscal year 1996, the Company settled a class action involving allegations concerning disclosure by the Company of its ongoing relationship with PRTV, then an independent infomercial producer, and Ronic, S.A., a supplier of the Company. The settlement resulted in cash payments by the Company's insurer of $2,175,000 and the issuance of 106,000 shares of the Company's common stock valued at the closing price on the New York Stock Exchange on the date of settlement, to the class. The Company recorded a charge in fiscal year 1995 of $725,000 in connection with this matter. TERMINATED 1994 TENDER OFFER AND MERGER AGREEMENT WITH VALUEVISION INTERNATIONAL, INC. In April 1994, the Company filed suit in federal court against ValueVision alleging that ValueVision had wrongfully terminated its amended tender offer. In May 1994, ValueVision answered the Company's complaint and set forth various counterclaims. In April 1995, the parties to this litigation entered into a settlement agreement. In connection with the settlement agreement, the Company and ValueVision executed a Telemarketing, Production and Post-Production Agreement (the "Telemarketing Agreement") and a Joint Venture Agreement. The Telemarketing Agreement obligated ValueVision to provide to the Company over a three-year period in-bound telephone call-taking services at rates more favorable than those currently being paid by the Company. The Telemarketing Agreement also obligated ValueVision to provide to the Company certain production and post-production services. As additional consideration for the services to be provided by ValueVision under the Telemarketing Agreement, the Company granted to ValueVision ten (10) year warrants (the "Warrants") to purchase up to 500,000 shares of the Company's common stock at a price of $8.865 per share (subject to adjustment pursuant to the antidilution provision of the Warrants). This price was based on a premium over the average 20-day market value prior to the date of settlement. The Warrants were scheduled to vest with respect to an equal number of shares on each of the thirteen-month, 2-year and 3-year anniversaries of the effective date (November 24, 1995), provided that ValueVision satisfied certain conditions. The Warrants will expire on the tenth anniversary of the effective date. During fiscal year 1997, the parties entered into an amendment to the Telemarketing Agreement pursuant to which ValueVision was no longer obligated to provide in-bound Telemarketing Services and is required to pay $1.3 million for the Warrants. As of March 31, 1998, the Company had received $800,000 in payments for 333,333 vested warrants. The remaining warrants will vest upon payment of the final installment due November 28, 1998. As part of the settlement, the Company and ValueVision also entered into a Joint Venture Agreement. Pursuant to the Joint Venture Agreement, the Company is required, subject to certain exceptions, to negotiate in good faith with ValueVision to form a joint venture to pursue home shopping opportunities 63 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 12. LITIGATION AND REGULATORY MATTERS (CONTINUED) outside the United States and Canada before pursuing such opportunities by itself or with certain third parties. ValueVision granted the Company similar rights with respect to infomercial opportunities ValueVision may have outside of the United States and Canada. In connection with the matters discussed above, the Company (1) reimbursed its former Chairman $50,000 for certain legal costs, (2) paid approximately $300,000 due to the former Chairman under the Consulting Agreement, and (3) paid $220,000 in connection with the exercise of the Company's early termination option for its then-principal offices which were located in a building owned by a company controlled by the former Chairman. The issuance of the Warrants to ValueVision required the prior consent of the holders of the promissory notes issued pursuant to a Note Agreement for a $5,000,000 five-year secured loan. As an inducement to the noteholders to permit the issuance of the Warrants, the Company issued to the noteholders warrants (the "Waiver Warrants") to purchase 500,000 shares of the Company's common stock at a price of $10.00 per share. These warrants expired unexercised on November 28, 1997. AB ROLLER PLUS PATENT LITIGATION On March 1, 1996, Precise Exercise Equipment ("Precise") filed suit in the United States District Court for the Central District of California against certain parties, including the Company, alleging patent infringement, unfair competition, and other intellectual property claims. Such claims relate to an alleged infringement of Precise's initial US patent for an exercise device. The suit claimed that a product marketed by the Company, the Ab Roller Plus, pursuant to a license granted by a third party violated Precise's initial US patent. On July 16, 1997, the Company and certain of the other defendants to the action entered into a settlement agreement with the plantiffs. The Company recorded a charge of approximately $6.0 million in the fourth quarter of the fiscal year ended March 31, 1997 in connection with this matter. FITNESS FLYER LITIGATION In February 1997, the Company filed suit in a Los Angeles, California state court against Guthy Renker Corporation in connection with a joint venture between Guthy Renker and the Company concerning the marketing of a fitness product. Guthy Renker also filed actions against the Company in California federal and state court concerning the same circumstances. In early March 1997, the parties reached a settlement of these actions pursuant to which the Company retained its rights to market a competing product that it had developed, and gave up the right to sell the original fitness product. WWOR LITIGATION In March 1997, WWOR-TV filed a breach of contract action in the United States District Court for New Jersey against one of the Company's operating subsidiaries alleging that the subsidiary wrongfully terminated a contract for the purchase of media time, seeking in excess of $1,000,000 in compensatory damages. The Company is contesting the action. While at this stage it is not possible to predict the outcome of this matter, the Company believes that any resolution of this matter will not have a material adverse effect on the Company's results of operations. 64 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 12. LITIGATION AND REGULATORY MATTERS (CONTINUED) PRTV LITIGATION PRTV SHAREHOLDERS' CALIFORNIA CLASS ACTION On May 1, 1995, prior to the acquisition of PRTV by the Company, a purported class action suit was filed in the United States District Court for the Central District of California against PRTV and its principal executive officers. The suit sought unspecified compensatory damages and other equitable relief. The Company settled this action in fiscal 1997 which settlement provided for the payment of $550,000 to the class, 66% of which was paid by PRTV's insurance carrier. The Company recorded a charge of $187,000 during fiscal year 1997. Such settlement has received court approval. EDMARK INDUSTRIES LITIGATION In February 1996, prior to the acquisition of PRTV by the Company, Edmark Industries ("Edmark"), a supplier of the SUPER SLICER kitchen product, filed suit in the U.S. District Court for the Southern District of Texas against PRTV and the retail distributor of the product. The action was settled in April 1997 upon the payment by the Company, on behalf of PRTV, of $200,000, a $200,000 note payable on June 30, 1997, the issuance of a note requiring the payment of $50,000 per month for 24 months beginning July 31, 1997, with interest at 8%, and certain other nonmaterial matters. The Company recorded a charge of $2,656,000 during the fourth quarter of fiscal year 1997 in connection with this matter. BLUBLOCKER LITIGATION In September 1995, prior to the acquisition of PRTV by the Company, suit was filed by Blublocker Corp., a distributor of sunglasses, against PRTV alleging unfair competition and false advertising relating to a PRTV product campaign. In April 1997, the suit was settled by the parties with PRTV agreeing to pay $400,000 to Blublocker Corp. The Company recorded this charge in the fourth quarter of fiscal year 1997 in connection with this matter. SUNTIGER LITIGATION In late March 1997, Suntiger, Inc. ("Suntiger"), a distributor of sunglasses, filed suit against PRTV and certain other parties alleging patent infringement. The Company has reached a settlement with the plaintiffs involving a going-forward business relationship which management believes will not have a material adverse impact upon the Company's financial condition or results of operations. PARKIN LITIGATION In October 1997, John Parkin, an on-air personality appearing in certain of the Company's infomercials, brought an action for injunctive relief and unspecified damages in the United States District Court for the Eastern District of Pennsylvania. The action was settled in March 1998 upon the Company agreeing to pay Parkin $820,000 over a period extending to April 1, 2001 and Mr. Parkin granting the Company, among other things, the rights to air existing informercials on a worldwide basis through March 2002. The Company recorded a charge in fiscal 1998 in connection with this matter. REGULATORY MATTERS In June 1996, the Company received a request from the FTC for additional information regarding certain of the Company's infomercials in order to determine whether the Company was operating in 65 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 12. LITIGATION AND REGULATORY MATTERS (CONTINUED) compliance with previously issued consent orders. The FTC later advised the Company that it believed the Company had violated one of the consent orders by allegedly failing to substantiate certain claims made in one of its infomercials which it no longer airs in the United States. The Company, which is now indemnified against damages sustained as a result of any action taken by the FTC in connection with such infomercial, has provided information to the FTC to demonstrate substantiation. If the Company's substantiation is deemed to be insufficient by the FTC, the FTC has a variety of enforcement mechanisms available to it, including, but not limited to, monetary penalties. While no assurances can be given, especially given the applicable indemnification, the Company does not believe that any remedies to which it may become subject will have a material adverse effect on the Company's results of operations or financial condition. The FTC recently notified the Company that it had concerns about claims being made in one of the Company's current infomercials and also raised questions concerning certain aspects of the Company's pricing practices. The Company is responding to the FTC's inquiries. In addition, in Spring 1997, in accordance with applicable regulation, the Company notified the CPSC of breakages which were occurring in its Fitness Strider product. The Company also notified the CPSC of its replacement of certain parts of the product with upgraded components. The CPSC reviewed the Company's testing results in order to assess the adequacy of the Company's upgraded components. The CPSC also undertook its own testing of the product and, in November 1997, informed the Company that the CPSC compliance staff had made a preliminary determination that the Fitness Strider product and upgraded component present a substantial product hazard, as defined under applicable law. The Company and the CPSC staff are discussing voluntary action to address the CPSC's concerns including replacement of the affected components. At present, management of the Company does not anticipate that any action agreed upon, or action required by the CPSC, will have any material adverse impact on the Company's financial condition or results of operations. The Company has also been contacted by Australian consumer protection regulatory authorities regarding the safety and fitness of the Fitness Strider product and an exercise rider product marketed only in Australia and New Zealand. At this point, management cannot predict whether the outcome of these matters regarding the Fitness Strider will have a material adverse impact upon the Company's financial condition or results of operations. OTHER MATTERS The Company, in the normal course of business, is a party to litigation relating to trademark and copyright infringement, product liability, contract-related disputes, and other actions. It is the Company's policy to vigorously defend all such claims and enforce its rights in these areas. The Company does not believe any of these actions either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. 13. RETIREMENT PLAN All of the Company's U.S. full-time employees may participate in a 401(k) defined contribution plan. The Company matches employee contributions at levels that depend on the return on equity of the Company each year. The Company recognized $13,000, $22,000, and $110,000 for the years ended March 31, 1998, 1997 and 1996, respectively, in connection with this plan. 66 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 14. RELATED PARTY TRANSACTIONS The Company previously leased office space in a building owned by the Company's former Chairman of the Board and Chief Executive Officer. The Company terminated the lease, effective October 31, 1996 and paid a lump sum of $376,000 in fiscal 1997. The Company also leases an office building and retail store in New Zealand owned by an officer of the Company which expires on March 31, 2006. Rental expense is $17,300 per month. Included in accounts receivable is approximately $478,000 in notes receivable and advances to certain officers of the Company. The notes including accrued interest are due from two officers of the Company and range in amount from $172,000 to $39,000. The notes bear interest at a rate of 8% with payment terms ranging from due on demand to December 1998. In March 1998 the Company entered into an employment agreement with its new president which included the forgiveness of a loan, including accrued interest, in an amount of $190,000 and the issuance of a $545,000 loan. The new loan was funded in April 1998, bears interest at prime plus 1 1/2% and is repayable on May 30, 2000. The Company also entered into transactions with companies affiliated with various board members and current and former executives for services including printing, consulting, show production and professional services. During the years ended March 31, 1998, 1997 and 1996, the total amount paid to these companies for such services was approximately $501,000, $1,187,000 and $336,000, respectively. In addition, a company affiliated with the Chief Executive Officer subleased a portion of the Company's production facility for part of the year ending March 31, 1998 for approximately $24,000. In accordance with provisions of the Company's stock option plan, in fiscal 1997, an officer of the Company delivered 25,220 shares of the Company's common stock with a fair market value of $473,000 to the Company in satisfaction of an outstanding note receivable in said amount. 67 NATIONAL MEDIA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 15. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one industry segment and is engaged in the direct marketing of products principally through television. Information as to the Company's operations by geographic area, is set forth below (in thousands):
1998 1997 1996 ---------- ---------- ---------- Revenues from unaffiliated customers: U.S. and Canada........................................ $ 125,725 $ 188,524 $ 141,642 Europe................................................. 66,423 58,977 56,406 Asia................................................... 42,389 71,017 94,559 South Pacific.......................................... 43,937 39,661 -- ---------- ---------- ---------- Total.............................................. $ 278,474 $ 358,179 $ 292,607 ---------- ---------- ---------- ---------- ---------- ---------- Operating (loss) income: U.S. and Canada........................................ $ (24,644) $ (33,446) $ 4,080 Europe................................................. (10,916) (7,661) 5,384 Asia................................................... (5,436) 5,668 15,728 South Pacific.......................................... (3,337) 5,995 -- Unallocated corporate expenses......................... (8,279) (12,808) (4,073) ---------- ---------- ---------- Total.............................................. $ (52,612) $ (42,252) $ 21,119 ---------- ---------- ---------- ---------- ---------- ---------- Identifiable assets: U.S. and Canada........................................ $ 76,373 $ 83,185 $ 73,051 Europe................................................. 20,448 25,925 19,106 Asia................................................... 14,007 16,956 24,391 South Pacific.......................................... 32,263 39,566 -- ---------- ---------- ---------- Total.............................................. $ 143,091 $ 165,632 $ 116,548 ---------- ---------- ---------- ---------- ---------- ----------
Operating income is net income before interest and income taxes. Fiscal 1998 U.S and Canada operating loss includes a $14,546,000 write-off of PRTV goodwill. 16. SUBSEQUENT EVENTS On January 5, 1998, the Company entered into an Agreement and Plan of Reorganization and Merger (the "Merger Agreement"), by and among the Company, ValueVision and Quantum Direct Corporation, formerly known as V-L Holdings Corp. ("Quantum Direct") a newly formed Delaware corporation. On April 8, 1998, it was announced that ValueVision had received preliminary notification from holders of more than 5% of ValueVision's common stock that they intended to exercise their dissenter's rights with respect to the proposed transaction. On June 2, 1998, the Company announced that the Company and ValueVision had mutually terminated their agreement after not having been able to reach agreement on a restructured transaction. As a result of the termination of the merger, the Company will record a charge to writeoff in excess of $600,000 of merger related costs in the first quarter of fiscal 1999. In addition, in June 1998 the Company and Mitsui and Co., Ltd., the Company's Asian partner, each notified the other that the existing agreement regarding their operations in Japan will terminate pursuant to its terms on January 1, 1999. The Company and Mitsui are involved in negotiations to restructure their relationships in Japan and throughout Asia in order to address changes in that market and other circumstances which have arisen. 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL MEDIA CORPORATION Date: July 1, 1998 By: /s/ ROBERT N. VERRATTI ----------------------------------------- Robert N. Verratti CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) AND DIRECTOR Date: July 1, 1998 By: /s/ JOHN SULLIVAN ----------------------------------------- John Sullivan SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates so indicated. Chief Executive Officer /s/ ROBERT N. VERRATTI (Principal - ------------------------------ Executive Officer) and July 1, 1998 Robert N. Verratti Director /s/ CONSTANTINOS I. COSTALAS - ------------------------------ Vice Chairman of the Board July 1, 1998 Constantinos I. Costalas and Director /s/ ALBERT R. DOWDEN - ------------------------------ Director July 1, 1998 Albert R. Dowden - ------------------------------ Director July 1, 1998 Michael J. Emmi /s/ WILLIAM M. GOLDSTEIN - ------------------------------ Director July 1, 1998 William M. Goldstein /s/ FREDERICK S. HAMMER - ------------------------------ Chairman of the Board and July 1, 1998 Frederick S. Hammer Director /s/ ROBERT E. KEITH, JR. - ------------------------------ Director July 1, 1998 Robert E. Keith, Jr. /s/ JOHN W. KIRBY - ------------------------------ President and Director July 1, 1998 John W. Kirby /s/ IRA M. LUBERT - ------------------------------ Director July 1, 1998 Ira M. Lubert /s/ WARREN V. MUSSER - ------------------------------ Director July 1, 1998 Warren V. Musser /s/ JON W. YOSKIN, II - ------------------------------ Director July 1, 1998 Jon W. Yoskin, II
SCHEDULE II NATIONAL MEDIA CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
ADDITIONS BALANCE -------------------------- AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER BALANCE AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ------------------------------------------- ----------- ----------- ------------- ----------- -------------- YEAR ENDED MARCH 31, 1998: Allowance for doubtful accounts............ $ 6,907 $ 2,203 $ -- $ 3,670(1) $ 5,440 ----------- ----------- ------------- ----------- ------- ----------- ----------- ------------- ----------- ------- Reserve for refunds........................ $ 4,771 $ 51,861 $ -- $ 48,762(2) $ 7,870 ----------- ----------- ------------- ----------- ------- ----------- ----------- ------------- ----------- ------- Inventory reserve.......................... $ 11,739 $ 6,535 $ -- $ 11,755(3) $ 6,519 ----------- ----------- ------------- ----------- ------- ----------- ----------- ------------- ----------- ------- YEAR ENDED MARCH 31, 1997 Allowance for doubtful accounts............ $ 2,127 $ 5,698 $ 1,877(4) $ 2,795(1) $ 6,907 ----------- ----------- ------------- ----------- ------- ----------- ----------- ------------- ----------- ------- Reserve for refunds........................ $ 5,089 $ 41,309 $ -- $ 41,627(2) $ 4,771 ----------- ----------- ------------- ----------- ------- ----------- ----------- ------------- ----------- ------- Inventory reserve.......................... $ 1,558 $ 8,743 $ 1,828(4) $ 390(3) $ 11,739 ----------- ----------- ------------- ----------- ------- ----------- ----------- ------------- ----------- ------- YEAR ENDED MARCH 31, 1996: Allowance for doubtful accounts............ $ 1,954 $ 1,194 $ -- $ 1,021(1) $ 2,127 ----------- ----------- ------------- ----------- ------- ----------- ----------- ------------- ----------- ------- Reserve for refunds........................ $ 3,371 $ 29,705 $ -- $ 27,987(2) $ 5,089 ----------- ----------- ------------- ----------- ------- ----------- ----------- ------------- ----------- ------- Inventory reserve.......................... $ 1,126 $ 674 $ -- $ 242(3) $ 1,558 ----------- ----------- ------------- ----------- ------- ----------- ----------- ------------- ----------- -------
- ------------------------ (1) Uncollectible accounts written off, net of recoveries. (2) Refunds on products sold. (3) Obsolete inventory written off. (4) Acquired through acquisitions. EXHIBIT INDEX
EXHIBIT NO. - ------------- 4.9 Amendment No. 6 to Rights Agreement, dated as of January 5, 1998 10.51 Employment Agreement, dated as of March 20, 1998, between the Company and John W. Kirby. 10.52 Loan Agreement, dated as of March 31, 1998, by and between the Company and John W. Kirby. 10.53 Non-Incentive Stock Option Agreement, dated as of January 28, 1998, by and between the Company and John W. Kirby. 10.54 Lease, dated November 26, 1996, by and between Encino Terrace Center and Positive Response Television, Inc. and DirectAmerica Corporation. 11.1 Statement Re: Computation of Per Share Earnings 21.1 Subsidiaries of the Company 23.1 Consent of Independent Auditors 27.1 Financial Data Schedule
EX-4.9 2 EXHIBIT 4.9 Exhibit 4.9 AMENDMENT NO. 6 TO RIGHTS AGREEMENT ("Amendment No. 6") between NATIONAL MEDIA CORPORATION, a Delaware corporation (the "Company") and ChaseMellon Shareholder Services, LLC, a New Jersey Corporation, as Rights Agent (the "Rights Agent"). W I T N E S S E T H WHEREAS, on January 3, 1994, the Company and the Rights Agent entered into that certain Rights Agreement (as amended by Amendments Nos. 1 through 5 to Rights Agreement, the "Rights Agreement"); and WHEREAS, pursuant to Section 27 of the Rights Agreement, this Amendment No. 6 may be entered into by the Company and the Rights Agent without the approval of any holders of Rights. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto hereby agree as follows: 1. The definition of "Acquiring Person" set forth in Section 1(a) of the Rights Agreement is hereby amended by adding to the second sentence thereof, after the words "(vi) the execution or consummation of the transactions contemplated by that certain Securities Purchase Agreement between National Media Corporation and the Purchasers named therein, dated September 4, 1997, or the conversion of the Series C Preferred Stock or the exercise of the Warrants to be issued pursuant to such Securities Purchase Agreement; or (vii)" the following new language: "the execution or consummation of the transactions contemplated by that certain Agreement and Plan of Reorganization and Merger (the "Merger Agreement") by and among ValueVision International, Inc. ("ValueVision"), the Company and V-L Holdings Corp., dated as of January 5, 1998, or the exercise of the warrants or the conversion of the note to be issued in connection therewith, (viii) the execution or consummation of the transactions contemplated by that certain Redemption and Consent Agreement by and between the Company and Capital Ventures International and RGC International Investors, LDC, dated as of January 5, 1998, or the conversion of the Series D Preferred Stock or the exercise of the Warrants to be issued pursuant to such Redemption and Consent Agreement or the exercise of the Warrants to be amended pursuant to such Redemption and Consent Agreement, (ix) the execution or consummation of the transactions contemplated by that certain Stock Option Agreement (ValueVision), dated January 5, 1998, between ValueVision and the Company, or (x)" 2. Section 3(a) of the Rights Agreement is hereby amended by adding as a new sentence (to be inserted after language added by Amendment No. 5 to the Rights Agreement, dated August 14, 1997) the following: "Notwithstanding the foregoing, no Distribution Date shall occur as a result of (i) the execution or consummation of the transactions contemplated by that certain Agreement and Plan of Reorganization and Merger, by and among ValueVision International, Inc., the Company and V-L Holdings Corp., dated as of January 5, 1998, or the exercise of the Warrants or the conversion of the Note to be issued in connection therewith, (ii) the execution or consummation of the transactions contemplated by that certain Stock Option Agreement between the Company and ValueVision International, Inc., dated as of January 5, 1998, or the exercise of the options to be granted pursuant to such Stock Option Agreement, or (iii) the execution or consummation of the transactions contemplated by that certain Redemption and Consent Agreement by and between the Company and Capital Ventures International and RGC International Investors, LDC, dated as of January 5, 1998, or the conversion of the Series D Preferred Stock or the exercise of the Warrants to be issued pursuant to such Redemption and Consent Agreement or the exercise of the Warrants to be amended pursuant to such Redemption and Consent Agreement." 3. Section 7(a) of the Rights Agreement is hereby amended by replacing "and (iii)" from the ninth line thereof with the following new language: "(iii) at the "Effective Time" of the "Merger" as such terms are defined in the Merger Agreement and (iv)" 4. Capitalized terms used but not defined in this Amendment No. 6 shall have the respective meanings ascribed thereto in the Rights Agreement. 5. Except as expressly amended by this Amendment No. 6, the Rights Agreement shall remain in full force and effect as the same was in effect immediately prior to the effectiveness of this Amendment No. 6. 6. This Amendment No. 6 shall be governed and construed on the same basis as the Rights Agreement, as set forth therein. 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 6 to the Rights Agreement to be executed by their respective officers thereunto duly authorized as of January 5, 1998. NATIONAL MEDIA CORPORATION By: /s/ Brian J. Sisko ----------------------------------- Name: Brian J. Sisko Title: Senior Vice President and General Counsel ChaseMellon Shareholder Services, LLC By: /s/ Donald Messmer ----------------------------------- Name: Donald Messmer Title: Relationship Manager 3 EX-10.51 3 EXHIBIT 10.51 Exhibit 10.51 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, is made as of the 20th day of March, 1998, by and between NATIONAL MEDIA CORPORATION, a Delaware corporation (the "Company" or "National Media"), and JOHN W. KIRBY ("Executive"). WITNESSETH WHEREAS, Executive, DirectAmerica Corporation, a wholly-owned subsidiary of National Media, and National Media entered into an employment agreement on October 24, 1995 in connection with the acquisition of DirectAmerica Corporation by National Media (the "Prior Agreement"); WHEREAS, the parties wish to enter into this agreement in lieu of such prior agreement for periods subsequent to the date hereof; WHEREAS, Executive is willing to serve the Company on a full-time basis during the term hereof, subject to the terms and conditions hereinafter set forth; and WHEREAS, the Company desires to employ Executive in accordance with the terms hereof. NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth, it is agreed as follows: 1. Employment. The Company hereby employs Executive, and Executive hereby accepts employment from the Company, upon the terms and conditions hereinafter set forth. 2. Term of Employment. The term ("Term") of this Agreement shall be deemed to have commenced as of the date hereof (the "Commencement Date") and shall continue thereafter until September 30, 1998 (the "Termination Date"), unless sooner terminated in accordance with the terms hereof. As used herein, "Term" shall refer to the initial Tenn of this Agreement. "Termination Date" shall refer to the last day of the Term of this Agreement. 3. Duties. Executive shall be engaged as, and hold the positions of, President of the Company and as Chairman, President and Chief Executive Officer of DirectAmerica Corporation d/b/a Quantum TV, and in such other capacities as the Boards of Directors of 1 DirectAmerica Corporation or the Company shall decide. Executive shall have such authority and responsibilities as are normally attendant thereto and agrees to perform such duties and render such services consistent therewith, and as may from time to time be reasonably required of him by the Company. Executive shall devote his full business time, attention and best efforts to the affairs of the Company during the Tenn of this Agreement. Executive will report directly to the Company's Board of Directors (the "Board") and to the Chairman and/or Chief Executive Officer of the Company, as instructed by the Board. Of even date herewith, Executive shall be appointed as a director of the Company, effective as soon as practicable. Provided, however, that during any period that National Media is a publicly-held company, Executive's service as a director of National Media shall be at the discretion of National Media's shareholders. 4. Compensation and Reimbursement for Expenses. 4.1 Base Salary. The Company shall pay to Executive a minimum base salary of Three Hundred Twenty Five Thousand Dollars ($325,000.00) per annum (as the same may be increased or decreased (but not below $325,000) from time to time, the "Base Salary"). The Base Salary shall be payable in accordance with the Company's regular payroll practices in effect from time to time and shall be subject to annual review and adjustment as the Board deems appropriate. The Base Salary may be increased or decreased from time to time in the discretion of the Board; provided, however, that Executive's Base Salary shall at no time be less than Three Hundred Twenty Five Thousand Dollars ($325,000.00) per annum. In addition to the Base Salary, Executive shall be advanced an aggregate of Seventy Five Thousand Dollars ($75,000.00) per annum, in installments, against bonuses otherwise payable hereunder to Executive. Such Base Salary and advance shall be deemed to have commenced as of October 1, 1997. 4.2 Bonus. Executive shall not participate in National Media's Management Incentive Plan or any other bonus plan or program of the Company or DirectAmerica or V-L Holdings Corp., as referred to in Paragraph 10 below, or any of the Company's other subsidiaries, other than the Production Bonus program described in Exhibit A attached hereto and made a part hereof. The Production Bonus program shall be deemed to have taken effect 2 as of October 1, 1997 but only as to products/show revenues generated after October 1, 1997. The applicability of any other bonus or incentive plans will be deemed to have ceased as of October 1, 1997. 4.3 Reimbursement of Expenses. The Company will promptly reimburse Executive, upon receipt of vouchers therefor, for all reasonable and necessary expenses incurred by Executive for travel, entertainment and miscellaneous and other business expenses which are incurred in connection with the performance of his duties hereunder. such reimbursements shall be made in accordance with the regular reimbursement procedures and practices in effect from time to time for similarly situated officers of National Media and its other subsidiaries. 5. Fringe Benefits. 5.1 General. Other than as specifically set forth herein, during the Term, unless this Agreement is sooner terminated in accordance with the terms hereof, Executive shall be entitled to participate in any and all fringe and other employee benefit type programs generally available to the officers of National Media and its subsidiaries, including without limitations profit sharing plans, thrift and savings plans, insurance plans, supplemental insurance health, medical, and savings investment plans and benefit plans. However, nothing contained in this subparagraph 5.1 shall be construed as requiring the Company or National Media generally to maintain any such benefit program or to make any discretionary grant to Executive thereunder. 5.2 Life Insurance. (a) Purchase. During the Term hereof, unless this Agreement is sooner terminated in accordance with the terms hereof, if Executive chooses to obtain a life insurance policy (term, whole life, universal life, etc.) concerning Executive, the Company will reimburse Executive for the amount of the premiums therefor (covering portions of the Term, no more than six (6) months at one time) as set forth in invoices presented to the Company; provided the Company shall not be required to reimburse premiums in excess of the out-of-pocket costs it would otherwise have incurred had Executive purchased a one year or shorter $1,000,000 term policy for a person of Executive's age who was in good health at the time of 3 application. The Company shall have no claim to any accrued cash value of any such policy upon Termination hereunder. 5.3 Automobile Allowance. During the Tenn, unless this Agreement is sooner terminated in accordance with the terms hereof, the Company shall pay Executive a monthly automobile allowance of Eight Hundred Dollars ($800.00) which shall be deemed to compensate Executive for all automobile related costs, including, but not limited to, insurance, fuel, maintenance, wear and tear, etc. 5.4 Club Memberships. During the Term, unless this Agreement is sooner terminated in accordance with the terms hereof, the Company shall pay Executive's reasonable dues and membership fees (up to a maximum-reimbursement of $2000 per annum) in one (1) health and/or eating club of Executive's choice. Executive's club-related expenses other than dues and membership fees may be reimbursed to Executive by the Company in accordance with the provisions and requirements of subparagraph 4.3 hereunder. 5.5 Vacations; Holidays; Sick Leave. During the Term, unless this Agreement is sooner terminated in accordance with the terms hereof, Executive shall be entitled to such number of paid vacation days in each calendar year as are generally awarded to senior executive officers of National Media, but not less than three (3) weeks in any calendar year (prorated in any calendar year during which Executive is employed hereunder for less than the entire year in accordance with the number of days in such calendar year during which he is so employed). Notwithstanding any other National Media company policy generally applicable to non-executive employees, other than as set forth herein, Executive shall not be permitted to carry over any portion of Executive's accrued but unused vacation time from one fiscal year to the next fiscal year; provided, however, that in the event applicable law renders the preceding clause unenforceable, Executive shall be permitted to carry over accrued but unused vacation time, but in no event shall Executive be permitted to accrue at any time more than three (3) weeks' vacation time. If Executive is unable to utilize planned vacation time in a given year due to the demands of the business as set forth by the Chairman or the Chief Executive Officer of National Media, and such vacation time is not thereafter used in the applicable year, Executive shall be paid for such accrued but unused vacation time at the expiration of such year. 4 Executive shall also be entitled to all paid holidays and sick leave as are generally awarded to senior executives of National Media. 6. Non-Disclosure. Executive shall not at any time during the Term of this Agreement or thereafter, except (i) as properly required in the conduct of the business of the Company and as authorized by the Company, or (ii) as otherwise required by law or court order, or (iii) to his attorneys, accountants, financial advisors or other professional advisors as necessary in the conduct of their services to Executive, disclose or authorize anyone else to disclose any secret, proprietary or confidential information, material or matter relating to the Company or any of its customers. For purposes of this agreement, "secret, proprietary or confidential information" shall not include any information which (i) is or becomes within the public domain or becomes generally available to the public through no act of Executive, (ii) is lawfully received by Executive from another source unrelated to his employment with the Company, which information is not subject to any restriction on use or disclosure in the hands of the provider, (iii) is deemed in writing by the Company no longer to be secret, proprietary or confidential information, (iv) was or is developed independently by Executive, outside of the normal course of his employment hereunder and not in breach of this Agreement, without reference to or use of any secret, proprietary, or confidential information, or (v) is required to be disclosed by order of any court of competent jurisdiction or other governmental authority. (Provided, however, that, in the event of (v) above, Executive shall timely inform the Company of such required disclosure in order to give the Company the opportunity to limit disclosure and maintain confidentiality.) 7. Covenant Not to Complete. From the Commencement Date through the Termination Date ( and thereafter for any additional period during which Executive is being paid any severance amount hereunder), Executive shall not, without the prior written consent of the Company, take part directly or indirectly (other than as a non-"Substantial Owner", as hereinafter defined) in any television infomercial venture or in any television infomercial production or in any "home shopping" style marketing venture which is competitive with the business of the Company or its affiliates and shall not be an officer, director, employee, independent contractor or Substantial Owner of any such restricted business. "Substantial 5 Owner" as used herein shall mean an owner of at least five percent (5%) of the beneficial equity or voting interests in a subject restricted business. In addition, for a period of ninety (90) days following the termination of this Agreement, Executive shall not engage directly or indirectly, other than as non-Substantial Owner, in any television infomercial marketing or any television infomercial production or home shopping ventures which are involved in the development or marketing of any product(s) which are the same or substantially similar to any product(s) which the Company developed or began developing or as to which the Company produced a show or began producing a show with the Executive's involvement, either itself or through a third party producer, during Executive's employment by the Company. Notwithstanding the foregoing, if Executive terminates this Agreement pursuant to subparagraph 8.1(c) hereof or if the Company terminates this Agreement other than pursuant to subparagraph 8.1(b), the restrictions described above shall terminate as of the date of such termination. Thus, by way of example, Executive has been involved in the development and sale of the cyclone elliptical exercise machine. Pursuant to the foregoing, he will not be involved in a television infomercial or other television activity, for the term set forth above, concerning another elliptical exercise machine. The involvement of Executive with the cyclone elliptical machine does not, in and of itself restrict Executive's activities with regard to other exercise equipment. Executive acknowledges that the obligations and restrictions contained in this Paragraph 7, in view of the nature of the business in which the Company is engaged, are reasonable and necessary in order to protect the legitimate interests of the Company and that any violation thereof would result in irreparable injury to the Company. Executive understands and agrees that the remedies at law for any breach of the forgoing covenant may be inadequate and that the Company may be entitled to, in addition to all other remedies which it may have, enforcement of this Agreement by injunctive relief or by decree of specific performance in a court of competent jurisdiction. If one or more of the provisions contained in this Paragraph 8 shall for any reason be held to be excessively broad in scope, subject or otherwise, to be unenforceable at law, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, as the case may be, so as to be enforceable to the maximum extent compatible with applicable law then in existence. 6 8. Termination. 8.1 Executive's employment under this Agreement shall terminate upon the occurrence of any of the following: (a) Death or Disability. If Executive dies or becomes "Permanently Disabled" (meaning that, in the opinion of an independent physician selected by the Company and reasonably satisfactory to Executive or his representative, he is unable to perform his duties hereunder due to partial or total mental or physical disability for an aggregate of 90 days (whether or not consecutive) in any consecutive six (6) month period). (b) Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment if the Executive, in the reasonable judgment of the Company, (i) materially breaches any of his agreements, duties or obligations under this Agreement and has not cured, such breach within thirty (30) days after notice, or, if the breach cannot be cured within thirty (30) days, Executive has not commenced to cure such breach as soon as practicable following notice and has not thereafter diligently pursued to cure such breach; (ii) embezzles or converts to his own use any funds of the Company or any client or customer of the Company; (iii) converts to his own use or unreasonably destroys any property of the Company without the Company's consent; (iv) is convicted of a felony; (v) is adjudicated as mentally incompetent; (vi) is habitually intoxicated or is diagnosed by an independent medical doctor to be addicted to a controlled substance or any drug whatsoever; or (v) breaches his obligations pursuant to the Loan Agreement, defined in Paragraph 17 below. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until the Executive has received thirty (30) days' prior written notice (the "Dismissal Notice") of such termination. In the event Executive does not dispute such determination within thirty (30) days after receipt of the Dismissal Notice, Executive shall not have the remedies provided pursuant to Paragraph 11 of this Agreement. (c) Company Breach. In the event of the Company's material breach of any provisions of this Agreement, Executive shall have the right to terminate his employment hereunder; provided that Executive shall give written notice to the Company of his intent to so terminate setting forth the basis for such termination, and the Company shall then have thirty 7 (30) days after receipt of such notice to cure the subject breach. 8.2 Termination Obligations of Executive. In the event Executive's employment under this Agreement is terminated, Executive, or his legal representative in case of termination by death or Executive's physical or mental incapacity to serve, shall: (a) by the close of the next business day following termination, resign from all corporate and board positions held in National Media, and any of its subsidiaries and affiliated companies; (b) promptly return to a representative designated by the Company all property, including but not limited to, automobiles, keys, identification cards and credit cards of the Company or any of its subsidiaries or affiliated companies; and (c) incur no further expenses or obligations on behalf of the Company or any of its subsidiaries and affiliated companies. 9. Termination Compensation. 9.1 Compensation. Subject to the terms of subparagraph 9.2 hereof, in the event that Executive shall terminate his employment under this Agreement pursuant to subparagraph 8.1(c) above, or if the Company shall terminate Executive's employment under this Agreement prior to the Termination Date for any reason other than those set forth in subparagraphs 8.1(a) or (b), the Company shall (a) pay Executive or, in the event of Executive's death following termination, Executive's estate (i) his full Base Salary through the date of termination at the rate in effect at the time notice of such termination is given; and (ii) in lieu of any further salary or other payments to Executive hereunder for periods subsequent to the date of termination, the Company shall pay as liquidated damages to Executive in accordance with the terms of subparagraph 9.2 hereof an amount equal to his full Base Salary through the Termination Date calculable at the then current Base Salary and (b) maintain in full force and effect for the continued benefit of Executive through the earlier of the Termination Date or Executive obtaining similar benefits through other employment, all employee benefit plans and programs in which Executive was entitled to participate immediately prior to Executive's discharge or resignation, provided that Executive's continued participation is possible under the general terms and provisions of such benefit plans and programs and otherwise in 8 accordance with applicable law other than as specifically set forth elsewhere herein, no additional compensation shall be payable hereunder, nor shall the Company have any obligation to continue any benefits if this Agreement is terminated by Executive pursuant to any other provision of this Agreement. 9.2 In the event that Executive is entitled to receive severance in accordance with subparagraph 9.1 hereof or Paragraph 16 hereof, such severance shall be paid to Executive in accordance with the Company's normal payroll practices in effect from time to time as if Executive was employed by the Company through the Termination Date; provided, however, that in the event that Executive violates the Covenant Not to Compete contained in Paragraph 7 hereof, in addition to all other rights and remedies which the Company may have, the foregoing severance shall only be payable through the date of such violation and the Company shall be entitled to cease providing Executive with the benefits to which he would otherwise be entitled. 9.3 No Mitigation. Executive shall not be required to mitigate the amount of any payments provided for in subparagraph 9.1 above by seeking other employment or otherwise, nor shall the amount of any payment provided for herein be reduced by any compensation earned as a result of employment by another employer. 10. Change in Control. Within thirty (30) days following a Change in Control, as hereinafter defined, notwithstanding anything in this Agreement to the contrary, Executive may resign and thereby terminate this Agreement by giving the Company at least thirty (30) days' prior written notice of the effective date of such termination and upon such termination, all of the terms and provisions of this Agreement (including the provisions contained in Paragraph 7 hereunder) shall terminate and be of no further force and effect. Notwithstanding the foregoing, in such event, Executive shall have the obligation hereunder to oversee the completion of shows in pre production, production or post production at the time of resignation/termination, despite such resignation/termination. As used in this Paragraph 10, a "Change in Control" shall be deemed to have occurred only if, other than as a result of the consummation of that certain Agreement and Plan of Reorganization and Merger, dated January 5, 1998, by and between the Company, ValueVision International, Inc. and V-L 9 Holdings Corp. (since renamed Quantum Direct Corporation), or any amendment or extension thereof (The "ValueVision Merger"), (a) any person or group (as such term is defined in Section 13(d)(3) of the Securities Exchange Act of 1934) acquires direct or indirect control over in excess of twenty-five (25%) percent of the voting power of the voting stock of the Company prior to consummation of the ValueVision Merger, or of Quantum Direct Corporation subsequent to the ValueVision Merger, in a transaction's not approved by the Company's, or Quantum Direct Corporation as the case may be, Board of Directors. 11. [Intentionally Omitted]. 12. Counsel Fees and Indemnification. (a) In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any and all of his rights under this Agreement, including participation in any proceeding contesting the validity or enforceability of this Agreement, the Executive shall be entitled to recover from the Company his reasonable attorneys' fees and costs and expenses in connection with the enforcement of his rights. No fees shall be payable if the Company is successful on the merits. (b) The Company shall indemnify and hold Executive harmless to the maximum extent permitted by law against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees incurred by Executive, in connection with the defense of, or as a result of, any action or proceeding (or any appeal from any action or proceeding) in which Executive is made or is threatened to be made a party by reason of Executive's employment hereunder and/or any act or omission of Executive in his capacity as an officer, director or employee of the Company, or the Company or any officer, director, employee, agent or representative of the Company, regardless of whether such action or proceeding is one brought by or in the right of the Company, to procure a judgment in its favor. Expenses (including attorneys' fees) incurred by Executive in defending any civil, criminal, administrative, or investigative action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of Executive to repay such amount if it shall ultimately be 10 determined that he is not entitled to be indemnified by the Company as authorized in this subparagraph 12(b). (c) The provisions of this Paragraph 12 shall survive termination of this Agreement and shall survive indefinitely with respect to any cost or liability incurred by Executive on account of any actual or alleged act, omission, or decision by Executive during the Term. 13. Notices. Unless either party notifies the other to the contrary, any notice required hereunder shall be duly given if delivered in person or by registered first class mail or recognized overnight mail carrier: If to the Company, to: National Media Corporation 1835 Market Street, Suite 1100 Philadelphia, PA 19103 Attention: Chairman If to Executive, to: John W. Kirby La Tour Wilshire 10380 Wilshire Blvd., #401 Beverly Hills, CA 90024 with a copy to: Bloom, Hergott, Cook, Diemer and Klein, LLP 150 S. Rodeo Drive 3rd Floor Beverly Hills, CA 90212 Attention: Stephen F. Breimer, Esq. 14. General Provisions. 14.1 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns and Executive, his designees, and his estate. Neither Executive, his designees, nor his estate shall commute, pledge, encumber, sell or otherwise dispose of the rights to receive the Payments provided in this Agreement, which payments and the rights thereto are expressly declared to be nontransferable and nonassignable (except by death or otherwise by operation of law). 14.2 Set-Off. Executive hereby acknowledges and agrees that the Company shall have the right to set-off against any amounts payable by the Company to Executive under 11 this Agreement all amounts payable to the Company or DirectAmerica Corporation by Executive under the Agreement and Plan of Merger and Reorganization (the "Acquisition Agreement") by and among the Company and DirectAmerica Corporation's predecessors, et. al., dated as of October 24, 1995 (including, without limitation, Article 8 thereof (other than Section 8.2(b) thereof)). 14.3 Governing Law. This Agreement shall be governed by the laws of the State of Delaware from time to time in effect. 14.4 Entire Agreement. This Agreement represents the entire agreement between Executive and the Company with respect to the subject matter hereof and supersedes any prior employment agreements between the parties. The parties confirm that the Prior Agreement has lapsed, effective as of the date of this Agreement. In that regard, without limitation, the Company confirms that all restrictions on Executive's current share holdings of Company stock set forth in paragraph 6 of the Prior Agreement have lapsed. This Agreement may not be amended or modified except by a writing signed by the parties hereto. Any written amendment, waiver or termination hereof executed by the Company and Executive (or his estate) shall be binding upon them and upon all persons, without the necessity of securing the consent of any other person and no person shall be deemed to be a third party beneficiary under this Agreement. 14.5 Third Party Beneficiaries. Except as provided in this Agreement, each of Executive and the Company intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than Executive and the Company. 14.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same Agreement. 14.7 No Waiver. Except as otherwise expressly set forth herein, no failure on the part of either party hereto to exercise and no delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 12 14.8 Headings. The headings of the paragraphs of this Agreement have been inserted for convenience of reference only and shall in no way restrict any of the terms or provisions hereof. 15. Release. For good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, effective upon the execution of this Agreement, Executive does hereby remise, release and forever discharge the Company and its predecessors, successors, subsidiaries and affiliates and its present and former agents, employees, assigns, directors and officers (collectively, the "National Media Parties") of and from any and all debts, demands, actions, causes of action, manner of actions, suits, claims, cross claims, third-party claims, impleader or interpleader claims, demands and liabilities whatsoever, of any nature whatsoever, both in law and in equity, whether known or unknown (collectively "Claims"), which Executive ever had, now has as of the date hereof and may ever have had as of the date hereof, prior to the date hereof or hereafter, including, but not limited to, any and all Claims against any and all of the National Media Parties arising from, pursuant to, or in connection with: (i) any representation, warranty, covenant, agreement or obligation of any National Media Party contained in the Acquisition Agreement or any other contract, instrument or agreement executed in connection therewith; (ii) the consummation of the Acquisition Agreement; (iii) the issuance of shares of Common Stock in connection with the Acquisition Agreement; (iv) any action or omission of any National Media Party in connection with the consummation of the transactions contemplated by the Acquisition Agreement and any other contract, instrument or agreement executed in connection therewith; and (v) any action or inaction by the National Media Parties in connection with the management, operations or financial condition of the Company on or prior to the date hereof. For good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, effective upon the execution of this Agreement, the Company does hereby remise, release and forever discharge Executive of and from any and all debts, demands, actions, causes of action, manner of actions, suits, claims, cross claims, third-party claims, impleader or interpleader claims, demands and liabilities whatsoever, of any nature whatsoever both in law and in equity, whether known or unknown (collectively "Claims"), which 13 the Company ever has, now has as of the date hereof and may ever have had as of the date hereof, prior to the date hereof or hereafter, including, but not limited to, any and all Claims against Executive arising from, pursuant to, or in connection with: (i) any representation, warranty, covenant, agreement or obligation of Executive contained in the Acquisition Agreement or any other contract, instrument or agreement executed in connection therewith; (ii) the consummation of the Acquisition Agreement; (iii) any action or omission of any Executive in connection with the consummation of the transaction contemplated by the Acquisition Agreement and any other contract, instrument or agreement executed in connection therewith; and (iv) any action or inaction by Executive in connection with the performance of his duties as an employee of the Company on or prior to the date hereof. The foregoing releases do not affect the validity or enforceability of this Agreement (including, but not limited to, Sections 12 or 14.2 hereof) or the Loan Agreement (as hereinafter defined). 16. Retention of CEO by Quantum Direct Corporation. It is presently intended that, in connection with the ValueVision Merger, a Chief Executive Officer will be retained by Quantum Direct Corporation to replace Robert Johander. Executive shall have the right hereunder to resign his position as President of the Company and thereby terminate this Agreement by giving the Company written notice of such intention within six (6) months of the hiring of such Chief Executive Officer. Such resignation and termination shall take effect on the thirtieth (30th) day following the delivery of such written notice. In the event of such a termination, Executive shall have the right to receive, as severance three (3) months Base Salary, payable in installments. Notwithstanding the foregoing, in such event, Executive shall have the obligation hereunder to oversee the completion of shows in pre production, production or post production at the time of resignation/termination despite such resignation/termination. 17. Loan Matters. The existing promissory note of Executive to the Company in the aggregate principal amount of $175,000 shall be deemed satisfied as of the date hereof. The Company hereby agrees to advance to Executive an aggregate of up to $545,000, upon the terms and conditions set forth in the documentation attached hereto as Exhibit B (collectively, the "Loan Agreement"), as soon as practicable after the date hereof. 14 18. Option. In connection with the execution hereof, the Company hereby issues to Executive (in addition to the already outstanding option to purchase 30,000 shares at an exercise price of $8.325) an option to purchase up to 300,000 shares of the Company's common stock in the form attached hereto as Exhibit C. In the event that the ValueVision Merger is not consummated during the Term hereof, the Company agrees to negotiate with Executive in good faith regarding the possible issuance of additional options, subject to availability under the Company's 1991 Stock Option Plan, in exchange for additional consideration on the part of Executive. The foregoing shall not constitute an obligation on the part of the Company to issue any options at any particular exercise price. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. NATIONAL MEDIA CORPORATION By: /s/ Robert N. Verratti ------------------------------------------------ Name: Robert N. Verratti Title: President and Chief Executive Officer /s/ John W. Kirby ------------------------------------------------ JOHN W. KIRBY 15 EX-10.52 4 EXHIBIT 10.52 Exhibit 10.52 LOAN AGREEMENT This LOAN AGREEMENT (this "Agreement") is entered into as of this 31st day of March, 1998, by and between JOHN W. KIRBY, as borrower ("Borrower"), and NATIONAL MEDIA CORPORATION, a Delaware corporation, as lender ("Lender"). RECITALS 18.1 Borrower desires to borrow up to Five Hundred Forty Five Thousand Dollars ($545,000.00) from Lender. 18.2 Borrower has agreed to pledge the [Three Hundred Thirty Nine Thousand Seven Hundred Eighty Four (339,784)] shares of Lender common stock, par value $0.01, and certain related interests, owned by Borrower (the "Common Stock") to Lender to secure the obligations of Borrower under this Agreement and the other Loan Documents (as defined below). 18.3 Lender is willing to lend Borrower Five Hundred Forty Five Thousand Dollars ($545,000.00) on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: (a) Loan Disbursement. Subject to the terms and conditions of this Agreement, Lender will make a loan or loans (individually, a "Loan," and collectively, the "Loans") to Borrower in a principal amount up to Five Hundred Forty Five Thousand Dollars ($545,000.00) to be evidenced by a secured promissory note (the "Note") in the form of Exhibit A. Borrower hereby requests a Loan in the amount of Five Hundred Forty Five Thousand Dollars ($545,000.00) (b) Conditions Precedent. (a) Conditions to Loan. Lender's obligation to make the Loan is subject to the fulfillment of each of the following conditions: (i) Each of the conditions section forth in Section 2(b) shall be satisfied as of the date of the funding of the Loan. (ii) Lender shall have received the following documents (collectively, the "Loan Documents") fully executed and acknowledged, where applicable, and in form and substance satisfactory to Lender: (A) this Agreement; (B) the Note; (C) that certain Pledge Agreement (the "Pledge Agreement") dated as of the date hereof by and between Lender and Borrower, in the form attached hereto as Exhibit B; and (D) such other documents as Lender shall reasonably request in connection with the other Loan Documents. (b) Conditions to All Loans. Lender's obligation to make any Loan is subject to the fulfillment of each of the following conditions: (i) Each of the representations and warranties of Borrower contained in this Agreement and in the other Loan Documents shall be true in all material respects as of the date of the making of such Loan. (ii) No Event of Default (as defined herein) or an event that with the giving of notice or the passage of time or both would constitute an Event of Default has occurred and is continuing. (iii) The funding of such Loan by Lender does not violate any agreement, indenture, mortgage, deed of trust, instrument or other document to which Lender or by which Lender or any of its properties may be bound or affected. (c) Representations and Warranties. In order to induce Lender to make the Loan, Borrower represents and warrants as follows: (a) Each of the Loan Documents constitutes the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms; and (b) Neither the execution and delivery of any of the Loan Documents by Borrower nor the consummation of the transactions herein contemplated nor the fulfillment of the terms hereof will result in a breach of any of the terms or provisions of, or constitute a default under, or constitute an event which with notice or lapse of time or both will result in a breach of or constitute a default under, any agreement, indenture, mortgage, deed of trust, instrument or other document to which Borrower is a party or conflict with any law, order, rule or regulation applicable to Borrower of any court or any federal or state government, regulatory body or administrative agency, or any other governmental body having jurisdiction over Borrower or its properties. (d) Covenants. Borrower covenants and agrees that promptly upon the occurrence of an Event of Default or event that with the giving of notice or the passage of time or both would constitute an Event of Default, Borrower shall notify Lender of such event. (e) Prepayment. The Loan may be prepaid without premium or penalty. (f) Defaults. Upon the occurrence of any of the following events (each an "Event of Default"): (a) Borrower shall fail to make any payment required under any of the Loan Documents on or before the date such payment is due. (b) Any representation or warranty made by Borrower in any of the Loan Documents or which is contained in any certificate, document, financial or other written statement furnished at any time pursuant thereto shall prove to have been untrue, incorrect or misleading in any material respect when made. (c) Borrower shall fail duly to observe or perform any covenant or agreement contained in the Loan Documents. (d) Borrower commences or proposes to commence any bankruptcy, reorganization or insolvency proceeding, or other proceeding under any federal, state or other law for the relief of debtors. (e) Borrower fails to obtain the dismissal, within thirty (30) days after the commencement thereof, of any bankruptcy, reorganization or insolvency proceeding, or other proceeding under any law for the relief of debtors, instituted by one or more third parties, fails actively to oppose any such proceeding, or, in any such proceeding, defaults or files an answer admitting the material allegations upon which the proceeding was based or alleges its willingness to have an order for relief entered or its desire to seek liquidation, reorganization or adjustment of its debts. (f) Any receiver, trustee or custodian is appointed to take possession of all or any substantial portion of the assets of Borrower, or any committee of Borrower's creditors, or any class thereof, is formed for the purpose of monitoring or investigating the financial affairs of Borrower or enforcing such creditors' rights. then, on notice of acceleration by Lender to Borrower in the case of an Event of Default specified in subsections (a) through (c) above, and Borrower's failure to cure such Event of Default within a reasonable period of time after notification thereof (or automatically and immediately without demand, notice, protest or other action of any kind by Lender, which Borrower hereby expressly waives, in the case of an Event of Default specified in subsections (d) 2 through (f) above), all amounts outstanding hereunder and under each of the Loan Documents shall be immediately due and payable in full. (g) Waiver and Release by Borrower. To the maximum extent permitted by applicable Laws, Borrower hereby: (a) Waives: (i) protest of all commercial paper at any time held by Lender on which Borrower is in any way liable; and (ii) except as otherwise set forth herein or in the Loan Documents, notice and opportunity to be heard, after acceleration in the manner provided in Section 6 before exercise by Lender of the remedies of self-help, set-off, or of other summary procedures permitted by any applicable Laws or by any agreement with Borrower and, except where required hereby or by any applicable Laws, notice of any other action taken by Lender; and (b) Releases Lender and its officers, attorneys, agents and employees from all claims for loss or damage caused by any act or omission on the part of any of them. (h) Indemnification. (a) Borrower hereby indemnifies and agrees to protect, defend and hold harmless Lender, Lender's Affiliates and any member, officer, director, official, agent, employee or attorney of Lender or Lender's Affiliates and their respective heirs, administrators, executors, successors and assigns (collectively, the "Indemnified Parties"), from and against any and all losses, damages, expenses or liabilities of any kind or nature and from any suits, claims or demands, including reasonable attorneys' fees incurred in investigating or defending such claim, suffered by any of them and caused by, relating to, arising out of, resulting from, or in any way connected with this Agreement, the Note or the Loan Documents or the transactions contemplated therein (unless determined by a final judgment of a court of competent jurisdiction to have been caused by the gross negligence or willful misconduct of the Indemnified Parties) including, without limitation: (i) any untrue statement of a material fact contained in information submitted to Lender by Borrower or the omission of any material fact necessary to be stated therein in order to make such statement not misleading or incomplete; and (ii) the failure of Borrower to perform any obligations herein required to be performed by Borrower. (b) In case any action shall be brought against Lender or any other Indemnified Party in respect to which indemnity may be sought against Borrower, Lender or such other Indemnified Party shall promptly notify Borrower and Borrower shall assume the defense thereof, including the employment of counsel selected by Borrower and satisfactory to Lender, the payment of all costs and expenses and the right to negotiate and consent to settlement. The failure of Lender to so notify Borrower shall not relieve Borrower of any liability it may have under the foregoing indemnification provisions or from any liability which it may otherwise have to Lender or any of the other Indemnified Parties. Lender shall have the right, at its sole option, to employ separate counsel in any such action and to participate in the defense thereof, all at Borrower's joint and several cost and expense. Borrower shall not be liable for any settlement of any such action effected without its consent (unless Borrower fails to defend such claim), but if settled with Borrower's consent, or if there be a final judgment for the claimant in any such action, Borrower agrees to indemnify and save harmless Lender from and against any loss or liability by reason of such settlement or judgment. (c) The provisions of this Section 8 shall survive the repayment or other satisfaction of the obligations. (i) Warrant of Attorney. BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR ANY CLERK OF ANY COURT OF RECORD UPON OR AFTER THE OCCURRENCE AND DURING THE CONTINUANCE OF ANY EVENT OF DEFAULT TO APPEAR FOR AND CONFESS JUDGMENT AGAINST BORROWER, (A) FOR SUCH SUMS AS ARE DUE AND/OR MAY BECOME DUE ON THE BORROWER'S OBLIGATIONS, AND/OR (B) IN ANY ACTION OF REPLEVIN INSTITUTED BY LENDER TO OBTAIN POSSESSION OF ANY COLLATERAL OR OTHER COLLATERAL SECURITY FOR THE OBLIGATIONS OF BORROWER TO LENDER, IN EITHER CASE WITH OR WITHOUT DECLARATION, WITH COSTS OF SUIT, 3 WITHOUT STAY OF EXECUTION AND WITH FIVE (5%) PERCENT OF THE PRINCIPAL AMOUNT THEREOF, BUT NOT LESS THAN FIVE THOUSAND ($5,000.00) DOLLARS, ADDED FOR LIEN PRIORITY PURPOSES WITH ACTUAL ATTORNEY'S FEES GOVERNED BY SECTION [12(a)] HEREOF. BORROWER UNCONDITIONALLY AND IRREVOCABLY: (A) WAIVES THE RIGHT OF INQUISITION ON ANY REAL ESTATE LEVIED ON, VOLUNTARILY CONDEMNS THE SAME, AUTHORIZES THE PROTHONOTARY OR CLERK TO ENTER UPON THE WRIT OF EXECUTION SAID VOLUNTARY CONDEMNATION AND AGREES THAT SAID REAL ESTATE MAY BE SOLD ON A WRIT OF EXECUTION; (B) WAIVES AND RELEASES ALL RELIEF FROM ALL REDEMPTION, APPRAISEMENT, STAY, EXEMPTION OR APPEAL LAWS OF ANY STATE NOW IN FORCE OR HEREAFTER ENACTED; AND (C) RELEASES ALL ERRORS IN SUCH PROCEEDINGS. IF A COPY OF THIS AGREEMENT, VERIFIED BY AFFIDAVIT BY OR ON BEHALF OF LENDER SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL OF THIS AGREEMENT AS A WARRANT OF ATTORNEY. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST BORROWER SHALL NOT BE EXHAUSTED BY THE INITIAL EXERCISE THEREOF, AND THE SAME MAY BE EXERCISED, FROM TIME TO TIME, AS OFTEN AS LENDER SHALL DEEM NECESSARY AND DESIRABLE, AND THIS AGREEMENT SHALL BE A SUFFICIENT WARRANT THEREFORE. LENDER MAY ENTER ONE OR MORE JUDGMENTS IN THE SAME OR DIFFERENT COUNTIES FOR ALL OR PART OF THE BORROWER'S OBLIGATIONS, WITHOUT REGARD TO WHETHER JUDGMENT HAS BEEN ENTERED ON MORE THAN ONE OCCASION FOR THE SAME BORROWER'S OBLIGATIONS. IN THE EVENT ANY JUDGMENT ENTERED AGAINST BORROWER HEREUNDER IS STRICKEN OR OPENED UPON APPLICATION BY OR ON BORROWER'S BEHALF FOR ANY REASON WHATSOEVER, LENDER IS HEREBY AUTHORIZED AND EMPOWERED TO AGAIN APPEAR FOR AND CONFESS JUDGMENT AGAINST BORROWER; SUBJECT, HOWEVER, TO THE LIMITATION THAT SUCH SUBSEQUENT ENTRY OR ENTRIES OF JUDGMENT BY LENDER MAY ONLY BE DONE TO CURE ANY ERRORS IN PRIOR PROCEEDINGS, ONLY AND TO THE EXTENT THAT SUCH ERRORS ARE SUBJECT TO CURE IN THE LATER PROCEEDINGS. (j) Waiver of Jury Trial. IN ANY LITIGATION ARISING OUT OF OR RELATING TO THE LOANS OR ANY OF THE OTHER OBLIGATIONS IN WHICH BORROWER AND LENDER ARE ADVERSE PARTIES, BORROWER AND LENDER HEREBY WAIVE TRIAL BY JURY. (k) Jurisdiction. In any litigation arising out of or relating to the Loans or any of the other Obligations, Borrower hereby consents to the personal jurisdiction of the State and/or Federal courts of the Commonwealth of Pennsylvania. (l) Miscellaneous. (a) Borrower agrees to pay on demand all costs and expenses, including legal fees, incurred or paid by Lender in preparing, executing or amending this Agreement and any of the other Loan Documents, and in exercising its rights and remedies or protecting its interests hereunder. (b) All notices, requests and other communications required or permitted to be made hereunder shall, except as otherwise provided, be in writing and may be delivered personally or sent by telegram, telecopy, telex or certified mail, postage prepaid, addressed as follows: To Lender: National Media Corporation Suite 1100, 1835 Market Street Philadelphia, PA 19103 Attention: General Counsel Telephone number: (215) 988-4600 Telecopy number: (215) 988-4869 To Borrower: John W. Kirby La Tour Wilshire 4 10380 Wilshire Boulevard, No. 401 Beverly Hills, CA 90024 Telephone number: (310) 550-7664 Telecopy number: (310) 550-0981 Such notices, requests and other communications sent shall be effective upon receipt, unless sent by (i) overnight courier, in which case they shall be effective exactly one (1) business day after deposit with such overnight courier, or (ii) mail, in which case they shall be effective exactly three (3) business days after deposit in the United States mail. Either party may change its address or other information by giving notice thereof to the other party hereto in conformity with this paragraph. (c) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. (d) This Agreement or any provision hereof may be changed, waived, or terminated only by a statement in writing signed by the party against which such change, waiver or termination is sought to be enforced. (e) No delay in enforcing or failing to enforce any right under this Agreement by Lender shall constitute a waiver by Lender of such right. No waiver by Lender of any default hereunder shall be effective unless in writing, nor shall any waiver operate as a waiver of any other default or of the same default on a future occasion. (f) All rights of Lender hereunder shall inure to the benefit of its successors and assigns. Borrower shall not assign any of its interest under this Agreement without the prior written consent of Lender. Any purported assignment inconsistent with this provision shall, at the option of Lender, be null and void. (g) In any action or proceeding brought to enforce any provision of this Agreement, or to seek damages for a breach of any provision hereof, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. (h) Borrower waives the right to plead any statute of limitations as a defense to any indebtedness or obligation hereunder to the full extent permitted by law. (i) If any provision of this Agreement should be found to be invalid or unenforceable, all of the other provisions shall nonetheless remain in full force and effect to the maximum extent permitted by law. (j) All representations, warranties and covenants of Borrower contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full payment and performance by Borrower of its indebtedness and obligations hereunder. (k) This Agreement, together with the other Loan Documents, is intended by the parties as a final expression of their agreement and is intended as a complete and exclusive statement of the terms and conditions thereof. Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant to determine the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. (l) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same agreement. [SIGNATURES ON FOLLOWING PAGE] 5 IN WITNESS WHEREOF the parties hereto have executed this Loan Agreement as of the date set forth above. /s/ John W. Kirby (SEAL) - ----------------------------- -------------------------------- Witness JOHN W. KIRBY NATIONAL MEDIA CORPORATION, a Delaware corporation By: /s/ --------------------------- Name: Title: 6 EXHIBIT A FORM OF SECURED PROMISSORY NOTE $545,000.00 March 31, 1998 FOR VALUE RECEIVED, the undersigned, JOHN W. KIRBY ("Borrower"), promises to pay to NATIONAL MEDIA CORPORATION, a Delaware corporation ("Lender"), or order, the principal amount of Five Hundred Forty Five Thousand Dollars ($545,000.00), with interest from the date hereof on the unpaid principal balance under this Note at the Prime Rate (as defined below) in effect from time to time, plus one and one-half percent (1.5%) per annum. The "Prime Rate" shall mean the prime, reference or other comparable rate announced from time to time by Norwest Bank, N.A. ("Norwest Bank"), as reasonably determined by Lender, with the understanding that the Prime Rate is intended by the parties to be one of Norwest Bank's base rates and may serve as the basis upon which effective rates of interest are calculated from those loans making reference thereto. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change in announced by Norwest Bank. Interest shall be due and payable in immediately available funds (i) quarterly, on January 1, April 1, July 1 and October 1, and (ii) as of any date in which any principal payment is due and payable hereunder (whether in cash or otherwise, as provided herein). The principal amount of this Note, together with any and all accrued and unpaid interest and any and all costs and expenses provided for under this Note and the other Loan Documents (as defined in the Loan Agreement (as defined below)), shall be due and payable on the earliest to occur of the following dates (the "Maturity Date"): (1) 5/30/00, (2) the forty-fifth day following the first date after which Borrower is no longer an employee of Lender and (3) the date on which the indebtedness under this Note is accelerated as provided for under this Note, that certain Loan Agreement, dated as of the date hereof (as amended, modified and supplemented from time to time, the "Loan Agreement") between Borrower and Lender or that certain Pledge Agreement, dated as of the date hereof (as amended, modified and supplemented from time to time, the "Pledge Agreement") between Borrower and Lender. Interest shall be calculated on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed. The Note shall continue to accrue interest in accordance with the terms hereof even after Default, an Event of Default, maturity, acceleration, judgment, bankruptcy, insolvency proceedings of any kind or the happening of any other event or occurrence, whether similar or dissimilar. All payments under this Note shall be made to Lender or its order, in lawful money of the United States of America at the offices of Lender at its then principal place of business or at such other place as Lender or any holder hereof shall designate in writing for such purpose from time to time. If a payment under this Note otherwise would become due and payable on a Saturday, Sunday or legal holiday, the due date thereof shall be extended to the next day which is not a Saturday, Sunday or legal holiday, and interest shall be payable thereon during such extension. All amounts due under this Note and the Loan Documents shall be payable without defense, set off or counterclaim. This Note may be prepaid in whole or in part at any time, and shall be prepaid in accordance with the terms of the Loan Agreement. Any prepayment shall be without premium or penalty. Each payment and prepayment under this Note shall applied in the following order: (i) to the payment of costs and expenses provided for under this Note or any of the other Loan Documents; (ii) to the payment of accrued and unpaid interest; and (iii) to the payment of outstanding principal. Upon the occurrence of a default under this Note or any of the other Loan Documents, including, without limitation, failure to make any principal or interest payment by the stated maturity (whether by acceleration, notice of prepayment or otherwise) for such payment, interest shall thereafter accrue on the entire unpaid principal balance under this Note, including without limitation any delinquent interest which has been added to the principal amount due under this Note pursuant to the terms hereof, at the rate set forth herein plus three percent (3%) per annum (on the basis of a 360-day year and the actual number of days elapsed). In addition, upon the occurrence of a default under this Note or any of the other Loan Documents the holder of this Note may, at its option, without notice to or demand upon Borrower or any other party, declare immediately due and payable the entire principal balance hereof A-1 together with all accrued and unpaid interest thereon, plus any other amounts then owing pursuant to this Note or any of the other Loan Documents, whereupon the same shall be immediately due and payable. In no event shall interest be charged under this Note which would violate any applicable law. This obligations under this Note and the other Loan Documents are secured pursuant to Pledge Agreement. Reference is hereby made to the Pledge Agreement for a description of the nature and extent of the security for this Note and the rights with respect to such security of the holder of this Note. Nothing herein shall be deemed to limit the rights of Lender under this Note or the other Loan Documents, all of which rights and remedies are cumulative. No waiver or modification of any of the terms of this Note shall be valid or binding unless set forth in a writing specifically referring to this Note and signed by a duly authorized officer of Lender or any holder of this Note, and then only to the extent specifically set forth therein. If any default occurs in any payment due under this Note, Borrower and any guarantors and endorsers hereof, and their successors and assigns, promise to pay all costs and expenses, including attorneys' fees, incurred by each holder hereof in collecting or attempting to collect the indebtedness under this Note, whether or not any action or proceeding is commenced. None of the provisions hereof and none of the holder's rights or remedies under this Note on account of any past or future defaults shall be deemed to have been waived by the holder's acceptance of any past due installments or by any indulgence granted by the holder to Borrower. Borrower and any guarantors and endorsers hereof, and their successors and assigns, hereby waive presentment, demand, diligence, protest and notice of every kind (except such notices as may be required under any of the Loan Documents), and agree that they shall remain liable for all amounts due under this Note notwithstanding any extension of time or change in the terms of payment of this Note granted by any holder hereof, any change, alteration or release of any property now or hereafter securing the payment hereof or any delay or failure by the holder hereof to exercise any rights under this Note or any of the Loan Documents. Borrower and any guarantors and endorsers hereof, and their successors and assigns, hereby waive the right to plead any and all statutes of limitation as a defense to a demand under this Note to the full extent permitted by law. This Note shall inure to the benefit of Lender, its successors and assigns and shall bind the heirs, executors, administrators, successors and assigns of Borrower. Each reference herein to powers or rights of Lender shall also be deemed a reference to the same power or right of such assignees, to the extent of the interest assigned to them. In the event that any one or more provisions of this Note shall be held to be illegal, invalid or otherwise unenforceable, the same shall not affect any other provision of this Note and the remaining provisions of this Note shall remain in full force and effect. BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR ANY CLERK OF ANY COURT OF RECORD UPON OR AFTER THE OCCURRENCE AND DURING THE CONTINUANCE OF ANY EVENT OF DEFAULT TO APPEAR FOR AND CONFESS JUDGMENT AGAINST BORROWER, (A) FOR SUCH SUMS AS ARE DUE AND/OR MAY BECOME DUE ON THE BORROWER'S OBLIGATIONS, AND/OR (B) IN ANY ACTION OF REPLEVIN INSTITUTED BY LENDER TO OBTAIN POSSESSION OF ANY COLLATERAL OR OTHER COLLATERAL SECURITY FOR THE OBLIGATIONS OF BORROWER TO LENDER, IN EITHER CASE WITH OR WITHOUT DECLARATION, WITH COSTS OF SUIT, WITHOUT STAY OF EXECUTION AND WITH FIVE (5%) PERCENT OF THE PRINCIPAL AMOUNT THEREOF, BUT NOT LESS THAN FIVE THOUSAND ($5,000.00) DOLLARS, ADDED FOR LIEN PRIORITY PURPOSES TOGETHER WITH ACTUAL ATTORNEY'S FEES. BORROWER UNCONDITIONALLY AND IRREVOCABLY: (A) WAIVES THE RIGHT OF INQUISITION ON ANY REAL ESTATE LEVIED ON, VOLUNTARILY CONDEMNS THE SAME, AUTHORIZES THE PROTHONOTARY OR CLERK TO ENTER UPON THE WRIT OF EXECUTION SAID VOLUNTARY CONDEMNATION AND AGREES THAT SAID REAL ESTATE MAY BE SOLD ON A WRIT OF EXECUTION; (B) WAIVES AND RELEASES ALL RELIEF FROM ALL REDEMPTION, APPRAISEMENT, STAY, EXEMPTION OR APPEAL LAWS OF ANY STATE NOW IN FORCE OR HEREAFTER ENACTED; AND (C) RELEASES ALL ERRORS IN SUCH PROCEEDINGS. IF A COPY OF THIS NOTE, VERIFIED BY AFFIDAVIT BY A-2 OR ON BEHALF OF LENDER SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL OF THIS NOTE AS A WARRANT OF ATTORNEY. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST BORROWER SHALL NOT BE EXHAUSTED BY THE INITIAL EXERCISE THEREOF, AND THE SAME MAY BE EXERCISED, FROM TIME TO TIME, AS OFTEN AS LENDER SHALL DEEM NECESSARY AND DESIRABLE, AND THIS NOTE SHALL BE A SUFFICIENT WARRANT THEREFORE. LENDER MAY ENTER ONE OR MORE JUDGMENTS IN THE SAME OR DIFFERENT COUNTIES FOR ALL OR PART OF THE BORROWER'S OBLIGATIONS, WITHOUT REGARD TO WHETHER JUDGMENT HAS BEEN ENTERED ON MORE THAN ONE OCCASION FOR THE SAME BORROWER'S OBLIGATIONS. IN THE EVENT ANY JUDGMENT ENTERED AGAINST BORROWER HEREUNDER IS STRICKEN OR OPENED UPON APPLICATION BY OR ON BORROWER'S BEHALF FOR ANY REASON WHATSOEVER, LENDER IS HEREBY AUTHORIZED AND EMPOWERED TO AGAIN APPEAR FOR AND CONFESS JUDGMENT AGAINST BORROWER; SUBJECT, HOWEVER, TO THE LIMITATION THAT SUCH SUBSEQUENT ENTRY OR ENTRIES OF JUDGMENT BY LENDER MAY ONLY BE DONE TO CURE ANY ERRORS IN PRIOR PROCEEDINGS, ONLY AND TO THE EXTENT THAT SUCH ERRORS ARE SUBJECT TO CURE IN THE LATER PROCEEDINGS. IN ANY LITIGATION ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS OR ANY OF THE OTHER OBLIGATIONS IN WHICH BORROWER AND LENDER ARE ADVERSE PARTIES, BORROWER AND LENDER HEREBY WAIVE TRIAL BY JURY. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to the principles thereof relating to conflicts of law. IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed the day and year first above written. - ------------------------------- ----------------------------(SEAL) Witness JOHN W. KIRBY A-3 EXHIBIT B FORM OF PLEDGE AGREEMENT This PLEDGE AGREEMENT (this "Agreement") is made and entered into as of March 31, 1998 by and between JOHN W. KIRBY, as borrower ("Borrower"), and NATIONAL MEDIA CORPORATION, a Delaware corporation, as lender ("Lender"). RECITALS 18.1 Borrower and Lender have entered into that certain Loan Agreement dated as of the date hereof (as amended, modified and supplemented from time to time, the "Loan Agreement"). All capitalized terms used herein which are not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement 18.2 Lender has required, as a condition precedent to making Loans under the Loan Agreement, that Borrower shall have agreed to make the pledge of stock contemplated by this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: (a) Pledge. Borrower hereby pledges and grants to Lender a security interest in the following collateral (the "Pledged Collateral"): (a) the shares of Lender Common Stock identified on Schedule 1 hereto, and all other shares of Common Stock delivered to Lender pursuant to this Agreement and all shares of stock in Lender issued in the future to Borrower, whether certificated or uncertificated, together with all options (and shares of stock in which Borrower obtains an interest pursuant to the exercise of any options), rights, dividends issued in addition to, in substitution or in exchange for, or on account of, any such shares (collectively, the "Pledged Shares"), and the certificates representing the Pledged Shares, and all dividends, cash, instruments, chattel paper and other rights, property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) all other claims of any kind or nature, and any instruments, certificates, chattel paper or other writings evidencing such claims, whether in contract or tort and whether arising by operation of law, consensual agreement or otherwise, at any time acquired by Borrower against Lender or any of its subsidiaries; and (c) all proceeds of any kind with respect to any of the foregoing. (b) Security for Performance. This Agreement (and all of the Pledged Collateral) secures the payment of the principal of and the interest on the Note and the performance of Borrower's obligations pursuant to this Agreement and the other Loan Documents (the "Obligations"). If Borrower shall become entitled to receive or shall receive, in connection with any of the Pledged Collateral, any: (i) stock or certificate, including, without limitation, any certificate representing a stock dividend or in connection with any increase or reduction of capital, reclassification, merger, consolidation, sale of assets, combination of shares, stock split, spin-off, split-off or exercise of an option; (ii) option, warrant or right, whether as an addition to or in substitution or in exchange for any of the Pledged Collateral, or otherwise; (iii) dividends or distributions payable in property, including securities issued by an issuer other than Lender; or (iv) dividends or distributions of any sort; then, Borrower shall accept the same as Lender's agent, in express trust for Lender, and shall deliver the same forthwith to Lender in the exact form received with, as applicable, Borrower's endorsement, or appropriate stock powers duly executed in blank (with signatures "bank guaranteed"), which the Borrower hereby unconditionally agrees to make and/or furnish, to be held by Lender, subject to the terms hereof, as part of the Pledge Collateral. B-1 (c) Delivery of Pledged Collateral. (a) Borrower may at any time deliver to Lender additional shares of Common Stock to be pledged pursuant to this Agreement, and upon delivery of such additional shares, they shall become Pledged Shares under and pursuant to this Agreement. (b) All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by Lender pursuant hereto and shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Lender. Lender shall have the right, at any time in its discretion and without notice to Borrower following the occurrence of an Event of Default, to transfer to or to register in the name of Lender or any of its nominees any or all of the Pledged Collateral. In addition, Lender shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. (d) Representations and Warranties. Borrower represents and warrants as follows: (a) Borrower owns the Pledged Collateral free and clear on any lien, security interest or other encumbrance. (b) The delivery of the Pledged Shares to Lender pursuant to this Agreement creates a valid and perfected first priority security interest in the Pledged Collateral (other than cash not in the possession of Lender), securing the Obligations. (c) No consent of any other party (including, without limitation, any creditor of Borrower) and no governmental approval is required either (i) for the pledge by Borrower of the Pledged Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by Borrower or (ii) for the exercise by Lender of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant to this Agreement (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally). (e) Further Assurances. Borrower agrees that at any time and from time to time Borrower will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable or that Lender may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Lender to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral and to carry out the provisions and purposes hereof. (f) Administration of Security. The following provisions shall govern the administration of the Pledged Collateral: (a) So long as no Event of Default shall have occurred: (i) Borrower shall be entitled to receive all cash dividends and other cash distributions paid or payable with respect to any of the Pledged Collateral. Any and all instruments and other property (other than cash or checks) received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, shall be, and shall be forthwith delivered to Lender to hold as Pledged Collateral and shall, if received by the Borrower, be received in express trust for the benefit of Lender, be segregated from the other property or funds of Borrower, and be forthwith delivered to Lender as Pledged Collateral in the same form as so received (with any necessary indorsement). (ii) Borrower shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Note; provided, however, that the Borrower shall not exercise or refrain from exercising any such right if, in Lender's judgment, such action or inaction would have a material adverse effect on the value of the Pledged Collateral or any part thereof; and provided, further, that the Borrower shall give Lender at least ten (10) days' written notice of the manner in which he intends to exercise, and the reasons therefor, or the reasons for B-2 refraining from exercising, any such right. (b) Upon the occurrence of an Event of Default: (i) All rights of Borrower to receive the dividends which he would otherwise be authorized to receive and retain pursuant to Section 6(a)(i) shall cease, and all such rights shall become vested in Lender who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends (and to the extent permissible, apply them to the Obligations of Borrower). (ii) Upon notice by Lender to Borrower, all rights to exercise the voting and other consensual rights which he would otherwise be entitled to exercise pursuant to Section 6(a)(ii), shall cease, and all such rights shall become vested in Lender who shall thereupon have the sole right to exercise such voting and other consensual rights. (iii) All dividends which are received by Borrower contrary to the provisions of paragraph (i) of this Section 6(b) shall be received in trust for the benefit of Lender, shall be segregated from other funds of Borrower and shall be forthwith paid over to Lender as Pledged Collateral in the same form as so received (with any necessary indorsement). (g) Lender Appointed Attorney-in-Fact. Borrower hereby appoints Lender Borrower's attorney-in-fact effective upon the occurrence of an Event of Default, with full authority in the place and stead of Borrower and in the name of Borrower or otherwise, from time to time in Lender's discretion to take any action and to execute any instrument which Lender may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, indorse and collect all instruments made payable to Borrower representing any dividend (other than Tax Dividends) or other distribution in respect of the Pledged Collateral or any part thereof. (h) Lender's Duties; Reasonable Care. The powers conferred on Lender hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty on it to exercise any such powers. Except for the safe custody of any Pledged Collateral in its possession and the accounting for monies actually received by it hereunder, Lender shall have no duty as to any Pledged Collateral. Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if the Pledged Collateral is accorded treatment that is not materially less protective than that which Lender accords its own property. (i) Remedies upon Default. If any Event of Default shall have occurred: [(a) Lender may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the Uniform Commercial Code (the "Code") in effect in the Commonwealth of Pennsylvania at that time, and Lender may also (i) with ten (10) days' notice to the Borrower, accept and cancel the certificates evidencing any Pledged Shares, with each Pledged Share valued as the average of the last reported sales price for the five (5) consecutive trading days immediately preceding the date in question, and/or (ii) without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of Lender's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as Lender may deem commercially reasonable. The Borrower acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale. The Borrower agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Lender shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Lender shall be under no obligation to delay a sale of any of the Pledged Shares for the period of time necessary to permit the issuing corporation of such securities to register such securities for public sale under the Securities Act of 1933, as from time to time amended (the "Securities Act"), or under applicable state securities laws, even if the issuing corporation would agree to do so.] B-3 (b) Any cash held by Lender as Pledged Collateral and all cash proceeds received by Lender in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral may, in the discretion of Lender, be held by Lender as collateral for, and/or then or at any time thereafter applied in whole or in part by Lender for its benefit against, all or any part of the Obligations of Borrower pursuant to the Note or this Agreement. Any surplus of such cash or cash proceeds held by Lender and remaining after payment in full of all the Obligations shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive such surplus or as a court of competent jurisdiction may direct; provided, that in the event that all of the conditions to the termination of this Agreement pursuant to Section 11 shall not have been fulfilled, such balance shall be held and applied from time to time as provided in this subsection 9(b) until all such conditions shall have been fulfilled. (j) Remedies Cumulative. Each right, power and remedy of Lender provided in this Agreement or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Agreement or now or hereafter existing at law or in equity or by statute or otherwise. The exercise or partial exercise by Lender of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by Lender of all such other rights, powers or remedies, and no failure or delay on the part of Lender to exercise any such right, power or remedy shall operate as a waiver thereof. (k) Release; Termination. (a) So long as no Event of Default shall have occurred and the requirements of payment set forth in the Note are satisfied, Borrower may sell or dispose of any Pledged Collateral, if such sale or disposition is not prohibited by any terms or conditions of this Agreement or any other Loan Agreement. Lender shall upon request of Borrower execute and deliver to Borrower a release or releases in form reasonably satisfactory to Lender to release the lien of this Agreement with respect to such Pledged Collateral and assign, transfer and deliver such Pledged Collateral to Borrower. Such releases and assignments shall be without warranty by or recourse to Lender, except as to the absence of any prior assignments by Lender of its interest in the Pledged Collateral, and shall be at the expense of Borrower. (b) This Agreement shall terminate upon full and complete payment in full of all Obligations and the termination of the Obligations of the Lender under the Loan Agreement. Lender, at the time of such termination and at the expense of Borrower and subject to the provisions of Section 17 below, will execute and deliver to Borrower a proper instrument or instruments acknowledging the termination of this Agreement, and will duly assign, transfer and deliver to the Borrower such of the Pledged Collateral as has not yet theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by Lender hereunder. Such assignment and delivery shall be without warranty by or recourse to Lender, except as to the absence of any prior assignments by Lender of its interest in the Pledged Collateral. (l) Notice. Any notice, approval, consent or other communication shall be in the form and manner and to the addresses as set forth in the Loan Agreement. (m) Continuing Security Interest; Transfer of Notes. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (i) remain in full force and effect until terminated pursuant to Section 11(b), (ii) be binding upon Borrower, his successors and assigns, and (iii) inure, together with the rights and remedies of Lender hereunder, to the benefit of Lender, its successors, transferees and assigns. (n) Waiver. To the fullest extent he may lawfully so agree, Borrower agrees that he will not at any time insist upon, claim, plead, or take any benefit or advantage of any appraisement, valuation, stay, extension, moratorium, redemption or similar law now or hereafter in force in order to prevent, delay, or hinder the enforcement hereof or the absolute sale of any part of the Pledged Collateral; Borrower for himself and all who claim through him, so far as he or they now or hereafter lawfully may do so, hereby waive the benefit of all such laws, and all right to have the Pledged Collateral marshalled upon any foreclosure hereof, and agree that any court having jurisdiction to foreclose this Agreement may order the sale of the Pledged Collateral as an entirety. B-4 (o) Reinstatement. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any amount received by Lender in respect of Borrower's Obligations pursuant to the Note or this Agreement is rescinded or must otherwise be restored or returned by Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of Borrower or upon the appointment of any intervenor or conservator of, or trustee or similar official for, Borrower or any substantial part of his assets, or otherwise, all as though such payments had not been made. (p) Severability. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. (q) Interpretation. Time is of the essence of each provision of this Agreement of which time is an element. To the extent a term or provision of this Agreement conflicts with the Loan Agreement and is not dealt with more specifically herein, the Loan Agreement shall control with respect to such term or provision. (r) Survival of Provisions. All representations, warranties and covenants of Borrower contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full and final payment and performance by Borrower of his indebtedness and obligations secured hereby. (s) Headings Descriptive. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning or construction or any provision of this Agreement. (t) Entire Agreement. This Agreement, together with the other Loan Documents is intended by the parties as a final expression of their agreement and is intended as a complete and exclusive statement of the terms and conditions thereof. Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant to determine the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. (u) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same agreement. (v) Governing Law. This Agreement shall be construed in accordance with and all disputes hereunder shall be governed by the laws of the Commonwealth of Pennsylvania, without regard to principles of conflicts of laws. (w) Amendments. This Agreement may be amended, modified or supplemented only by a written instrument signed by Borrower and Lender. IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered as of the date first above written. /s/ John W. Kirby (SEAL) - ---------------------------- ----------------------------------- Witness JOHN W. KIRBY NATIONAL MEDIA CORPORATION, a Delaware corporation By: --------------------------------- Name: Title: B-5 Schedule 1 List of Pledged Shares Stock Certificate Number Number of Shares ------------------------ ---------------- EX-10.53 5 EXHIBIT 10.53 Exhibit 10.53 NON-INCENTIVE STOCK OPTION AGREEMENT (Plan Option) THIS NON-INCENTIVE STOCK OPTION AGREEMENT ("Agreement") is dated as of January 28, 1998 and is by and between NATIONAL MEDIA CORPORATION, a Delaware corporation with its principal office located at Eleven Penn Center, Suite 1100, 1835 Market Street, Philadelphia, Pennsylvania 19103 (the "Company"), and John W. Kirby. The Compensation Committee of the Board of Directors of the Company (the "Committee") has determined to grant to the Optionee an option to purchase shares of the Company's Common Stock in order to provide the Optionee with an added incentive to contribute to the Company's future success and prosperity. The option granted herein shall be issued under the Company's Amended and Restated Stock Option Plan, as it may be amended from time to time hereafter (the "Plan"). Capitalized terms contained herein and not otherwise defined shall have the meanings ascribed to such terms in the Plan. Accordingly, in consideration of the premises set forth herein, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company hereby grants the Optionee the option to acquire shares of the common stock of the Company upon the following terms and conditions: 1. Grant of Option. (a) The Company hereby grants to the Optionee the right and option (the "Option") to purchase up to Three Hundred Thousand (300,000) fully paid and non-assessable shares of common stock, par value $.01 per share, of the Company (the "Shares"), to be issued upon the exercise hereof. (b) The Option may be exercised during the period ("Option Period") commencing on the date hereof and, unless sooner terminated as provided herein, expiring and terminating at 5:00 p.m. Eastern Standard Time on January 28, 2008, at which time the Optionee shall have no further right to purchase any Shares not then purchased the Option may be exercised in whole or in part from time to time during the Option period. The Company shall at all times during the term of this Agreement reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of this Agreement. (c) It is not intended that the Option qualify as an Incentive Stock Option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Exercise Price. The exercise price of the Option (the "Exercise Price") shall be $2.6875. The exercise price shall be payable by certified or bank check payable to the order of the Company in full at the time of the exercise in cash or, with the consent of the Committee in its sole discretion, by delivering (i) shares of Common Stock already owned by the Optionee and having a fair market value (as determined under the Plan) on the date of exercise equal to the Exercise Price, or (ii) a combination of cash and shares of Common Stock with a fair market value equal to the Exercise Price. 3. Exercise of Option. The Optionee may exercise this Option to purchase Shares by providing notice to the Company by registered or certified mail, return receipt requested, addressed to its principal office, or by hand delivery, signed by the Optionee, indicating the number of whole Shares which Optionee desire to purchase under the Option. The notice shall be accompanied by payment of the Exercise Price therefor as specified in Paragraph 2 above, any amounts payable pursuant to Paragraph 10 below and any required written representation as specified pursuant to Paragraph 7 below. As soon as practicable after the receipt of such notice of exercise, payments and written representation, the Company shall issue to the Optionee a certificate(s) issued in the Optionee's name evidencing the Shares purchased by the Optionee hereunder, subject to the Company's right to require that Optionee hereunder, subject to the Company's right to require that Optionee execute such other documents as it deems reasonably necessary. 4. Limitations on Right to Exercise. Should the Optionee cease to be an Eligible Participant for any reason other than the Optionee's death or disability, the Option (to the extent then vested) shall be exercisable for a period of ninety (90) days after the Optionee ceases to be an Eligible Participant or until the expiration of the Option Period, whichever shall occur first. 5. Death or Disability of Optionee. In the event of the death or disability of the Optionee while the Optionee is an Eligible Participant (or the death of the Optionee within ninety (90) days after the date on which the Optionee ceases to be an Eligible Participant), any unexercised portion of the Option shall be exercisable for a period of one year after the Optionee's death or disability or upon the expiration of the Option Period, whichever shall occur first, and, in the event of the death of the Optionee, shall be exercisable only by the Optionee's personal representative or such person or persons to whom the Optionee's rights pass under the Optionee's will or by the Laws of descent and distribution. 6. Non-Transferability of Option. Except as provided in Paragraph 5 herein, the Option shall be exercisable only by the Optionee. The Optionee may not give, grant, sell, exchange, transfer legal title, pledge, assign or otherwise encumber or dispose of the Option herein granted or any interest therein, otherwise than by will or the laws of descent and distribution or, if permitted under Rule 16b-3 promulgated under the Securities Exchange Act of 1934 and by the Committee in its sole discretion pursuant to a qualified domestic relations order as defined in the Code or Title 1 of ERISA or the rules promulgated thereunder. Upon any attempt to so transfer the Option, or upon the levy or attachment or similar process of the Option, the Option shall automatically become null and void. 7. Restriction on Issuance; Investment Representation. The Optionee agrees for himself, his heirs and legatees that, unless at the time of exercise there exists an effective registration statement under the Securities Act of 1933 concerning the Shares issuable pursuant to the Option providing for the issuance of such Shares to the Optionee and/or the subsequent transfer of the shares by Optionee, any and all Shares purchased upon the exercise of the Option shall be acquired for investment and not for distribution. Upon the issuance of any or all of the Shares subject to the Option, the Company, in its discretion and in accordance with the foregoing, may require the Optionee, or his heirs or legatees receiving such Shares, to deliver to the Company a representation in writing, in a form satisfactory to the Board, that such Shares are being acquired in good faith for investment and not for distribution. In accordance with the foregoing, (i) the Company may place with its transfer agent a "stop transfer" order with respect to such Shares and may place an appropriate restrictive legend on the certificate(s) evidencing such Shares; and (ii) any stock certificates issued upon the exercise of the Option may bear an appropriate restrictive legend, if deemed necessary by the Company. 8. No Rights as Shareholder. The Optionee shall have no rights as a shareholder of the Company in respect of the Shares as to which the Option shall not have been exercised and payment made as herein provided. 9. No Obligation Relating to Engagement of Optionee. Nothing herein shall obligate the Company or any of its subsidiaries to engage the Optionee, nor shall this Agreement constitute an agreement of employment or for services, nor confer upon the Optionee any right to continue to render services to the Company or any of its subsidiaries or interfere in any way with the right of the Company or any of its subsidiaries to terminate the services of the Optionee at any time without liability to the Company or the subsidiary. 10. Taxes. The Company may make such provisions as it may deem appropriate for the withholding of any taxes which it determines is required in connection with any options granted under the Plan. The Company may further require notification from the Optionee upon any disposition of Shares acquired pursuant to the exercise of the Option. 11. Conflict between Option Agreement and Plan. In the event of any conflicts between this Agreement and the terms and condition of the Plan, the terms and conditions of the Plan shall control. 12. Binding Effect. Except as herein otherwise expressly provided, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their legal representatives and assigns. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed wholly within the State of Delaware. 2 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. NATIONAL MEDIA CORPORATION By: /s/ Frederick S. Hammer ---------------------------------------- Frederick S. Hammer Chairman of the Board /s/ John W. Kirby ---------------------------------------- John W. Kirby 3 EX-10.54 6 EXHIBIT 10.54 Exhibit 10.54 STANDARD OFFICE LEASE--GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Lease Provisions ("Basic Lease Provisions"). 1.1 Parties: This Lease dated for reference purposes only, November 26, 1996 is made by and between ENCINO TERRACE CENTER (herein called "Lessor") and Positive Response Television, Inc. and Director America Corporation doing business under the name of _________________ , (herein called "Lessee"). 1.2 Premises: Suite Number(s)_______________ floors, consisting of approximately 23,180 feet, more or less, as outlined in paragraph 2 and as shown on Exhibit "A" hereto (the "Premises"). 1.3 Building: Commonly described as being located at * 15021 VENTURA BOULEVARD in the City of LOS ANGELES County of LOS ANGELES State of CALIFORNIA as more particularly described in Exhibit _____ hereto, and as defined in paragraph 2. 1.4 Use: General office use See Addendum 1.4 subject to paragraph 6. 1.5 Term: Ten (10) years commencing May 1, 1997** ("Commencement Date") and ending Ten (10) years thereafter as defined in paragraph 3. 1.6 Base Rent:______________ per month, payable on the 1st day of each month per paragraph 4.21 See Addendum 1.6.1. 1.7 Base Rent Increase: On See Addendum 1.6.1. the monthly Base Rent payable under paragraph 1.6 above shall be adjusted as provided in See Addendum 1.6.1. 1.8 Rent Paid Upon Execution: _____________________________________ for _______________________________________________________________________ 1.9 Security Deposit: ______________________________________________ 1.10 Lessee's Share of Operating Expense Increase: __________________ as defined in paragraph 4.2. 2. Premises, Parking and Common Areas. 2.1 Premises: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises,", Including rights to the Common Areas as hereinafter specified. 2.2 Vehicle Parking: So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to park cars in the Office Building at the monthly rate applicable from time to time for monthly parking as set by Lessor and/or its licensee. 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow aware the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.2.2. The monthly parking rate per car will be $70.00 per month at the commencement of the term of this Lease and is subject to change upon five (5) days prior written notice to Lessee. Monthly parking fees shall be payable one month in advance prior to the first day of each calendar month. - See Addendum 2.2.3. 2.3 Common Areas--Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office - -------------------- * Suites 570 ------- ** or under Tender of Possession (as hereinafter defined), whichever occurs earlier 1 Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 Common Areas--Rules and Regulations. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers and invitees to so abide and confirm. Lessor of such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other Lessees, their agents, employees and invitees of the Office Building Project. 2.5 Common Areas--Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways, provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 3. Term. 3.1 Term. The term and Commencement Date of this Lease shall be ads specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 Delay in Possession. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2 Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extent the term hereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligations of Lessee under the terms of this Lease, except as may be otherwise prohibited in this Lease, until possession of the Premises is tendered to Lessee as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within 90 days following said Commencement Date as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee. Lessee may, at Lessee's option, by notice in writing to Lessor within thirty (3) days thereafter, cancel this Lease. In which event the parties shall be discharged from all obligations hereunder; provided, however, Less shall return any money previously deposited by Lessee (less any offsets due Lessor for NonStandard improvements); and provided further, that if such written notice by Lessee is not received by Lessor within thirty (30) day period. Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.2.1 Possession Tendered--Defined. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, (3) Lessee has reasonable access to the Premises, and (4) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the matters described in (1), (2), and (3) above of this paragraph 3.2.1. SEE ADDENDUM 3.2.1 3.2.2. Delays Caused By Lessee. There shall be no abatement of rent, and the 90 day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omission of Lessee. Lessee's agent, employees and contractors. 3.3 Early Possession. If Lessor occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee 2 shall after the first seven (7) days of such occupancy pay rent for such occupancy after such seven (7) day period. 3.4 Uncertain Commencement. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2.1) or the actual taking of possession by lessee, whichever first occurs, as the Commencement Date. 4. Rent. 4.1 Base Rent. Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 Operating Expense Increase. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's share, as hereinafter defined, of the amount by which all Operating Expenses, as hereinafter defined, for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year, such excess being hereinafter referred to as the "Operating Expense Increase," in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as the percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which percentage has been determined by dividing the approximate square footage of the Premises by the total approximate square footage of the rentable space contained in the Office Building Project. It is understood and agreed that the square footage figures set forth in the Basic Lease Provision are approximations which Lessor and Lessee agree are reasonable and shall not be subject to revision except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Office Building Project; (b) "Base Year" is defined as the calendar year in which the Lease term commences; (c) "Comparison Year" is defined as each calendar year during the term of this Lease subsequent tot he base Year; provided, however, lessee shall have no obligation to pay a share of the Operating Expense increase applicable to the first twelve (12) months of the Lease Term (other than such as are mandated by a governmental authority, as to which government mandated expenses Lessee shall pay Lessee's Share, notwithstanding they occur during the first twelve (12) months). Lessee's Share of the Operating Expense Increase for the first and last Comparison years of the Lease Term shall be prorated according to that portion of such Comparison Year as to which lessee is responsible for a share of such increase; (d) "Operating Expense" is defined, for purposes of this Lease, to include all reasonable and necessary costs, if any, incurred by Lessor in the exercise of its reasonable discretion, for: (i) The operation, repair, maintenance, and replacement, in net, clean, safe, good order and condition, of the Office Building Project, including but not limited to, the following: (aa) The Common Areas, including their surfaces, coverings, decorative items, carpets, drapes and window coverings, and including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, building exterior and roofs, fences and gates; (bb) All hearing, air conditioning, plumbing, electrical systems, life safety equipment, telecommunication and other equipment used in common by, or for the benefit of, lessees or occupants of the Office Building Project, including elevators and escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services; (iii) Any other service to be provided by Lessor that is elsewhere in this Lease stated as being an "Operating Expense;" (iv) The cost of the premises for the liability and property insurance policies to be maintained by Lessor under paragraph 8 hereof; (v) (INTENTIONALLY OMITTED) (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services to the Office Building Project; (vii) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Office Building Project and accounting and a management fee not to exceed 4% attributable to the operation of the Office Building Project; (viii) Replacing and/or adding improvements mandated by any governmental agency and any 3 repairs or removals necessitated thereby amortized over its useful lie according to the Federal Income tax regulations or guidelines for depreciation thereof (including interest on the amortized balance as is then reasonable in the judgment of Lessor's accountants; (ix) Replacements of equipment or improvements that have a useful life for depreciation purposes according to Federal income tax guidelines of five (5) years or less, as amortized over such life. (e) Operating Expenses shall not include the costs of replacements of equipment or improvements that have a useful life for Federal income tax purposes in excess of five (5) years unless it is of the type described in paragraph 4.2(d)(viii), in which case their cost shall be included as above provided. (f) Operating Expenses shall not include any expenses paid by any Lessee directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds. See Addendum 4.2(f). (g) Lessee's Share of Operating Expense Increase shall be payable by lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount to be estimated by Lessor from time to time in advance of Lessee' Share of the Operating Expense Increase for any Comparison Year, and the same shall be payable monthly or quarterly, as Lessor shall designate, during each Comparison Year of the Lease term, on the same day as the Base Rent is due hereunder In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60) days after the expiration of each Comparison Year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses Increase incurred during such year. If Lessee's payments under this paragraph 4.2(g) during said Comparison Year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expense Increase next falling. due. If Lessee's payment under this paragraph during said Comparison Year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Lessee is responsible as to Operating Expense increase, notwithstanding that the Lease term may have terminated before the end of such Comparison Year. 4.3 Rent increase. See Addendum 4.2(h). 4.3.1 (Intentionally omitted). 4.3.2 (Intentionally omitted). 4.3.3 (Intentionally omitted). 4.3.4 (Intentionally omitted). 4.3.5 (Intentionally omitted). 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lease, after the expiration of any applicable notice or grace periods, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's or to compensate Lessor for any loss or damage which Lessor may suffer thereby. Lessor shall not be required to keep said security deposition separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payments of interest or other increment for its use, to Lessor (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. Use. 6.1 Use. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basis Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that the Premises in the state existing on the date that the Lease term commences but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises does not violate any covenants or restrictions of record or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with 4 all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions or records, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy that now existing, during their term or any part of the term hereof, relating in any manner to the use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Area in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. See Addendum 6.2(c). 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) and Lessor warrants to the Lessee that the plumbing, lighting, air conditioning, and heating systems in the Premises shall be in good operating condition in the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, alter receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except at otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinance and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor not Lessor's agent or agents has made any representation or warranty as to the present or future suitability of Premises, Common Areas or Office Building Project for the conduct of Lessee's business. 7. Maintenance, Repairs, Alternation and Common Area Services. 7.1 Lessor's Obligations. Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements in the Premises that are not ordinarily a part of the Building or are above then Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alternations or repairs made by Lessor to the Office Building Project any part thereof, provided that Lessor shall use its best efforts not interfere with Lessee's business operation. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. SEE ADDENDUM. 7.2 Lessee's Obligations. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes by Lessor's negligence. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, as its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the costs of which is otherwise Lessee's responsibility hereunder. (b) On the last day of their term hereof, or on any soon termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear casualty and condemnation excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alternations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window covering, wall coverings, carpets, call paneling, ceiling and plumbing on the Premises and in good operating condition. 7.3 Alternations and Additions. (a) Lessee shall not, with Lessor's prior written consent make any alternations, improvements, additions, utility installations or repairs in, on or about the Premises, or the Office Building Project. As used in the paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, 5 electrical distribution systems, light fixtures, air conditioning plumbing and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alternation, improvements, additions or Utility installations, and the restoration of the Premises of the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alternations, improvements, additions or utility installations, Lessee shall use only such contractors as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make and alternations, improvements, addition or utility installations without the prior approval of Lessor, of use a contractor not expressly approved by Lessor, Lessor, may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alternations, improvements, additions or utility installations in or about the Premises or the Office Building Project that Less shall desire make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alternation, improvement, addition or utility installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises of the Building as provided by law. If Lessee, shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy . any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Project, upon the condition that if Lessor, shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim, in addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alternations, improvements, additions and Utility installations (unless such Utility installations constitute trade fixtures of Lessee) which may be made to the Premises by Lessee, including but not limited to, floor coverings, paneling, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communications systems, conduct, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of Lease term unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed with material damage to the Premises or the Building, and other than Utility installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. SEE ADDENDUM 7.3(e). (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility installations. 7.4 Utility Additions. Lessor reserves the right to install now or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity. 8.1 Liability Insurance--Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Comprehensive General Liability Insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (GL040-4). or equivalent, in an amount of not less than $1,000,000.00 per occurrence of bodily injury and property damage combined or in a grater amount as reasonably determined by Lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the 6 use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 Liability Insurance--Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 8.3 Property Insurance--Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsement in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, on all of Lessee's personal property, fixtures, equipment and tenant Improvements. 8.4 Property Insurance--Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project Improvements, but not Lessee's personal property, fixtures, equipment or tenant Improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form, or equivalent, providing protection against all perils included within the classification of fire, extended overage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by lessor and shall have no right to any proceeds therefrom. The policies required by these paragraph 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determined. In the event that the Premises shall suffer an Insured Loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense, Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's Insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 Insurance Policies. Lessee and Lessor shall deliver to each other copies of liability insurance policies required under paragraph 8.2 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date of this Lease. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to the other. Lessee and Lessor shall, at least thirty (30) days prior to the expiration of such policies, furnish the other with renewals thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agent, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its agent, Lessor's mater or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises and shall further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of the Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such mater, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect hereof against Lessor. See Addendum 8.7 and 8.8. 7 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income herefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or light fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto and regardless of whether the means of repairing the same is inaccessible. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or use of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of Insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuilt the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. 9.2 Premises Damage; Premises Building Partial Damage. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor' expense repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for directly by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises. Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) given written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 Premises Building Total Destruction; Office Building Project Total Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls within the classifications of either (i) Premises Building Total Destruction, or 8 (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage of destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this shall continue in full force and effect, or (ii) given written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 Damage Near End of Term. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor or Lessee's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to the other of such party's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph (.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option maybe exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the terms of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period notwithstanding any term or provision in the grant of option to the contrary. 9.5 Abatement of Rent; Lessee's Remedies. (a) In the event Lessor repairs or resolves the Building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expense Increase) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence, Lessee may at Lessee's option cancel and terminate this lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 Termination--Advance Payments. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 Waiver. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. Real Property Taxes. 10.1. Payment of Taxes. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 Additional Improvements. Lessor shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax" As used herein, the term "real property tax" shall include any form of 9 real estate tax or assessment, general special, ordinary or extraordinary, and any license fee, commercial rental tax, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof as against any legal or equitable interest of Lessor in the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment of charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax,", or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 Joint Assessment. If the Improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good, faith, shall be conclusive. 10.5. Personal Property Taxes. (a) Lessee shall pay prior to delinquency all taxes assess against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent lubes and ballasts for standard overhead fixtures. 11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay Lessee's share. 11.3 Hours of Service. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. See Addendum 11.3(a) 11.4 Excess Usage by lessee. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon utilities or services including but not limited to security services over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises without Lessor's prior written consent which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need to notice Lessee under paragraph 13.1 "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating: (a) Lessee is a corporation more than fifty percent (50%) of 10 the voting stock of such corporation, or (b) if Lessee is a partnership, more than fifty percent (50%) of the profit and loss participation in such partnership. 12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof without Lessor's consent to any corporation which controls, is controlled by or is under common control with Lessee or to any corporation resulting from the merger of consolidation with Lessee or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expense Increase, and to perform any other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver of estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 of this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease: however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgment that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease: provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to 11 become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublease as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any such sublease shall by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assured and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease: provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within three (3) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees. 12.6 Conditions to Consent. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 13. Default; Remedies. 13.1 Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee combined with a failure to pay rent. (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment of subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.2(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33 (auctions), or 411 (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee: provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. 12 (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors: (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interests in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or at Lessee's interests in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder was materially false. 13.2 Remedies. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means. In which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all direct damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises: reasonable expenses of reletting including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid: the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandon the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease. Including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation: provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. Condemnation. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs: provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date 13 the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expense Increase shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages: provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefore by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. Broker's Fee. (a) The brokers involved in this transaction are JULIAN J. STUDLEY, INC. as "listing broker" and Estmac Commercial Brokerage & Fred Sands Commercial as "cooperating broker," licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s). (b) (Intentionally Omitted) (c) (Intentionally Omitted) (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker or finder (other than the person(s). If any, whose names are set forth in paragraph 15(a), above) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. Estoppel Certificate. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") executed, acknowledge and deliver to the requesting party a statement in writing (i) certifying that the Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Guarantors as may be reasonably required by such lender or purchaser. Such statement shall include the past three (3) years' financial statements of Guarantors. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17.Lessor's Liability. The term "Lessor" as used herein shall mean only the owner or owners, at the time in 14 question, of the fee title or a lessee's interest in a ground lease of the Office Building Project to the extent all obligations, past and present, and all liabilities are assumed by a successor Lessor. In the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers than the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. Severability. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate than allowable by lay or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease: provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. Time of Essence. Time is of the essence with respect to the obligations to be performed under this Lease. 21. Additional Rent. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to lessee's Share of Operating Expense Increase and any other expenses payable by Lessee hereunder shall be deemed to be rent. 22. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises of the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice of Lessee. 24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. (Intentionally omitted) 26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the Premises or any party thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be one hundred fifty percent (150%) of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Lessee 15 and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the County in which the Office Building Project is located. 30. Subordination. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be provided such documents contain a non-disturbance provision in form and substance reasonably acceptable to Lessee. Lessee's failure to execute such documents within ____ days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. Attorney's Fees. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. 31.2 The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notice of default and consultations in connection therewith, whether or not a legal transaction is subsequently commenced in connection with such default. 32. Lessor's Access. 32.1 Lessor and Lessor's agents after prior notice to Lessee, except in the case of emergency shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a foreseeable unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. Auctions. Lessee shall not conduct, nor permit to be conducted either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises 16 or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. Signs. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. Merger. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor shall not work merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. (Intentionally omitted) 37. Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing and performing all of the Covenants, conditions and provisions of Lessee's part to be observed and performed hereunder, Lessee shall have quite possession of the Premises for the entire term hereof subject to a ____ of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. Options. 39.1 Definition. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option of right of first refusal to lease in Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach. Including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation 17 those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. Security Measures--Lessor's Reservations. 40.1 Lessee hereby acknowledges that Lessor shall provide guard service or other security measures for the benefit of the Premises or the Office Building Project. The cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building in which the Premises are located upon not less than 90 days prior written notice; (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs in the Common Areas; 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 41. Easements. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. Authority. If Lessee is a corporation, individual or general or limited partnership, Lessee or Lessor and an individual executing this Lease on behalf of such entity represents and warrants that such individual is authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to the other party evidence of such authority satisfactory to the other party. 44. Conflict. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. No Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. Intentionally Omitted. 47. Multiple Parties. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or lessee, respectively. 48. Work Letter. This Lease is supplemented by that certain Work Letter of even date executed by Lessor and Lessee, attached hereto as Exhibit C. 49. Attachments. Attached hereto are the following documents which constitute a part of this Lease: EXHIBIT A: FLOOR PLAN EXHIBIT B: RULES AND REGULATIONS EXHIBIT C: SPACE PLAN AND SPECIFICATIONS 18 EXHIBIT D: Signage Addendum 19 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND BE EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LESE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE ENCINO TERRACE CENTER POSITIVE RESPONSE TELEVISION, INC., a Delaware corporation By: /s/ W.G. Wells By: /s/ Val Levy --------------------------- ---------------------------------- W. G. Wells Val Levy its President its Director DIRECT AMERICA CORPORATION, a Delaware corporation By: /s/ Gary Quint -------------------------------- Gary Quint its Vice President & General Manager 20 RULES AND REGULATIONS FOR STANDARD OFFICE LEASE Dated: --------------------------------------------- BY and between: --------------------------------------------------------------- GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not altar any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the premises of Office Building Project. 9. Lessee shall not suffer or permit any thing in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight and equipment shall be moved into or out of the Building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building on Saturdays and legal holidays, and on other days between the hours of _____ p.m. and _____ a.m. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used by Lessee. 15. No Lessee, employee or invites shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation. 1 20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver or any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rues and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. 24. Lessee shall not place any furniture or equipment on any terrace that does not conform to Lessor's furniture or equipment standards. 25. Lessee shall not offer any lottery tickets for public sale on the Premises or in the Building. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee's employees, suppliers, shippers, customers or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offsite location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking. 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. 2 GUARANTY AGREEMENT THIS AGREEMENT is made on the date signed below between Encino Terrace Center ("ETC") and National Media Corporation, a Delaware Corporation herein called "Guarantor." RECITALS A. Positive Response Television, Inc. and Direct America Corp. ("Lessee") is, or is about to become, the Lessee of certain premises in the County of Los Angeles, State of California (the "Property"), located at 15821 Ventura blvd., Encino, California. B. Lessee has sought a lease from ETC, to be evidenced by a written lease (the "Lease"). C. Guarantor, at the solicitation of Lessee, requests that ETC execute the Lease. ETC is willing to make the Lease on the condition that Guarantor execute this Guaranty Agreement. AGREEMENT Therefore, in consideration of the above and of the making of the Lease by ETC, Guarantor unconditionally guarantees and promises to pay ETC or order, in lawful money of the United States, any and all indebtedness of Lessee to ETC evidenced by or growing out of, o in any way connected with the Lease. Guarantor further unconditionally guarantees and promises ETC to perform all agreements to be performed by Lessee under the Lease, and any other agreement executed by Lessee to ETC pertaining to or additionally securing the Lease. Guarantor further agrees as follows: 1. The obligations of Guarantor hereunder are independent of the obligations of Lessee, and a separate action or actions may be brought and prosecuted against Guarantor, whether action is brought against lessee or whether Lessee by joined in any such action or actions. 2. In giving ETC this Guaranty, Guarantor is not concerned with Lessee's financial condition or with the condition of title of or the value of the Leasehold and waives any right that ETC disclose any information it may now have or hereafter acquire concerning Lessee's character, credit, or financial condition or any information affecting or concerning the condition of title of the Property or the value of the Lease. Guarantor assumes the responsibility for being and keeping informed of the financial condition of Lessee and of all circumstances bearing upon the risk of nonpayment or non-performance of the Lease hereunder. If Lessee is a corporation or a partnership or a trust, ETC need not inquire into the power of Lessee or the authority of its officers, directors, partners, trustees or agents acting or purporting to act on its behalf and the Lease granted in reliance upon the purported exercise of such power or authority is hereby guaranteed. Guarantor waives any and all notices of any type whatsoever, whether relating to any act or condition of ETC, or Lessee or of others, or relating in any other way to the subject matter of this Guaranty. 3. ETC is authorized at any time, without notice or demand and in such manner, upon such terms and for such time as it deems fit to alter, accelerate, extend or change the time or manner for the payment or performance of the Lease or any part thereof; or to release, substitute or add assignee, subtenants or guarantors; or to add, exchange, release, substitute or waive any security; and no action by ETC shall affect Guarantor's liability hereunder in any manner. 4. Until the Lease has been paid and performed in full, Guarantor shall not have any right of subrogation. Guarantor waives any benefit of and any right to participate in security, and authorized and empowers ETC, at its sole discretion, to exercise any right or remedy which it may have including, but not limited to, unlawful detainer, exercise of rights, or taking a possession or an assignment in lieu of unlawful detainer as to the Leasehold and as to any other security interest in real or personal property which ETC may hold for the Lease, and Guarantor shall be liable for any deficiency existing after the exercise of any such remedy, even though rights which Guarantor may have against other s might be destroyed or diminished by the exercise of such remedy. 1 5. Any indebtedness of Lessee now or hereafter owing to Guarantor is hereby subordinated to the Lease. Guarantor shall not accept any payment of or on account of any such indebtedness at any time while any part of the Lease is in default and unpaid. At the request of ETC, Lessee shall pay ETC all or any part of any such indebtedness and any amount so paid to ETC at its request shall be applied to the Lease obligation. Payment on any indebtedness of Lessee to Guarantor received in violation of any of the provisions of this agreement shall be deemed to have been received by Guarantor as trustee for ETC and shall be paid over to ETC immediately. Notwithstanding these provision, Guarantor reserves the right to collect and accept payment of salary for personal services which Guarantor may become entitled to receive from Lessee so long as Lessee is not then in default. 6. Guarantor's liability shall continue notwithstanding the incapacity, lack of authority, death or disability of, or revocation hereof, by any others. The failure by ETC to file or enforce a claim against the estate (either in administration, bankruptcy or other proceedings) of any others shall not release Guarantor from liability hereunder. Guarantor shall not be released from liability hereunder if recovery from Lessee or from any other guarantor is or hereafter becomes barred by any statute of limitations or if such liability is or becomes otherwise unenforceable. Guarantor agrees that this Guaranty shall be reinstated if and to the extent that for any reason any payment by or on behalf of Lessee is rescinded or must be otherwise restored by ETC whether as a result of any proceedings in bankruptcy or reorganization or otherwise. 7. Guarantor waives any right to require ETC (a) to proceed against Lessee or any other person or entity; (b) to proceed against or exhaust any security held from Lessee; (c) to foreclose on the Property; (d) to pursue any other remedy. Guarantor further waives (a) any right to participate in any security now or hereafter held by ETC; (b) the right of subrogation against Lessee; (c) any defense based upon Sections 580 and 726 of the Code of Civil Procedure of the State of California, or either of them; (d) any defense based upon, or involving the assertion of, the invalidity or unenforceability, in whole or in part, of the Lease, or any security or the lack of legal capacity of any party thereto or the nonexistence or cessation of the liability of any party thereon; (e) all presentments, demands for performance and notices of nonperformance, notices of dishonor, and of the existence, creation or incurring of new or additional indebtedness. 8. ETC may apply any payment or recovery from or for the benefit of Lessee to any obligation of Lessee as it deems fit and in such order of priority as it deems fit, whether or not such obligation relates to the Lease or is secured or is due at the time. 9. Any married person who sighs this Guaranty hereby agrees that recourse may be had against his or her separate property for all obligations under this Guaranty. If this Guaranty be signed by more than one person, form or corporation, then all obligations thereof hereunder shall be joint and several. 10. As used herein, the term "Lessee" means and includes the Lessee of the lease agreement, and all successors and assignees thereof, and all present and subsequent owners of the Leasehold. This Guaranty shall inure to the benefit of and bind ETC, its successors and assigns, including the assignees of the Lease, and Guarantor's heirs, executors, administrators, successors and assigns. 11. No delay or failure on the part of ETC in exercising any right, privilege or remedy hereunder shall operate as waiver of such or any other right, privilege or remedy, and no waiver whatsoever shall be valid unless in writing, signed by ETC, and then only to the extent set forth therein. 12. All rights, powers and remedies of ETC hereunder shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given by law. 13. All words used herein in the singular shall be deemed to have been used in the plural when the context and construction so require. 14. Guarantor agrees without demand to pay and reimburse ETC for all costs. attorneys' fees (whether or not for the services of salaried employees in the regular employ of ETC) and other expenses which it expends or incurs in the collection of the Lease or in the enforcement of this Guaranty or the Lease agreement. 2 First Addendum This First Addendum is made as of December 9, 1996 to the Lease dated November 26, 1996 by and between Encino Terrace Center, as Lessor, and Positive Response Television, Inc. and Direct America Corporation, as Lessees, for a portion of the Building located at 15821 Ventura Boulevard, Encino, California as follows: Section 1.8: Insert "$43,346.60" Section 1.9: Insert "0" Section 1.10: Insert "5.877%" Section 2.2: Insert "70" LESSOR LESSEE ENCINO TERRACE CENTER POSITIVE RESPONSE TELEVISION, INC. A DELAWARE CORPORATION By: /s/ Mike Levey -------------------------------- DIRECTAMERICA CORPORATION, A DELAWARE CORPORATION By: /s/ Gary Quint -------------------------------- ACCEPTED AND AGREED BY GUARANTOR NATIONAL MEDIA CORPORATION By: /s/ Brian Sisko -------------------------------- Brian Sisko, Vice President Corporate Development Addendum This Addendum to the Lease dated November 26, 1996 by and between Encino Terrace Center, as Lessor, and Positive Response Television, Inc. and Direct America Corporation, as Lessee, for a portion of the Building located at 15821 Ventura Boulevard, Encino, California, shall be attached and made a part thereto. To the extent of any conflicts between the Lease and the Addendum, the Addendum shall control. 1.4 Use. Lessee's use shall include those activities related to the conduct of Lessee's direct television and radio business including, but not limited to, telemarketing, video editing and production and radio broadcasting. In no event shall the Lessee use the Premises or any part thereof for auctions, religious activities, dating services, liquidation sales, warehousing, manufacturing, day care centers, schools, public lectures, retail sales (other than direct marketing) or public invitees without the express prior written consent of Lessor. 1.6.1 Base Rent (cont'd) Notwithstanding the provisions of Paragraph 1.6 hereof, the monthly Base Rent payable hereunder shall be adjusted as follows: Months 1- 30: $43,346.60 per month ($1.87 per rentable square foot per month) Months 31- 60: $45,896.40 per month ($1.98 per rentable square foot per month) Months 61- 90: $50,532.40 per month ($2.18 per rentable square foot per month) Months 91-126: $55,168.40 per month ($2.38 per rentable square foot per month) 2.2.3 Vehicle Parking (cont'd) Notwithstanding the provisions of the Lease to the contrary: all of Lessee's cars shall be parked in unreserved parking areas as designated by Lessor, at an initial monthly rental of $70.00 per car, plus applicable parking taxes. Up to ten (10) of the cars provided for in Paragraph 2.2 of the Lease may, at Lessee's option, park in single reserved parking spaces in locations designated by Lessor, at a monthly rental of $120.00 per car, plus applicable parking taxes. Increases to the initial parking rates, exclusive of city taxes, shall be capped at five percent (5%) per annum. There are no garage attendants or supervision during non-Building hours. 3.2 Possession Tendered (cont'd) The definition of "Tender of Possession" shall also include (iv) Lessor has obtained a Final Inspection for Tenant Improvements on the Premises. The ten (IO) day notice specified in 3.2.1 shall apply to this item. 3.2.3 Failure to Deliver. Notwithstanding anything to the contrary contained in this Section 3.2, in the event Lessor does not deliver possession of the Premises to Lessee on or before the scheduled Commencement Date as may be extended, Lessee shall be entitled to one day's free rent for each day after the Commencement Date that the Premises are not delivered to Lessee until Tender of Possession. Such free rent shall commence after the date possession of the Premises is tendered to Lessee. 4.2(f) Operating Expense Increases (cont'd) It is agreed that any cost allocable to the items specified below shall be excluded from Additional Rent and Operating Expenses: (a) the cost of correcting structural defects (latent or otherwise) in the design, construction or equipping of the Building or in the Building equipment; (b) salaries or other employee benefits of officers and executives of Lessor, above the grade of building or property manager; (c) the cost of any items for which Lessor is reimbursed by insurance or otherwise; (d) the cost of any repairs, alterations, additions, changes, replacements and other items which under sound accounting principles are properly classified as capital expenditures or which are made in order to prepare for a new lessee's occupancy; (e) interest on debt or amortization payments on any mortgage and rental under any ground lease or other underlying lease; (f) any real estate brokerage commissions or other costs incurred in procuring other lessees; (g) any costs or expenses arising from Lessor's repair, cleanup, remediation, or detoxification of Hazardous Materials in, on, or about the Premises, the Building, or the Common Areas, for which Lessor is responsible by law or pursuant to the terms of this Lease; (h) repairs and construction work for specific tenants; (i) legal fees for tenant disputes; (j) brokers commissions; and (k) repairs, alterations, replacements, or additions to the Building (other than the Premises) relating to compliance with any governmental laws, codes, orders or regulations. 4.2(h) Operating Expenses (cont'd) Lessor shall use reasonable efforts to reduce operating expenses to the minimum which is reasonably possible, commensurate with the standards of operation and maintenance provided for in this Lease and of similar A buildings in the immediate vicinity. All estimates of Operating Expenses shall be determined in good faith. 4.2(i) Audit. Lessee shall have the right upon request and at reasonable times, to examine and copy Lessor's books and records relating to items referred to in this Section 4 and Lessee may recover any overcharges of Operating Expenses. 6.2(c) Compliance with Law (cont'd) Lessor represents that, to the best of its actual knowledge: 1) Lessor has received no notice of violation of environmental law from any applicable governmental authority, and 2) the Building contains no asbestos insulation or fireproofing. Lessor shall comply with all statutes, orders and rules now in effect or which may hereafter come into effect in the future including, but not limited to, the Americans With Disabilities Act, the Clean Air Act and all environmental laws. 7.1 Lessor's Obligations. Lessor shall be responsible for the repair and replacement of all plumbing, lighting, air conditioning, heating systems, mechanical systems, electrical systems, the Common Areas and all structural components of the Office Building Project. Lessor shall maintain the Building in a condition comparable to other first class A office buildings in the immediate vicinity. 7.3 Alterations and Additions (cont'd) Lessee shall have the right to remove all Tenant's telephone and data systems, computer systems and audio and video equipment from the Premises, providing that the Premises are restored to prior condition. 8.7 and 8.8 Indemnity and Exemption of Lessor from Liability (cont'd) Lessee's indemnity pursuant to Paragraph 8.7 and Lessor's exemption from liability pursuant to Paragraph 8.8 shall not apply to damage or injury caused by Lessor's negligence or willful misconduct or emissions. 9. Premises Building Total Destruction; Office Building Project Total Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an insured loss, which falls into the classifications of either (i) Premises Building Total Destruction, or (ii) Office Building Project Total Destruction, then Lessee may, at Lessee's option, terminate this lease by giving written notice to Lessor within thirty (30) days after the date of the occurrence of such damage, in which case this Lease shall terminate as of the occurrence of such damage. 10.3 Real Property Taxes. Real property taxes shall also not include transfer taxes or penalties or interest caused by the failure to pay taxes. 11.1 Services Provided by Lessor. Lessor shall also provide maintenance of all Common Areas including cleaning, landscaping and illumination; extermination and pest control; and freight elevators and passenger elevators service. 11.3(a) Hours of Service (cont'd) Notwithstanding the provisions of Paragraph 11.3 to the contrary, Lessee shall have access to the Building, the Premises, elevator service and the Building parking structure 24 hours per day, 365 days per year, subject to Lessor's security measures for the Building. Lessee's access shall not require Lessor to station garage attendants in the Building or the Building garage 24 hours per day. Heating, ventilating and air conditioning shall be provided 7:00 a.m. to 7:00 p.m. Monday through Friday, and 9:00 a.m. to 1:00 p.m. Saturdays, holidays excepted. HVAC services furnished after these hours will be charges to Lessee at Lessor's actual cost, which cost shall not exceed, $45.00 per hour for the first twelve (12) months of the Lease Term. Lessee's use of separate HVAC package unit(s) for Lessee's phone/data room or other rooms within the Premises shall be separately metered and billed directly to Lessee. 11.5(a) Interruption of Services (cont'd) 3 In the event that any utilities or services to be furnished by Lessor to the Premises are interrupted, disrupted, or terminated due to the gross negligence or willful misconduct of Lessor, or due to Lessor's failure to pay for such services or utilities and thereby prevents the normal conduct of Lessee's business at the Premises, then the base rent and any other amounts owing as rent hereunder shall abate, based upon the portion or portions of the Premises so affected by the interruption, disruption, or termination until normal business at the Premises may be resumed. 13.4 Late Charges (cont'd) Notwithstanding anything to the contrary contained in Section 13.4, if Lessee pays any amounts due under this Lease within twelve days after such amount shall be due, Lessee shall not be required to pay to Lessor a late charge of more than $500.00. 23. Notices (cont'd) Notwithstanding the provisions of Paragraph 23 hereof, it is hereby agreed that all notices to Lessee shall include a copy to: National Media Corporation, 11th Floor, 1818 Market Street, Philadelphia, Pennsylvania 19103, Attention: Controller. 32.1 Lessor's Access (cont'd) Except in the case of an emergency, Lessor shall provide prior reasonable notice to Lessee of Lessor's intent to enter the Premises. 34.1 Signage (cont'd) Notwithstanding the provisions of Paragraph 34 hereof, Lessee, at Lessee's sole cost and expense, shall have the right to install one sign in the Building's sign monument, as shown in Exhibit "D" reflecting the names of Lessee and/or Guarantor. All such signage shall be in accordance with Building signage regulations and the signage specifications shown on Exhibit "D", and subject to all applicable governmental regulations. Lessee shall not have the right to change said signage without Lessor's prior written approval. 50. Lessee Improvements. Lessor shall provide a total allowance of up to $692,852.00 ($34.00 per usable square foot initially leased by Lessee), ( hereinafter "Improvement Allowance"), based upon 20,378 usable square feet, for any and all Lessee improvement costs, including, but not limited to, space planning, design and architectural fees, a Lessor supervision and coordination fee, construction drawings, mechanical and electrical engineering, permits and other fees, plan check and construction of Lessee's real property improvements in the Premises. The Improvement Allowance shall not be utilized for personal property improvement items (i.e. furniture, removable fixtures, computers, phone systems and related equipment, and cabling). All costs to complete Lessee's Improvements (as set forth in the lump sum construction contract) in excess of said Improvement Allowance and all costs incurred by Lessor as a result of Lessee's additions or modifications to said mutually approved construction drawings shall be paid by Lessee to Lessor after completion of such Lessee Improvements within fifteen (15) calendar days of Lessor's written notice. Except for this Paragraph 50 and the Improvement Allowance provided herein, and the provisions provided for in Paragraph 6, and Paragraph 7.1 or otherwise specifically set forth in the Lease, Lessor shall have no obligation whatsoever to modify, construct, or otherwise alter the Premises or the Office Building Project for Lessee's occupancy. 4 Lessee shall have the right to enhance the tiled floor in the elevator lobby on the western portion of 5th floor of the Building, subject to Lessor's prior written approval. The cost of such enhancement may be deducted from the Improvement Allowance by the Lessor. Lessor shall utilize the Lessor's Building standard ceiling grid, lights, hardware, locksets, doors and window coverings for the Premises. Attached as Exhibit "C" is a preliminary space plan and specifications, prepared by Lessor's architect for the improvements to Lessee's Premises, which shall be mutually approved by Lessee and Lessor prior to the commencement of construction drawings ("Lessee's Improvements"), which approval shall not be unreasonably withheld. Construction documents shall be completed by Chelsea Design. Lessee shall approve a final space plan for the Premises by December 10, 1996. Lessor shall promptly deliver to Lessee working drawings and specifications for the interior finishes to the Premises. Lessee shall notify Lessor of any required changes to such working drawings within five (5) calendar days following Lessee's receipt of same and, if applicable, Lessor shall cause its architect and engineers to make such changes and deliver the revised final working drawings to Lessee for its approval within five (5) calendar days of Lessor's receipt of notice of such required changes. Lessee shall provide approval of the revised working drawings within two (2) business days of its receipt. Upon Lessee's approval of the final working drawings, Lessor shall instruct its approved mechanical and electrical engineers to commence engineering for Lessee's Improvements. Upon completion of engineering, Lessor shall submit the completed set of plans to the list of approved general contractors for the Building. Lessee's space plans and working drawings shall not conflict with the building codes for the City of Los Angeles, or with any other applicable governmental law or regulation, or with applicable insurance regulations. All space plans and working drawings shall be in a form satisfactory to appropriate governmental authorities responsible for issuing permits and licenses required for construction. Lessee hereby designates Brooks E. Pickering as its representative with respect to the construction of the Lessee Improvements, to act on behalf of and in the name of Lessee and may make all decisions and give all approvals required of Lessee with respect to such construction. All notices shall be sent to Brooks E. Pickering at the following address: 649 South Olive Street, Suite 400, Los Angeles, CA. 90014, by hand delivery or overnight delivery. Lessor shall competitively bid the project to at least three (3) qualified general contractors reasonably approved by Lessee. Lessee may name a fourth (4th) general contractor, subject to Lessor's prior reasonable approval of said general contractor. Lessor shall enter into a lump sum construction contract (subject to Lessee's reasonable approval which approval or denial must be made within 72 hours or such contract shall be deemed approved) with the selected contractor for the installation of the Lessee Improvements in accordance with the approved plans and working drawings. Lessor shall supervise the completion of such work and shall use commercially reasonable efforts to secure substantial completion of the work in accordance with a work schedule, to be defined prior to finalizing the constriction contract. There shall be a Lessor coordination, supervision and observation fee of $13,857.00, which shall be deducted from the Improvement Allowance defined above. Lessor shall obtain permits for Lessee's Improvements, and shall construct and complete Lessee's Improvements in the Premises in accordance with the approved plans. Lessor's approved mechanical contractors, Preferred Mechanical or Westco Air Conditioning, and Lessor's approved electrical contractor which is Hye-line Electric, 5 may be utilized by the approved general contractor. Lessor agrees to competitively bid the mechanical and electrical components of the project to at least two other qualified mechanical and electrical contractors reasonably approved by Lessee. All telephone line installation shall be undertaken by Lessee at its expense. Such expense shall not constitute Tenant Improvement. The general contractor shall coordinate such installation with Lessee's Tenant Improvements. Prior to any contractor entering the Building, said contractors shall provide Lessor with a waiver of any and all mechanic and lien rights, and the contractors shall name Lessor as additional insured in its liability policy (which shall be for not less than $1,000,000 per occurrence) and in Lessee's workmen's compensation insurance policy. All contractors shall schedule all work and deliveries, including the use of loading docks and elevators, through Lessor (Lessor's contact is Scott Flanagin (818-990-8410)), and shall comply with all construction regulations established by Lessor for the Building. All contractor and subcontractors shall use service elevators only, shall park and load in designated areas only, and shall protect the Building, its Common Areas, and Lessor's property (i.e. carpeting, walls, tile, finishes, etc.). In no event shall any construction personnel use tenant restrooms or enter tenant offices. The general contractor shall provide construction toilets and dumpsters per Lessor's direction. In the event: (i) of any Lessee requested additions, modifications, or changes to said approved plans or drawings, (ii) Lessee's failure to approve any item or perform any other obligation within the timelines contained herein, (iii) Lessee's request to materials, finishes or installations which are not part of the Building standards or which are not readily available of which Lessor shall provide Lessee written notice following Lessor's receipt of the approved working drawings, cause a delay in the construction of Lessee's Improvements, then notwithstanding the provisions of Paragraph 1.5 hereof, the Commencement Date under this Lease shall be the date that Tender of Possession should have occurred were it not for such Lessee caused delay(s). If Lessor shall be delayed at any time in the progress of the construction of Lessee's Improvements or any portion thereof by strikes, lockouts, fire, delay in transportation, unavoidable casualties, severe weather conditions, unforeseeable government delays, then the Commencement Date established in Paragraph 1.5 of the Lease shall be extended by the period of such delay. The term "Completion," as used in the Lease, is hereby defined to mean the date the building department of the municipality having jurisdiction of the Premises shall have made a final inspection of Lessee's Improvements and Lessee's punchlist has been substantially completed. 51. Directory Board and Identity. Lessor, at Lessee's sole cost and expense, shall install Lessee's and/or Guarantor's name on all ground floor Building directories. Lessee shall have the right to two (2) Directory Board strips on the west Directory Board for Lessee's and/or Guarantor's name only, two (2) Directory Board strips on the east Directory Board for Lessee's and/or Guarantor's name only, and ten (10) Directory Board strips on the center Directory Board for Lessee's and/or Guarantor's name and executives. 52. Jury Waiver. The parties waive their respective right to trial by jury of any cause whatsoever in any action, proceeding or hearing by either party against the other on any subject whatsoever arising out of this lease, the use or occupancy of the Premises, the relationship of the parties or for any claim for injury or damage or enforcement of any remedy under any law, statute, regulation, or otherwise, now or hereafter in effect. 6 53. Extension Options. In the event and on the condition that Lessee has timely performed each and every, all and singular, of the terms, covenants and conditions on Lessee's part to be performed, then Lessee shall have two (2) options to renew this lease for a period of five (5) years ("Renewal Term") each, exercisable by written notice to Lessor not less than nine (9) months and not more than twelve (12) months prior to the expiration of the initial Lease Term or subsequent Renewal Term. The initial Base Rent for the Renewal Term shall be Ninety-Five percent (95%) of the then prevailing market rental rates, as of the commencement of the applicable Renewal Term, for comparable class buildings in the Encino/Sherman Oaks area. 54. Expansion Space. Lessee shall have the right of first refusal to lease Suites 567 and 550, hereinafter the "Option Space". Such right of first refusal shall expire on December 31, 1997. The right of first refusal shall be exercised under the following terms and conditions. In the event that a bonafide written proposal or request for proposal has been received by Lessor from a prospective third party tenant, for the lease of all or a portion of the Option Space, Lessee shall have ten (IO) calendar days from Lessor's written notice to Lessee of the receipt of the written proposal or request for proposal for all or a portion of the Option Space to either, (i) lease the premises described in Lessor's written notice at the Option Space Terms described below, or (ii) not lease the premises described in Lessor's written notice. In the event Lessee sd notifies Lessor in writing of Lessee's intent to exercise said right of first refusal, within said ten (10) calendar day period, then Lessor and Lessee shall promptly thereafter execute an amendment to the Lease incorporating the Option Space into the Lease, at the Option Space Terms described below. All such Option Space leased by Lessee will be coterminous with the initial Lease Term. In the event Lessee fails to notify Lessor within said ten (10) calendar day period, then Lessor shall have the right to proceed with the lease of said Option Space to the prospective third party tenant. Option Space Terms. The Lease Term for the Option Space shall be coterminous with the initial Premises. The Base Rental Rate for the Option Space shall be the Base Rental Rates stated in Addendum Paragraph 1.6 hereof, subject to the expiration of the right of first refusal. Lessee shall have the right to rent additional parking for the Expansion Space per Paragraph 2.2 of the Lease, based upon the terms and vehicle parking ratios contained in Paragraph 2.2 of the Lease and Addendum Paragraph 2.2.3. 55. Load Factor. The usable to rentable add-on factor for the Building is 1.1375. 56. Patios. Lessee, at Lessee's sole cost and expense, may utilize the Building's standard patio furniture manufactured by Brown Jordan. Umbrellas and other objects shall not be placed upon the terraces. 57. Cable TV. Lessor shall cooperate with Lessee in effectuating the installation of cable TV in the 7 Building, however, Lessor shall not be responsible for any costs involved with the installation or maintenance of cable TV in the Building. 58. Temporary Premises. Suite 520, consisting of approximately 3,914 rentable square feet, on the 5th floor of the Building shall be made available upon fall Lease execution. The Temporary Space shall be provided to Lessee on an "as-is" basis. Lessee may, at Lessee's option, apply a portion of the Improvement Allowance towards the costs of stripping the wallcovering and repainting the walls in Suite 520. Base Rent for said Temporary Space shall be $1.75 per rentable square foot per month, full service gross, prorated for any partial month. 59. Ground Floor Option Space. Lessee shall have the option to lease Suite 165 consisting of 3,530 rentable square feet, located on the First Floor of the Building (the "Suite 165") for (i) a term commencing on January 1, 1998 and expiring on the Fifth (5th) anniversary of the Commencement Date (the "Initial Space Term"); and (ii) a Tenn of an addition Five (5) years (the "Second Space Term"). The option for the Initial Space Term must be exercised by written notice by Lessee to Lessor on or prior to 5:00 P.M. Pacific Standard Time on October 31, 1997. The Option for the Second Space Term must be executed in writing no later than Ninety (90) days prior to the expiration of the Initial Space Term. The Base Rent for Suite 165 during the Initial Space Term shall be $5,295.00 per month (based upon 3,530 rentable square feet.) The Base Rent for the Second Space Term shall be Ninety-Five (95%) percent of the then prevailing market rental rates for similar space in comparable class buildings in the Encino/Sherman Oaks area. 8 December 4, 1996 Mr. Brooks Pickering NATIONAL MEDIA CORP. c/o FPM Group 649 S. Olive St., Suite 400 Los Angeles, CA 90014 RE: National Media Temporary Space Dear Brooks: You have brought to my attention National Media's desire to occupy as Temporary Space Suite 530, consisting of approximately 4,231 rentable square feet on the 5th floor of the building, rather than Suite 520 as specified in Paragraph 58 of the lease. Encino Terrace Center is agreeable to this change under the same terms and conditions as outlined in the lease. The monthly rental rate shall be $7,404.25/month. This letter shall also confirm the agreement which was made at the time of lease execution (via coin toss) whereby National Media will be allowed to occupy the Temporary Space as early as December 7, 1996, yet the rental charges will begin on December 15, 1996. Sincerely, ENCINO TERRACE CENTER By: /s/ Scott H. Flanagin ----------------------------- Scott H. Flanagin Manager of Operations SHF/md cc: Brian Sisko Gary Quint Val Levy SECOND LEASE AMENDMENT DATED FOR REFERENCE PURPOSES ONLY, JANUARY 28,1997 Reference is made to that certain lease dated November 26, 1996 and the First Addendum dated December 9, 1996 between Encino Terrace Center ("Lessor") and Positive Response Television, Inc. and Direct America Corporation ("Lessee") for Suite Number 570 in the building located at 15821 Ventura Boulevard, Los Angeles, California. It is hereby agreed that all terms and conditions of the Lease shall remain in full force and effect except for the following: 1) Addendum Paragraph 58 (Temporary Premises) shall be amended by adding the following terms: "On February 15, 1997, Lessor shall make available that portion of Suite 275, outlined in attached Exhibit 1 consisting of approximately 6,673 rentable square feet, on the 2nd floor of the building. Lessee will be allowed to move from current Temporary Space (Suite 530) to new Temporary Space (portion of Suite 275) and shall thereafter not be responsible for payment of any rent or other amount pertaining to the initial temporary space. The new Temporary Space shall be provided on an "as-is" basis. Base Rent for said new Temporary Space shall be $1.75 per rentable square foot per month, full service gross, prorated for any partial month. Any tenant improvements to said Temporary Space must be submitted in writing to and approved by building management." Agreed and Accepted: Agreed and Accepted ENCINO TERRACE CENTER ("Lessor") POSITIVE RESPONSE TELEVISION, INC., A DELAWARE CORPORATION By: /s/ Scott Flanagin, Vice President By: /s/ Val Levy ---------------------------------- ------------------------------- Scott Flanagin, Vice President Dated: 3/5/97 Dated: 2/10/97 ---------------------------------- ------------------------------- DIRECTAMERICA CORPORATION, A DELAWARE CORPORATION By: /s/ Gary Quint ------------------------------- Dated: /2/10/97 ------------------------------- Agreed and Accepted by Guarantor: NATIONAL MEDIA CORPORATION By: /s/ Brian J. Sisko ------------------------------- Dated: 2/10/97 ------------------------------- EX-11.1 7 EXHIBIT 11.1 Exhibit 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Twelve Months Ended March 31, ---------------------------------------------------- (In thousands, except per share data) 1998 1997 1996 --------------- --------------- ---------------- Basic Average common shares outstanding 24,904 21,905 15,411 --------------- --------------- ---------------- --------------- --------------- ---------------- Net (loss) income $(56,769) $(45,691) $16,579 Adjustments to net (loss) income: Deemed dividend on convertible preferred stock (643) -- -- --------------- --------------- ---------------- Adjusted net (loss) income $(57,412) $(45,691) $16,579 --------------- --------------- ---------------- --------------- --------------- ---------------- Per share (loss) earnings: Net (loss) income $(2.31) $(2.09) $ 1.08 --------------- --------------- ---------------- --------------- --------------- ---------------- Diluted Average common shares outstanding 24,904 21,905 15,411 Assumed conversion of preferred stock 0 0 2,248 Net effect of common stock equivalents (1) 0 0 5,015 --------------- --------------- ---------------- Total shares 24,904 21,905 22,674 --------------- --------------- ---------------- --------------- --------------- ---------------- Net (loss) income $(56,769) $(45,691) $16,579 Adjustments to net (loss) income: Deemed dividend on convertible preferred stock (643) -- -- --------------- --------------- ---------------- Adjusted net (loss) income $(57,412) $(45,691) $16,579 --------------- --------------- ---------------- --------------- --------------- ---------------- Per share (loss) earnings: Net (loss) income (1) $(2.31) $(2.09) $ .73 --------------- --------------- ---------------- --------------- --------------- ----------------
- ------------------- (1) Common stock equivalents include the effect of the exercise of dilutive stock options and warrants using the Treasury Stock Method. EX-21.1 8 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT 1. Dignity Prestige SDN BHD, a Malaysia corporation 2. DirectAmerica Corporation, a Delaware corporation 3. Multi-Media Distribution Center, Inc., a Delaware corporation 4. Nancy Langston & Associates, Inc., a Delaware corporation 5. National Media Holdings, Inc., a Delaware corporation 6. National Media Marketing Corporation, a Delaware corporation 7. National Media Media Corp., a Delaware corporation 8. NPA Realty Corp., a New York corporation 9. Positive Response Media, Inc., a California corporation 10. Positive Response Seminars, Inc., a California corporation 11. Positive Response Telemarketing, Inc., a California corporation 12. Positive Response Television, Inc., a Delaware corporation 13. PRDISC, Inc., a California corporation 14. Prestige Marketing Limited, a New Zealand corporation 15. Quantum Asia, a Hong Kong joint venture 16. Quantum Far East Ltd., a New Zealand corporation 17. Quantum International Japan Company Ltd., a Japanese corporation 18. Quantum International Limited, a United Kingdom corporation 19. Quantum Marketing International, Inc., a Delaware corporation 20. Quantum Marketing Mexico S.A. de C.V., a Mexico corporation 21. Quantum North America, Inc., a Delaware corporation 22. Quantum Polska Sp. Z.o.o., a Poland corporation 23. Quantum Productions AG, a Switzerland corporation 24. Suzanne Paul Holdings Pty Limited, an Australian corporation 25. Suzanne Paul (Australia) Pty Limited, an Australian corporation 26. Telemall Shopping Pty Ltd., an Australian corporation EX-23.1 9 EXHIBIT 23.1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-06007, Form S-8 No. 333-08323, Form S-3 No. 33-53252, Form S-3 No. 33-34303, Form S-3 No. 33-35301, Form S-3 No. 33-41916, Form S-3 No. 33-82618, Form S-3 No. 33-63841, Form S-8 No. 33-34304, Form S-8 No. 33, 60969, Form S-8 No. 63537, Form S-3 No. 333-36637, Form S-3 No. 333-48205 and Form S-3 No. 333-48217) of National Media Corporation and the related prospectuses of our report dated June 29, 1998 with respect to the consolidated financial statements and schedule of National Media Corporation included in this Annual Report (Form 10-K) for the year ended March 31, 1998. Ernst & Young LLP Philadelphia, Pennsylvania July 7, 1998 EX-27.1 10 EXHIBIT 27.1
5 0000070412 NATIONAL MEDIA 12-MOS MAR-31-1998 APR-01-1998 MAR-31-1998 17,915 0 42,725 (5,440) 21,228 92,926 12,338 4,107 143,091 83,484 0 0 1 263 54,063 143,091 278,474 278,474 259,442 331,086 0 0 3,457 (56,069) 700 (56,769) 0 0 0 (56,769) (2.31) (2.31)
-----END PRIVACY-ENHANCED MESSAGE-----