<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 September 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
e4L, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-2658741
- --------------------------------------------------------------------------------
(State or Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 34,556,301 issued and outstanding shares of the registrant's common
stock, par value $.01 per share, at October 31, 1999, net of 865,208 shares of
common stock held in treasury as of such date.
<PAGE>
e4L, Inc.
---------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
Facing Sheet.................................................................................. 1
Index......................................................................................... 2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 1999 and March 31,
1999....................................................................... 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1999 and 1998............................ 4
Condensed Consolidated Statements of Operations for the
six months ended September 30, 1999 and 1998.............................. 5
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1999 and 1998.............................. 6
Notes to Unaudited Condensed Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 12
Part II. Other Information
Item 1. Legal Proceedings........................................................... 25
Item 6. Exhibits and Reports on Form 8-K............................................ 25
Signatures.................................................................................... 26
</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>
September 30, March 31,
1999 1999
------------- ---------
ASSETS (Unaudited) (See Note 1)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 3,245 $ 7,574
Restricted cash...................................................................... 3,081 524
Accounts receivable, net............................................................. 32,377 35,681
Inventories, net..................................................................... 20,801 16,229
Prepaid media........................................................................ 1,210 836
Deferred costs....................................................................... 3,114 3,329
Prepaid expenses and other current assets............................................ 2,209 1,050
Deferred income taxes................................................................ 2,595 2,595
--------- ---------
Total current assets............................................................... 68,632 67,818
Property and equipment, net............................................................ 7,065 8,119
Excess of cost over net assets of acquired businesses and
other intangible assets, net......................................................... 21,023 21,737
Other assets........................................................................... 1,833 1,127
--------- ---------
Total assets......................................................................... $ 98,553 $ 98,801
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable..................................................................... $ 14,679 $ 18,174
Accrued expenses..................................................................... 22,281 25,754
Deferred revenue..................................................................... 3,445 511
Income taxes payable................................................................. 577 476
Deferred income taxes................................................................ 1,552 1,552
Current portion of long-term debt and capital lease obligations...................... 1,592 8,119
--------- ---------
Total current liabilities.......................................................... 44,126 54,586
Long-term debt and capital lease obligations........................................... 15,364 135
Deferred income taxes.................................................................. 1,043 1,043
Other liabilities...................................................................... 4,556 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 September 30, and March 31, 1999; 18,160 and
18,618 shares Series D convertible preferred stock at September 30, and March 31,
1999, respectively; 20,000 shares Series E convertible
preferred stock at September 30, and March 31, 1999; and 5,000 shares Series F
convertible preferred stock at September 30, 1999.................................. 1 1
Common stock, $0.01 par value; authorized 150,000,000 shares; issued
33,642,616 and 32,347,284 shares, at September 30, and March 31, 1999,
respectively....................................................................... 336 323
Additional paid-in capital........................................................... 190,211 183,540
Retained deficit..................................................................... (140,227) (129,489)
--------- ---------
50,321 54,375
Treasury stock, 865,208 and 874,044 shares, at cost at September 30, and
March 31, 1999, respectively....................................................... (6,633) (6,701)
Note receivable, officer............................................................. (545) (545)
Foreign currency translation adjustment.............................................. (9,679) (9,382)
--------- ---------
Total shareholders' equity......................................................... 33,464 37,747
--------- ---------
Total liabilities and shareholders' equity......................................... $ 98,553 $ 98,801
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Revenue:
Products...................................................... $71,075 $85,159
Commission and other.......................................... 2,515 1,493
------- -------
Net revenue...................................................... 73,590 86,652
Operating costs and expenses:
Media......................................................... 24,699 30,664
Product and other direct...................................... 42,903 51,959
Selling, general and administrative........................... 7,852 10,206
Depreciation, amortization and non-cash compensation.......... 1,302 1,419
------- -------
Total operating costs and expenses............................... 76,756 94,248
------- -------
Loss from operations (3,166) (7,596)
Other:
Loss on equity investment in BuyItNow.com LLC................. 1,173 -
Interest expense.............................................. 432 1,256
------- -------
Loss before income taxes......................................... (4,771) (8,852)
Income taxes..................................................... 85 105
------- -------
Net loss......................................................... $(4,856) $(8,957)
======= =======
Net loss per common share - basic and diluted.................... $ (0.19) $ (0.37)
======= =======
Weighted average number of common shares outstanding -
basic and diluted............................................. 32,677 25,470
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended September 30,
------------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Products....................................................... $138,180 $166,904
Commission and other........................................... 3,632 2,915
-------- --------
Net revenue...................................................... 141,812 169,819
Operating costs and expenses:
Media.......................................................... 50,025 59,135
Product and other direct....................................... 82,411 98,258
Selling, general and administrative............................ 15,467 20,265
Depreciation, amortization and non-cash compensation........... 2,590 2,827
Unusual charges................................................ - (1,199)
-------- --------
Total operating costs and expenses............................... 150,493 179,286
-------- --------
Loss from operations............................................. (8,681) (9,467)
Other:...........................................................
Loss on equity investment in BuyItNow.com LLC.................. 1,173 -
Interest expense............................................... 714 2,502
-------- --------
Loss before income taxes......................................... (10,568) (11,969)
Income taxes..................................................... 170 230
-------- --------
Net loss......................................................... $(10,738) $(12,199)
======== ========
Net loss per common share - basic and diluted.................... $ (0.42) $ (0.48)
======== ========
Weighted average number of common shares outstanding -
basic and diluted.............................................. 32,340 25,443
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended September 30,
-----------------------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................. $ (10,738) $(12,199)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 2,276 2,827
Non-cash loss on equity investment in BuyItNow.com LLC.............. 650 -
Non-cash compensation............................................... 314 (1,875)
Changes in operating assets and liabilities, net.................... (9,098) 10,022
Other............................................................... (1,367) 899
--------- --------
Net cash used in operating activities................................. (17,963) (326)
Cash flows from investing activities:
Additions to property and equipment................................. (502) (300)
--------- --------
Net cash used in investing activities................................. (502) (300)
Cash flows from financing activities:
Proceeds from long-term debt........................................ 111,947 1,500
Payments on long-term debt, notes payable and capital lease
obligations........................................................ (103,245) (1,431)
Net proceeds from issuance of preferred stock....................... 4,519 -
Exercise of stock options and warrants.............................. 1,939 -
Loan to officer..................................................... - (545)
--------- --------
Net cash provided by (used in) financing activities................... 15,160 (476)
Effect of exchange rate changes on cash and cash equivalents.......... (1,024) (297)
--------- --------
Net decrease in cash and cash equivalents......................... (4,329) (1,399)
Cash and cash equivalents, beginning of period........................ 7,574 17,915
--------- --------
Cash and cash equivalents, end of period.............................. $ 3,245 $ 16,516
========= ========
</TABLE>
See notes to unaudited condensed consolidated financial statement
6
<PAGE>
e4L
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 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. Results of operations for the three month
and six month periods ended September 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):
7
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------- ----------------------
1999 1998 1999 1998
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Net loss................................................. $(4,856) $(8,957) $(10,738) $(12,199)
Effect of beneficial conversion features and accrued
dividends on convertible preferred stock............... (1,430) (424) (2,739) (1) 13
-------- ------- -------- --------
Adjusted net loss-basic and diluted earnings per share... $(6,286) $(9,381) $(13,477) $(12,186)
======== ======= ======== ========
Weighted average shares outstanding - basic and diluted 32,677 25,470 32,340 25,443
======== ======= ======== ========
Basic and diluted earnings per share (2) ................ $ (0.19) $ (0.37) $ (0.42) $ (0.48)
======== ======= ======== ========
</TABLE>
(1) Represents reversal of previously recorded accrued premium on Series C
Preferred Stock of $690,000 net of the current premium earned on Series D
Preferred Stock of $677,000.
(2) Convertible preferred stock convertible into 31,391,364 and 19,746,472
shares of common stock, and stock options and warrants to purchase common
stock exercisable into 16,650,016 and 14,472,317 shares of common stock for
each of the six month periods ended September 30, 1999 and 1998,
respectively, were not included in the computation of diluted earnings per
share because the effect of such securities would be antidilutive during
each of these periods.
3. Income Taxes
e4L recorded income tax expense of $170,000 and $230,000 for the six months
ended September 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 and six month periods ended September
30, 1999 and 1998 is as follows (in thousands) :
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- ---------------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net Loss.......................................... $(4,856) $(8,957) $(10,738) $(12,199)
Foreign currency translation adjustments.......... 17 (813) (297) (1,942)
-------- ------- -------- --------
Total comprehensive loss.......................... $(4,839) $(9,770) $(11,035) $(14,141)
======== ======= ======== ========
</TABLE>
5. Segment and Geographic Information
e4L operates in one industry segment and is engaged in the direct marketing
of consumer products principally through direct response 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, non-cash compensation charges and other income
(expense). e4L also excludes unusual charges in computing EBITDA. Accounting
policies of e4L's geographic business segments are the same as those described
in the summary of significant accounting policies set forth in the notes to
e4L's audited financial statements in e4L's Form 10-K with respect to its fiscal
year ended March 31, 1999. Business segment assets consist of the owned assets
used in each geographic area. The production and corporate components of EBITDA
include the costs incurred to produce direct response television programming,
product development and general and administrative expense. EBITDA does not
reflect an allocation of production or corporate costs to the geographic
business segments, which is consistent with management's review of each
segment's financial performance. Production and corporate assets primarily
consist of cash, property and equipment, and intangible assets.
8
<PAGE>
Information with respect to e4L's operations by geographic area, is set
forth below (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------- ----------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
United States............................................. $51,313 $55,747 $ 94,896 $104,935
Europe.................................................... 6,608 15,911 13,880 33,014
Asia...................................................... 15,651 14,428 33,002 30,381
Other..................................................... - 486 - 1,325
Production and corporate.................................. 18 80 34 164
------- ------- -------- --------
Total..................................................... $73,590 $86,652 $141,812 $169,819
======= ======= ======== ========
EBITDA:
United States............................................. $ 648 $ 3,512 $ (778) $ 7,505
Europe.................................................... (138) (309) 86 207
Asia...................................................... 1,862 (2,209) 3,660 (2,567)
Other..................................................... - (476) - (439)
Production and corporate.................................. (4,236) (6,695) (9,059) (12,545)
------- ------- -------- ---------
Total..................................................... $(1,864) $(6,177) $ (6,091) $ (7,839)
======= ======= ======== =========
<CAPTION>
September 30, March 31,
1999 1999
------------ --------
<S> <C> <C>
Identifiable assets:
United States............................................ $54,025 $45,357
Europe................................................... 7,363 11,654
Asia..................................................... 25,944 30,317
Other.................................................... - 261
Production and corporate................................. 11,221 11,212
------- -------
Total.................................................... $98,553 $98,801
======= =======
</TABLE>
The reconciliation of EBITDA to loss before income taxes is set forth below
(in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
EBITDA................................................... $(1,864) $(6,177) $ (6,091) $ (7,839)
Less:
Depreciation, amortization and non-cash compensation 1,302 1,419 2,590 2,827
Unusual charges.......................................... - - - (1,199)
Loss on equity investment in BuyItNow.com, LLC........... 1,173 - 1,173 -
Interest expense......................................... 432 1,256 714 2,502
------- ------- -------- --------
Loss before income taxes................................. $(4,771) $(8,852) $(10,568) $(11,969)
======= ======= ======== ========
</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 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. In addition, 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 and outdoor media. On June 25,
1999, Xoom.com, Inc. and Snap.com, Inc. collectively acquired an approximate
5.0% equity interest in Buyitnow LLC in exchange for their 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 in Buyitnow
9
<PAGE>
LLC. The tangible assets and liabilities contributed by e4L to Buyitnow LLC were
not material.
e4L has accounted for its investment in Buyitnow LLC using the equity
method, as Buyitnow LLC is not majority owned or controlled by e4L. During the
three and six months ended September 30, 1999, e4L recorded a loss on its equity
investment in Buyitnow LLC of approximately $l.2 million. At September 30, 1999,
e4L has a receivable of approximately $2.4 million for sales of its products to
Buyitnow, LLC.
7. Sale of Series F Convertible Preferred Stock
On August 30, 1999, e4L consummated a transaction pursuant to which three
affiliated institutional investors (the "Series F Investors") purchased $5.0
million of e4L's newly-created Series F Convertible Preferred Stock (the "Series
F Preferred Stock"). The Series F Preferred Stock is convertible into the number
of shares of e4L common stock as is determined by dividing (i.) the aggregate
stated value of the shares of Series F Preferred Stock being converted by (ii.)
$4.7125 per share. The Series F Preferred Stock accrues a premium of 4% per
annum which is required to be paid in cash at the time of conversion of the
Series F Preferred Stock.
In connection with the issuance of the Series F Preferred Stock, e4L issued
warrants (the "Series F Warrants") to purchase an aggregate of 50,000 shares of
e4L common stock to the Series F Investors. The Series F Warrants are
exercisable until August 26, 2004, at an exercise price of $4.7125 per share of
e4L common stock (subject to adjustment in certain circumstances). e4L also
issued to the Series F Investors warrants to purchase 100,000 common units (the
"Buyitnow Warrants") of Buyitnow LLC. The Buyitnow Warrants are exercisable
until August 26, 2004, at an exercise price equal to the greater of (i.) $5.00
per unit or (ii.) the price per unit at which Buyitnow receives equity financing
of at least $10.0 million.
8. 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. 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.
In August 1999, a purported shareholder filed a writ of summons in the
Court of Common Pleas for Philadelphia County, Pennsylvania against e4L and
certain officers of e4L. In June 1999, this purported shareholder had filed a
writ of summons in the Court of Common Pleas for Philadelphia County,
Pennsylvania against certain former directors and an investor in e4L. No
complaint has been filed in either action. Accordingly, e4L cannot determine the
subject matter of the alleged claims. e4L has given notice of these actions to
its insurance carrier and will continue to monitor these actions.
10
<PAGE>
Regulatory Matters
During the year ended March 31, 1997, in accordance with applicable
regulations, 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. Subsequent Event - Acquisition of Flageoli Limited
On September 22, 1999, e4L executed a definitive agreement ("Flageoli
Transaction") to acquire Flageoli Limited, a Nevada limited liability company
("Flageoli"). Flageoli produces and distributes the "Serious Skin Care" line of
skin care and cosmetics products and is involved in other ancillary businesses.
Flageoli is currently owned by three corporations, which will be acquired by e4L
in order to effect the acquisition. The agreement provides that the three
corporations that own Flageoli will merge with and into a subsidiary of e4L and
each of the owners of the three corporations will receive from e4L their pro
rata share, calculated in accordance with their respective ownership interests,
of approximately $30.0 million payable in cash and shares of e4L's to be created
Series G Convertible Preferred Stock (the "Series G Preferred Stock") with an
aggregate stated value of $30.0 million.
The Series G Preferred Stock is to be convertible into the number of shares
of e4L common stock as is determined by dividing (i.) the aggregate stated value
of the shares of Series G Preferred Stock being converted by (ii.) approximately
$7.50 per share; provided, that if the market price of e4L's common stock is
below $7.50 per share at the time of conversion, the conversion price will be
adjusted to reflect the market price of e4L's common stock at the time of
conversion.
e4L intends to finance the cash portion through the issuance of long-term
debt and warrants to purchase e4L common stock. e4L is currently in discussions
with potential lenders with respect to the financing of the cash portion of the
Flageoli Transaction. The Flageoli Transaction is contingent upon, among other
things, e4L obtaining the necessary financing, and shareholder and regulatory
approval.
11
<PAGE>
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 known
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 and the expansion of BuyItNow.com LLC ("Buyitnow LLC"). e4L
will do this by leveraging its 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, wholesale/retail distributors, expanded
up-sell programs, continuity programs and use of customer list through rental
arrangements. e4L uses its direct response television programming 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 of its business model or merely a one-time sale. e4L takes
advantage of product brand awareness created by its television direct response
programming globally and also extends the sales life of its products through
alternative distribution channels. These alternative 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 (loss) before
interest, provision for income taxes, depreciation and amortization, non-cash
compensation, other income (expense) 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
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<PAGE>
be 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 Six months ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
----- ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue............................... 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Media................................... 33.6 35.4 35.3 34.8
Product and other direct................ 58.3 60.0 58.1 57.9
Selling, general and administrative..... 10.7 11.8 10.9 11.9
Depreciation, amortization and non-cash
compensation........................... 1.8 1.6 1.8 1.7
Unusual charges......................... - - - (0.7)
----- ----- ----- -----
Total operating costs and expenses...... 104.3 108.8 106.1 105.6
----- ----- ----- -----
Loss from operations...................... (4.3) (8.8) (6.1) (5.6)
Other:
Loss on equity investment in Buyitnow
LLC.................................... 1.6 - 0.8 -
Interest expense........................ 0.6 1.4 0.5 1.5
----- ----- ----- -----
Loss before income taxes.................. (6.5) (10.2) (7.5) (7.0)
Income taxes.............................. 0.1 0.1 0.1 0.1
----- ----- ----- -----
Net loss.................................. (6.6%) (10.3%) (7.6%) (7.2%)
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 1999 As Compared to Three Months Ended
- -----------------------------------------------------------------------
September 30, 1998
- ------------------
Net Revenue
Net revenue was $73.6 million for the three months ended September 30,
1999, as compared to $86.7 million for the three months ended September 30,
1998, a decrease of $13.1 million or 15.1%.
United States net revenue for the three months ended September 30, 1999 was
$51.3 million as compared to $55.9 million for the three months ended September
30, 1998, a decrease of $4.6 million or 8.1%. The decrease was primarily
attributable to fewer new direct response television programs and products
distributed during the current three month period, and focus on lower volume,
higher margin retail and ancillary revenue sources. Retail revenue was $6.0
million for the three months ended September 30, 1999 as compared to $0.5
million for the three months ended September 30, 1998, an increase of $5.5
million. The three month period ended September 30, 1999 included four shows
with net revenue of $5.0 million or greater, including one show which accounted
for approximately 50% of the total United States net revenue. The comparable
three month period ended September 30, 1998 included five shows with net revenue
of $5.0 million or greater and three shows each of which accounted for over 15%
of total United States net revenue.
International net revenue for the three months ended September 30, 1999 was
$22.3 million as compared to $30.8 million for the three months ended September
30, 1998, a decrease of $8.5 million or 27.8%. The decrease was primarily
attributable to a $9.3 million, or 58.5%, 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
$1.2 million or 8.5% for the three months ended September 30, 1999 as compared
to the three
13
<PAGE>
months ended September 30, 1998. This increase was in part attributable to a
25.3% increase in Australian net revenue a portion of which was due to favorable
currency fluctuations. This increase was also attributable to a slight increase
in Japanese net revenue which more than offset lower net revenue in other Asian
markets resulting from e4L's decision to close down 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 $76.8 million for the three months
ended September 30, 1999 as compared to $94.2 million for the three months ended
September 30, 1998, a decrease of $17.4 million or 18.6%. The decrease was
principally due to the decrease in net revenue.
Media
Media expenditures were $24.7 million for the three months ended September
30, 1999 as compared to $30.7 million for the three months ended September 30,
1998, a decrease of $6.0 million or 19.5%. e4L's worldwide ratio of media
expenditures to net revenue decreased to 33.6% for the three months ended
September 30, 1999 as compared to 35.4% for the three months ended September 30,
1998. The ratio of media expenditures to net revenue decreased in both the
United States and foreign markets. The decrease in the United States ratio of
media expenditures to net revenue was primarily attributable to the $5.3
million, or 33.1%, increase in non-direct response television revenue during the
three months ended September 30, 1999 as compared to the three months ended
September 30, 1998. The ratio of foreign media expenditures to foreign net
revenue declined during the three months ended September 30, 1999 as compared to
the three months ended September 30, 1998 in both the European and Asian
markets, which markets benefited from reduced costs associated with the write-
down of the Eutelstat Satellite contract in the third quarter of fiscal year
1999, the cancellation of a higher cost French media contract, and increased
Asian retail revenue.
Product and Other Direct Costs
Product and other direct costs are principally variable and semi-variable,
and consist of the cost of product fulfillment and warehousing, program
production, commissions and royalties, in-bound telemarketing, and credit card
processing fees. Product and other direct costs were $42.9 million for the three
months ended September 30, 1999 as compared to $52.0 million for the three
months ended September 30, 1998, a decrease of $9.1 million or 17.4%. The
decrease was primarily attributable to the decrease in net revenue. As a
percentage of net revenue, product and other direct costs were 58.3% for the
three months ended September 30, 1999 as compared to 60.0% for the three months
ended September 30, 1998.
While, in the aggregate, product and other direct costs as a percentage of
net revenue decreased during the three months ended September 30, 1999 as
compared to the three months ended September 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 product and other direct costs as a percentage of net revenue
during the current period was primarily attributable to increased retail
revenue, which revenue carries higher product costs, but no media expenditures,
or telemarketing charges. Higher telemarketing costs were incurred in connection
with testing of a new sales approach. The decrease in foreign product and other
direct costs as a percentage of net revenue was primarily attributable to cost
reductions in e4L's Asian markets from e4L's restructuring during the second
half of fiscal year 1999, including the closing of unprofitable markets and
emphasis on higher margin retail/wholesale revenue. The three months ended
September 30, 1998 also included significant charges for inventory and
production cost write-downs.
Selling, General and Administrative
Selling, general and administrative expense was $7.9 million for the three
months ended September 30, 1999 as compared to $10.2 million for the three
months ended September 30, 1998, a decrease of $2.3 million or 23.1%. The
decrease was attributable to e4L's continued cost reduction efforts, including
its restructuring during the
14
<PAGE>
second half of fiscal year 1999. Selling, general and administrative expense as
a percentage of net revenue decreased from 11.8% for the three months ended
September 30, 1998 to 10.7% for the three months ended September 30, 1999 due to
the impact of the cost reductions.
Depreciation, Amortization and Non-Cash Compensation
Depreciation, amortization and non-cash compensation were $1.3 million for
the three months ended September 30, 1999 as compared to $1.4 million for the
three months ended September 30, 1998, a decrease of $117,000 or 8.2%. The
decrease was attributable to lower depreciation and amortization resulting 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 in connection with e4L's restructuring efforts in
fiscal year 1999. This decrease was partially offset by the inclusion in the
current three month period of $157,000 of non-cash compensation relating to
warrants issued in connection with the issuance of Series E convertible
preferred stock during the third quarter of fiscal year 1999.
Loss on Equity Investment in BuyItNow.com LLC
During the three months ended September 30, 1999, e4L recorded a loss on
its equity investment in Buyitnow LLC of $1.2 million. Because Buyitnow LLC is
not majority owned or controlled by e4L, e4L has accounted for its investment in
Buyitnow LLC using the equity method. The loss is comprised of certain expenses
associated with the Buyitnow LLC investment, primarily professional fees, and
the write-down of the e4L investment in Buyitnow LLC, which consists of the
value ascribed to warrants issued to BuyiItNow, Inc. ("Buyitnow") and the value
of media utilized to promote Buyitnow LLC.
Interest Expense
Interest expense was $432,000 for the three months ended September 30,
1999, as compared to $1.3 million for the three months ended September 30, 1998,
a decrease of $0.8 million. This decrease was attributable to a decrease in
e4L's average outstanding indebtedness from approximately $31.8 million during
the three months ended September 30, 1998 to approximately $16.4 million during
the three months ended September 30, 1999, resulting from retirement of $21.5
million in outstanding indebtedness to e4L's former principal lender in October
1998 and repayment of $10.0 million of outstanding indebtedness to ValueVision
International, Inc. ("Value Vision") in December 1998. In addition, e4L's
average interest rate decreased from 15.8% for the three months ended September
30, 1998, to 10.6% for the three months ended September 30, 1999.
Income Taxes
e4L recorded income tax expense of $85,000 and $105,000 for the three
months ended September 30, 1999 and 1998, respectively, 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 $(1.9) million for the three months ended September 30,
1999 as compared to an EBITDA Deficit of $(6.2) million for the three months
ended September 30, 1998, an improvement of $4.3 million or 69.8%. EBITDA
deficit margin was (2.5)% and (7.1)% during the three month periods ended
September 30, 1999 and 1998, respectively.
Net Loss
e4L incurred a net loss of $4.9 million for the three months ended
September 30, 1999, as compared to $9.0 million for the three months ended
September 30, 1998. This decreased net loss was primarily attributable to
15
<PAGE>
the improved performance in Asia, savings derived from the Company's cost
reduction efforts and reduced interest expense.
Six Months Ended September 30, 1999 As Compared to Six Months Ended September
- -----------------------------------------------------------------------------
30, 1998
- --------
Net Revenue
Net revenue was $141.8 million for the six months ended September 30, 1999,
as compared to $169.8 million for the six months ended September 30, 1998, a
decrease of $28.0 million or 16.5%.
United States net revenue for the six months ended September 30, 1999 was
$94.9 million as compared to $105.1 million for the six months ended September
30, 1998, a decrease of $10.2 million or 9.7%. The decrease was primarily
attributable to fewer new direct response television programs and products
distributed during the current six month period and the greater emphasis made on
lower volume, higher margin retail and ancillary revenue sources. The six month
period ended September 30, 1999 included two shows with net revenue of $10.0
million or greater, each of which accounted for over 15% of total United States
net revenue. The comparable six month period in fiscal year 1999 included five
shows with net revenue of $10.0 million or greater and three shows, each of
which accounted for over 15% of total United States net revenue.
International net revenue for the six months ended September 30, 1999 was
$46.9 million as compared to $64.7 million for the six months ended September
30, 1998, a decrease of $17.8 million or 27.6%. The decrease was primarily
attributable to a $19.1 million or 58.0% decline in e4L's European net revenue
due to the loss of two media contracts during the fourth quarter of fiscal year
1999. Asian net revenue increased approximately $2.6 million or 8.6% for the six
months ended September 30, 1999 as compared to the six months ended September
30, 1998. This increase was attributable to a $3.0 million increase in Japanese
net revenue due to increased wholesale/retail revenues in that market and
favorable currency fluctuations. This increase in Japanese net revenue more than
offset the slightly lower net revenue in other Asian markets resulting from
e4L's decision to close down 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 $150.5 million for the six months
ended September 30, 1999 as compared to $179.3 million for the six months ended
September 30, 1998, a decrease of $28.8 million or 16.1%. The overall decrease
was principally due to the decrease in net revenue. The decrease in operating
costs is more fully described below.
Media
Media expenditures were $50.0 million for the six months ended September
30, 1999 as compared to $59.1 million for the six months ended September 30,
1998, a decrease of $9.1 million or 15.4%. e4L's worldwide ratio of media
expenditures to net revenue increased to 35.3% for the six months ended
September 30, 1999 as compared to 34.8% for the six months ended September 30,
1998. The increase in the ratio of media expenditures to 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 66.9% of total net revenue for the six
months ended September 30, 1999 as compared to 61.9% for the six months ended
September 30, 1998. In addition, the ratio of media expenditures to net revenue
increased due to lower efficiency of United States media expenditures
attributable to fewer new programs and new products. The ratio of foreign media
expenditures to foreign net revenue decreased during the six months ended
September 30, 1999 as compared to the six months ended September 30, 1998 in
both the European and Asian markets. During the current period the European
ratio of media expenditures 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 minimal media expenditures.
16
<PAGE>
Product and Other Direct Costs
Product and other direct costs were $82.4 million for the six months ended
September 30, 1999 as compared to $98.3 million for the six months ended
September 30, 1998, a decrease of $15.9 million or 16.1%. The decrease was
primarily attributable to the 16.5% decrease in net revenue. As a percentage of
net revenue, product and other direct costs were 58.1% for the six months ended
September 30, 1999 and 57.9% for the six months ended September 30, 1998.
While, in the aggregate, product and other direct costs as a percentage of
net revenue increased slightly during the six months ended September 30, 1999 as
compared to the six months ended September 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 was attributable to
increased product return rates and higher telemarketing and fulfillment costs.
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
markets and the non-recurrence of charges for inventory and production write-
downs, which were incurred during the six months ended September 30, 1998.
Selling, General and Administrative
Selling, general and administrative expense was $15.5 million for the six
months ended September 30, 1999 as compared to $20.3 million for the six months
ended September 30, 1998, a decrease of $4.8 million or 23.7%. 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 11.9% for
the six months ended September 30, 1998 to 10.9% for the six months ended
September 30, 1999 due to the impact of the cost reductions.
Depreciation, Amortization and Non-Cash Compensation
Depreciation, amortization and non-cash compensation were $2.6 million for
the six months ended September 30, 1999 as compared to $2.8 million for the six
months ended September 30, 1998 a decrease of $0.2 million or 8.4%. The decrease
was attributable to lower depreciation and amortization resulting 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 in connection with e4L's restructuring efforts in
fiscal year 1999. This decrease was offset, in part, by $314,000 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 six months ended September 30, 1998 include the write-off
of capitalized costs of $676,000 attributable to the termination of a proposed
merger of e4L with ValueVision. In addition, e4L recorded $1.9 million
compensation expense during fiscal year ended March 31, 1998 in connection with
750,000 stock options issued to e4L's former chief executive officer and two
other former officers in connection certain triggering events. The compensation
expense was reversed during the six months ended September 30, 1998 as the
triggering event had lapsed. No unusual charges were recorded during the six
months ended September 30, 1999.
Loss on Equity Investment in BuyItNow.com LLC
During the six months ended September 30, 1999, e4L recorded a loss on its
equity investment in Buyitnow LLC of $1.2 million. Because Buyitnow LLC is not
majority owned or controlled by e4L, e4L has accounted for its investment in
Buyitnow LLC using the equity method. The loss is comprised of certain expenses
associated with the Buyitnow LLC investment, primarily professional fees, and
the write-down of the e4L investment in Buyitnow LLC which consists of the value
ascribed to warrants issued to Buyitnow and the value of media utilized to
promote Buyitnow LLC.
17
<PAGE>
Interest Expense
Interest expense was $0.7 million for the six months ended September 30,
1999 as compared to $2.5 million for the six months ended September 30, 1998, a
decrease of $1.8 million. This decrease was attributable to a decrease in e4L's
average outstanding indebtedness from approximately $31.8 million during the six
months ended September 30, 1998 to approximately $14.3 million during the six
months ended September 30, 1999, resulting from retirement of $21.5 million in
outstanding indebtedness to e4L's former 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 $170,000 and $230,000 for the six months
ended September 30, 1999 and 1998 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 $(6.1) million for the six months ended September 30,
1999 as compared to an EBITDA deficit of $(7.8) million for the six months ended
September 30, 1998, an improvement of $1.7 million or 22.3%. EBITDA deficit
margin was (4.3)% and (4.6)% during the six month periods ended September 30,
1999 and 1998, respectively.
Net Loss
e4L incurred a net loss of $10.7 million for the six months ended September
30, 1999, as compared to a net loss of $12.2 million for the six months ended
September 30, 1998. Net losses excluding the reversal of unusual charges during
the six months ended September 30, 1998 and excluding the loss on equity
investment in Buyitnow LLC during the six months ended September 30, 1999 was
$13.4 million and $9.6 million, respectively, an improvement of $3.8 million or
28.6%. The decreased loss was attributable to the improved performance in
certain of e4L's Asian markets and the reduction of selling, general and
administrative expense.
Liquidity and Capital Resources
e4L's working capital was $24.5 million at September 30, 1999 as compared
to $13.2 million at March 31, 1999, an increase of $11.3 million. This increase
resulted from a change in classification of e4L's outstanding balance under its
credit facility from current to long-term at September 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 funding under its credit
facility, and from the issuance of the Series F Preferred Stock and exercise of
stock options and warrants. Operating activities for the six months ended
September 30, 1999, resulted in a use of cash of $18.0 million. e4L's cash flow
from operations during the six months ended September 30, 1999, was adversely
impacted by the net loss of approximately $10.7 million.
The increase in restricted cash is attributable to credit card deposits
held by e4L's processor as a reserve against chargebacks and fees. The
restricted cash balance may adjusted periodically based upon e4L's future
chargeback activity.
Consolidated accounts receivable decreased by $3.3 million, or 9.3% at
September 30, 1999 as compared to March 31, 1999 attributable to increased
United States accounts receivable of $1.3 million offset by decreases in
European accounts receivable of $2.2 million and Asian accounts receivable of
$2.4 million. United States accounts receivable increased due to increased sales
at retail and to Buyitnow LLC. The Buyitnow LLC receivable was $2.4 million at
September 30, 1999. No such receivable existed at March 31, 1999. European
accounts receivable decreased due to lower sales volume.
18
<PAGE>
Consolidated inventory increased $4.6 million or 28.2% at September 30,
1999 as compared to March 31, 1999. This increase was attributable to a $3.5
million increase in the United States inventory necessary to support retail
sales. This increase in the United States inventory balance was offset by lower
foreign inventory balances in line with e4L's continued efforts to reduce
inventory levels.
The increase in deferred revenue of $2.9 million at September 30, 1999 as
compared to March 31, 1999 is attributable to cash received for e4L's membership
services.
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 October 31, 1999, e4L had $17.9 million in total availability under its
senior credit facility of which $17.0 million was outstanding as principal
borrowings and there were no outstanding letters of credit. e4L is currently in
negotiations with its senior lender to provide for a short-term overadvance and
over-line facility, which will provide it with up to $2.5 million of additional
borrowing availability under its Credit Agreement ("Overadvance Facility"). In
connection with its Overadvance Facility, e4L shall be subject to additional
short-term and permanent covenants under the Credit Agreement, including among
others, minimum EBITDA, and maximum weekly advertising expenditures. In
addition, e4L shall agree to extend the maturity of the Credit Facility until
December 1, 2002. e4L anticipates that it will finalize the Overadvance Facility
during November 1999.
On August 30, 1999, e4L consummated a transaction pursuant to which three
institutional investors (the "Series F Investors") purchased $5.0 million of
e4L's newly-created Series F Convertible Preferred Stock (the "Series F
Preferred Stock"). Proceeds net of related costs were approximately $4.5
million. The Series F Preferred Stock is convertible into 1,061,008 shares of
e4L common stock. The Series F Preferred Stock accrues a premium of 4% per annum
which is required to be paid in cash at the time of conversion of the Series F
Preferred Stock.
In connection with the issuance of the Series F Preferred Stock, e4L issued
warrants (the "Series F Warrants") to purchase an aggregate of 50,000 shares of
e4L common stock to the Series F Investors. The Series F Warrants are
exercisable until August 26, 2004, at an exercise price of $4.7125 per share of
e4L common stock (subject to adjustment in certain circumstances). e4L also
issued to the Series F Investors warrants to purchase 100,000 common units (the
"Buyitnow Warrants") of Buyitnow LLC. The Buyitnow Warrants are exercisable
until August 26, 2004, at an exercise price equal to the greater of (i.) $5.00
per unit or (ii.) the price per unit at which Buyitnow receives equity financing
of at least $10.0 million.
On September 22, 1999, e4L announced that it had executed a definitive
agreement to acquire Flageoli Limited, a Nevada limited liability company
("Flageoli") and related businesses. Flageoli produces and distributes the
"Serious Skin Care" line of skin care and cosmetics products and is involved in
other ancillary businesses. Flageoli is currently owned by three corporations,
which will be acquired by e4L in order to effect the acquisition. The agreement
provides that the three corporations that own Flageoli will merge with and into
a subsidiary of e4L and each of the owners of the three corporations will
receive from e4L their pro rata share, calculated in accordance with their
respective ownership interests, of approximately $30.0 million in cash and
shares of e4L's to be created Series G Convertible Preferred Stock (the "Series
G Preferred Stock") with an aggregate stated value of $30.0 million. e4L intends
to finance the cash portion of the acquisition through the issuance of long-term
debt and warrants to purchase e4L common stock. e4L is currently in discussions
with potential lenders with respect to the financing of the cash portion of the
acquisition. The Flageoli Transaction is contingent upon, among other things,
e4L obtaining the necessary financing, and shareholder and regulatory approval.
e4L is currently exploring the possibility of raising additional capital
through the sale of equity securities, issuance of debt, or expansion of the
availability under its Credit Agreement. It is anticipated that these funds will
be utilized, for among other things, working capital purposes, pay down existing
debt and for 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
September 30, 1999, e4L had
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outstanding forward contracts to hedge its Japanese Yen position in the amount
of $3.9 million. These contracts mature through February 2000. e4L recognized an
immaterial loss on forward contracts during the period ended September 30, 1999.
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 six months ended September 30,
1999. While e4L's credit facility has helped its liquidity position, e4L needs
to continue to implement certain plans and actions designed to rebuild its
business, including the ability to utilize or sublease the Eutelstat Satelite,
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.
Year 2000 Implications
e4L has reviewed the implications of Year 2000 compliance and has completed
its process and believes that e4L's information systems and software
applications will manage dates beyond 1999. e4L, as with all direct marketing
and electronic commerce companies, is heavily dependent upon computer systems
for all phases of its operations. For this reason, it aggressively addressed the
Year 2000 issue to mitigate the effect on software performance. Aggregate costs
for work related to Year 2000 efforts were approximately $1.5 million. Operating
costs related to the Year 2000 compliance project were incurred over several
quarters and were expensed as incurred.
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 sale 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
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 obtains 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.
While e4L has implemented the changes necessary to address the Year 2000
issue for systems and equipment it uses within e4L, and believes that the
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 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.
Specific factors that might cause differences include, but are not limited to,
the success achieved by e4L's suppliers in reaching Year 2000 readiness, the
timely availability of necessary replacement equipment, and similar
uncertainties should such need arise.
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.
20
<PAGE>
Factors That May Effect Future Performance
e4L has historically suffered losses which have adversely affected 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 $10.7 million during the six months ended September 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 strategies designed
to increase net revenue, reduce costs and return it to profitability. If the
business plan does not adequately address the circumstances and situations which
resulted in e4L's historic 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.
The direct response marketing and electronic commerce industries are extremely
competitive
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, including consumers'
acceptance of the Internet as a medium for commerce and competition;
Introduce successful products;
Produce compelling direct response television programs and Internet sales
initiatives;
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, including greater use of the
Internet as a sales medium;
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, lack of successful products, failure to adequately leverage its
global spending and deteriorating economic conditions in the Asian (including
the South Pacific Rim) market. e4L actively seeks out new products, new sources
of products and alternative distribution channels, including wholesale/retail
and the Internet. e4L cannot be certain 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.
e4L depends upon foreign sales for revenue, which expose e4L to additional risks
e4L markets products to consumers in over 70 countries. In recent years,
e4L has derived approximately forty percent 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,
may continue to have, an adverse effect on e4L. e4L's international expansion
has caused an increase in its working capital requirements due to the additional
time required to deliver products abroad and receive payment from foreign
countries.
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 direct
marketing 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 intense. 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.
As e4L enters new markets, it is confronted with new and complex issues
21
<PAGE>
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, the likelihood of success
is unpredictable for reasons particular to each new market. For example, e4L's
success in any new market is based primarily on strong product acceptance by
consumers in the 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.
e4L depends on the introduction of successful new products to be profitable
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 channels 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 direct response program, the availability of competing
products and the timing and frequency of program 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 product life cycle 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.
e4L depends on third party manufacturers and service providers for many of its
activities
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, 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, reasonably 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.
e4L must be able to acquire and effectively use media time to sell products and
build brand awareness
e4L must have access to media time to televise its direct response
television programming on cable and broadcast networks, network affiliates and
local stations. e4L purchases a significant amount of media time from
22
<PAGE>
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.
e4L has been subject to numerous lawsuits 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. and Positive Response'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.
e4L is exposed to product liability claims by consumers
Products sold by e4L may expose it to potential liability from damage
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.
e4L competes with many other types of companies for customers
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 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.
e4L places great reliance on its 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.
23
<PAGE>
e4L's business could be adversely affected by 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. While e4L believes
its internal systems are fully Year 2000 compliant, e4L is 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.
e4L's business is affected by seasonality issues
e4L's revenue varies 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.
e4L's stock price may be adversely affected by sales of its convertible
securities
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. As of October 31, 1999, there are approximately 34.6 million shares
of e4L common stock outstanding, nearly all of which are freely tradable. In
addition, approximately 46.2 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 16.6
million shares of common stock may be issued to holders of e4L's Series D
Convertible Preferred Stock (based on a conversion price of $1.073125 per share)
and approximately 11.9 million shares of common stock may be issued to holders
of e4L's Series E Convertible Preferred Stock (based on a conversion price of
$1.50 per share).
24
<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
previously filed reports on Form 10-Q and/or Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein or incorporated by reference
herein:
27.1 Financial Data Schedule
(b) e4L filed the following Current Reports on Form 8-K during the three month
period ended September 30, 1999:
e4L filed a Current Report on Form 8-K dated August 30, 1999, reporting
under Item 5, the sale of $5.0 million of Series F convertible preferred
stock to three institutional investors.
e4L filed a Current Report on Form 8-K dated September 22, 1999,
reporting under Item 5, the execution of a definitive agreement to
acquire Flageoli Limited for approximately $60.0 million, and the
execution of a letter of intent with a lender to purchase $37.5 million
aggregate principal amount of senior subordinated notes.
25
<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: November 12, 1999 /s/ Stephen C. Lehman
-------------------------------------------
Stephen C. Lehman
Chief Executive Officer and Chairman of
the Board of Directors
Date: November 12, 1999 /s/ Daniel M. Yukelson
-------------------------------------------
Daniel M. Yukelson
Executive Vice President/Finance and
Chief Financial Officer, and Secretary
26
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