15821 Ventura Boulevard
National Media Corporation is the world's largest publicly held direct response (infomercial) television company and a leader in the growing world of electronic commerce. The company broadcasts more than 3,000 half hours of programming each week throughout the world, bringing its programming to more than 370 million television households in more than 70 countries worldwide. As it approached the end of the century, National Media hoped to begin providing live, taped, and on-demand video programming over the Internet.
The television infomercial was born in 1984. Prior to 1984, the Federal Communications Commission (FCC) limited the amount of advertising to 16 minutes of commercial messages per hour. In 1984 the FCC eliminated its limitations and permitted the sale of blocks of advertising. Recognizing the advertising opportunity, infomercial producers began buying chunks of broadcast time from cable operators. Their half-hour and one-hour shows combined direct response marketing and retailing principles in a television talk show format.
Media Arts International, based in Phoenix, Arizona, was one of the first companies to produce infomercials in 1984. In November 1986 Media Arts International was acquired by National Media Corporation, then known as National Paragon Corporation, for $4 million, as part of National Paragon's approved reorganization plan. Prior to entering the infomercial business, National Paragon Corporation was engaged in the needlecraft business for more than 60 years. In 1984 it formed National Syndication, Inc., a subsidiary that managed a variety of specialty catalogs and mail-order businesses. In October 1985 National Paragon filed for bankruptcy protection under Chapter 11 of the Bankruptcy Reform Act. A year later it emerged from Chapter 11 and in November 1986 acquired Media Arts International as part of its approved reorganization plan.
On July 24, 1987, National Paragon Corporation adopted its present name, National Media Corporation. Fiscal 1988 (ending March 31, 1988) was the company's first profitable year following its emergence from bankruptcy protection, when it reported net income of $4.2 million on revenues of $31.9 million. For fiscal 1989 it had net income of $2.5 million on sales of $31.8 million. Then, in fiscal 1990, revenues increased dramatically to $92.7 million, with net income rising to $11.5 million. In September 1990, the company's stock, which had been trading on the NASDAQ, was approved for listing on the New York Stock Exchange.
Focus on Infomercials: 1991
In 1991 National Media took two steps that would enable it to focus on producing infomercials and expand into the European market. In May 1991 it sold its wholly owned subsidiary National Syndication, Inc. (NSI), to NSI's management for $5 million in cash and additional consideration based on NSI's pretax income for the next seven years. Following the sale of NSI, National Media's continuing business in the United States was conducted primarily through Media Arts International, Inc., which marketed products directly to consumers principally through television and its "Amazing Discoveries" infomercial series. The products were mainly in the areas of housewares, beauty, kitchen, automotive, and self-improvement.
Proceeds from the sale of NSI enabled National Media to acquire a leading European infomercial producer, Quantum Marketing International, Inc. Through Quantum, National Media began to expand its presence quickly in Europe. In July 1991 it signed an exclusive three-year agreement with the Super Channel, the largest pan-European entertainment satellite network. The contract allowed National Media to air 30-minute infomercials for three years beginning August 15, 1991, reaching nearly 40 million homes in more than 23 countries.
Also in 1991 the company hired several key administrative and marketing executives. These included Mark P. Hershhorn, who was appointed president and Chief Operating Officer. He joined National Media from Nutri/System, where he was senior vice-president with worldwide responsibilities. David J. Carman was appointed president and CEO of Quantum Television Marketing Ltd., National Media's international subsidiary, which would be headquartered in London, England.
Pivotal Year for National Media: 1991--92
Fiscal 1992 was a pivotal year for National Media, the first in which the company embarked on a new global vision. Its strategy was to position itself as the world's premier marketer of consumer products via direct response television. Central to the company's marketing strategy was the use of infomercials to create and heighten brand awareness. Outside factors contributing to National Media's success were the growth of satellite-driven cable television and the potential of international consumerism. The emerging economies of Europe were creating new purchasing power where none had existed before.
The company achieved a vertically integrated structure by supervising the manufacture of the products it sold as well as producing the majority of its programming. It added staff to increase the number of new product introductions. The company also owned its own fulfillment operation, giving it greater control over customer service. Product quality and customer service initiatives required higher levels of inventory and, as a result, more working capital. Consequently, the company did not declare a dividend this year and suspended future dividends indefinitely. As a result of special charges, it reported a loss of $4.9 million on revenues of $102.2 million for fiscal 1992.
Revenue Increases in Fiscal 1993
National Media reported net income of $6.3 million on revenue of $142 million for fiscal 1993. During the year the company began to implement a multichannel marketing approach. It was airing almost 600 hours of programming a week through satellite and cable television as well as local television. In addition to infomercials, National Media was using print ads, catalogs, direct mail, and point-of-purchase advertising to expose its products to a larger audience. The company was also forming strategic alliances with major direct marketers and retailers.
To fuel its multichannel marketing strategy, National Media expanded its product categories to include higher-priced items. It was also forming strategic ventures with established manufacturers and marketers to achieve more product diversification.
Internationally, National Media operated through strategic alliances with local partners in 20 different countries in Europe, the Middle East, Australia, and New Zealand. Technological developments allowed National Media to simultaneously broadcast its infomercials in four different languages: English, French, German, and Dutch. The company controlled over 200 hours a week of airtime on major European networks.
In December 1993 National Media settled a lawsuit filed earlier in the year by Positive Response Television, Inc., its business partner in the "Amazing Discoveries" infomercial series. The series spokesperson, Mark Levey, was chairman and CEO of the privately held Positive Response Television. The two companies would continue their partnership, with National Media owning the trademark "Amazing Discoveries" and Positive Response acting as exclusive producer of the infomercial series. According to the Wall Street Journal, the "Amazing Discoveries" infomercials, which aired late at night and offered "amazing" car waxes, hair-styling kits, and exercise videos, were responsible for approximately half of National Media's revenues.
For fiscal 1994, National Media enjoyed higher revenues of $167.9 million, but it reported a net loss of $8.7 million. The company recorded unusual charges of $9 million, mostly related to litigation costs. Based on the volume of outstanding litigation and other perceived weaknesses in the business, the company's independent auditors issued an opinion questioning whether the company could continue as a going concern.
Hostile Takeover Bid in 1994
Minneapolis, Minnesota-based ValueVision International Inc., the country's third largest home shopping network, began an unsolicited $10 per share stock and cash takeover bid for National Media in January 1994 valued at $117.5 million. When National Media's board of directors rejected the bid as "financially inadequate," ValueVision announced it would launch a $134 million two-step tender offer for National Media at $10.50 per share. This second offer was also rejected. In March 1994 the Wall Street Journal carried reports that National Media had accepted a $150 million offer from ValueVision to purchase its stock at $11.50 a share. However, ValueVision terminated the offer, causing National Media to file a lawsuit against ValueVision seeking $20 million in damages. National Media and ValueVision subsequently reached a settlement in April 1995, whereby the two companies would enter into a three-year agreement.
Meanwhile, National Media continued to expand internationally. In February 1994 the company entered into an agreement with Japanese trading firm Mitsui & Co. to launch a televised home shopping business in Japan. Under the agreement, National Media would supply infomercial programming, and Mitsui would handle the broadcasting and marketing. The deal was updated in early 1995 and provided for infomercial programming to 33 million Japanese households on more than 21 television stations. According to Fortune magazine, Mitsui was the world's largest diversified service company. In May 1994 National Media expanded its programming into Brazil and Taiwan through its subsidiary Quantum International.
Financial Challenges in the Mid-1990s
In June 1994 the company announced it needed a capital infusion to remain stable. During the year it benefited from capital investments made by its management team and outside investors. In October 1994 selected officers, board members, and other private investors made an equity investment of $1.3 million. The same month a $5 million loan was closed with an affiliate of Safeguard Scientific. In December, Safeguard Scientific, along with certain affiliates and other individual investors, purchased $5.4 million of convertible preferred stock.
National Media controlled or owned more than $65 million in media time worldwide, or more than 1,600 half-hours of media time per week, reaching over 190 million homes in North America and 49 countries around the world. Internationally, revenues from Quantum International were $80.4 million for fiscal 1995, an increase of 75 percent over the previous year. The company could take products that had matured out of the American infomercial market into international markets. Also helping international revenues was the fact that media costs were lower than in the United States. National Media estimated it accounted for an 18 percent market share of the $1 billion international infomercial business.
On April 15, 1995, management was restructured to facilitate global expansion. Brian McAdams was re-elected chairman of the board and chairman of the executive committee. Mark P. Hershhorn, who had rejoined the company a month earlier, became president and CEO of National Media as well as chairman of the board of Quantum International Ltd. David J. Carman became president and CEO of Quantum International Ltd. In order to be able to empower and trust key managers throughout the world, an office of the chairman was created to provide authority for National Media's management team. The office of the chairman, which consisted of four key executives, provided for "efficient strategic flow between the board of directors and National Media's management team."
For fiscal 1995 National Media reported a net loss of $672,000 on revenues of $168.7 million. Unusual charges for the year were down to $5.5 million, again related to litigation costs to resolve a variety of disputes.
Fiscal 1996, ended March 31, was the best year in the company's history, with net income of $16.6 million on revenues of $292.6 million. International revenues were $151 million, up from $80 million in fiscal 1995. During the year National Media added 70 million international television households, 10 million of them in Japan alone.
Through a tax-free exchange of common stock, National Media acquired West Coast infomercial producer DirectAmerica Corporation, which became a wholly owned subsidiary, on October 24, 1995. The stock represented about 2.6 percent of National Media's outstanding common stock.
In November 1995 National Media announced it would become partners in a joint venture with Graff Pay-Per-View Inc. to be called the Dragnet, an infomercial network that would broadcast half-hour infomercials 24 hours a day. Dragnet was set to launch December 1, 1995, with National Media supplying the infomercial programming.
Acquisitions Leave Company Financially Drained, 1996--97
In late 1995 National Media announced it had agreed to acquire Positive Response Television, Inc. The acquisition was completed in May 1996 for 1.8 million shares of common stock valued at $25.9 million. It was part of a series of acquisitions that left the company in financial straits in 1997.
For the first six months of fiscal 1997, the company's net income rose 66 percent to $9.5 million, up from $5.7 million the previous year, due in part to strong growth in emerging markets. About half of the company's sales came from foreign consumers. National Media announced it would begin airing infomercials in South Africa and other nearby African countries through an arrangement with Johannesburg-based retailer Verimark Holdings Pty. National Media would provide the infomercial programming, while Verimark would manage the venture and secure air time on broadcast networks.
National Media, which had recently entered the Indonesia market, was able to enter emerging markets with a limited amount of risk. The company simply aired its library of shows, so it did not have to make a significant new investment in programming. In March 1997 National Media announced further international expansion, extending its infomercial programming to 67 million households in Russia, Belarus, and the Ukraine.
During 1996 National Media's stock price plummeted from $20 in January to $5 in December. In 1995 the company's stock had hit a high near $21, up from around $3 in the fall of 1994. As National Media was about to announce operating losses for its fourth quarter and fiscal year 1997 ending March 31, the company appointed a new CEO, Robert N. Verratti, who was also named president and a director. He replaced Mark P. Hershhorn, who resigned. Verratti was viewed as a "turnaround specialist"; he had previously been special advisor for acquisitions to the chairman and CEO of Safeguard Scientific, Inc., which owned about 15 percent of National Media.
Most of National Media's 1997 losses were from its U.S. operations, where media costs were relatively high and there was more pressure to produce new infomercials. For fiscal 1997, National Media reported a net loss of $45.7 million on revenues of $358.2 million. Its fourth-quarter loss was $49.3 million, compared with a year-earlier profit of $5.9 million for the quarter. As a result, National Media was in technical violation of certain loan agreements which could affect its ability to remain solvent.
National Media was in financial straits after its recent acquisitions resulted in extensive losses. The company was reported to be in talks with at least two possible acquirers or merger partners, and it laid off 85 employees--most of them at Positive Response Television--representing 19 percent of its workforce. It appeared that National Media had committed too much money to air time, but did not have any new sensational products to compare with the highly successful Ab Roller Plus, which generated $100 million a year at its peak in 1996. Because of patent infringement litigation, National Media had stopped selling the abdominal exerciser. The company hired the investment firm Lehman Brothers in April to explore a variety of strategic alternatives.
In September 1997 National Media completed the sale of $20 million worth of preferred stock and common stock warrants to two institutional investors. Under an exemption granted by the New York Stock Exchange, National Media was able to sell the stock and warrants without shareholder approval, which is normally required when a transaction may increase outstanding shares by 20 percent or more. The infusion of money from the institutional investors helped relieve the company's financial distress. By August 1997, the company's stock was trading in the $5 range, well below its 52-week high of $17.125 a share.
In January 1998 National Media and ValueVision International disclosed a merger plan that called for the formation of a new company. However, dissident shareholders at ValueVision's annual meeting in April 1998 threatened to exercise "dissenter's rights," which would require them to be paid in cash rather than in stock under Minnesota law, where ValueVision was based. As the two companies tried to renegotiate their agreement, a June 1 expiration date passed, and the merger plan was mutually terminated. In June 1998 National Media's stock was selling for around $1.25 a share. For fiscal 1998 National Media reported net revenues of $278.5 million and a net loss of $56.8 million.
New Investor Group Takes Control: 1998
With National Media shares trading at around $1 or $2 a share, Stephen Lehman and his investor group saw the opportunity to gain control of the company, improve its core business, and expand into the world of electronic commerce. Lehman was formerly president and CEO of Premiere Radio Networks. The investor group included Jacor Communications, the parent company of Premiere Radio Networks and owner, operator, or representative of more than 200 radio stations. It also included several executives from media companies such as Broadcast.com, Capstar Broadcasting Corporation, Group W Productions, Westwood One Radio Networks, and Warner Brothers Records. Radio and television personality Casey Kasem was also part of the investment group.
In July 1998 it was announced that Lehman's investor group planned to invest $30 million in National Media. At the time of the announcement Lehman's group took over control of National Media's board of directors and Lehman became acting CEO. He brought in a new management team to leverage National Media's infomercial business to establish a presence on the World Wide Web and become a major player in the world of electronic commerce.
The transaction was approved at National Media's annual shareholder meeting in October 1998. Following the meeting, Lehman was installed as National Media's CEO and chairman of the board. He articulated the company's new direction in his address to the stockholders. "This company is uniquely well-positioned to become a leader in the fast-growing E-Commerce/Internet marketplace," he said. "We have an incredible opportunity through our $100 million in annual television media; our millions of customer contacts; our international infrastructure; and our ability to deliver live, taped, and on-demand programming over the Internet. We are a leader in electronic direct-marketing, and we will use this creativity and expertise to drive consumers to our sites and make their visits rewarding."
In November 1998 National Media expanded into electronic commerce by launching three full-time video programming channels over the Internet at www.broadcast.com/shopping. The company's alliance with Broadcast.com created the first 24-hour-per-day live and on-demand streaming video shopping channels on the Internet as well as a link from Broadcast.com's web site. As part of its electronic commerce initiative, National Media expanded its strategic relationship with Mitsui to jointly pursue electronic commerce opportunities in Japan as well as throughout Asia and Australia.
National Media relocated its corporate headquarters from Philadelphia, Pennsylvania, to the Los Angeles metropolitan area in November 1998. The move consolidated the company's offices in Philadelphia and Encino, California. Lehman said that the move was "clearly symbolic of the change in the company's direction as we expand into the world of electronic commerce." The move was also cited as a cost-cutting measure. The new headquarters was located at the site of Quantum Television, National Media's creative and marketing center, in Encino.
National Media debuted its new web site, Everything4Less.com (or www.E4L.com), the weekend before Thanksgiving in time for the biggest shopping season of the year. Over Thanksgiving weekend a national television advertising campaign featuring "TV moms" Shirley Jones ("The Partridge Family"), Florence Henderson ("The Brady Bunch"), and Marion Ross ("Happy Days") was launched. By January 1, 1999, National Media expected to insert Everything4Less commercials in all of the infomercials that it broadcast each week.
Everything4Less was an electronic commerce web site and catalog-based shopping service. Online shoppers could choose from more than 800,000 products at guaranteed low prices, including hundreds of major brands. National Media's revenues from Everything4Less were based on membership fees rather than on the products that were sold. According to company statements, more than 25,000 people signed up for Everything4Less memberships before December 1, 1998.
As the company looked to the new millennium, it was focusing its efforts on four areas. One was to improve and expand its core infomercial business. This was the company's main source of revenue. Second, cost-cutting efforts were made a top priority to reduce expenses. Third, it was seeking to reduce the cyclical nature of its infomercial business by strengthening its continuity programs, whereby customers would order products on a continuing basis throughout the year. The fourth and perhaps most promising area was the Internet and electronic commerce. As Lehman told the stockholders in October 1998, "I believe this [electronic commerce] is such a crucial and potentially rewarding area that I have made this my personal number one goal."
Principal Subsidiaries: Quantum North America, Inc.; National Media Marketing Corporation; Quantum International Japan Co., Ltd.; DirectAmerica Corporation; Positive Response Television, Inc.; Quantum Productions AG (Germany); Suzanne Paul Holdings Pty Ltd.; Quantum Far East Ltd.; Quantum Polska Sp.Z.o.o.; Quantum Asia.