<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 1-6715
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e4L, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
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Delaware 13-2658741
----------------------------------------- ----------------------------
(State or Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
15821 Ventura Boulevard, 5th Floor
Los Angeles, California 91436
------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (818) 461-6400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
There were 32,659,688 issued and outstanding shares of the registrant's common
stock, par value $.01 per share, at July 31, 1999, net of 866,544 shares of
common stock held in treasury as of such date.
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e4L, INC.
---------
INDEX
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Facing Sheet ....................................................................................................1
Index............................................................................................................2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 1999 and March 31, 1999......................3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1999 and 1998....................................................4
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 1999 and 1998................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................................10
Part II. Other Information
Item 1. Legal Proceedings ............................................................................20
Item 6. Exhibits and Reports on Form 8-K..............................................................20
Signatures......................................................................................................21
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
e4L, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS (Unaudited) (See Note 1)
Current assets:
Cash and cash equivalents ..................................................... $ 1,873 $ 7,574
Restricted cash ............................................................... 1,537 524
Accounts receivable, net ...................................................... 32,854 35,681
Inventories, net .............................................................. 18,701 16,229
Prepaid media.................................................................. 429 836
Deferred costs ................................................................ 6,399 3,329
Prepaid expenses and other current assets ..................................... 1,160 1,050
Deferred income taxes ......................................................... 2,595 2,595
------------ ------------
Total current assets ........................................................ 65,548 67,818
Property and equipment, net ...................................................... 7,687 8,119
Excess of cost over net assets of acquired businesses and
other intangible assets, net .................................................. 21,380 21,737
Other assets ..................................................................... 1,179 1,127
------------ ------------
Total assets .................................................................. $ 95,794 $ 98,801
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 16,468 $ 18,174
Accrued expenses .............................................................. 24,095 25,754
Deferred revenue............................................................... 1,028 511
Income taxes payable .......................................................... 657 476
Deferred income taxes ......................................................... 1,552 1,552
Current portion of long-term debt and capital lease obligations................ 3,186 8,119
------------ ------------
Total current liabilities ................................................... 46,986 54,586
Long-term debt and capital lease obligations ..................................... 10,133 135
Deferred income taxes ............................................................ 1,043 1,043
Other liabilities ................................................................ 4,913 5,290
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 10,000,000 shares; issued
5,000 shares Series B convertible preferred stock at June 30, 1999 and
March 31, 1999; 18,244 and 18,618 shares Series D convertible preferred
stock at June 30, 1999 and March 31, 1999, respectively; and 20,000 shares
Series E convertible preferred stock at June 30, 1999 and March 31, 1999 1 1
Common stock, $0.01 par value; authorized 150,000,000 shares; issued
33,312,361 and 32,347,284 shares, at June 30, 1999 and March 31, 1999,
respectively................................................................ 333 323
Additional paid-in capital .................................................... 184,641 183,540
Retained deficit............................................................... (135,371) (129,489)
------------ ------------
49,604 54,375
Treasury stock, 866,544 and 874,044 shares, at cost at June 30, 1999 and
March 31, 1999, respectively................................................. (6,644) (6,701)
Note receivable, officer....................................................... (545) (545)
Foreign currency translation adjustment ....................................... (9,696) (9,382)
------------ ------------
Total shareholders' equity .................................................. 32,719 37,747
------------ ------------
Total liabilities and shareholders' equity .................................. $ 95,794 $ 98,801
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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e4L, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenue:
Products ........................................... $ 67,105 $ 81,745
Commission and other ............................... 1,117 1,422
------------ -----------
Net revenue ......................................... 68,222 83,167
Operating costs and expenses:
Media .............................................. 25,326 28,471
Product and other direct ........................... 39,508 46,299
Selling, general and administrative ................ 7,615 10,059
Depreciation, amortization and non-cash compensation 1,288 1,408
Unusual charges .................................... -- (1,199)
------------ -----------
Total operating costs and expenses ................... 73,737 85,038
------------ -----------
Loss from operations ................................. (5,515) (1,871)
Interest expense ..................................... 282 1,246
------------ -----------
Loss before income taxes ............................. (5,797) (3,117)
Income taxes ......................................... 85 125
------------ -----------
Net loss ............................................. $ (5,882) $ (3,242)
============ ===========
Net loss per common share - basic and diluted ........ $ (0.22) $ (0.11)
============ ===========
Weighted average number of common shares outstanding:
Basic and diluted .................................. 32,003 25,424
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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e4L, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $ (5,882) $ (3,242)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 1,131 1,408
Non-cash compensation ................................................ 157 (1,875)
Changes in operating assets and liabilities, net ...................... (6,392) (1,922)
Other ................................................................. (882) 941
------------ -----------
Net cash used in operating activities ..................................... (11,868) (4,690)
Cash flows from investing activities:
Additions to property and equipment ..................................... (378) (123)
------------ -----------
Net cash used in investing activities ..................................... (378) (123)
Cash flows from financing activities:
Proceeds from long-term debt ............................................ 57,850 1,500
Payments on long-term debt, notes payable and capital lease obligations . (52,785) (1,198)
Exercise of stock options and warrants .................................. 1,499 --
Loan to officer ......................................................... -- (545)
------------ -----------
Net cash provided by (used in) financing activities ....................... 6,564 (243)
Effect of exchange rate changes on cash and cash equivalents .............. (19) 289
------------ -----------
Net decrease in cash and cash equivalents ........................... (5,701) (4,767)
Cash and cash equivalents, beginning of period ............................ 7,574 17,915
------------ -----------
Cash and cash equivalents, end of period .................................. $ 1,873 $ 13,148
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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e4L, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of e4L, Inc. and subsidiaries ("e4L") have been prepared in
accordance with generally accepted accounting principles for interim
financial information, and in accordance with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, the financial statements do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of e4L's management, all adjustments (consisting of normal, recurring
items and accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
year ending March 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in e4L's
annual report on Form 10-K for the year ended March 31, 1999.
The balance sheet at March 31, 1999 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required under generally accepted accounting
principles for complete financial statement presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of derivatives are accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133 is
effective for e4L in fiscal year 2001. The adoption of SFAS No. 133 is not
expected to have a material impact on the financial position or results of
operations of e4L.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. PER SHARE AMOUNTS
Net loss per share has been computed in accordance with FASB's
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). In computing per share amounts, accrued dividends and the
effect of beneficial conversion features on preferred stock have been
added/deducted from net loss to arrive at net loss applicable to common
shareholders.
The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss .............................................. $ (5,882) $ (3,242)
Effect of beneficial conversion features and accrued
dividends on convertible preferred stock ........... (1,309) 438(1)
-------- --------
Adjusted net loss basic and diluted earnings per share $ (7,191) $ (2,804)
======== ========
Weighted average shares outstanding - basic and diluted 32,003 25,424
======== ========
Basic and diluted earnings per share .................. $ (0.22) $ (0.11)
======== ========
</TABLE>
(1) Represents reversal of previously recorded accrued premium on Series C
Preferred Stock of $690, net of the current premium earned on Series D
Preferred Stock of $252.
6
<PAGE>
Convertible preferred stock convertible into 30,408,630 and 19,356,472
shares of common stock, and stock options and warrants to purchase
common stock exercisable into 16,877,197 and 11,582,525 shares of common
stock for each of the three month periods ended June 30, 1999 and 1998,
respectively, were not included in the computation of diluted earnings
per share because the losses incurred by e4L during each of these
periods would cause such securities to be antidilutive.
3. INCOME TAXES
e4L recorded income tax expense of $85,000 and $125,000 for the
three months ended June 30, 1999 and 1998, respectively, due to tax
liabilities associated with its Asian operations. Income tax benefits on
United States and certain foreign losses and loss carryovers have been fully
reserved until realized.
4. COMPREHENSIVE INCOME
Comprehensive income for the three month periods ended June 30, 1999
and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Net loss...................................................... $(5,882) $(3,242)
Foreign currency translation adjustments...................... (314) (1,129)
------------- --------------
Total comprehensive income (loss)............................. $(6,196) $(4,371)
============= ==============
</TABLE>
5. SEGMENT AND GEOGRAPHIC INFORMATION
e4L operates in one industry segment and is engaged in the direct
marketing of consumer products principally through television. e4L evaluates
performance and allocates resources based on several factors, of which the
primary financial measure is EBITDA, or earnings before interest, taxes,
depreciation and amortization. e4L also excludes unusual charges and non-cash
compensation in computing EBITDA. Accounting policies of the business
segments are the same as those described in the summary of significant
accounting policies. Business segment assets are the owned assets used in
each geographic area. The production and corporate components of EBITDA
include the costs incurred to produce shows, develop product and general and
administrative expense. EBITDA does not reflect an allocation of production
or corporate costs to the geographic segments, which is consistent with
management's review of its financial performance. Production and corporate
assets primarily consist of cash, property and equipment, and intangible
assets.
Information with respect to e4L's operations by geographic area, is set forth
below (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Net revenue:
United States and Canada........................................... $ 43,584 $ 49,188
Europe............................................................. 7,272 17,103
Asia............................................................... 17,351 15,953
Other.............................................................. - 839
Production and corporate........................................... 15 84
---------------- ---------------
Total.............................................................. $ 68,222 $ 83,167
================ ===============
EBITDA:
United States and Canada........................................... $ (1,426) $ 3,993
Europe............................................................. 224 516
Asia............................................................... 1,798 (358)
Other.............................................................. - 37
Production and corporate........................................... (4,823) (5,850)
---------------- ---------------
Total.............................................................. $ (4,227) $ (1,662)
================ ===============
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
------------- --------------
<S> <C> <C>
Identifiable assets:
United States and Canada .......................................................... $ 51,961 $ 45,357
Europe ............................................................................ 7,119 11,654
Asia .............................................................................. 26,183 30,317
Other ............................................................................. -- 261
Production and corporate .......................................................... 10,531 11,212
------------- --------------
Total ............................................................................. $ 95,794 $ 98,801
============= ==============
The reconciliation of EBITDA to loss before income taxes is set forth below (in
thousands):
EBITDA ............................................................................ $ (4,227) $ (1,662)
Less:
Depreciation, amortization and non-cash compensation ................................ 1,288 1,408
Unusual charges ..................................................................... -- (1,199)
Interest expense .................................................................... 282 1,246
------------- --------------
Loss before income taxes .......................................................... $ (5,797) $ (3,117)
============= ==============
</TABLE>
6. INVESTMENT IN BUYITNOW.COM, LLC
On June 7, 1999, e4L consummated an agreement with BuyItNow, Inc.
("BuyItNow") pursuant to which e4L and BuyItNow formed a new global
electronic commerce entity, BuyItNow.com LLC ("BuyItNow LLC"). BuyItNow LLC
was formed through the contribution by BuyItNow of substantially all of its
assets and liabilities, and the contribution by e4L of, among other things,
e4L's (i.) on-line business of "As Seen on TV" products, and (ii.) a
commitment to promote BuyItNow LLC within e4L programs for a three year term.
Concurrent with the consummation of this agreement, e4L issued 500,000
warrants to purchase e4L common stock to BuyItNow. Concurrent with the
closing, Clear Channel Communications, Inc. acquired an approximate 4.0%
equity interest in BuyItNow LLC in exchange for a contribution of $12.5
million of radio broadcast media. On June 25, 1999, Xoom.com, Inc. and
Snap.com, Inc. collectively acquired an approximate 5.0% equity interest in
BuyItNow LLC for a contribution of $15.0 million of Internet media. In
exchange for its contributions to BuyItNow LLC, and issuance of the warrants
to BuyItNow, e4L currently owns an approximate 48.0% equity interest of
BuyItNow LLC. The tangible assets and liabilities contributed by e4L to
BuyItNow LLC were not material. No value has been attributed to the
commitment to promote the new entity at this time.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
In March 1999, Intervention, Inc., a California non-profit
corporation ("Intervention"), filed a complaint for false advertising against
e4L in the Superior Court for Contra Costa County, alleging that e4L
overstated the effectiveness of one of its home exercise products in one of
its direct response television programs. e4L is vigorously contesting the
action. At this time, e4L cannot predict the outcome of this matter; however,
even if Intervention were to succeed on all of its claims, e4L does not
believe that such results would have a material adverse impact on e4L's
results of operations or financial condition.
In February 1999, e4L filed a complaint against The Media Group,
Inc. ("TMG"), a direct marketing company located in Stamford, Connecticut,
for trademark infringement, declaratory relief, breach of written contract,
breach of oral contract, and other causes of action in the United States
District Court for the Central District of California. e4L's complaint
alleges, among other things, that TMG failed to pay to e4L for its share of
profits under a distribution agreement, infringed upon e4L's trademarks and
intellectual property, and failed to pay for media airtime purchased by e4L
on TMG's behalf. Shortly thereafter, TMG filed a separate complaint in the
Pennsylvania Court of Common Pleas for the County of Philadelphia claiming
that e4L allegedly breached a purported oral agreement to provide TMG with a
right of first refusal to market e4L's products with a retail sale price of
less than $99.00. TMG's state court action was removed to the United States
District Court for the Eastern
8
<PAGE>
District of Pennsylvania. A written order is still pending. e4L is vigorously
prosecuting its claims against TMG and contesting TMG's claims in both
actions. At this time, e4L cannot predict the outcome of this matter;
however, even if TMG were to succeed on all of its claims, e4L does not
believe that such results would have a material adverse impact on e4L's
results of operations or financial condition.
REGULATORY MATTERS
During the year ended March 31, 1997, in accordance with applicable
regulation, e4L notified the Consumer Products Safety Commission ("CPSC") of
breakages that were occurring with respect to its Fitness Strider product.
e4L also notified the CPSC of its replacement of certain parts of the product
with upgraded components. The CPSC reviewed e4L's test results in order to
assess the adequacy of e4L's upgraded components. The CPSC also undertook its
own testing of the product and, in November 1997, informed e4L that the CPSC
compliance staff had made a preliminary determination that the Fitness
Strider product and upgraded components present a substantial product hazard,
as defined under applicable law. e4L and the CPSC staff are discussing
voluntary action to address the CPSC's concerns, including replacement of the
affected components. At present, management of e4L does not anticipate that
any action agreed upon, or action required by the CPSC, will have a material
adverse impact on e4L's financial condition or results of operations. e4L has
also been contacted by Australian consumer protection regulatory authorities
regarding the safety and fitness of the Fitness Strider product and another
exercise product marketed only in Australia and New Zealand. At the present
time, management cannot predict whether the outcome of these matters
regarding the Fitness Strider and other exercise products will have a
material adverse impact on e4L's financial condition or result of operations.
OTHER MATTERS
e4L, in the normal course of business, is or has been a party to
litigation relating to trademark and copyright infringement, product
liability, contract-related disputes, and other matters. e4L has also, from
time to time, received correspondence from persons purporting to be
shareholders alleging various claims. It is e4L's policy to vigorously defend
all such claims and enforce its rights in these matters. e4L does not believe
any of these matters either individually or in the aggregate, will have a
material adverse effect on e4L's results of operations or financial condition.
9
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CERTAIN FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS CERTAIN "FORWARD-LOOKING" STATEMENTS REGARDING POTENTIAL
FUTURE EVENTS AND DEVELOPMENTS AFFECTING THE BUSINESS OF e4L. SUCH STATEMENTS
RELATE TO, AMONG OTHER THINGS, (I.) FUTURE OPERATIONS OF e4L, INCLUDING THE
IMPACT OF ANY YEAR 2000 ISSUES ENCOUNTERED BY e4L; (II.) THE DEVELOPMENT OF
NEW PRODUCTS, PRODUCT SALES AND MEDIA, INCLUDING ELECTRONIC COMMERCE; (III.)
COMPETITION FOR CUSTOMERS FOR e4L'S PRODUCTS AND MEMBERSHIP SERVICES; (IV.)
THE UNCERTAINTY OF DEVELOPING OR OBTAINING RIGHTS TO NEW PRODUCTS THAT WILL
BE ACCEPTED BY CONSUMERS; (V.) THE TIMING OF THE INTRODUCTION OF NEW PRODUCTS
INTO THE MARKET; (VI.) THE LIMITED MARKET LIFE OF e4L'S PRODUCTS; AND (VII.)
OTHER STATEMENTS ABOUT e4L OR THE DIRECT RESPONSE TELEVISION, MEMBERSHIP
SERVICES OR ELECTRONIC COMMERCE INDUSTRIES.
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 e4L AND ITS BOARD OF DIRECTORS AND OFFICERS WITH RESPECT TO
NUMEROUS ASPECTS OF e4L AND ITS BUSINESS. e4L'S ABILITY TO PREDICT RESULTS OR
THE EFFECT OF ANY PENDING EVENTS ON e4L'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 OUTSIDE OF THE UNITED STATES; THE UNCERTAINTY OF DEVELOPING OR
OBTAINING RIGHTS TO NEW PRODUCTS THAT WILL BE ACCEPTED BY THE MARKET; THE
LIMITED MARKET LIFE OF e4L'S PRODUCTS; AND THE EFFECTS OF GOVERNMENT
REGULATION. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
e4L has historically been engaged in the direct marketing of
consumer products, primarily through direct response television programming
(also know as "infomercials") and more recently through wholesale/retail
distribution and electronic commerce on a global basis. In the United States,
e4L has been dependent on a limited number of successful products to generate
a significant portion of its net revenue. e4L's new strategies for future
periods are designed to reduce the risk associated with relying on a limited
number of successful products for a disproportionate amount of its revenue,
expand e4L's leverage of its media expenditures and tailor e4L's operations
in the United States to more efficiently deal with the cyclical nature of
e4L's business.
A key strategy for e4L's future is the expansion of its global
direct response, wholesale/retail, membership services, continuity and
electronic commerce businesses, including the branding of its
"Everything4Less" membership shopping club, expansion of BuyItNow LLC, and
expanded deployment of continuity and wholesale/retail marketing strategies.
e4L will do this by leveraging its substantial media expenditures, first in
the United States and then internationally (i.e., using its media primarily
as an advertising vehicle to build brand awareness). This strategy
encompasses the more effective utilization and leveraging of its global
marketing presence and media access, the continued development and marketing
of innovative products to enhance its existing programs, the increased
emphasis on developing other means of revenue generation such as membership
services, as well as wholesale/retail, expanded up-sell programs, continuity
programs and customer list rental. e4L's direct response television
programming is a vehicle used by it to generate a customer base which will be
utilized in various other revenue generating initiatives as opposed to the
television direct response sale historically being the end result or merely a
one-time sale. e4L takes advantage of product awareness created by its
television direct response programming globally and also extends the sales
life of its products through alternative distribution channels. These
channels include wholesale/retail arrangements, continuity sales programs and
Internet marketing, among others.
e4L's net revenue varies throughout the year. e4L's revenue has
historically been highest in its third and fourth fiscal quarters and lowest
in its first and second fiscal quarters due to seasonal fluctuations in the
number of television viewers. These seasonal trends have been and may
continue to be affected by the timing and success of new product offerings,
expansion of e4L's wholesale/retail and continuity programs, and the
potential growth in e4L's electronic commerce and membership services
businesses.
In the discussion and analysis that follows, e4L discusses "EBITDA
(Deficit)" and "EBITDA (Deficit) Margin." EBITDA consists of net income (or
loss) before interest, provision for income taxes, depreciation and
amortization, non-cash compensation and unusual charges. EBITDA Margin
represents EBITDA as a percentage of net revenue. EBITDA does not represent
cash flows as defined by generally accepted accounting principles and does
not necessarily indicate that cash flows are sufficient to fund all of e4L's
liquidity requirements. EBITDA should not be
10
<PAGE>
considered in isolation or as a substitute for net income, cash from
operating activities or other measures of liquidity determined in accordance
with generally accepted accounting principles. e4L believes that EBITDA is a
measure of financial performance widely used in the media and
Internet/electronic commerce industries, and is useful to investors as a
measure of e4L's financial performance.
RESULTS OF OPERATIONS
The following table sets forth operating data of e4L as a percentage of net
revenue for the periods indicated below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
------ ------
<S> <C> <C>
Net revenue ............................................ 100.0% 100.0%
Operating costs and expenses:
Media .............................................. 37.1 34.2
Product and other direct ........................... 57.9 55.7
Selling, general and administrative ................ 11.2 12.1
Depreciation, amortization and non-cash compensation 1.9 1.7
Unusual charges .................................... -- (1.4)
------ ------
Total operating costs and expenses ................. 108.1 102.2
------ ------
Loss from operations ................................... (8.1) (2.2)
Interest expense ....................................... 0.4 1.5
------ ------
Loss before income taxes ............................... (8.5) (3.7)
Income taxes ........................................... 0.1 0.2
------ ------
Net loss ............................................... (8.6%) (3.9%)
====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET REVENUE
Net revenue was $68.2 million for the three months ended June 30,
1999, as compared to $83.2 million for the three months ended June 30, 1998,
a decrease of $15.0 million or 18.0%.
United States net revenue for the three months ended June 30, 1999
was $43.6 million as compared to $49.3 million for the three months ended
June 30, 1998, a decrease of $5.7 million or 11.5%. The decrease was
primarily attributable to a fewer number of new television programs and
products distributed during the current period, and delays in the receipt and
subsequent shipment of a new product principally due to unanticipated
manufacturing delays. At June 30, 1999, e4L's backlog of product shipments
was $14.9 million, an increase of $5.9 million as compared to June 30, 1998.
In addition, the decrease in United States net revenue was attributable to
increased product return rates from e4L's product mix, which included a
greater portion of intellectual properties (i.e., paper and tape products)
than the comparable period in fiscal year 1999, and the current period
including 30-day deferred payment offers which historically carry a higher
return rate. The three month period ended June 30, 1999 included four shows
with net revenue of $5.0 million or greater, including two shows each of
which accounted for over 15% of the total United States net revenue. The
comparable three month period in fiscal year 1999 included five shows with
net revenue of $5.0 million or greater and four shows each of which accounted
for over 15% of total United States net revenue.
International net revenue for the three months ended June 30, 1999
was $24.6 million as compared to $33.9 million for the three months ended
June 30, 1998, a decrease of $9.3 million or 27.4%. The decrease was
primarily attributable to a $9.8 million or 57.5% decline in e4L's European
net revenue. This decrease was due to the loss of two media contracts during
the fourth quarter of fiscal year 1999. Asian net revenue increased
approximately $1.4 million or 8.8% for the three months ended June 30, 1999
as compared to the three months ended June 30, 1998. This increase was
attributable to a 46.6% increase in Japanese net revenue due to the increased
emphasis on wholesale/retail sales in that market and favorable currency
fluctuations. This increase in Japanese net revenue more than offset lower
net revenue in other Asian markets resulting from e4L's decision to close down
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operations in and/or convert certain markets to third party licensee
arrangements during the second half of fiscal year 1999.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses were $73.7 million for the three
months ended June 30, 1999 as compared to $85.0 million for the three months
ended June 30, 1998, a decrease of $11.3 million or 13.3%. The three months
ended June 30, 1998 included a net reversal of unusual charges of
approximately ($1.2) million. Excluding the unusual charges, operating costs
and expenses were $86.2 million for the three months ended June 30, 1998. The
decrease was principally due to the 18.0% decrease in net revenue offset, in
part, by certain fixed operating costs. The decrease in operating costs is
more fully described below.
MEDIA
Media purchases were $25.3 million for the three months ended June
30, 1999 as compared to $28.5 million for the three months ended June 30,
1998, a decrease of $3.2 million or 11.0%. e4L's worldwide ratio of media
purchases to net revenue increased to 37.1% for the three months ended June
30, 1999 as compared to 34.2% for the three months ended June 30, 1998. The
increase in media purchases as a percentage of net revenue was primarily
attributable to the increased proportion of United States net revenue to
foreign net revenue, which United States revenue carries greater media costs.
United States net revenue represented 63.9% of total net revenue for the
three months ended June 30, 1999 as compared to 59.2% for the three months
ended June 30, 1998. In addition, the ratio increased as a result of a
decrease in the efficiency of United States media due to a lower number of
new programs introduced during the current period. The percentage of foreign
media to foreign net revenue declined during the three months ended June 30,
1999 as compared to the three months ended June 30, 1998 in both the European
and Asian markets. During the current period the European ratio of media
purchases to net revenue benefited from reduced costs associated with the
write-down of the Eutelstat Satellite contract in the third quarter of fiscal
year 1999, and the Asian ratio benefited from increased retail revenue which
carries no direct media cost.
PRODUCT AND OTHER DIRECT COSTS
Product and other direct costs are principally variable and
semi-variable, and consist of product costs, fulfillment, program production,
commissions and royalties, in-bound telemarketing, credit card processing
fees, warehousing and profit participation payments. Product and other direct
costs were $39.5 million for the three months ended June 30, 1999 as compared
to $46.3 million for the three months ended June 30, 1998, a decrease of $6.8
million or 14.7%. The decrease was primarily attributable to the 18.0%
decrease in net revenue. As a percentage of net revenue, product and other
direct costs were 57.9% for the three months ended June 30, 1999 and 55.7%
for the three months ended June 30, 1998.
While, in the aggregate, product and other direct costs as a
percentage of net revenue increased during the three months ended June 30,
1999 as compared to the three months ended June 30, 1998, United States
product and other direct costs increased as a percentage of net revenue and
foreign product and other direct costs decreased as a percentage of net
revenue. The increase in United States direct costs as a percentage of net
revenue during the current period was attributable to increased product
return rates from a greater portion of intellectual properties in the product
mix than the comparable period in fiscal year 1999 and the current period
including 30-day deferred payment offers. The decrease in foreign product and
other direct costs as a percentage of net revenue was primarily attributable
to the improved performance in e4L's Asian business.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense was $7.6 million for the
three months ended June 30, 1999 as compared to $10.1 million for the three
months ended June 30, 1998, a decrease of $2.5 million or 24.3%. The decrease
was attributable to e4L's continued cost reduction efforts including its
restructuring during the second half of fiscal year 1999. Selling, general
and administrative expense as a percentage of net revenue decreased from
12.1% for the three months ended June 30, 1998 to 11.2% for the three months
ended June 30, 1999 due to the impact of the cost reductions.
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DEPRECIATION, AMORTIZATION AND NON-CASH COMPENSATION
Depreciation, amortization and non-cash compensation were $1.3
million for the three months ended June 30, 1999 as compared to $1.4 million
for the three months ended June 30, 1998, a decrease of $0.1 million or 8.5%.
The decrease was attributable to lower depreciation and amortization from the
write-off of a portion of goodwill associated with e4L's Australia and New
Zealand subsidiaries and the write-off and/or acceleration of depreciation of
certain property and equipment from e4L's restructuring efforts in fiscal
year 1999. The current three month period includes $157,000 of non-cash
compensation relating to warrants issued in connection with the issuance of
Series E convertible preferred stock during fiscal year 1999.
UNUSUAL CHARGES
Results for the three months ended June 30, 1998 included the
write-off of capitalized costs of $676,000 related to the termination of a
proposed merger of e4L with ValueVision International, Inc. ("ValueVision").
In addition, e4L recorded $1.9 million in compensation expense during the
fiscal year ended March 31, 1998 in connection with 750,000 stock options
issued to e4L's chief executive officer and two other officers based upon
certain triggering events occurring by June 30, 1998. This charge was
reversed during the three months ended June 30, 1998 as no such triggering
event had occurred. No unusual charges were recorded during the three months
ended June 30, 1999.
INTEREST EXPENSE
Interest expense was $282,000 for the three months ended June 30,
1999, as compared to $1.2 million for the three months ended June 30, 1998, a
decrease of $0.9 million. This decrease was attributable to a decrease in
e4L's average outstanding indebtedness from approximately $31.8 million
during the three months ended June 30, 1998 to approximately $12.0 million
during the three months ended June 30, 1999, resulting from retirement of
$21.5 million in outstanding indebtedness to its principal lender in October
1998 and repayment of $10.0 million of outstanding indebtedness to
ValueVision in December 1998.
INCOME TAXES
e4L recorded income tax expense of $85,000 for the three months
ended June 30, 1999 attributable to certain of its Asian operations. Income
tax benefits have not been recorded during the respective periods for United
States and certain foreign losses, and such benefits have been fully reserved
for. These benefits will be recorded when realized, reducing the effective
tax rate on future United States and certain foreign earnings, if any.
EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND AMORTIZATION DEFICIT
(EBITDA)
EBITDA deficit was $4.2 million for the three months ended June 30,
1999 as compared to an EBITDA deficit exclusive of unusual charges of $1.7
million for the three months ended June 30, 1998, a decrease of $2.5 million
or 154.3%. EBITDA deficit margin, exclusive of unusual charges, was (6.2)%
and (2.0)% during the three month periods ended June 30, 1999 and 1998,
respectively.
NET LOSS
e4L incurred a net loss of $5.9 million for the three months ended
June 30, 1999. The net loss of $3.2 million for the June 30, 1998 quarter
includes unusual charges of $(1.2) million. Excluding unusual charges, the
net loss was $4.4 million for the three months ended June 30, 1998, an
increase of $1.5 million or 32.4%. This increased loss was a result of the
decrease in net revenue and increase in media and product and other direct
costs as a percentage of net revenue which more than offset the decrease in
selling, general and administrative expenses.
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LIQUIDITY AND CAPITAL RESOURCES, JUNE 30, 1999 COMPARED TO MARCH 31, 1999
e4L's working capital was $18.6 million at June 30, 1999 as compared
to $13.2 million at March 31, 1999, an increase of $5.3 million. This
improvement was due to a portion of e4L's outstanding revolving credit
facility being classified as long-term at June 30, 1999 as compared to
current at March 31, 1999 based on current cash flow projections. e4L met its
current period cash requirements primarily through the use of existing cash
and funding under its credit facility. Operating activities for the three
months ended June 30, 1999, resulted in a use of cash of $11.9 million. e4L's
cash flow from operations during the three months ended June 30, 1999, was
adversely impacted by the net loss of approximately $5.9 million.
Consolidated accounts receivable decreased by $2.8 million, or 7.9%,
which decrease was attributable to lower United States accounts receivable of
$1.6 million and European accounts receivable of $l.4 million, offset by an
increase in other worldwide receivables of $0.2 million. United States
accounts receivable decreased due to a decline in time payment receivables
attributable to the decrease in net revenue. European accounts receivable
decreased due to lower sales volume. Consolidated inventory increased $2.5
million or 15.2%. This increase was attributable to a $3.6 million increase
in the United States inventory as a result of a $1.2 million increase in
inventory in-transit. This increase in the United States inventory balance
was offset by lower foreign inventory balances from the continued efforts to
reduce such inventory levels.
Deferred costs increased from $3.3 million at March 31, 1999 to $6.4
million at June 30, 1999. This increase was attributable to the increase in
the United States backlog of product shipments from $6.4 million at March 31,
1999 to $14.9 million at June 30, 1999. The increased backlog of product
shipments was attributable to e4L's Ab Rocker product caused by unanticipated
manufacturing delays.
In December 1998, e4L entered into a three-year credit agreement
with a senior lender (the "Credit Agreement"). The Credit Agreement provides
for a revolving credit facility with a maximum commitment of $20.0 million,
of which up to $7.5 million may be utilized for letters of credit. Borrowings
under the Credit Agreement are limited to a borrowing base consisting of
certain eligible United States accounts receivable and inventory. Outstanding
borrowings under the Credit Agreement bear interest, at the option of e4L, at
the Prime rate plus one-quarter percent or the London Interbank Offered Rate
(LIBOR) plus three percent, however, in no event shall the interest rate
charged be less than seven percent per annum. A commitment fee of one-quarter
percent per annum is paid on the unused portion of the Credit Agreement.
At June 30 1999, e4L had $15.0 million in total availability under
this facility of which $12.4 million was outstanding as principal borrowings
and $1.4 million in outstanding letters of credit. At July 31, 1999, e4L had
$20.0 million in total availability under this facility of which $18.4
million was outstanding as principal borrowings.
e4L is currently exploring the possibility of raising additional
capital through the sale of equity securities and/or issuance of subordinated
debt. It is anticipated that these funds will be utilized, for among other
things, working capital purposes, pay down existing debt and corporate
acquisitions. The issuance of additional equity securities could have a
dilutive effect to existing shareholders.
e4L's foreign revenue is subject to foreign exchange risk. To the
extent e4L incurs expenses in local currency that is based upon locally
denominated sales volume (order fulfillment and media costs), this exposure
is reduced. e4L monitors exchange rate and/or forward contracts when and
where appropriate. At June 30, 1999, e4L had outstanding forward contracts to
hedge its Japanese Yen position in the amount of $2.6 million. These
contracts mature through September 1999. e4L recognized an immaterial gain on
forward contracts during the period ended June 30, 1999. Subsequent to June
30, 1999, e4L has entered into an additional $3.0 million in forward
contracts for the Japanese yen maturing through January 2000. In the long
term, e4L has the ability to change the selling price of its products to a
certain extent in order to react to major currency fluctuations, which may
reduce a portion of the risk associated with local currency fluctuations.
However, the significant currency devaluation and the economic downturn being
experienced in certain foreign regions can have an adverse impact on e4L's
operating results and cash flows in fiscal year 2000. Currently, e4L's major
foreign currencies are the European Economic Union's Euro, Japanese yen,
Australian dollar and New Zealand dollar, each of which has been subject to
recent fluctuations.
e4L's cash position continues to be pressured by the losses incurred
during each of its prior two fiscal years and during the three months ended
June 30, 1999. While e4L's credit facility has helped it's liquidity
position, e4L needs to continue to implement certain plans and actions
designed to rebuild its business, including the continued introduction of
successful new shows and products, more successfully leverage its media, and
to return e4L to profitability in order to improve its liquidity position. No
assurances can be given that any of these actions will be successful.
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YEAR 2000 IMPLICATIONS
e4L has reviewed the implications of Year 2000 (e.g., "Y2K")
compliance and is presently finalizing the process to ensure that e4L's
information systems and software applications will manage dates beyond
December 31, 1999. e4L believes that it has allocated adequate resources for
this purpose and those planned software upgrades, which are underway and in
the normal course of business, will address e4L's internal Year 2000 needs.
While e4L expects that efforts on the part of current employees of e4L will
be required to monitor Year 2000 issues, no assurances can be given that
these efforts will be successful. e4L does not expect the cost of addressing
any Year 2000 issue to be a material event or uncertainty that would have a
material, adverse effect on future results of operations or financial
condition.
The Year 2000 issue developed because most computer systems and
programs were designed to record years (e.g. "1998") as two-digit fields
(e.g. "98"). When the year 2000 begins, these systems may interpret "00" as
the year 1900 and may stop processing date-related computations or process
them incorrectly. To prevent this occurrence, e4L has corrected its computer
systems and programs, correcting the problems and testing the results. e4L on
or before December 31, 1999 must achieve Year 2000 compliance. Also, due to
the nature of e4L's time payment offers within its direct response television
programs, certain systems currently refer to dates beyond December 31, 1999
and, therefore, require earlier compliance.
e4L, as with most direct marketing and electronic commerce
companies, is heavily dependent upon computer systems for all phases of its
operations. For this reason, it is aggressively addressing the Year 2000
issue to mitigate the effect on software performance. During late fiscal year
1998, e4L commenced a comprehensive effort to identify and correct the Year
2000 programming issues. By early fiscal year 1999 e4L had identified all
potential Year 2000 hardware and software issues within both its mainframe
processing systems and personal computers worldwide. e4L initiated a project
to address all of the identified Year 2000 issues within its systems,
utilizing both internal and external resources.
During early fiscal year 1999, e4L formed a Year 2000 Compliance
Task Force to oversee the project, address all related business issues, and
facilitate communication with significant suppliers and service providers.
The project was divided into the following phases: (i.) identification and
inventorying of all systems and software with potential Year 2000 problems;
(ii.) evaluation of scope of Year 2000 issues and assignment of priorities to
each item based upon its importance in e4L's operations; (iii.) rectification
of Year 2000 issues in accordance with assigned priorities by correction,
upgrade, replacement, or retirement; and (iv.) testing for and validation of
Year 2000 compliance. Because e4L uses a variety of systems, internally
developed and third party provided software, and embedded chip equipment,
depending on the business function and location, various aspects of e4L's
Year 2000 efforts are in different phases and are proceeding parallel.
e4L's operations are also dependent on the Year 2000 readiness of
third parties that do business with e4L. In particular, e4L's systems
interact with automated clearing-houses to handle the transfer of cash
relating to the collection of e4L's receivables. e4L is also dependent on
third-party suppliers of such infrastructure elements as, but not limited to,
telephone services, electric power, and water. In addition, e4L depends upon
various vendors that manufacture its products, are responsible for in-bound
telemarketing, and fulfill customer orders.
e4L has identified and initiated formal communications with key
suppliers, service providers and merchandise vendors to determine the extent
to which e4L will be vulnerable to such parties' failures to address and
resolve their Year 2000 issues. In addition, e4L now requires its vendors to
provide representations and warranties in all new contracts that there are no
Year 2000 issues that could impact vendor performance, and e4L also seeks to
obtain indemnification for damages it may suffer due to a vendor's failure to
comply with Year 2000 requirements. Although e4L is not aware of any known
third party problem that will not be corrected, e4L has limited information
concerning the Year 2000 readiness of third parties.
e4L estimates that its systems will be Year 2000 compliant by
September 30, 1999. Aggregate costs for work related to e4L's entire Year
2000 efforts are anticipated to range from approximately $1.0 to $1.2
million. Operating costs related to the Year 2000 compliance project will be
incurred over several quarters and have been expensed as incurred. e4L has
incurred approximately $0.8 million and $0.2 million of this total expense
during the year ended March 31, 1999 and three months ended June 30, 1999,
respectively, in connection with its Year 2000 compliance efforts.
e4L expects to implement the changes necessary to address the Year
2000 issue for systems and equipment used within e4L. e4L presently believes
that, with modifications to existing software, conversions to new software,
and appropriate replacement of equipment, the Year 2000 issue is not likely
to pose significant operational problems. However, if unforeseen difficulties
arise or such modification, conversions and replacements are not completed in
a
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timely manner, or if e4L's vendors' or suppliers' systems are not modified to
become Year 2000 compliant, the Year 2000 issue may have a material impact on
the results of operations and financial condition of e4L. e4L is presently
unable to assess the likelihood that it will experience significant
operational problems due to unresolved Year 2000 problems of third parties.
e4L's estimates of the costs of achieving Year 2000 compliance and the date
by which Year 2000 compliance will be achieved are based on management's best
estimates. These estimates are derived using numerous assumptions about
future events including the continued availability of resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific factors that might cause such differences
include, but are not limited to, the availability and cost of personnel
trained in Year 2000 issues, the ability to locate, correct, and test all
relevant computer codes, the success achieved by e4L's suppliers in reaching
Year 2000 readiness, the timely availability of necessary replacement
equipment, and similar uncertainties.
e4L believes the most likely worst-case scenarios that it might
confront with respect to the Year 2000 issues have to do with the possible
failure in one or more geographic regions of third party systems over which
e4L has no control, such as, but not limited to, power and telephone service,
and vendors that supply manufactured products and services. e4L has developed
a Year 2000 contingency plan.
FACTORS THAT MAY EFFECT FUTURE PERFORMANCE
RECENT LOSSES; CASH FLOW
e4L incurred significant losses in four of its last five fiscal
years. e4L also reported a net loss of approximately $43.6 million for fiscal
year 1999 and a loss of $5.9 million during the three months ended June 30,
1999. Because of e4L's historical financial condition as well as other
unfavorable conditions, e4L developed a business plan and has begun
implementing new initiatives designed to increase net revenue, reduce costs
and return it to profitability. In addition e4L has entered into a new three
year $20.0 million credit facility. However, if the business plan does not
adequately address the circumstances and situations which resulted in e4L's
poor performance, e4L would be required to seek alternative forms of
financing, the availability of which is uncertain, or be forced to go out of
business.
NATURE OF THE DIRECT RESPONSE MARKETING AND ELECTRONIC COMMERCE INDUSTRIES.
e4L experiences extreme competition for products, customers and
media access in the direct response marketing and electronic commerce
industries. Accordingly, to be successful, e4L must:
Accurately predict consumer needs, market conditions and
competition;
Introduce successful products;
Produce compelling direct response television programs;
Acquire appropriate amounts of media time;
Manage its media time effectively;
Fulfill customer orders timely and efficiently;
Provide courteous and informative customer service;
Maintain adequate vendor relationships and terms;
Enhance successful products to generate additional sales;
Expand the methods used to sell products;
Expand in existing geographic markets; and
Integrate acquired companies and businesses efficiently.
e4L's recent operating results were primarily caused by delays in
product introductions, a lack of successful products, failure to adequately
leverage its global spending and deteriorating economic conditions in the
Asian (includes South Pacific Rim) market. e4L actively seeks out new
products, new sources of products and alternative distribution channels,
including retail and the Internet. e4L cannot be sure that inventors and
product manufacturers will select it to market their products. Significant
delays in product introductions or a lack of successful products could
prevent e4L from selling adequate amounts of its products and otherwise have
a negative effect on e4L's business.
DEPENDENCE UPON FOREIGN SALES
e4L markets products to consumers in over 70 countries. In recent
years e4L has derived approximately half of its net revenue from sales to
customers outside the United States and Canada. e4L's largest international
markets are Europe and Asia, primarily Japan, Australia and New Zealand. The
economic downturn in the Asian region has had and, for the foreseeable
future, is expected to have, an adverse effect on e4L. e4L's international
expansion has increased its working capital requirements due to the
additional time required to deliver products abroad and receive payment from
foreign countries.
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While e4L's foreign operations have the advantage of airing direct
response television programs that have already proven successful in the
United States, as well as successful direct response television programs
produced by other infomercial companies with limited media access and
distribution capabilities, there can be no assurance that e4L's foreign
operations will continue to generate similar revenue or operate
profitability. Competition in the international marketplace is increasing
rapidly. In addition, e4L is subject to many risks associated with doing
business abroad including: (i.) adverse fluctuations in currency exchange
rates; (ii.) transportation delays and interruptions; (iii.) political and
economic disruptions; (iv.) the imposition of tariffs and import and export
controls; and (v.) increased customs or local regulations.
The occurrence of any of these risks could have an adverse effect on
e4L's business.
ENTRANCE INTO NEW MARKETS
As e4L enters new markets, it is faced with the uncertainty of never
having done business in that country's particular commercial, political and
social environment. Accordingly, despite e4L's best efforts, likelihood of
success is unpredictable for reasons particular to each new market. It is
also possible that, despite e4L's apparently successful entrance into a new
market, some unforeseen circumstance could arise which would limit e4L's
ability to continue to do business, operate profitability or to expand in
that new market.
DEPENDENCE ON SUCCESSFUL PRODUCTS; UNPREDICTABLE MARKET LIFE; INVENTORY
MANAGEMENT AND PRODUCT RETURNS
e4L is dependent on its continuing ability to introduce successful
new products to supplement or replace existing products as they mature
through their product life cycles. e4L's five most successful products each
year typically account for a substantial amount of e4L's annual net revenue.
Generally, e4L's successful products change from year to year. Accordingly,
e4L's future results of operations depend on its ability to introduce
successful products consistently and to capture the full revenue potential of
each product at all stages of consumer marketing and distribution channel's
during the product's life cycle.
In addition to a supply of successful new products, e4L's revenue
and results of operations depend on a positive customer response to its
direct response television programming, the effective management of product
inventory and other factors. Customer response to e4L's programming depends
on many variables, including the appeal of the products being marketed, the
effectiveness of the infomercial, the availability of competing products and
the timing and frequency of airings. There can be no assurance that e4L's
programming will receive market acceptance.
e4L must have an adequate supply of inventory to meet consumer
demand. Most of e4L's products have a limited market life, so it is extremely
important that e4L generate maximum sales during this time period. If
production delays or shortages, poor inventory management or inadequate cash
flow prevent e4L from maintaining sufficient inventory, e4L could lose
potential product sales, which may never be recouped. In addition,
unanticipated obsolescence of a product may occur or problems may arise
regarding regulatory, intellectual property, product liability or other
issues which adversely affect future sales of a product even though e4L may
still hold a large quantity of the product in inventory. Accordingly, e4L's
ability to maintain systems and procedures to effectively manage its
inventory is of critical importance to e4L's cash flow and results of
operations.
The average United States and international market life of a product
is less than two years. Generally, products generate their most significant
revenue in their first year of sales. In addition, e4L must adapt to market
conditions and competition as well as other factors which may cut short a
product's life cycle and adversely affect e4L's results of operations.
e4L offers a limited money-back guarantee on all of its products if
the customer is not fully satisfied. Accordingly, e4L's results of operations
may be adversely affected by product returns under e4L's guarantee, its
product warranty or otherwise. Although e4L establishes reserves against
product returns which it believes are adequate based on product mix and
returns history, there can be no assurance that e4L will not experience
unexpectedly high levels of product returns which exceed the reserves for
that product. If product returns do exceed reserves, e4L's results of
operations would be adversely affected.
DEPENDENCE ON THIRD PARTY MANUFACTURERS AND SERVICE PROVIDERS
Substantially all of e4L's products are manufactured by other United
States and foreign companies. In addition, e4L utilizes other companies to
fulfill orders placed for e4L's products and to provide telemarketing
services. If e4L's suppliers are unable, either temporarily or permanently,
to deliver products to e4L in time to fulfill sales orders,
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it could have a material adverse effect on e4L's results of operations.
Moreover, because the time from the initial approval of a product by e4L's
product development department until the first sale of a product must be
short, e4L must be able to cause its product manufacturers to quickly produce
high-quality, reasonable priced products for e4L to sell. However, because
e4L's primary product manufacturers are foreign companies which require
longer lead times for products, any delay in production or delivery would
adversely affect sales of the product and e4L's results of operations. In
addition, utilization of foreign manufacturers further exposes e4L to the
general risks of doing business abroad.
DEPENDENCE OF MEDIA ACCESS; EFFECTIVE MANAGEMENT OF MEDIA TIME
e4L must have access to media time to televise its direct response
programming on cable and broadcast networks, network affiliates and local
stations. e4L purchases a significant amount of media time from cable
television and satellite networks, which assemble programming for
transmission to cable system operators. If demand for airtime increases,
cable system operators and broadcasters may limit the amount of time
available for these broadcasts. Larger multiple cable system operators have
begun selling `dark' time, (i.e., the hours during which a network does not
broadcast its own programming) to third parties which may cause prices for
such media to rise. Significant increases in the cost of media time or
significant decreases in e4L's access to media could adversely impact e4L. In
addition, periodic world events may limit e4L's access to air time and reduce
the number of persons viewing e4L's direct response programming in one or
more markets, which would adversely impact e4L for these periods.
Recently, international media suppliers have begun to negotiate for
fixed media rates and minimum revenue guarantees, each of which increase
e4L's cost of media and risk. In addition to acquiring adequate amounts of
media time, e4L's business depends on its ability to manage efficiently its
acquisitions of media time, by analyzing the need for, and making purchases
of, long term media and spot media. e4L must also properly allocate its
available airtime among its current library of direct response television
programs. Whenever e4L makes advance purchases and commitments to purchase
media time, it must manage the media time effectively, because the failure to
do so could negatively affect e4L's business. If e4L cannot use all of the
media time it has acquired, it attempts to sell its excess media time to
others. However, there can be no assurance that e4L will be able to use or
sell its excess media time.
In April 1998, e4L began leasing a twenty-four hour transponder on
the Eutelstat Satellite, which broadcasts across Europe. e4L has incurred
significant start-up costs in connection with the transponder lease. If e4L
is unable to use effectively or sell the remaining transponder media time,
e4L's future operations could be adversely affected. During the year ended
March 31, 1999, e4L classified a portion of this contract as unfavorable and
recorded a $5.3 million unusual charge.
LITIGATION AND REGULATORY ACTIONS
There have been many lawsuits against companies in the direct
marketing industry. In recent years, e4L has been involved in significant
legal proceedings and regulatory actions by the FTC and CPSC, which have
resulted in significant costs and charges to e4L. In addition, e4L, its
wholly owned subsidiary, Positive Response Television, Inc. ("PRTV"), and
PRTV's chief executive officer, are subject to FTC consent orders which
require them to submit periodic compliance reports to the FTC. Any additional
FTC or CPSC violations or significant new litigation could have an adverse
effect on e4L's business.
PRODUCT LIABILITY CLAIMS
Products sold by e4L may expose it to potential liability from
damages claims by users of the products. In certain instances, e4L is able to
obtain contractual indemnification rights against these liabilities from the
manufacturers of the products. In addition, e4L generally requires its
manufacturers to carry product liability insurance. However, e4L cannot be
certain that manufacturers will maintain this insurance or that their
coverage will be adequate to cover all claims. In addition, e4L cannot be
certain that it will be able to maintain its insurance coverage or obtain
additional coverage on acceptable terms, or that its insurance will provide
adequate coverage against all claims.
18
<PAGE>
COMPETITION
e4L competes directly with companies which generate sales from
direct response television programs and other direct marketing and electronic
commerce companies. e4L also competes with a large number of consumer product
retailers, many of which have substantially greater financial, marketing and
other resources than e4L. Some of these retailers have recently begun, or
indicated that they intend to begin, selling products through direct response
marketing methods, including sales in various e-commerce channels, such as
via the Internet. e4L also competes with companies that make imitations of
e4L's products at substantially lower prices, which may be sold in department
stores, pharmacies, general merchandise stores and through magazines,
newspapers, direct mail advertising, catalogs and the Internet.
DEPENDENCE UPON KEY PERSONNEL
e4L's executive officers have substantial experience and expertise
in direct response sales and marketing, electronic commerce and media. In
particular, e4L is highly dependent on certain of its employees responsible
for product development and production of direct response television
programs. If any of these individuals leave e4L, e4L's business could be
negatively affected.
YEAR 2000 ISSUES
The operation of e4L's business is dependent on its management
information systems, computer hardware, software programs and operating
systems. Computer technology is used in several key areas of e4L's business,
including merchandise purchasing, inventory management, pricing, sales,
shipping and financial reporting, as well as in various administrative
functions. e4L has been evaluating its computer technology to identify
potential Year 2000 compliance problems and has an implementation process
with respect thereto. It is anticipated that modification or replacement of
some of e4L's computer technology will be necessary to enable e4L's computer
to recognize the Year 2000. e4L does not expect that the costs associated
with achieving Year 2000 compliance will have a significant effect on its
business. In addition, e4L is also dependent on third-party suppliers and
vendors and will be vulnerable to such party's failures to address and
resolve their Year 2000 issues. While e4L is not aware of any known third
party problems that will not be corrected, e4L has limited information
concerning the Year 2000 readiness of third parties. If management is
incorrect, Year 2000 problems could have a negative effect on e4L and its
business.
SEASONALITY
e4L's revenue vary throughout the year. e4L's revenue have
historically been highest in its third and fourth fiscal quarters and lower
in its first and second fiscal quarters due to fluctuations in the number of
television viewers. These seasonal trends have been and may continue to be
affected by the timing and success of new product offerings and the potential
growth in e4L's electronic commerce businesses.
CONVERTIBLE SECURITIES; SHARES FOR FUTURE SALE
Sales of a substantial number of shares of e4L's common stock in the
public market could adversely affect the market price of e4L's common stock
outstanding. There are currently approximately 32.7 million shares of e4L
Common Stock outstanding, nearly all of which are freely tradable. In
addition, approximately 47.1 million shares of e4L Common Stock are currently
reserved for issuance upon the exercise of outstanding options and warrants
and the conversion of convertible preferred stock. For example, approximately
17.0 million shares of Common Stock will be issued to holders of e4L's Series
D Preferred Stock (based on a conversion price of $1.073125 per share) and
approximately 13.3 million shares of Common Stock will be issued to holders
of e4L's Series E Convertible Preferred Stock (based on a conversion price of
$1.50 per share).
19
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The information contained in Note 7, "Commitments and Contingencies," to the
unaudited Condensed Consolidated Financial Statements in Part I of this
report is incorporated herein by reference. All of the matters referred to in
Note 7 have been the subject of disclosure in e4L's previous reports on Form
10-Q and/or Form 10-K.
e4L, in the normal course of business, is a party to litigation relating to
trademark patent and copyright infringement, product liability,
contract-related disputes, and other actions. It is e4L's policy to
vigorously defend all such claims and enforce its rights in these areas. e4L
does not believe any of these actions either individually or in the
aggregate, will have a material adverse effect on e4L's results of operations
or financial condition.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein or incorporated by reference
herein:
NONE
(b) e4L filed the following Current Reports on Form 8-K during the three month
period ended June 30, 1999:
e4L filed a Current Report on Form 8-K, dated June 8, 1999 reporting, under
Item 5, the execution and consummation of a definitive agreement with
BuyItNow, Inc. and Clear Channel Communications, Inc. to jointly form
BuyItNow.com LLC, a new company dedicated to global electronic commerce.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
e4L, Inc.
Date: August 16, 1999 /s/ Stephen C. Lehman
---------------------------------------
Stephen C. Lehman
Chief Executive Officer and
Chairman of the Board of Directors
Date: August 16, 1999 /s/ Daniel M. Yukelson
---------------------------------------
Daniel M. Yukelson
Executive Vice President/Finance
and Chief Financial Officer, and
Secretary
21
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