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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
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.
(formerly National Media Corporation)
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 13-2658741
(State of Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
15821 Ventura Boulevard, 5th Floor
Los Angeles, California 91436
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (818) 461-6400
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Securities registered pursuant to Name of each exchange
Section 12(b) of the Act: on which registered:
Common Stock, par value $0.01 per share New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation SK is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment to this Form 10K. [X]
The aggregate market value of the Registrant's voting stock held by
nonaffiliates of the Registrant as of June 15, 2000 was approximately
$37,470,671*
There were approximately 43,087,980 issued and outstanding shares of the
Registrant's common stock, par value $.01 per share, at June 15, 2000 (net of
approximately 855,208 shares of common stock held in treasury as of such
date).
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* Based upon a market value per share of $0.9375, which was the closing price
of e4L's Common Stock on the New York Stock Exchange on June 15, 2000.
Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers and directors of the e4L, without conceding
that all such persons are "affiliates" of e4L for purposes of the federal
securities laws, but by including the shares beneficially owned by others
listed on the "Security Ownership of Certain Beneficial Owners" table
included in Section III to this Form 10-K.
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e4L, Inc.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
MARCH 31, 2000
TABLE OF CONTENTS
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PART I
ITEM 1 BUSINESS....................................................... 2
ITEM 2 PROPERTIES..................................................... 12
ITEM 3 LEGAL PROCEEDINGS.............................................. 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 13
PART II
ITEM 5 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS............................... 14
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA........................... 14
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................... 15
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 32
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 33
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 33
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 34
ITEM 11 EXECUTIVE COMPENSATION......................................... 37
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 42
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 44
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- 45
K.............................................................
SIGNATURES.............................................................. 49
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains "forward-looking" statements
regarding potential future events and developments affecting the business of
e4L, Inc. and its subsidiaries ("e4L"). These statements relate to, among
other things, (i.) future operations of e4L, including integration of e4L's
investments in BuyItNow, Incorporated and Promenade Membership Services LLC;
(ii.) the development of new products and distribution channels, product sales
and media, including electronic commerce; (iii.) competition for customers for
e4L's products; (iv.) the uncertainty of developing or obtaining rights to new
products that will be accepted by the market (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 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
Annual Report on Form 10-K and include statements regarding the intent, belief
or current expectations of e4L and its board of directors and management 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 abroad; 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 regulations. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PART I
ITEM 1. BUSINESS
Background of Company
e4L, Inc., formerly National Media Corporation, and its subsidiaries
("e4L") is engaged in the use of direct marketing of consumer products,
primarily through direct response transactional television programming (also
known as infomercials) and through wholesale/retail distribution and
electronic commerce on a global basis. e4L manages all phases of direct
marketing for the majority of its products in both the United States and
international markets, which includes product selection and development,
manufacturing by third parties, acquisition of television media, production
and broadcast of programming, order processing and fulfillment, and customer
service.
e4L is engaged in direct marketing of consumer products in the United
States through its wholly-owned subsidiary, Quantum North America, Inc. (d/b/a
e4L North America), which e4L acquired in 1986, and internationally through
its wholly-owned subsidiaries: Quantum International Limited, which e4L
acquired in 1991 ("QIL"); Quantum Prestige Limited (a combination of the
former Quantum Far East, Ltd. and Prestige Marketing Limited), through which
e4L operates in New Zealand and most Asian countries other than Japan ("QPE");
Quantum International (Japan) Company Limited, which e4L formed in June 1995
("QIJ"); and Suzanne Paul Holdings Pty Limited which e4L acquired in July 1996
and which operates in Australia ("SP"). e4L produces direct response
transactional television programming through e4L Television (formerly Direct
America Corporation and d/b/a Quantum Television), which e4L acquired in
October 1995.
e4L is a Delaware corporation, with its principal executive offices located
at 15821 Ventura Boulevard, 5/th/ Floor, Los Angeles, California 91436. e4L's
telephone number is (818) 461-6400, and its facsimile number is (818) 461-
6525.
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Recent Developments
During May 2000, e4L acquired a fifty percent ownership interest in
Promenade Membership Services, LLC ("Promenade") for consideration valued at
$1.0 million in either cash, shares of e4L common stock, or shares of
BuyItNow.com LLC, ("Buyitnow LLC") common units valued at $5.00 per share. The
consideration is payable on or before May 17, 2001. Promenade markets discount
membership buying services and clubs to consumers and businesses. In
connection with the acquisition of Promenade, e4L acquired an option to
purchase up to an additional thirty-five percent of the equity of Promenade
for cash consideration equal to between $1.2 million and $l.9 million,
depending upon the date such option is exercised.
Also during May 2000, e4L executed a non-binding Heads of Agreement (also
known as a "Letter of Intent" in the United States), as amended, with two
venture capital companies with operations in Europe and Asia, pursuant to
which, among other things, these two companies and certain members of
management will purchase 75% of the equity of e4L's subsidiaries; QIJ, QPE and
SP, for approximately $44.0 million (approximately $38.0 million net of
repayment of an inter-company loan). Closing of the transaction, which is
anticipated to occur during the second quarter of fiscal year 2001, is subject
to normal closing conditions, including finalization of definitive agreements.
During June 1999, e4L consummated a transaction with BuyItNow, Inc.
("Buyitnow") pursuant to which e4L and Buyitnow formed 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.
During June 2000, Buyitnow LLC consummated a transaction with pcWonders.com,
Inc. ("pcWonders") pursuant to which Buyitnow LLC and pcWonders formed
Buyitnow Incorporated ("BIN Inc.") through the contribution of substantially
all of their assets and liabilities. BIN Inc. is presently 27.5% owned by e4L,
23.3% owned by Buyitnow, 33.3% owned by pcWonders, 3.8% owned by Clear Channel
Communications, Inc., 4.6% owned by NBC Interactive, Inc., 3.0% owned by Star
Media Inc., and 4.5% owned by others.
During March 2000, e4L consummated a transaction pursuant to which two
institutional investors (the "G/H Preferred Investors") purchased an aggregate
of $5.0 million of e4L's newly-created Series G Convertible Preferred Stock
(the "Series G Preferred Stock") and $5.0 million of e4L's newly-created
Series H Convertible Preferred Stock (the "Series H Preferred Stock"
collectively with the Series G Preferred Stock, the "G/H Preferred Stock").
Proceeds, net of related offering costs, were approximately $9.4 million. The
G/H Preferred Stock carries a 4% annual premium payable, at e4L's option, in
cash or shares e4L common stock at the time of conversion.
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 $4.6
million. 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.
During November 1999 and January 2000, e4L and its senior lender entered
into a series of amendments of the Credit Agreement (as hereinafter defined)
pursuant to which e4L was provided with a short-term over-advance and over-
line facility, which provided e4L with up to $2.5 million of additional
borrowing availability under the Credit Agreement. In connection with the
amendments, e4L agreed to certain additional convenants under the Credit
Agreement, including among others, minimum EBITDA and limitations on weekly
media expenditures. In addition, e4L and the senior lender agreed to extend
the maturity of the Credit Agreement until December 2002. In February 2000,
e4L amended the Credit Agreement whereby it obtained a $5.0 million term loan
("Term Loan"). The Term Loan bears interest at the rate of 13% per annum, and
is due in December 2002 concurrent with the expiration of the Credit
Agreement. In connection with the Term Loan, e4L granted to its senior lender
5-year warrants to purchase 325,000 shares of its common stock at an exercise
price of $2.5625 per share. The value attributed to these warrants has been
treated as a loan discount and is being amortized as
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interest expense over the remaining term of the loan. Also in connection with
the Term Loan, e4L re-paid amounts then outstanding under the short-term over-
advance and over-line facility.
Strategies
e4L is a global leader in direct marketing, wholesale/retail distribution
of consumer products and electronic commerce. One of e4L's principal
strategies is to leverage its global television direct response and marketing
infrastructure to maximize opportunities in wholesale/retail distribution of
products, electronic commerce and membership services. Through direct response
transactional television programming and integrated direct consumer marketing
techniques, e4L is pursuing a business strategy focused on: (i.) increasing
the effective utilization and leveraging of its global presence and its media
access to drive its direct response television, wholesale/retail, continuity,
electronic commerce and membership services businesses; (ii.) continuing to
develop and market innovative consumer products; and (iii.) engineering the
most efficient business model for the conduct of its global operations.
Leveraging Global Presence and Media Access. e4L is continuing its efforts
to expand its position as a worldwide leader in direct response marketing,
wholesale/retail distribution of products and in the continuity, electronic
commerce and membership services businesses. Through its global media access,
and order fulfillment and telemarketing operations, e4L has the ability to
deliver its programming, infomercials and products to over 270 million
households worldwide via television and through the Internet. e4L also
effectively utilizes and leverages its worldwide distribution reach, and
marketing capabilities, and its media access by facilitating the distribution
of third-party products; by entering into alliances with companies that need
or desire to reach the households in one or more of e4L's many markets; and by
taking advantage of the product and brand awareness created by its programming
in other methods of consumer distribution (i.e., wholesale/retail, Internet
and continuity). In addition, e4L aggressively utilizes its assets such as its
customer lists in order to generate revenue.
Continue to Develop and Market Innovative Products. e4L continually seeks
out and develops innovative consumer products that it can market and
distribute profitably on a global basis. e4L has an in-house product
development and marketing team responsible for researching, developing and
analyzing products and product ideas. e4L often augments its product
development activities through relationships with third parties.
e4L believes that through its opportunities to leverage global media, its
extensive international operations, its presence on the Internet, and its
experience in product sourcing, telemarketing, order fulfillment and customer
service, that it maintains a significant competitive advantage over other
companies desiring to enter into e4L's current or new markets. While e4L
incurs certain initial and ongoing costs in connection with adapting a product
and programming for specific markets, the primary expenses are incurred when
the product is first developed for its initial target market. Accordingly, as
e4L decides to introduce a product into additional markets, it attempts to do
so quickly, efficiently and relatively inexpensively.
Engineering the Most Efficient Business Model for e4L. e4L continues to
explore methods to improve each step in the development and life cycle of a
product, and to develop its expertise in, and refine its approach to product
sourcing, inbound telemarketing, order fulfillment, customer service, media
and electronic commerce applications. e4L believes that its current
competitive advantages of international media access, multi-country coverage
and fully integrated program production, product sourcing and order
fulfillment and telemarketing, as well as certain strategic relationships,
provide it with a strong base from which it can lower its costs and engineer a
business model that is the most efficient for a direct marketing and
electronic commerce business.
Global Media Access
An important part of e4L's ability to successfully market products is its
access and ability to leverage global media time. An integral part of e4L's
business operations is the availability of media time at a price that allows
e4L to sell sufficient product quantities at targeted gross margins. Many
factors, such as changing viewer
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patterns, cable company practices and competition have an impact on e4L's
ability to properly manage this function. e4L's programming is presently
available to more than 270 million households throughout the world.
During peak periods, e4L utilizes up to approximately 1,500 half-hours of
cable and broadcast television time per week in the United States and
approximately 750 half-hours per week internationally, most of which is
satellite and terrestrial broadcast time, to broadcast its direct response
programs and commercials. For the most part, cable broadcast technology is not
as prevalent internationally as it is in the United States. Historically,
approximately one-half of e4L's cable air time in the United States and a
majority of e4L's satellite and terrestrial air time internationally had been
purchased under long-term contracts that had provided for specific time slots
over the term of the respective contracts. Over the past 18 months, e4L has
effectuated an intentional reduction in long-term media commitments to the
point where less than 10 percent of its media time is currently purchased
pursuant to long-term contracts, therefore, allowing e4L to maintain
flexibility in its programming and media decisions.
United States Media
e4L purchases television media in the United States through its in-house
staff of media buyers or through media buying agencies. Most of e4L's cable
television time is purchased directly from cable networks and their respective
media representatives, rather than from multi-system operators. Presently, e4L
has short-term commitments for cable television time slots for periods ranging
from two weeks to three months. e4L believes that its programming is seen on
at least one network which is carried by every local cable system carrier
throughout the United States.
In addition to United States television time purchased on cable networks,
e4L also purchases broadcast television time from network affiliates and
independent television stations. Broadcast television time segments are
purchased primarily in 30-minute spots. e4L also purchases 60 and 120 second
spots where economically feasible, and either adapts portions of its long-form
programs or develops specific products for airings in such spots. The time
segments on broadcast television are purchased primarily on a quarterly basis
based on the availability of broadcast time. In the event e4L determines that
such time slots are not advantageous to e4L, e4L is generally able to
terminate such agreements. e4L believes there is currently more than an
adequate supply of broadcast television time available from sources in the
United States to satisfy its needs. e4L's programs generally are broadcast in
the United States between the hours of 12:00 a.m. and 6:00 p.m., Eastern
Standard Time, seven days a week.
As discussed above, e4L purchases a significant amount of its media time
from cable television and satellite networks. These cable television and
satellite networks assemble programming for transmission to multiple and local
cable system operators. These local cable system operators may not be required
to carry all the system's programming. e4L currently does not pay and is not
paid for the "privilege" of being broadcast by these operators. It is possible
that, if demand for airtime grows in the United States, these operators will
begin to charge e4L to continue broadcasting e4L's programs or limit the
amount of airtime available to e4L. e4L is dependent on having access to media
time to market its products on cable networks, satellite networks, network
affiliates and local broadcast stations.
International Media
Internationally, e4L's programs are broadcast on one or more of three
technologies: (i.) satellite transmission direct to homes with satellite
reception dishes, (ii.) cable operators who retransmit satellite broadcasts to
cable-ready homes and (iii.) terrestrial broadcast television. e4L's satellite
airtime has historically been obtained through agreements with companies that
own or lease satellite transponder time. During the terms of these contracts,
e4L is generally entitled to broadcast programming continuously for a
specified period of time daily. Under some of these arrangements, e4L has
rights of first refusal for any additional direct response broadcast time that
becomes available.
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During April 1998, e4L began a direct lease of a twenty-four hour
transponder on a Eutelstat satellite, the "Hotbird IV" (the "Eutelstat
Satellite") the coverage of which reaches across the European continent. e4L
had incurred significant start-up costs in connection with the Eutelstat
Satellite, which has increased its European media costs. The term of the
Eutelstat Satellite lease is for the life of the satellite, estimated to be
approximately 10-12 years. To date, household penetration of the Eutelstat
Satellite has been less than anticipated and, as a result, e4L has sought
alternative means (other than broadcast of its own programming) to mitigate
the substantial cost of the Eutelstat Satellite lease, including subleasing of
time to other content providers. During June 2000, e4L subleased substantially
all of its transponder time of the Eutelstat Satellite, which sublease becomes
effective on August 1, 2000 ("Satellite Sublease"). See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
At present, in Japan and throughout most of Asia, e4L purchases the
majority of its media time through Mitsui & Co., Ltd. ("Mitsui"). As a result
of other media relationships, e4L's transactional television programming can
be seen in the Middle East, South Africa, Austral-Asia, South America and in
most countries in Europe, and its products are available for purchase in more
than 70 countries. As e4L's media contracts expire, e4L expects that it could
face increases in costs associated with the renewal of certain of these
contracts, which may or may not have a material adverse effect on e4L.
Product Development
e4L's product development and sourcing department researches and develops
new products that may be suited for direct response television marketing and
subsequent marketing through other distribution channels. e4L's product
development and sourcing staff reviews and develops new product concepts and
ideas from a variety of sources, including inventors, suppliers, trade show
participants, manufacturing and consumer products companies. In addition, e4L
develops new products through its ongoing review of new developments within
targeted product categories.
e4L does not invent new products but, as a result of e4L's prominence in
the direct marketing industry, it often evaluates and reviews new product
proposals from independent third parties who have invented or patented a
product to be marketed through e4L. During the evaluation phase of product
development, e4L analyzes the suitability of the product for television
demonstration and explanation as well as the anticipated perceived value of
the product to consumers; determines whether an adequate and timely supply of
the product can be obtained; and analyzes whether the estimated profitability
of the product satisfies e4L's criteria. e4L typically enhances products
brought to it by these parties in order to better target the products for a
direct marketing audience. This effort may include actual changes to the
product itself as well as alterations of tradename, packaging and other
intellectual properties.
In order to develop or acquire the rights to distribute or market new
products, e4L sometimes works with other consumer products companies. A clear
advantage of these relationships is that e4L's partner typically will
underwrite the research and product development function, thereby reducing
e4L's financial risk as well as its working capital requirements.
e4L reviews its products and product concepts on an ongoing basis to select
those that it believes will be successful in one or more of its international
markets. When a product that was initially sold in the United States is
selected for international distribution, the program is dubbed, if necessary,
and product literature is created in the appropriate foreign languages. In
addition, a review of the product's and the program's compliance with local
laws is completed, as necessary.
Internationally, e4L markets products through television programs which it
produces, and also markets products of other independent direct marketing
companies. e4L obtains the rights to new products created by third parties
through various licensing arrangements generally involving a combination of
up-front advances and/or royalties payable based upon sales or profits of the
product. The amount of the royalty is negotiated and generally depends upon
the level of involvement of the third party in the development and marketing
of the
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product. e4L also obtains rights to sell products which have already been
developed, manufactured and marketed through direct response television
programming produced by other companies. e4L generally seeks exclusive
worldwide rights to all products in all means of distribution. In some cases,
e4L does not obtain rights to all marketing and distribution channels, but
seeks to receive a royalty on sales made by the licensor pursuant to the
rights that have been retained.
Test Marketing New Products
Once e4L decides to bring a product to market, it arranges for the
production of a television program or shorter commercial spot that can
adequately demonstrate and explain the product. e4L's programs have
historically been approximately 28 minutes in length. e4L attempts to present
a product in an entertaining and informative manner utilizing a variety of
program formats, including live talk shows and live paid studio audience
programs. e4L's programs are currently produced in-house or by independent
production companies with experience in e4L's product categories both in the
United States and in other countries. The cost of producing a program
generally ranges from $200,000 to $500,000. In addition, producers, hosts and
spokespersons generally receive advances and/or royalties based upon sales or
profits of the product.
Following completion of production, the program is then tested in the
United States during targeted time slots on both national cable networks and
broadcast stations. If a program achieves acceptable results during the market
tests and a supply of product is available, it is generally aired on a rapidly
increasing schedule on cable networks and broadcast channels in the United
States, and soon after, in international markets. During this initial test
phase, e4L may modify the creative presentation of the program, the offer
and/or pricing, depending upon viewer response. After the initial marketing
phase, e4L may adjust the frequency of a program's airings to achieve a
schedule of programs that it believes maximizes the profitability of all of
e4L's products being marketed at a given time.
Sourcing and Manufacturing
e4L uses sources in the United States and several countries in Europe and
Asia to manufacture products sold through its direct response television
programming. e4L monitors the availability of its products and adjusts the
amount of media time on a program for a particular product that cannot be
adequately supplied. Additionally, e4L uses the services of a
technical/engineering firm to assist in the coordination of the manufacturing
of some of e4L's products in Asia, and to assist in the monitoring of the
quality of the products manufactured in such countries. The same product
manufacturing sources are generally utilized irrespective of whether e4L's
program is being aired in the United States or internationally.
In general, when possible, before e4L acquires any sizeable inventory
position in a product, e4L test markets the product. e4L then purchases
additional inventory for a wider distribution and market penetration of the
product's program. Sometimes, due to issues of timing and costs relating to
product sourcing, e4L does take an inventory position in a product before
testing is completed.
Inbound Telemarketing
e4L strives to create a problem free purchasing and order fulfillment
process for its customers. This process consists of inbound telemarketing,
order fulfillment and customer service. The first step in this process is the
order taking function known as inbound telemarketing. Customers may order
products marketed by e4L during or after the broadcast of the program by
calling a telephone number (generally toll-free), which is shown periodically
on the television screen during the broadcast. Both within the United States
and in most instances internationally, e4L subcontracts its in-bound
telemarketing function to third parties that provide this service for a fee
based on the number of telephone calls answered, the duration of calls, and/or
sales generated. In Australia and New Zealand, e4L operates its own inbound
telemarketing call centers. In all instances in the United States, and in most
instances internationally, inbound telemarketers electronically transmit
orders to order fulfillment centers where the product is packaged and shipped
to the customer. In most cases, at the time of purchase, the
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inbound telemarketers also promote, cross sell and upsell complementary and/or
additional products or services, including product continuity programs and
memberships in Promenade. Such sales efforts are orchestrated by e4L's
marketing personnel who script the sales approaches of the telemarketing
personnel.
The large majority of customer payments in the United States are made by
credit cards over the telephone with the remainder (less than 1%) paid by
check or money order. The trend in the direct response television industry,
especially over the last few years, has been to sell products on a
multipayment basis whereby customers make installment payments over some
predetermined period after having received the product. This practice is
prevalent in the United States, Australia and New Zealand. In Europe, Asia and
other areas of the world, products are generally delivered to consumers on a
"cash on delivery" or "C.O.D." basis, where payment by check or cash at the
time of delivery is not uncommon.
Order Fulfillment
Various aspects of e4L's order fulfillment process in the United States are
conducted by e4L through its leased facility located in Phoenix, Arizona or
through third party warehouses and fulfillment centers. Order fulfillment
activities include receiving merchandise from manufacturers, inspecting
merchandise for damages or defects, storing and assembling product for later
delivery, packaging and shipping of products and processing of customer
returns. e4L primarily uses bulk shippers to deliver products to customers in
the United States. Each customer is charged a shipping and handling fee, which
varies among products.
Throughout most of Europe and Asia, e4L operates the warehousing, order
fulfillment, distribution and customer service functions of its business
through independent third parties, each of which is responsible for a
particular territory or country. In New Zealand and Australia, e4L performs
these functions internally. European products are shipped by e4L or the
manufacturer to independent warehouse and fulfillment centers throughout
Europe that process e4L's European sales orders. In Asia, Mitsui plays a key
role in the warehousing and distribution of e4L's products. In the Middle
East, South America, Africa and in many smaller Asian countries, e4L generally
contracts with independent licensees who buy e4L's products outright and then
sell them to consumers, both through use of e4L's programming and through
other local distribution channels, under conditions and standards prescribed
and monitored by e4L.
Customer Service
An important aspect of e4L's marketing strategy is to maintain and improve
the quality of customer service. In the United States, e4L operates toll free
customer service telephone numbers and has contracted with a third party to
respond to customer inquiries, provide product information to customers and
process product returns. Outside of the United States, customer service is
also generally provided on a contract basis through third parties whose
operations are monitored by e4L. In New Zealand and Australia, however, e4L
performs these functions internally.
e4L generally offers an unconditional 30-day money back return policy to
purchasers of its products. In addition, products are generally covered by
warranties offered by the manufacturer for defective products. The terms of
such warranties vary depending upon the product and the manufacturer. Product
return rates vary due to the following factors: (i.) sales of larger, more
expensive products (e.g., fitness equipment); and (ii.) sales of more
intellectual property based products (e.g., audio cassette and videotape)
especially in the United States. European sales carry higher average return
rates due to the "cash on delivery" or "C.O.D." terms of a significant portion
of this business. In countries where e4L depends upon the postal system for
deliveries on a "cash on delivery" basis, official return rates include
instances where there is no answer at the attempted delivery address, and
where a person at the delivery address does not have the cash on hand at the
time of delivery. e4L believes that its return experience is within the
customary range for the direct marketing industry.
During fiscal year 2000, e4L launched in the United States its "Save the
Sale" program. Through a dedicated group of trained operators, e4L's customers
are offered free incentives and gifts in exchange for
8
<PAGE>
keeping their product and to reduce overall returns. A rollout of various
aspects of the "Save the Sale" program are in process or currently planned for
e4L's markets outside of the United States.
Electronic Commerce and Membership Services
e4L has positioned itself, principally through the leverage of its global
direct response and marketing infrastructure, to effectively execute a
transition to a global consumer products and electronic commerce company.
During fiscal year 1999, e4L launched a strategy of marketing its direct
response television products and other products and services through the
Internet.
e4L owns an approximate 27.5% interest in BIN Inc., an Internet retailer.
Through its direct response television programs and media time, e4L provides
promotional inserts, commercials and branding to BIN Inc. Because of their
pre-disposition to purchase products on television and, therefore, shop
outside of regular retail distribution channels, e4L believes that its
customers are well suited to purchase products via the Internet. As a result,
from June 1999 through March 2000, e4L had approximately $8.5 million of gross
sales of its products through BIN Inc.'s Web site, which sales accounted for
approximately 5.5% of e4L's United States sales during that period.
During May 2000, e4L acquired a 50% interest in Promenade, which markets
discount membership buying services and clubs that are targeted for both
consumers and small businesses. A "key" aspect of Promenade's membership
programs is its comprehensive, online component that allows members to locate
the "best bargains" available over the Internet. Promenade memberships are
marketed to e4L's customers by promoting the clubs within e4L's direct
response television programs, and through inbound and outbound telemarketing.
Alternative Distribution Channels
Based on the success of certain of its products in traditional retail
markets, continuity channels, and electronic commerce, e4L believes that its
transactional television programming is effective in branding and building
consumer awareness of its products, as well as in positioning e4L to act as
the media marketing partner for manufacturers of consumer products. e4L
attempts to capitalize on its ability to create product awareness, and its
ability to both act as a media marketing partner and extend the sales life of
its products by shifting products from direct response television programming
to alternative marketing and distribution channels such as continuity sales,
wholesale/retail distribution, catalogs, direct mail, direct response print
advertisements, television home shopping programs, credit card statement
inserts, electronic commerce and other channels resulting from the development
of strategic relationships. e4L believes that established manufacturers regard
direct response marketing as a desirable vehicle to showcase their products,
and to create and build brand awareness that can generate follow-up product
sales through traditional retail outlets.
e4L intends to pursue the expansion of its wholesale/retail operations in
order to capitalize on the consumer brand awareness created by e4L's programs
and reinforced by "As Seen On TV" instore signage. e4L believes that the
product exposure created by e4L's transactional television programming enables
e4L and its distributors to utilize traditional wholesale/retail distribution
channels without incurring any of the additional media and promotion costs
that other consumer products companies may incur. In this manner, e4L believes
that it will be able to market products to consumers who view its programming,
but do not traditionally purchase products through direct response marketing.
e4L owns and operates retail locations in New Zealand and in Australia. In
addition, e4L plans to pursue a strategy of developing and marketing products
suitable for one of its continuity programs. Under its continuity programs,
customers continue to reorder products on a periodic basis, after the initial
product sale takes place.
Products
e4L markets consumer products in a variety of product categories, including
diet and fitness, personal care and housewares. During fiscal year 2000, e4L
offered over 100 products to consumers in one or more geographic
9
<PAGE>
markets worldwide, of which, on a revenue basis, approximately 78% were
products sold through e4L produced programs and approximately 22% were
products sold by e4L pursuant to license agreements with other direct response
companies. Of the products produced and sold through e4L's programs in fiscal
year 2000, approximately 5 were products first introduced by e4L in fiscal
year 2000 and approximately 20 were products that were originally offered in
previous years. Through its global programming and distribution capabilities,
e4L has brought to the international marketplace many of its products that had
been successfully marketed in the United States.
e4L's most successful products in each of fiscal years 2000, 1999 and 1998
accounted for approximately 56.0% , 40.9% and 40.3% respectively, of e4L's net
revenue for such periods. e4L continues to be dependent, in significant part,
upon its ability to develop or obtain rights to new products to supplement and
replace existing products as they mature through their product life cycles,
and upon its ability to develop products and revenue sources with extended
life cycles through wholesale/retail, continuity and electronic commerce.
Historically, in the United States, the majority of e4L's products generate
their most significant revenue in the first six to nine months following their
introduction. Internationally, however, products typically generate revenue
more evenly over a longer period due, in part, to the introduction of such
products into new markets each year. Because e4L already markets its products
in over 70 countries, e4L's ability to continue to expand into new markets
each year will be limited.
Competition
e4L competes directly with many other companies which generate revenue from
direct marketing, wholesale/retail distribution and electronic commerce
activities. e4L also competes with a large number of consumer products
companies and retailers which have substantially greater financial, marketing
and other resources than e4L, some of which presently conduct, or indicated
their intent to conduct, direct response marketing. e4L also competes with
companies that make imitations of e4L's products at substantially lower
prices. Companies which imitate or "knockoff" e4L's products take advantage of
the product category awareness, product development, a "unique selling
proposition", which e4L creates and pays for when it develops a product and a
program. e4L seeks to protect itself from "knockoffs" through establishment
and enforcement of its intellectual property rights. Products similar to e4L's
products may be sold in department stores, pharmacies, general merchandise
stores and through magazines, newspapers, direct mail advertising catalogs and
the Internet.
Management Information Systems
e4L's management information systems feature programs which allow e4L to
manage its media purchases and program scheduling; the flow of product order
information among its telemarketers, its order fulfillment centers, its credit
card clearing houses; and the flow of shipping, billing and payment
information. e4L believes that its management information systems are in need
of improvement and it is currently in the process of evaluating potential
upgrade of certain aspects of these systems it believes are most critical,
including conducting a review of outsourcing portions of its information
systems processing functions
Regulatory Compliance
Various aspects of e4L's business are subject to regulation and ongoing
review by a variety of federal, state, local and foreign government agencies,
including the Federal Trade Commission ("FTC"), the United States Post Office,
the Consumer Products Safety Commission ("CPSC"), the Federal Communications
Commission, ("FCC"), the Food and Drug Administration ("FDA"), various States'
Attorneys General and other state, local consumer protection and health
agencies. The statutes, rules and regulations applicable to e4L's operations,
and to various products marketed by it, are numerous, complex and subject to
change.
e4L's international business is subject to the laws and regulations of the
United Kingdom, the European Union, Japan and the various other countries in
which e4L sells products, including, but not limited to, the
10
<PAGE>
various consumer and health protection laws and regulations in these markets.
If any significant actions were brought against e4L or any of its subsidiaries
in connection with a breach of such laws or regulations, including the
imposition of fines or other penalties, or against one of the entities through
which e4L obtains a significant portion of its media, e4L could be materially
and adversely affected. There can be no assurance that changes in the laws and
regulations of any territory which forms a significant portion of e4L's market
will not adversely affect e4L's business or results of operations.
During July 1998, in accordance with applicable regulations, e4L notified
the Consumer Products Safety Commission ("CPSC") of a problem that was
occurring with respect to the first 20,000 units manufactured of its Red Devil
Grill product. At the time, e4L proposed, and the CPSC accepted, fixing the
affected part and other modifications. During February 1999 and October 1999,
the CPSC requested additional information, to which e4L responded. The CPSC is
in the process of reviewing e4L's responses, and has not yet made a
determination of whether there are any additional problems with the grill, and
what, if any, corrective measures e4L will have to implement if problems are
found to be present. At present, management of e4L cannot predict whether the
outcome of this matter will have a material adverse impact on e4L's financial
condition or results of operations.
During the year ended March 31, 1997, in accordance with applicable
regulations, e4L notified the 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 results of operations.
In June 2000, e4L received notice from the NYSE that it is considered
"below criteria" with respect to its market capitalization and stockholders'
equity in accordance with the NYSE's Listed Company Manual regarding continued
listing criteria (the "Listing Criteria"). In accordance with the Listing
Criteria, e4L is required, on or before July 29, 2000, to submit a business
plan to the NYSE, which demonstrates compliance with the $50.0 million minimum
market capitalization and stockholders' equity requirement contained in the
Listing Criteria within 18-months of submitting its plan, and to issue a press
release disclosing the fact that it is not in compliance with the Listing
Criteria. Upon submission, the business plan will be reviewed by the NYSE's
Listing and Compliance Committee for final disposition, and will either accept
or reject the plan. If e4L's common stock were delisted from trading on the
NYSE, it would have adverse effects on e4L and its stockholders. See also,
"Factors That May Effect Future Performance."
e4L collects and remits sales tax in the states where it has a physical
presence. Certain states in which e4L's only activity is direct marketing have
attempted to require direct marketers, such as e4L, to collect and remit sales
tax on sales to customers residing in such states. A 1995 United States
Supreme Court decision held that Congress can legislate such a change. Thus
far, Congress has taken no action to that effect. e4L is prepared to collect
sales taxes for other states if laws are passed requiring such collection. e4L
does not believe that a change in the laws requiring the collecting of sales
taxes will have a material adverse effect on e4L's financial condition or
results of operations.
Employees
As of June 15, 2000, e4L had approximately 253 full-time employees. e4L
also utilizes contract and part-time personnel on an as needed basis. None of
e4L's employees is covered by collective bargaining agreements and management
considers relations with its employees to be good.
11
<PAGE>
Trademarks and Patents
e4L has a number of registered trademarks and other common law trademark
rights for certain of its products and marketing programs. It is e4L's policy
to seek to fully protect and vigorously defend its trademark rights in its
products and programs, although e4L often will not actively seek to register
certain trademarks in all jurisdictions where its sells its products. e4L does
not hold any patents, but the products which e4L markets are often protected
by patents (or the subject of pending patent applications) held by the
product's inventor or manufacturer. e4L seeks to have its product inventors
and/or manufacturers indemnify e4L against claims that the product being
marketed by e4L does not infringe on a third party's patent rights.
ITEM 2. PROPERTIES
e4L currently leases approximately 23,200 square feet in Los Angeles,
California for its corporate headquarters and television post-production
facility. e4L does not maintain any television studio space. The lease, which
commenced in May 1997, runs for 126 months and requires payments at varying
rates from $520,000 in the first year to $662,000 in the final year. e4L
currently has approximately 10,000 square feet of excess office space
available for subletting or future expansion within this facility, and is
presently attempting to sublease all or a portion of this excess space.
e4L currently leases approximately 25,200 square feet of office space
pursuant to an eleven year lease for its former executive offices in
Philadelphia, Pennsylvania. The lease, which commenced in December 1996,
provides for annual rent payments of $479,000 in years one through five, and
$568,000 in years 6 through 11. Pursuant to the terms of such lease, e4L's
rent was abated from inception of the lease through November 1, 1997. In
October 1998, e4L made a decision to close its corporate headquarters in
Philadelphia, and relocate its headquarters to its offices in Los Angeles,
California. e4L has subsequently subleased its former corporate offices for
average annual rent payments of $337,000 for the remainder of the term of the
lease.
e4L leases approximately 188,000 square feet in Phoenix, Arizona for
warehousing, order fulfillment and customer service operations. e4L currently
has approximately 60,000 square feet of office space available for subletting
or expansion. The annual lease payments for this lease range from
approximately $707,000 for fiscal year 2000 to $1.1 million for fiscal years
2010 through 2014. e4L is presently in the process of attempting to sublease
all or a portion of this facility.
e4L leases approximately 10,800 square feet of office space in London,
England, approximately 3,600 square feet of which it currently sublets. The
lease expires in February 2001. The lease requires annual rent payments of
approximately (Pounds)269,000 ($428,000 as of March 31, 2000). Additionally,
pursuant to the terms of the lease, e4L must pay a basic service charge for
services provided by the landlord. For the fiscal year ended March 31, 2000,
e4L paid a basic service charge of approximately $64,500.
e4L leases an office building, warehouse, showroom facility and retail
stores in Auckland, New Zealand. The main lease, which commenced on April 1,
1996, is for ten years and requires annual payments of approximately $158,340
as of March 31, 2000. In addition, e4L entered into a three-year lease with a
three-year renewal option, beginning in August 1997, for its primary offices,
warehouse and retail store in Sydney, Australia. The lease requires annual
payments of AUS $571,400 ($346,600 as of March 31, 2000). This amount includes
approximately $47,000 per year for general area charges and maintenance.
e4L also leases retail stores in New Zealand for aggregate annual payments
of approximately NZ $247,500 ($128,400 as of March 31, 2000).
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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
this result would have a material adverse impact on e4L's results of
operations or financial condition.
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 matters. 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
Settlement of Executive Officer Loans and Advance
During November 1998, e4L entered into an employment agreement with an
executive pursuant to which, among other things, e4L loaned the executive
$545,000 with interest at the prime rate of interest plus 1 1/2 percent. As
collateral for the loan, the executive originally pledged 339,784 shares of
e4L common stock owned by the executive, which collateral was subsequently
released by e4L between April 1999 and October 1999. The executive also held
an allowance from e4L in the amount of $18,000, bearing no interest, and acted
as a surety for a debt owing to e4L in the amount of $44,376 at December 31,
1999.
During January 2000, e4L and the executive entered into a settlement
agreement and mutual release ("Settlement Agreement") with respect to the
amounts owed and certain other claims. Under the terms of the Settlement
Agreement, e4L agreed to forgive the loan and interest due thereon of
$660,454, the allowance was offset against certain amounts owed to the
executive by e4L, and the executive agreed to repay the remaining surety debt
and interest on or before March 31, 2000, which amount was paid. In addition,
certain employee stock options granted to the executive were extended through
December 31, 2000, and the executive's employment with e4L was terminated
effective March 31, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on January 20, 2000 for
the following purposes: (a.) to consider and vote upon the election of five
directors, (b.) to consider and approve an amendment to e4L's 1991 Stock
Option Plan increasing the number of shares of common stock available for
awards thereunder by 500,000 shares, and (c.) to consider and approve Ernst &
Young LLP, independent certified public accountants, as e4L's auditors for the
fiscal year ending March 31, 2000. All of the proposals were approved as
follows:
<TABLE>
<CAPTION>
Against
For or Withheld Abstain
---------- ----------- -------
<C> <S> <C> <C> <C>
a. Election of five directors:
Stuart D. Buchalter....................... 32,449,837 1,990,420 574,540
Stephen C. Lehman......................... 32,855,747 1,584,510 168,630
David E. Salzman.......................... 33,021,987 1,418,270 2,390
Andrew M. Schuon.......................... 33,015,487 1,424,768 8,888
Eric R. Weiss............................. 32,857,587 1,582,670 166,790
b. Ratification of amendment to 1991 Stock
Option Plan.............................. 29,660,971 4,503,373 275,913
c. Ratification of Ernst & Young LLP,
independent certified public accountants,
as auditors for the fiscal year ending
March 31, 2000........................... 34,219,766 125,104 95,387
</TABLE>
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON E4L'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
e4L's common stock is listed on the NYSE, and until June 23, 1999 was
listed on the Philadelphia Stock Exchange at which time e4L elected not to
continue its Philadelphia Stock Exchange listing.
The following table sets forth the quarterly high and low last sales prices
as reported on NYSE. e4L's common stock has been traded on the NYSE since
September 14, 1990.
<TABLE>
<CAPTION>
2000 1999
--------------- ------------------
Fiscal Quarter Ended High Low High Low
-------------------- ------ -------- --------- --------
<S> <C> <C> <C> <C>
June 30...................................... $8 $5 13/16 $ 2 13/16 $1 1/16
September 30................................. $7 $3 1/2 $ 6 1/8 $1 3/8
December 31.................................. $4 $1 7/16 $12 3/16 $2 9/16
March 31..................................... $3 3/8 $2 $10 7/16 $5 11/16
</TABLE>
Management believes that the number of record holders of e4L's common stock
on May 30, 2000 was approximately 796. e4L is currently restricted in its
ability to pay dividends on its common stock under the terms of its credit
facility and various equity financings as more fully described in Notes 5 and
6 to the consolidated financial statements. No dividends were declared in
fiscal years 2000 and 1999.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenue.................. $241,111 $327,850 $278,474 $358,179 $292,607
======== ======== ======== ======== ========
(Loss) income before income
taxes (3), (4), (5), (6).... $(35,908) $(48,034) $(56,069) $(43,794) $ 20,104
======== ======== ======== ======== ========
Net (loss) income (3), (4),
(5), (6).................... $(35,908) $(43,598) $(56,769) $(45,691) $ 1,579
======== ======== ======== ======== ========
Net (loss) income per common
share (7):
Basic...................... $ (1.16) $ (1.70) $ (2.31) $ (2.09) $ 1.08
======== ======== ======== ======== ========
Diluted.................... $ (1.16) $ (1.70) $ (2.31) $ (2.09) $ 0.73
======== ======== ======== ======== ========
Weighted average number of
shares outstanding:
Basic...................... 34,691 27,054 24,904 21,905 15,411
======== ======== ======== ======== ========
Diluted.................... 34,691 27,054 24,904 21,905 22,674
======== ======== ======== ======== ========
Balance Sheet Data:
Working capital.............. $ 12,533 $ 14,275 $ 9,442 $ 19,768 $ 38,722
======== ======== ======== ======== ========
Total assets................. $ 71,610 $ 98,515 $135,221 $160,861 $111,459
======== ======== ======== ======== ========
Short-term debt(1)........... $ 5,180 $ 8,119 $ 30,812 $ 17,901 $ 876
======== ======== ======== ======== ========
Long-term debt(2)............ $ 3,611 $ 135 $ 469 $ 959 $ 4,054
======== ======== ======== ======== ========
Shareholders' equity......... $ 18,549 $ 37,747 $ 54,327 $ 88,560 $ 56,462
======== ======== ======== ======== ========
</TABLE>
--------
(1) Net of loan discount of $0.2 million, $0.9 million and $0.8 million as of
March 31, 2000, 1998 and 1997, respectively.
(2) Net of loan discount of $0.2 million and $1.3 million as of March 31,
2000, and 1996, respectively.
14
<PAGE>
(3) Fiscal year 2000 includes a $7.5 million write-off of impaired goodwill
which was determined to be unrecoverable; $0.4 million of unusual charges
related to a failed merger; a $5.9 million write-off attributable to the
Satellite Sublease; and a $8.5 million loss on investment in Buyitnow LLC.
(4) As more fully described in the notes to e4L's consolidated financial
statements, fiscal year 1999 includes unusual charges of $20.2 million, an
extraordinary gain on extinguishment of long-term debt of $4.9 million, a
gain of $6.5 million related to the sale of an investment in common stock
and a write-off of goodwill of $11.3 million.
(5) Fiscal year 1998 includes a $14.5 million write-off of impaired goodwill,
which was determined to be unrecoverable; $1.9 million of unusual charges
for compensation expense and $6.5 million of provisions for inventory
obsolescence.
(6) Fiscal year 1997 includes the operating results of certain subsidiaries
for only a portion of the year as follows: Positive Response Television,
Inc. ("PRTV") from May 17, 1996; and QPE and SP from July 1, 1996. In
addition, the fiscal year 1997 loss includes $8.7 million of provisions
for inventory obsolescence; $5.7 million of bad debt expense; $13.3
million of legal fees and settlements; $2.5 million of amortization
attributable to new acquisitions; a $4.4 million write-off of impaired
goodwill of PRTV; and PRTV's significant operating loss.
(7) Fiscal year 1999 loss per common share is net of an extraordinary gain on
extinguishment of long-term debt of $0.18 per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
e4L is engaged in the direct marketing of consumer products, primarily
through direct response television programming (also known as "infomercials"),
wholesale/retail distribution and electronic commerce on a global basis and
the marketing of membership services through its 50% owned subsidiary,
Promenade. In the United States, e4L has historically been dependent on a
limited number of successful products to generate a significant portion of its
net revenue. e4L's current strategies attempt 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 to more efficiently deal with the cyclical nature of
e4L's business.
The principal components of e4L's strategies include the expansion of its
wholesale/retail distribution, continuity, electronic commerce and membership
services businesses. e4L attempts to accomplish this by leveraging its
substantial media expenditures, first 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 through membership services, as well as wholesale/retail
distribution of products, expanded up-sell programs, continuity programs and
customer list rental. e4L's direct response television programming is viewed
as a vehicle 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.
International expansion over the last five years has resulted in
approximately 36.5% of e4L's revenue being generated outside of the United
States. e4L takes advantage of product awareness created by its television
direct response programming 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.
15
<PAGE>
e4L's revenue varies throughout the year. e4L's revenue has 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, expansion of e4L's
wholesale/retail distribution and continuity businesses, and the potential
growth in e4L's electronic commerce and membership services businesses.
In the discussion and analysis that follows, e4L discusses its "EBITDA" and
"EBITDA Margin." EBITDA consists of net income before interest, provision for
income taxes, depreciation and amortization, extraordinary gain on
extinguishment of debt, gain on sale of investment 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 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 within its industry, 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>
Year Ended March 31,
---------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Statements of Operations
Data:
Net Revenue............... 100.0% 100.0% 100.0%
Operating costs and
expenses:
Media................... 29.9 34.6 33.0
Product and other
direct................. 60.7 57.8 60.2
Selling, general and
administrative......... 12.0 11.6 17.3
Depreciation,
amortization and non-
cash compensation...... 2.3 2.1 2.5
Write-off of impaired
goodwill............... 3.1 3.4 5.2
Unusual charges......... 2.6 6.2 0.7
----- ----- -----
Total operating costs and
expenses................. 110.7 115.7 118.9
----- ----- -----
Loss from operations...... (10.7) (15.7) (18.9)
Other (income)/expenses:
(Gain) on sale of
investment............. 0.0 (2.0) 0.0
Loss on equity
investment............. 3.5 0.0 0.0
Interest expense........ 0.7 1.0 1.2
----- ----- -----
Loss before income taxes
and extraordinary item... (14.9) (14.7) (20.1)
Income taxes.............. 0.0 0.1 0.3
----- ----- -----
Loss before extraordinary
item..................... (14.9) (14.8) (20.4)
Extraordinary item........ 0.0 1.5 0.0
----- ----- -----
Net loss.................. (14.9%) (13.3%) (20.4%)
===== ===== =====
</TABLE>
Year Ended March 31, 2000 As Compared to Year Ended March 31, 1999
Net Revenue
Net revenue was $241.1 million for the year ended March 31, 2000, as
compared to $327.9 million for the year ended March 31, 1999, a decrease of
$86.8 million or 26.5%.
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Net revenue in the United States for the year ended March 31, 2000 was
$153.0 million as compared to $197.6 million for the year ended March 31,
1999, a decrease of $44.6 million or 22.5%. The decrease was primarily
attributable to lower media expenditures, and fewer new programs "rolled-out"
during the year, which was the result of e4L's revised strategy of placing
less reliance on "up-front" direct response television sales and more emphasis
on wholesale/retail and electronic commerce distribution of products. The year
ended March 31, 2000 included one program which generated over $20.0 million
in net revenue and comprised over 15% of total net revenue. The comparable
twelve month period of fiscal year 1999 included five programs which generated
in excess of $20.0 million of net revenue and only one of which comprised over
15% of total net revenue. The highest grossing products in fiscal years 2000
and 1999 generated approximately 43.2% and 20.2% of total United States net
revenue, respectively.
International net revenue for the year ended March 31, 2000 was $88.1
million as compared to $130.3 million for the year ended March 31, 1999, a
decrease of $42.2 million or 32.4%. The decrease was attributable to a
combination of, among other things, adverse economic conditions experienced in
several e4L markets during all or a portion of fiscal year 2000, reduced media
expenditures or media availability in Europe, and the conversion of certain
markets to licensee arrangements. e4L's European business experienced a 65.4%
decline in net revenue due to the loss of two significant media contracts
during the fourth quarter of the fiscal year ended March 31, 1999. The decline
in Japanese net revenue was attributable to the unfavorable economic climate
during the first six months of fiscal year 2000, offset in part by increased
net revenue in the last six months of fiscal year 2000, which improvement
resulted from the success of a e4L's wholesale/retail strategy and an
improvement in the Japanese economy. In addition, e4L's operations in the
Austral-Asian region (other than Japan) was adversely impacted by the economic
downturn throughout that region, which resulted in a significant decline in
consumer spending. This region was also adversely impacted by the lack of
successful new products. e4L's Austral-Asian region (other than Japan) net
revenue for the year ended March 31, 2000 as compared to the year ended March
31, 1999 increased approximately $0.6 million or 33.9%.
e4L's sales return rate was 15.6% and 17.8% in fiscal year 2000 and 1999,
respectively. This decreased overall return rate was attributable to an
increase in wholesale/retail sales in both the United States and the Austral-
Asia region.
Operating Costs and Expenses
Total operating costs and expenses were $266.8 million for the year ended
March 31, 2000 as compared to $379.2 million for the year ended March 31,
1999, a decrease of $112.4 million or 29.6%. Included in operating costs
during fiscal year 2000 and 1999 are unusual and restructuring charges and
write-offs of impaired goodwill. Excluding these amounts, operating costs for
the year ended March 31, 2000 decreased by $94.8 million or 27.3% as compared
to operating costs for the year ended March 31, 1999. The fiscal year 2000
decrease was primarily attributable to the decrease in net revenue of 26.5%, a
reduction in media spending and a decrease in selling, general and
administrative expenses. The decrease in operating costs is more fully
described below.
Media
Media purchases were $72.0 million for the year ended March 31, 2000 as
compared to $113.6 million for the year ended March 31, 1999, a decrease of
$41.6 million or 36.6%. e4L's worldwide ratio of media purchases to net
revenue decreased to 29.9% for the year ended March 31, 2000 as compared to
34.6% for the year ended March 31, 1999. The decrease in media purchases as a
percentage of net revenue was attributable to approximately $7.6 million in
United States media costs being contributed to Buyitnow LLC and recorded as a
loss on investment. In addition, e4L's wholesale/resale revenues, which carry
no direct media costs, have increased in both the United States and the
Austral-Asian region.
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Product and Other Direct Costs
Product and other direct costs consist of the cost of inventory and
materials, freight, television and radio program production, commission and
royalties, order fulfillment, in-bound telemarketing, credit card
authorization and processing and warehousing. Product and other direct costs
were $146.4 million for the year ended March 31, 2000 as compared to $189.4
million for the year ended March 31, 1999, a decrease of $42.9 million or
22.7%. The decrease was primarily attributable to the decrease in net revenue.
As a percentage of net revenue, product and other direct costs were 60.7% for
the year ended March 31, 2000 as compared to 57.9% for the year ended March
31, 1999. The increase as a percentage of net revenue was attributable to a
change in product mix, and the effect of the reduced sales volume in relation
to certain fixed and semi-variable costs of fulfillment and in-bound
telemarketing.
Selling, General and Administrative
Selling, general and administrative expense was $29.0 million for the year
ended March 31, 2000 as compared to $37.9 million for the year ended March 31,
1999, a decrease of $8.9 million or 23.5%. The decrease in selling, general
and administrative expense was attributable to e4L's continued cost reduction
and restructuring efforts. Selling, general and administrative expense as a
percentage of net revenue increased to 12.0% for the year ended March 31, 2000
from 11.6% for the year ended March 31, 1999, principally attributable to the
effects of certain fixed costs in relation to the 26.5% decrease in net
revenue.
Depreciation, Amortization and Non-cash Compensation
Depreciation, amortization and non-cash compensation were $5.4 million for
the year ended March 31, 2000 as compared to $6.8 million for the year ended
March 31, 1999, a decrease of $1.3 million, or 19.8%. The decrease in
depreciation and amortization was attributable to the write-off of goodwill
and other intellectual properties associated with QPE and SP during fiscal
year 1999 resulting in lower amortization expense during fiscal year 2000. In
addition, the acceleration of depreciation of certain assets over the
estimated remaining useful life resulting from the decision to outsource
various aspects of the United States operations during fiscal year 1999
resulted in decreased depreciation expense during fiscal year 2000.
Write-off of Impaired Goodwill
Fiscal year 2000 included a write-off of impaired goodwill of $7.5 million
attributable to e4L's acquisitions of DirectAmerica Corporation and the
"Flying Lure" business. Fiscal year 1999 included a write-off of impaired
goodwill of $11.3 million attributable to QPE and SP.
Unusual Charges
During fiscal year 2000, e4L wrote-off approximately $0.4 million
attributable to the termination of its intended purchase of Flageoli Limited
and $5.9 million attributable to broker commissions and other costs of the
Satellite Sublease. Costs associated with the Satellite Sublease are payable
over approximately a ten year period.
In connection with a transaction pursuant to which an investor group led by
certain e4L senior executives purchased $20.0 million of e4L's Series E
Preferred Stock and $10.0 million of e4L's series D Preferred Stock, and
assumed operational control of e4L during October 1998 (the "Transaction"),
e4L has undertaken specific actions to reduce its overall cost structure and
transition its business model from a television direct marketing company to an
electronic commerce and membership services company. Certain of these actions
had resulted in pre-tax restructuring and unusual charges during fiscal year
1999 of $20.2 million.
Loss on Equity Investment of BuyItNow, LLC
During the year ended March 31, 2000, e4L recorded a loss on its equity
investment in Buyitnow LLC of $8.5 million. Because Buyitnow LLC is not
majority owned or controlled by e4L, e4L has accounted for its
18
<PAGE>
investment in Buyitnow LLC under the equity method of accounting. The loss
represents the write-down of e4L's investment in Buyitnow LLC, including the
allocation of $7.6 million of television media as part of e4L's investment.
Interest Expense
Interest expense was $1.7 million for the year ended March 31, 2000, as
compared to $3.2 million for the year ended March 31, 1999, an decrease of
$1.5 million or 46.8%. This decrease was primarily attributable to a decrease
in average outstanding indebtedness from $20.3 million during fiscal year 1999
to $14.3 million during fiscal year 2000.
Income Taxes
e4L recorded income tax expense of $0.4 million for the year ended March
31, 1999, attributable to certain of its international operations. No income
tax expense has been recorded for the year ended March 31, 2000. Income tax
benefits have not been recorded during the respective periods on United States
and certain international losses. These benefits will be recorded when
realized, reducing the effective tax rate on future United States and European
earnings.
Earnings Before Interest, Depreciation and Amortization (EBITDA) Deficit
EBITDA deficit exclusive of the unusual charges, gain on extinguishment of
debt, write-off of impaired goodwill and gain on sale of investment, was
$(6.3) million for the year ended March 31, 2000 as compared to an EBITDA
deficit of $(13.0) million for the year ended March 31, 1999, an improvement
of $6.7 million or 51.3%. EBITDA margin deficit, exclusive of the above items,
was (2.6%) and (4.0%) for the years ended March 31, 2000 and 1999,
respectively. The improvements in EBITDA and EBITDA margin deficit were
primarily attributable to the allocation of television media as part of e4L's
investment in Buyitnow LLC.
Net Loss
e4L incurred a net loss of $35.9 million for the year ended March 31, 2000,
as compared to a net loss of $43.6 million for the year ended March 31, 1999.
The year ended March 31, 2000 included $6.4 million of unusual charges, a
write-off of impaired goodwill of $7.5 million and a loss on equity investment
of $8.5 million. The year ended March 31, 1999 includes unusual charges of
$20.2 million, a gain on sale of investments of $6.5 million, an extraordinary
gain on extinguishment of debt of $4.9 million and a write-off of impaired
goodwill of $11.3 million. Excluding these items e4L incurred a net loss of
$13.5 million for the year ended March 31, 2000 as compared to a net loss of
$23.5 million for the year ended March 31, 1999. This represents a $10.0
million, or 42.5% improvement as compared to the results of operations for the
year ended March 31, 1999.
Year Ended March 31, 1999 As Compared to Year Ended March 31, 1998
Net Revenue
Net revenue was $327.9 million for the year ended March 31, 1999, as
compared to $278.5 million for the year ended March 31, 1998, an increase of
$49.4 million or 17.7%.
Net revenue in the United States for the year ended March 31, 1999 was
$197.5 million as compared to $123.6 million for the year ended March 31,
1998, an increase of $74.0 million or 59.9%. The increase was primarily
attributable to a greater number of successful direct response television
programs and products during fiscal year 1999. The year ended March 31, 1999
included five programs which generated over $20.0 million in net revenue and
only one program which comprised over 15% of total net revenue. The comparable
twelve month period of fiscal year 1998 included only two programs which
generated in excess of $20.0 million of net
19
<PAGE>
revenue and three of which comprised over 15% of total net revenue. The top
products in fiscal years 1999 and 1998 generated approximately 20.2% and 16.8%
of total United States net revenue, respectively.
International net revenue for the year ended March 31, 1999 was $130.3
million as compared to $154.9 million for the year ended March 31, 1998, a
decrease of $24.6 million or 15.9%. The decrease was attributable to a 17.8%
decline in net revenue in Japan. The decline in Japanese revenues was
primarily due to the unfavorable economic climate in Japan. Approximately 4.2%
of the annual decline was attributable to the unfavorable economic climate in
Japan in the first six months of fiscal year 1999. Japanese net revenue,
however, increased in the last six months of fiscal year 1999 as compared to
fiscal year 1998 due to the success of a wholesale/retail strategy and an
improvement in the Japanese economy. In addition, e4L's operations in the
Austal-Asian region continued to experience the negative impact of the
economic downturn throughout that region, which resulted in a significant
decline in consumer spending. This region also suffered from a lack of
successful new products. e4L's Austral-Asian (other than Japan) net revenue
for the year ended March 31, 1999 as compared to the year ended March 31, 1998
decreased approximately $14.9 million or 33.9%. Approximately 14.7% of the
decline was the result of currency devaluation. European net revenue was
consistent with that of fiscal year 1998. During the forth quarter of fiscal
year 1999, European net revenue decreased 15.0% compared to fiscal 1998 due to
the loss of two significant media contracts during the quarter. While the loss
of these media contracts may cause European net revenue to continue to decline
in fiscal year 2000, e4L believes it can maintain or improve its overall
European profitability by replacing the lost media and revenue with additional
wholesale/retail sales and alternative media. The European operations
generated an additional $2.8 million of wholesale/retail net revenue in fiscal
year 1999 as compared to fiscal year 1998.
e4L's return rate was 17.8% and 15.7% in fiscal year 1999 and 1998,
respectively. This increased overall return rate was attributable to an
increase in sales of higher priced products, increased percentage of
intellectual property products and higher continuity sales. Sales of these
types of products and nature have historically carried higher return rates. In
addition, the increased product backlogs in the United States in fiscal year
1999 as compared to fiscal year 1998 resulted in increased returns.
Operating Costs and Expenses
Total operating costs and expenses were $379.2 million for the year ended
March 31, 1999 as compared to $331.1 million for the year ended March 31,
1998, an increase of $48.1 million or 14.5%. Included in operating costs
during fiscal year 1999 and 1998 are unusual and restructuring charges and
write-offs of impaired goodwill. Excluding these amounts, operating costs for
the year ended March 31, 1999 increased by $33.0 million or 10.5% as compared
to operating costs for the year ended March 31, 1998. The fiscal year 1999
increase was primarily attributable to the increase in net revenue of 17.7%,
which was partially offset by a reduction in direct costs as a percentage of
net revenue and a decrease in selling, general and administrative expenses.
The increase in operating costs is more fully described below.
Media
Media purchases were $113.6 million for the year ended March 31, 1999 as
compared to $91.9 million for the year ended March 31, 1998, an increase of
$21.7 million or 23.6%. e4L's worldwide ratio of media purchases to net
revenue increased to 34.6% for the year ended March 31, 1999 as compared to
33.0% for the year ended March 31, 1998. The increase in media purchases as a
percentage of net revenue was attributable to the increased proportion of
United States revenue in relation to international revenue, which United
States revenue carries greater media costs. United States net revenue
represented 60.3% of total net revenue for the year ended March 31, 1999 as
compared to only 44.4% for the year ended March 31, 1998.
Product and Other Direct Costs
Product and other direct costs consist of the cost of inventory and
materials, freight, television and radio program production, commission and
royalties, order fulfillment, in-bound telemarketing, credit card
20
<PAGE>
authorization and processing and warehousing,. Product and other direct costs
were $189.4 million for the year ended March 31, 1999 as compared to $167.5
million for the year ended March 31, 1998, an increase of $21.8 million or
13.0%. The increase was primarily attributable to the 17.7% increase in net
revenue. As a percentage of net revenue, product and other direct costs were
57.8% for the year ended March 31, 1999 as compared to 60.2% for the year
ended March 31, 1998. The decrease as a percentage of net revenue was
attributable to a reduction in both United States and international product
and other direct costs.
The decrease in United States product and other direct costs as a
percentage of net revenue was primarily attributable to increased United
States net revenue and the nature of certain fixed costs associated with e4L's
fulfillment center and television production activities. The decrease in
foreign product and other direct costs as a percentage of net revenue was
primarily attributable to a European and Middle East operations, which were
offset in part by increased costs of e4L's Austral-Asian operations. Lower
South Pacific Rim net revenues in relation to certain fixed and semi-variable
costs associated with operations in these regions resulted in increased costs
in relation to net revenue. The decrease in European product and other direct
costs as on percentage of net revenues in fiscal year 1999 as compared to
fiscal year 1998 is attributable to the favorable impact of a higher average
selling prices in relation to certain fixed fulfillment costs and a reduction
in production costs.
Selling, General and Administrative
Selling, general and administrative expense was $37.9 million for the year
ended March 31, 1999 as compared to $48.2 million for the year ended March 31,
1998, a decrease of $10.2 million or 21.2%. The decrease in selling, general
and administrative costs reflects e4L's continued cost reduction and
restructuring efforts. Selling, general and administrative expense as a
percentage of net revenue decreased to 11.6% for the year ended March 31, 1999
to 17.3% for the year ended March 31, 1998, principally attributable to e4L's
cost reduction and restructuring efforts combined with the 17.7% increase in
net revenue.
Depreciation and Amortization
Depreciation and amortization were $6.8 million for the year ended March
31, 1999 as compared to $7.1 million for the year ended March 31, 1998, a
decrease of $0.3 million, or 3.9%. The decrease in depreciation and
amortization was attributable to the write-off of goodwill and other
intellectual properties associated with e4L's PRTV subsidiary during the
fourth quarter of fiscal year 1998 resulting in lower amortization expense
during fiscal year 1999. This was offset by the acceleration of depreciation
of certain assets over the estimated remaining useful life, resulting from the
decision to outsource various aspects of the United States operations which
resulted in increased depreciation expense during fiscal year 1999.
Write-off of Impaired Goodwill
Fiscal year 1999 included a write-off of impaired goodwill of $11.3 million
attributable to QPL and SP, e4L's operations in New Zealand and Australia,
respectively. The write-off was based upon an independent appraiser's
valuation of the underlying goodwill and other intellectual properties in
light of the current economic downturn being experienced in these markets.
Unusual Charges
In connection with the Transaction, e4L adopted a revised business plan
under the direction of its new management team and Board of Directors. As a
result, e4L has undertaken specific actions to reduce its overall cost
structure and transition its business model from a television direct marketing
company to an electronic commerce and membership services company. Certain of
these actions had resulted in pre-tax restructuring and unusual charges during
the year ended March 31, 1999 of $20.2 million.
e4L is continuing to evaluate all areas of its business, however, as a
result of the plans discussed below, e4L expects to remove a significant
amount of costs from its cost structure in fiscal year 2000 and beyond. These
21
<PAGE>
savings are predominantly due to wage related costs; reduced carrying costs of
property, plant and equipment; reduced office rent and satellite leasing
charges; and other miscellaneous cost savings.
The restructuring charges are primarily attributable to the following:
Closure of Philadelphia, Pennsylvania Headquarters. e4L made a decision to
close its former corporate headquarters in Philadelphia, Pennsylvania and
relocate its headquarters to its offices in Los Angeles, California. Included
in restructuring charges are $3.8 million of costs associated with the
termination of employees, loss on the subleasing of the existing office lease
and other commitments, and the write-down of assets that are no longer in use.
Such assets were sold or abandoned during the first quarter of fiscal year
2000. A total of 17 employees were terminated as part of e4L's plans to close
its corporate offices. Of the 17 employees affected, 16 have been paid and/or
left e4L as of March 31, 1999, and one (who was notified of his termination
during fiscal year 1999) will receive his severance package and leave e4L
during fiscal year 2000.
Consolidation of New Zealand and Far East Business Offices, and Closure of
Australian Retail Stores. e4L made a decision to reduce the size of its New
Zealand work force, by consolidating its previously separate New Zealand and
Far East business offices within one location, and shutting down unprofitable
Australian retail stores. The restructuring charges of $0.7 million are
primarily comprised of costs associated with the termination of employees,
cancellation of leases and other commitments, and the write-down of assets no
longer in use. Such assets had been sold or abandoned as of March 31, 1999. A
total of 46 employees were terminated as part of e4L's plans to consolidate
the two offices and close certain retail stores. Of the 46 employees effected,
32 have been paid and/or left e4L as of March 31, 1999, and 14 shall receive
his/her severance packages and leave e4L during the first quarter of fiscal
year 2000.
Outsourcing of Certain North American Operations. e4L is in the process of
outsourcing various aspects of its Phoenix, Arizona fulfillment center,
customer service operations, and media agency business. As a result, during
the third quarter of the year ended March 31, 1999 e4L disposed of its media
agency subsidiary and is in the process of transitioning its fulfillment and
customer service functions to third parties. The costs expensed as of March
31, 1999, of $3.4 million include costs primarily associated with the
termination of employees and cancellation of lease and other commitments. This
transaction is expected to be completed by the end of the third quarter of
fiscal year 2000.
Closure of Certain Asian and Eastern European Markets. Due to the economic
downturn in Asia and Eastern Europe, the forecasted sales and opportunities in
these regions have decreased significantly from e4L's original plans.
Accordingly, e4L made a decision to exit certain Asian and Eastern European
markets and/or transfer such markets to third party licensee arrangements. The
costs included in the restructuring charges of $2.0 million are costs incurred
in connection with the termination of 12 employees, all of which terminations
were completed and paid as of March 31, 1999, and the write-down of
inventories and uncollectable trade accounts receivable in the affected
markets.
Write-down of Prepaid Production. Also included in the restructuring charge
is $2.6 million of costs related to the write-down of certain prepaid costs
attributable to the production of its direct response television programming.
e4L made a fundamental change in its strategy involving the use of its
programs. In connection with its revised business model, new electronic
commerce platform and other initiatives, e4L has begun utilizing its programs
not only for the sale of underlying products, but has begun leveraging its
wholesale programs and television media to drive memberships in its membership
shopping club, Everything4Less, to exploit a retail market and continuity
programs for its products, and to create list rental opportunities with
respect to its customer base.
Other unusual charges consist of the following:
Shopping Club Start-Up Costs. $1.2 million of start-up costs associated
with the development and production of commercials related to e4L's
Everything4Less membership shopping club.
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Eutelstat Satellite Contract. e4L entered into a long-term commitment to
lease a transponder on the Eutelstat satellite for the life of the satellite.
The satellite launched in April 1998, and e4L has an estimated commitment of
10 to 12 years. e4L has classified the satellite contract as unfavorable, as
it has estimated that it will be unable to recover certain costs relating to
its lease. Accordingly, e4L has included in unusual charges $5.3 million
relating to its inability to recover a portion of costs attributable to the
Eutelstat Satellite lease.
Change of Control Payments. As part of the Transaction, e4L recorded
severance charges of $1.8 million associated with the waiver of the change of
control provisions contained in the employment agreements of three former
executive officers.
Consulting Fees. In connection with the Transaction, e4L recorded a non-
cash charge of $0.2 million in connection with a five year option to purchase
up to 212,500 shares of e4L Common Stock at an exercise price of $1.32 per
share that were granted to a management company of which Messrs. Lehman, Weiss
and Yukelson are managing members. In addition, e4L recorded $0.4 million
related to the termination of a consulting agreement.
Write-off of Merger Costs. In June 1998, e4L wrote off capitalized costs of
$0.7 million related to the termination of e4L's intended merger with
ValueVision International, Inc. ("ValueVision").
Non-cash Executive Compensation. e4L had previously recorded compensation
expense of $1.9 million in connection with 750,000 stock options issued to
e4L's former chief executive officer and two other former executive officers
during fiscal year 1998. The stock options contained provisions that, upon the
occurrence of certain triggering events prior to June 30, 1998, the exercise
price of the stock options would be reduced. The previously recorded expense
was reversed in the first quarter of fiscal year 1999 as no triggering events
occurred as of the June 30, 1998 expiration date.
Gain of Sale of Investment
During the year ended March 31, 1999, e4L recognized a gain on the sale of
an investment in common stock of Earthlink Corporation of $6.5 million.
Interest Expense
Interest expense was $3.2 million for the year ended March 31, 1999, as
compared to $3.5 million for the year ended March 31, 1998, an decrease of
$0.3 million. This decrease was primarily attributable to a decrease in
average outstanding indebtedness from $26.6 million during fiscal year 1998 to
$20.3 million during fiscal year 1999.
Income Taxes
e4L recorded income tax expense of $0.4 million and $0.7 million for the
years ended March 31, 1999 and 1998, respectively, attributable to certain of
its international operations. Income tax benefits have not been recorded
during the respective periods on United States and certain international
losses. These benefits will be recorded when realized, reducing the effective
tax rate on future United States and European earnings.
Extraordinary Item--Gain on Extinguishment of Long-Term Debt
The gain on extinguishment of long-term debt resulted from e4L's retirement
of its approximately $21.5 million debt outstanding under a revolving credit
and term loan with its then principle lender at a twenty-five percent
discount.
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Earnings Before Interest, Depreciation and Amortization (EBITDA) Deficit
EBITDA deficit exclusive of the unusual charges, gain on extinguishment of
debt, write-off of impaired goodwill and gain on sale of investment, was
$(13.0) million for the year ended March 31, 1999 as compared to an EBITDA
deficit of $(29.1) million for the year ended March 31, 1998, an improvement
of $16.1 million or 55.3%. EBITDA margin deficit, exclusive of the above
items, was (4.0%) and (10.5%) for the years ended March 31, 1999 and 1998,
respectively. The improvements in EBITDA and EBITDA margin deficit were
primarily attributable to the improvement in e4L's United States, Japanese and
European results of operations.
Net Loss
e4L incurred a net loss of $43.6 million for the year ended March 31, 1999,
as compared to a net loss of $56.8 million for the year ended March 31, 1998.
The current fiscal year includes unusual charges of $20.2 million, a gain on
sale of investments of $6.5 million, an extraordinary gain on extinguishment
of debt of $4.9 million and a write-off of impaired goodwill of $11.3 million.
Fiscal year 1998 included a write-off of goodwill of PRTV of $14.5 million and
unusual charges of $1.9 million. Excluding these items e4L incurred a net loss
of $23.5 million for the year ended March 31, 1999 as compared to a net loss
of $40.3 million for the year ended March 31, 1998. This represents an $16.9
million, or 41.8%, improvement as compared to the results of operations for
the year ended March 31, 1998.
Liquidity and Capital Resources
e4L's working capital was $12.5 million at March 31, 2000 as compared to
$14.3 million at March 31, 1999 a decrease of $1.8 million. Operating
activities for the year ended March 31, 2000 resulted in a use of cash of
$22.3 million. e4L's cash flow from operations during the year ended March 31,
2000 was adversely impacted by the net loss of approximately $35.9 million.
The $1.0 million increase in restricted cash from March 31, 1999 to March
31, 2000 is attributable to credit card deposits held by e4L's Visa Card
processor as a reserve for credit card chargebacks and fees in the
United States. The restricted cash balance may be adjusted periodically based
upon e4L's future credit card chargeback activity.
Consolidated accounts receivable decreased by $15.3 million, or 43.2%,
primarily due to a decrease in United States accounts receivables of $12.1
million and a decrease in European accounts receivable of $2.9 million. United
States and European accounts receivable decreased due to a decrease in time
payment receivables which was attributable to the lower sales volume in these
markets. Consolidated inventories increased $2.5 million or 14.5%. This
increase was attributable to a $2.7 million increase in Austral-Asian
inventory as a result of the increased inventory requirements necessary to
operate the regions wholesale/retail business.
During June 2000, QIL entered into the Satellite Sublease. The Satellite
Sublease is to commence on August 1, 2000 with annual sublease payments of 3.0
million Euros ($2.9 million as of March 31, 2000) during the first year, and
3.4 million Euros ($3.2 million as of March 31, 2000) each year thereafter
through March 30, 2010.
During May 2000, e4L executed a non-binding Letter of Intent, as amended,
with two venture capital companies, pursuant to which, among other things,
these two companies and certain members of management will purchase 75% of the
equity of e4L's QIJ, QPE and SP subsidiaries for approximately $44.0 million
(approximately $38.0 million after repayment of inter-company debt). Closing
of the transaction, which is anticipated to occur during the second fiscal
quarter of 2001, is subject to normal closing conditions, including completion
of satisfactory due diligence, and finalization of definitive agreements.
During March 2000, e4L consummated a transaction pursuant to which the
Preferred Investors purchased an aggregate of $10.0 million of Series G/H
Preferred Stock. The Series G/H Preferred Stock carries a 4% annual premium
payable, at e4L's option, in cash or e4L common stock at the time of
conversion.
24
<PAGE>
On August 30, 1999, e4L consummated a transaction pursuant to which the
Series F Investors purchased $5.0 million Series F Convertible Preferred
Stock. Proceeds net of related costs were approximately $4.6 million. The
Series F Preferred Stock is convertible into 1,061,008 shares of common stock
of e4L. 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 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 (7%) per annum. A commitment fee of one-
quarter percent per annum is paid on the unused portion of the Credit
Agreement.
During November 1999 and January 2000, e4L and its senior lender entered
into a series of amendments of the Credit Agreement pursuant to which e4L was
provided with a short-term overadvance and over-line facility, which provided
e4L with up to $2.5 million of additional borrowing availability under its
Credit Agreement. In connection with the amendments, e4L agreed to certain
additional convenants under the Credit Agreement, including among others,
minimum EBITDA and limitations on weekly media expenditures. In addition, e4L
and the senior lender agreed to extend the maturity of the Credit Facility
until December 2002.
In February 2000, e4L amended the Credit Agreement whereby it obtained a
$5.0 million term loan ("Term Loan"). The Term Loan bears interest at the rate
of 13% per annum, and is due in December 2002 concurrent with the expiration
of the Credit Agreement. In connection with the Term Loan, e4L granted to its
senior lender 5-year warrants to purchase 325,000 shares of its common stock
at an exercise price of $2.5625 per share. Also, in connection with the Term
Loan, e4L re-paid amounts then outstanding under the short-term over advance
and over-line facility.
At March 31, 2000, e4L had $6.9 million in total availability under its
term loan and senior credit facility, of which $4.0 million was outstanding as
principal borrowings and there were no outstanding letters of credit. In
addition, $5.0 million of principal under the Term Loan was outstanding at
March 31, 2000.
e4L's foreign revenue is subject to currency exchange risk. To the extent
e4L incurs expenses (e.g. order fulfillment and media costs) in local
currencies that are based upon locally denominated sales volume, this exposure
is reduced significantly. e4L monitors exchange rate and/or forward contracts
when appropriate and, depending upon market and other conditions, may attempt
to hedge its currency risk. During fiscal year 2000 e4L entered into forward
contracts to hedge its Japanese Yen position resulting in a net loss of $0.3
million for fiscal year 2000. At March 31, 2000, e4L has outstanding forward
contracts to hedge its Japanese Yen position in the amount of $0.9 million.
These contracts matured through May 2000. e4L has recognized an immaterial net
loss on these contracts subsequent to March 31, 2000. In the long term, e4L
has the ability to change prices 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 economic downturn being experienced in certain foreign regions
will 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, German Deutsche Mark, 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 three fiscal years and during the current year ended March
31, 2000. In order to improve e4L'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 products, the continued
deployment of wholesale/retail and electronic commerce strategies, the ability
to successfully leverage its media and the return to profitability. While the
potential sale of
25
<PAGE>
the 75% interest in e4L's Austral-Asian business, recent cost reductions and
the consummation of the Satellite Sublease, among other things, will help to
improve e4L's liquidity position, no assurances can be given that any of the
actions will be successful. e4L's auditors have qualified their opinion with
respect to e4L's March 31, 2000 financial statements citing "going-concern"
issues. e4L's ability to continue as a going concern is dependent upon its
ability to implement its business plan and strategies, and return itself to
profitability. Management believes, however, that the proceeds from the sale
of its Austral-Asian businesses (if consummated) will be sufficient to meet
e4L's operating requirements for the foreseeable future. Should e4L be unable
to successfully consummate the sale of the Austral-Asian business in a timely
manner, it will have to obtain additional debt or equity financing in order to
fund its current working capital requirements. No assurances can be given that
e4L will be able to obtain such financing or that such financing will be
sufficient to fund e4L's working capital needs.
Year 2000 Implications
Year 2000 remediation activities were successfully completed prior to
December 31, 1999 with minimal disruption, and as of June 15, 2000, no
material issues have surfaced in any of e4L's critical business systems,
operations or third party relationships. While e4L does not expect further
Year 2000 issues to arise, efforts to monitor critical systems and major
vendors through normal operational and support processes will continue.
Virtually none of e4L's products are date-sensitive.
e4L recognizes that issues related to Year 2000 constitute a material
uncertainty. E4L believes it has been taking reasonable steps to address Year
2000 issues. The failure to identify and remediate Year 2000 issues or the
failure of external third parties who do business with the e4L to effectively
remediate their Year 2000 issues could cause system failures or errors,
business interruptions and, in a worst case scenario, the inability to operate
in the ordinary course of business for an unknown length of time, which could
adversely impact e4L's results of operations, financial position or liquidity.
e4L incurred Year 2000 expenses of approximately $1.2 million through March
31, 2000. e4L does not expect to incur any additional costs associated with
the Year 2000 issue.
Factors That May Affect Future Performance
e4L Has Historically Suffered Losses Which Has Adversely Affected Cash Flow
and Going Concern
e4L incurred significant losses in four of its last five fiscal years. e4L
also reported a net loss of approximately $35.9 million for fiscal year March
31, 2000. Because of e4L's historical financial condition as well as other
unfavorable conditions, e4L's independent auditors stated in their report
dated June 26, 2000, that substantial doubt exists as to e4L's ability to
continue as a going concern. e4L has 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. While
e4L's management believes that the proceeds from the sale of its Austral-Asian
businesses will be sufficient to meet e4L's operating requirements for the
foreseeable future, no assurances can be given that it will be able to
successfully complete the sale transaction.
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 and 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;
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<PAGE>
. 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 historical 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
Austral-Asian markets. More recently, reduced media availability and limited
new products have negatively affected e4L's operating results. 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 all over the world. In recent years, e4L
has derived approximately forty percent of its net revenue from sales to
customers outside the United States. e4L's largest international markets are
Europe and Asia, primarily Japan, Australia and New Zealand. The economic
environment 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:
. adverse fluctuations in currency exchange rates;
. transportation delays and interruptions;
. political and economic disruptions;
. the imposition of tariffs and import and export controls; and
. 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
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
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<PAGE>
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, and the effective management of product
inventory and media time. Consumer 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. We cannot assure you
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 product life cycle in the United States and internationally 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, e4L cannot assure you that it 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 domestic 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 negative 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
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<PAGE>
and e4L's results of operations. In addition, use 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 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 also sell `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 negatively 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
negatively 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, e4L
cannot assure you that it 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 incurred significant
start-up costs in connection with the transponder lease. If e4L is unable to
use effectively or continue to sublease the remaining transponder media time,
e4L's future operations could be negatively 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. During June 2000, e4L entered into the
Satellite Sublease and wrote-off an additional $5.9 million attributable
principally to broker commissions and other costs, which will be incurred over
an approximate ten year period in connection with the sublease.
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 a negative effect on e4L's
business.
In June 2000, e4L received notice from the NYSE that it is considered
"below criteria" with respect to its market capitalization and stockholders'
equity in accordance with the Listing Criteria. In accordance with the Listing
Criteria, e4L is required, on or before July 29, 2000, to submit a business
plan to the NYSE, which demonstrates compliance with the $50.0 million minimum
market capitalization and stockholders' equity requirement contained in the
Listing Criteria within 18 months of submitting its plan, and to issue a press
release disclosing the fact that it is not in compliance with the Listing
Criteria. Upon submission, the business plan will be reviewed by the NYSE's
Listing and Compliance Committee for final disposition, and will either accept
or reject the plan. Furthermore, at various times during June and July 2000,
the trading price of e4L's Common Stock on the NYSE fell below $1.00 per
share. If e4L's Common Stock trades below $1.00 per share over a 30-day
trading period, in accordance with the Listing Criteria, e4L must raise its
stock price above $1.00
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<PAGE>
per share within six months or as soon as possible thereafter in the event a
shareholder meeting is required. If e4L's Common Stock were delisted from
trading on the NYSE, it would have severe negative effects on e4L and its
stockholders.
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 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
addition, 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.
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 Shares of Common Stock
Underlying 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 June 15, 2000, there are approximately 43.1 million shares
of e4L Common Stock issued and outstanding, nearly all of which are freely
tradable. In addition, approximately 42.6 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 15.4 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 5.2 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 and not including any shares of e4L Common
Stock that are issuable to holders of Series E Convertible Preferred Stock in
satisfaction of the one-year 4% premium payable upon conversion). In addition,
shares of Series G Convertible Preferred Stock and Series H Convertible
Preferred Stock are convertible
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into shares of Common Stock at an initial conversion price equal to $2.9575
per share. Based on this initial conversion price of $2.9575 per share, the
Series G Convertible Preferred Stock and Series H Convertible Preferred Stock,
which has an aggregated stated value of $10 million, would be convertible into
approximately 3.4 million shares of Common Stock. Beginning on December 21,
2000 (and on each six-month anniversary thereafter), the conversion price will
be reset to the lesser of (i) $2.9575 per share or (ii) the average of the ten
lowest trade prices on each of ten trading days on which the lowest trade
prices occurred out of the 20 trading days immediately preceding a reset date.
For example, if this average trading price equaled $2.00 per share, the Series
G Convertible Preferred Stock and Series H Convertible Preferred Stock would
be convertible into 5,000,000 shares of e4L Common Stock (excluding conversion
of unpaid dividends).
Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Fiscal Quarters Ended (1)
------------------------------------------
Fiscal Year 2000 June 30 September 30 December 31 March 31
---------------- ------- ------------ ----------- --------
(Dollars in thousands, except per share
data)
<S> <C> <C> <C> <C>
Net revenue........................ $68,222 $73,590 $54,547 $ 44,752
Operating costs and expenses:
Media ........................... 25,326 24,699 12,723 9,246
Product and other direct......... 39,508 42,903 34,242 29,796
Selling, general and
administrative.................. 7,615 7,852 7,990 5,560
Depreciation, amortization and
non-cash compensation........... 1,288 1,302 1,308 1,551
Write-off of impaired goodwill... -- -- -- 7,537
Unusual charges.................. -- -- 411 5,943
------- ------- ------- --------
Total operating costs and
expenses.......................... 73,737 76,756 56,674 59,633
------- ------- ------- --------
Loss from operations .............. (5,515) (3,166) (2,127) (14,881)
Other (income)/expenses:
Loss on equity investment........ -- 1,173 2,957 4,376
Interest expense................. 282 432 414 585
------- ------- ------- --------
Loss before income taxes and
extraordinary item................ (5,797) (4,771) (5,498) (19,842)
Income taxes....................... 85 85 105 (275)
------- ------- ------- --------
Net loss ........................ $(5,882) $(4,856) $(5,603) $(19,567)
======= ======= ======= ========
Net loss per share:
Basic............................ $ (0.22) $ (0.19) $ (0.18) $ (0.53)
======= ======= ======= ========
Diluted.......................... $ (0.22) $ (0.19) $ (0.18) $ (0.53)
======= ======= ======= ========
</TABLE>
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<TABLE>
<CAPTION>
Fiscal Quarters Ended (2)
------------------------------------------
Fiscal Year 1999 June 30 September 30 December 31 March 31
---------------- ------- ------------ ----------- --------
(Dollars in thousands, except per share
data)
<S> <C> <C> <C> <C>
Net revenue ........................ $83,167 $86,652 $ 83,159 $74,872
Operating costs and expenses:
Media............................. 28,471 30,664 28,807 25,625
Product and other direct ......... 46,299 51,959 47,926 43,198
Selling, general and
administrative................... 10,059 10,206 9,470 8,196
Depreciation, amortization and
non-cash compensation............ 1,408 1,419 1,394 2,573
Write-off of impaired goodwill.... -- -- -- 11,300
Unusual charges................... (1,199) -- 21,680 (243)
------- ------- -------- -------
Total operating costs and expenses.. 85,038 94,248 109,277 90,649
------- ------- -------- -------
Loss from operations................ (1,871) (7,596) (26,118) (15,777)
Other (income)/expenses:
Gain on sale of investment ....... -- -- -- (6,544)
Interest expense ................. 1,246 1,256 528 186
------- ------- -------- -------
Loss before income taxes and
extraordinary item ................ (3,117) (8,852) (26,646) (9,419)
Income taxes........................ 125 105 105 105
------- ------- -------- -------
Net loss before extraordinary gain.. (3,242) (8,957) 26,646 (9,524)
------- ------- -------- -------
Extraordinary item--gain on
extinguishment of debt............. -- -- 4,876 --
Net loss.......................... $(3,242) $(8,957) $(21,875) $(9,524)
======= ======= ======== =======
Net loss per share:
Basic (3)......................... $ (0.11) $ (0.37) $ (1.36) $ (0.35)
======= ======= ======== =======
Diluted (3)....................... $ (0.11) $ (0.37) $ (1.36) $ (0.35)
======= ======= ======== =======
</TABLE>
--------
(1) Fiscal year 2000 includes unusual charges of $6.4 million, a loss on
e4L's equity investment in Buyitnow, LLC of $8.5 million and a write-off
of impaired goodwill of $7.5 million.
(2) Fiscal year 1999 includes unusual charges of $20.2 million, an
extraordinary gain on extinguishment of long-term debt of $4.9 million, a
gain of $6.5 million attributable to the sale of an investment in common
stock and a write-off of impaired goodwill of $11.3 million.
(3) The quarter ended December 31, 1998 basic and diluted earnings per share
includes the benefit of $0.19 due to an extraordinary gain on
extinguishment of debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
e4L currently maintains a revolving credit facility, which bears interest
at variable rates. Accordingly, e4L's results of operations are impacted by
changes in interest rates. Assuming the current level of borrowings at
variable rates, and assuming a two percentage point change in the average
interest rate under these borrowings, it is estimated that the e4L's interest
expense would have increased by $0.3 million during the year ended March 31,
2000. In the event of an adverse change in interest rates, management would
likely take actions to further mitigate its exposure. However, due to the
uncertainty of the actions that might be taken and their possible effects, the
analysis assumes no such actions are taken. Further the analysis does not
consider the effects of the change in the level of overall economic activity
that could result in a higher interest rate environment.
e4L does not currently hedge interest rates with respect to its outstanding
debt.
Equity Price Risk
The carrying value of the e4L's equity securities are affected by changes
in the quoted market prices of e4L's Common Stock. e4L has entered into an
agreement with a former investment banker pursuant to which
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e4L has guaranteed the market price of its Common Stock underlying warrants
issued to the investment banker, subject to certain limitations. In the event
the market price of its Common Stock is below the guaranteed price, e4L is
required to pay any deficiency in cash. e4L has recorded the resulting maximum
payment as a liability as of March 31, 2000.
Furthermore, shares of e4L's Series G/H Preferred Stock is convertible into
shares Common Stock based upon a floating conversion price, which price is
determined by dividing (i) the aggregate stated value of the Series G/H
Preferred Stock being converted by (ii) the conversion price then in effect,
which shall initially be set at $2.9575 per share of Common Stock, which
beginning on December 21, 2000 (and on each six-month anniversary thereafter,
each such date being a "Reset Date"), the conversion price will be reset to
the lesser of $2.9575 or the average of the ten lowest trade prices on each of
ten trading days out of the 20 trading days on which the lowest trade prices
occurred immediately preceding a Reset Date. In the event the conversion price
is below $2.9575 per share, there could be substantial dilution of its Common
Stock, and absent shareholder approval, e4L could be forced to redeem a
portion of the Series G/H Preferred Stock in cash. Following December 21,
2000, if e4L's Common Stock trades at greater than $4.50 per share for any 20
consecutive trading days, then the conversion price of the Series G Preferred
Stock will be $2.9575 per share thereafter; and if following December 21,
2000, if e4L's common stock trades at greater than $5.50 per share for any
20 consecutive trading days, then the conversion price of the Series H
Preferred Stock will be $2.9575 per share thereafter.
Foreign Currency
All of e4L's foreign operations are measured in their local currencies. As
a result, e4L's financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in the foreign
markets in which the e4L has operations. To the extent e4L incurs local
currency expenses (order fulfillment and media costs), that are based on
locally denominated sales volume, this exposure is reduced significantly. e4L
monitors exchange rate and/or forward contracts when appropriate.
To mitigate a portion of the exposure to risk of currency fluctuations
throughout Europe and the Austral-Asian Region, e4L enters into forward
contracts to hedge its foreign currency positions. In the long term, e4L has
the ability to change selling prices 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, currency
devaluation and economic downturn with respect to certain foreign regions
could have a negative impact on e4L's operating results and cash flows.
Currently, e4L's major foreign currencies are the European Economic Union's
Euro, British Pound, German Deutsche Mark, Japanese Yen, Australian Dollar and
New Zealand Dollar, each of which has been subject to recent fluctuations.
e4L maintains no other derivative instruments to mitigate the exposure to
translation and/or transaction risk. However, this does not preclude e4L's
adoption of specific hedging strategies in the future. e4L reported a net loss
of $35.9 million for the year ended March 31, 2000 It is estimated that a 5%
change in the value of the U.S. dollar to the Euro, Deutsche Mark, Yen,
Australian Dollar and New Zealand Dollar would change e4L's net loss for the
year ended March 31, 2000 by $0.8 million.
The above analysis does not consider the implications that such
fluctuations could have on the overall economic activity that could result in
such an environment in the United States or other countries, or on the results
of operations of e4L's foreign operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This Item is submitted in a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information concerning the present Directors and executive officers of e4L
is set forth below. The term of office for each Director is one year or until
the date of e4L's next meeting of stockholders, at which time elections are
held for each seat on the Board of Directors.
<TABLE>
<CAPTION>
Director
Name Position with Company Since
---- --------------------- --------
<C> <S> <C>
Stuart D. Buchalter.. Director 1998
Chairman of the Board of Directors and Chief
Stephen C. Lehman.... Executive Officer 1998
David E. Salzman..... Director 1998
Andrew M. Schuon..... Director 1998
Anthony M. Vercillo.. Executive Vice President, Operations --
Eric R. Weiss........ Vice Chairman of the Board of Directors,
President and Chief Operating Officer 1998
Executive Vice President/Finance and Chief
Daniel M. Yukelson... Financial Officer, and Secretary --
</TABLE>
The following is a summary of each director and executive officer's
occupation during the last five years.
Stuart D. Buchalter, age 62, has been Of Counsel with the California law
firm of Buchalter, Nemer, Fields & Younger, a Professional Corporation since
August 1980. From August 1980 until June 1993, he served as Chairman of the
Board of Directors and Chief Executive Officer of Standard Brands. Mr.
Buchalter completed his undergraduate studies at the University of California
at Berkeley, and earned an LLB at Harvard University Law School. Mr. Buchalter
is a director of Warnaco Group, Inc., an apparel manufacturer, Earl Scheib,
Inc., an automotive painting company, and City National Corp., the holding
company for City National Bank. He has served as a Director of e4L since
October 1998.
Stephen C. Lehman, age 48, has served as Chief Executive Officer and
Chairman of the Board of Directors of e4L since October 1998. From August 1998
until October 1998, Mr. Lehman was Acting Chief Executive Officer of e4L.
Prior thereto, from its formation in January 1987 until August 1998, Mr.
Lehman served as President, Chief Executive Officer and Chairman of the Board
of Directors of Premiere Radio Networks, Inc. ("Premiere"). From 1984 until
1987, Mr. Lehman was President of Stephen Lehman Productions, a radio
syndication company, while also serving as an on-air personality at KIIS-AM
and FM in Los Angeles, California. Mr. Lehman graduated cum laude from the
University of Nevada at Las Vegas, with a degree in Communications. Mr. Lehman
has served as a Director of e4L since August 1998.
David E. Salzman, age 56, has served as Co-Chief Executive Officer of
Quincy Jones-David Salzman Entertainment, a television, motion picture, music
and interactive content joint venture with Time-Warner Entertainment, since
its formation in 1993. Mr. Salzman has also served as Chief Executive Officer
of David Salzman Enterprises, a television, film, live events and new media
content producer, since June 1998. Mr. Salzman was a Director of Premiere from
July 1995 to April 1997 and a Director of Lorimar Telepictures from April 1986
until January 1989. Mr. Salzman holds a bachelor of arts degree from Brooklyn
College and a masters degree from Wayne State University. He has served as a
Director of e4L since October 1998.
Andrew M. Schuon, age 35, has served as president and chief operating
officer of Farmclub.com, Inc., a division of Universal Music Group since
December 1999. From March 1998 until November 1999 he served as Executive Vice
President/General Manager of Warner Bros. Records, a division of Time Warner
Entertainment, Inc. Mr. Schuon served as Executive Vice President of
Programming for MTV Music Television, a unit of Viacom, Inc. ("MTV") from
November 1995 through May 1998. Mr. Schuon attended the University of Nevada.
34
<PAGE>
Mr. Schuon was a Director of Premiere from January 1997 until July 1997 and is
currently a Director of Hot Topic, Inc. and FTM Media, Inc. He has served as a
Director of e4L since August 1998.
Anthony M. Vercillo, age 43, has served as Executive Vice President,
Operations of e4L since May 1999. From November 1998 until May 1999, Mr.
Vercillo served as Senior Vice President, Operations of e4L. Prior thereto,
from August 1998 until November 1998, Mr. Vercillo served as a consultant to
senior management of e4L. Prior to joining e4L, from January 1991 until
November 1998, Mr. Vercillo was President and Chief Executive Officer of IFMC,
Inc., a management consulting firm. Mr. Vercillo earned his undergraduate
degree at Caldwell University and his masters in business administration at
United States International University.
Eric R. Weiss, age 41, has served as Vice Chairman and Chief Operating
Officer of e4L since October 1998 and as President of e4L since May 2000.
Prior thereto, Mr. Weiss served as a Director of Premiere from January 1997
until August 1997. During 1996, Mr. Weiss served as Chairman and Chief
Executive Officer of After MidNite Entertainment, Inc., a privately held
producer and distributor of network radio programs and services. From 1986
until 1995, Mr. Weiss served as an executive officer of Westwood One, Inc., a
producer and distributor of network radio programs and services, serving as
Executive Vice President and Vice President/Business and Legal Affairs. Mr.
Weiss completed his undergraduate studies at Rutgers University where he was
elected Phi Beta Kappa and graduated with honors. Mr. Weiss received his Juris
Doctorate from George Washington University's National Law Center. Mr. Weiss
has served as a Director of e4L since August 1998.
Daniel M. Yukelson, age 37, has served as Executive Vice President/Finance
and Chief Financial Officer, and Secretary of e4L since October 1998. From
November 1996 until December 1998, Mr. Yukelson served as Senior Vice
President/Finance and Chief Financial Officer and Secretary of Premiere. From
June 1995 until November 1996, Mr. Yukelson served as Vice President and Chief
Financial Officer of Premiere. From December 1993 until June 1995, Mr.
Yukelson served as Assistant Vice President and Controller of Wherehouse
Entertainment, Inc. and during 1993 he served as Vice President/Finance and
Chief Financial Officer of Standard Brands Paint Company, Inc. ("Standard
Brands"), a paint retailer and manufacturer. Prior thereto, from 1985 until
1993, Mr. Yukelson served in various positions with Ernst & Young LLP, e4L's
independent auditors, last serving as a Senior Manager in the Restructuring
and Reorganization Practice. Mr. Yukelson earned his undergraduate degree in
business administration at the California State University at Northridge. He
is a Certified Public Accountant.
Meetings of the Board of Directors and its Committees
Board of Directors. During the fiscal year ended March 31, 2000, there were
three meetings of the Board of Directors. The Board of Directors also took
action by unanimous written consent as permitted by Delaware law. All
Directors attended at least 75% of the meetings held during the fiscal year
ended March 31, 2000. e4L's Board of Directors has an Executive Committee, an
Audit Committee and a Compensation/Stock Option Committee. All committee
members attended at least 75% of all committee meetings held during their
terms as members of such committees.
Executive Committee. The Executive Committee is composed of Messrs. Lehman
(Chairman), Weiss and Buchalter. The Executive Committee has general
responsibility and authority to manage the operations and affairs of e4L
between meetings of the full Board of Directors, subject to direction and
oversight by the Board of Directors. The Executive Committee met twice during
the year ended March 31, 2000.
Audit Committee. The Audit Committee is currently composed of three non-
employee Directors. The members of the Audit Committee are Messrs. Buchalter,
Schuon (Chairperson) and Salzman. This committee meets with e4L's independent
public accountants to review the scope and results of auditing procedures and
e4L's accounting policies and controls. The Audit Committee also provides
general oversight with respect to the accounting principles employed in e4L's
financial reporting. The Audit Committee met twice during the fiscal year
ended March 31, 2000.
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<PAGE>
Compensation/Stock Option Committee. The Compensation/Stock Option
Committee is composed of two non-employee Directors. The current members of
the Compensation/Stock Option Committee are Messrs. Salzman and Schuon. The
Compensation/Stock Option Committee is responsible for determining and
reviewing the compensation of the officers of e4L, including e4L's Chief
Executive Officer. The Compensation/Stock Option Committee determines and
reviews executive compensation matters and administers the terms and
provisions of e4L's stock option plan. The Compensation/Stock Option Committee
met ten times during the fiscal year ended March 31, 2000.
Compensation of the Board of Directors
Each Director who is not an employee of e4L is granted an equity retainer
consisting of options to purchase 15,000 shares of e4L Common Stock pursuant
to the 1991 Stock Option Plan upon such Directors' appointment or election to
the Board of Directors. The options vest over a three year period, with 5,000
options vesting on the date of grant and 5,000 options vesting at the end of
each of years two and three following such Director's appointment or election
to the Board of Directors. No options were granted to e4L's non-employee
Directors during the year ended March 31, 2000. During June 2000, Buyitnow LLC
granted each of Messrs. Buchalter, Salzman and Schuon 25,000 options
exercisable into common units of Buyitnow LLC with an exercise price of $5.00
per common unit.
In addition to the equity retainer, each Director receives $500 per meeting
attended in person and $250 per committee meeting attended in person, such
fees to be paid only in the event that e4L achieves pre-tax profits for two
consecutive quarters. During the fiscal year ended March 31, 2000, e4L
incurred no expenses for Directors' fees.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires e4L's Directors, certain of its
officers and persons who own more than ten percent (10%) of e4L's Common Stock
(collectively, the "Reporting Persons") to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and to
furnish e4L with copies of these reports.
Based on e4L's review of the copies of these reports received by it, and
representations received from Reporting Persons, e4L believes that all filings
required to be made by the Reporting Persons for the period April 1, 1999
through March 31, 2000 were made on a timely basis.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the cash compensation
and certain other components of the compensation received by Stephen C.
Lehman, Chairman of the Board of Directors and Chief Executive Officer of e4L
and the other three most highly compensated executive officers of e4L who were
executive officers of e4L as of March 31, 2000 for each of the fiscal years
ended March 31, 2000 and 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
---------------------------------------- --------------------------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus(1) Compensation(2) Options Compensation(3)
--------------------------- ------ -------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Stephen C. Lehman(4).... 2000 $410,570 $15,000 $1,375
Chairman of the Board 1999 $272,917 $ 1,250 125,000
and
Chief Executive Officer
Eric R. Weiss(5)........ 2000 $334,500 $15,000 $1,625
Vice Chairman of the 1999 $223,476 $ 1,250 62,500
Board,
President and Chief
Operating
Officer
Daniel M.
Yukelson(6)(7)......... 2000 $227,500 $15,000 25,000 $1,295
Executive Vice 1999 $130,641 $ 1,250
President/
Finance and Chief
Financial
Officer, and Secretary
Anthony M. Vercillo(8).. 2000 $200,000 $13,800 25,000 $ 367
Executive Vice 1999 $ 62,500 $ 3,600 75,000
President/Global
Operations
</TABLE>
--------
(1) No bonuses have been paid to any of the named executive officers during
the fiscal years ended March 31, 1999 and March 31, 2000.
(2) Automobile allowance.
(3) Amounts consist of contributions made by e4L in accordance with its 401K
match programs.
(4) From August 11, 1998 until February 28, 1999, Messrs. Lehman, Weiss and
Yukelson were compensated pursuant to a Consulting Agreement between e4L
and Temporary Media Co., LLC ("TMC"). Pursuant to the terms of the
Consulting Agreement, TMC received $80,000 per month, a five-year option
to purchase up to 212,500 shares of Common Stock at an exercise price of
$1.32 per share and warrants to purchase up to 3,762,500 shares of Common
Stock at exercise prices ranging from $1.32 per share to $3.00 per share.
Pursuant to the Consulting Agreement, Messrs. Lehman, Weiss and Yukelson
received consulting payments of $231,250, $190,184 and $111,891,
respectively.
(5) Mr. Lehman was appointed acting Chief Executive Officer in August 1998
and Chairman of the Board of Directors and Chief Executive Officer in
October 1998.
(6) Mr. Weiss was appointed Vice Chairman of the Board of Directors and Chief
Operating Officer in October 1998, and President in June 2000.
(7) Mr. Yukelson was appointed Executive Vice President/Finance and Chief
Financial Officer, and Secretary in October 1998.
(8) Mr. Vercillo was appointed Executive Vice President, Operations in May
1999, and served as Senior Vice President, Operations from November 1998
until May 1999.
37
<PAGE>
Stock Options Granted During Fiscal 2000
The following table sets forth certain information concerning options to
purchase Common Stock of e4L granted to the executive officers named in the
Summary Compensation Table in the fiscal year ended March 31, 2000.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
% of Total Potential Realizable Value
Number of Options at Assumed Annual Rates of
Securities Granted to Stock Price Appreciation
Underlying Employees for Option Term (1)
Options in Fiscal Exercise Expiration ---------------------------
Name Granted Year Price Date 5% 10%
---- ---------- ---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony Vercillo........ 25,000 3.4% $1.75 11/17/09 $ 42,785 $ 94,043
</TABLE>
The following table sets forth certain information concerning the exercise
in the fiscal year ended March 31, 2000 of options to purchase Common Stock of
e4L by the executive officers named in the Summary Compensation Table and the
unexercised options to purchase Common Stock of e4L held by such individuals
at March 31, 2000. Year-end values are based upon the closing market price per
share of e4L's Common Stock on March 31, 2000 of $2.125.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at FY-End at FY-End (1)
on Value ------------------------- -------------------------
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen C. Lehman....... -- -- 125,000 -- $100,625 --
Eric R. Weiss........... -- -- 62,500 -- $ 50,313 --
Daniel M. Yukelson...... -- -- 25,000 -- $ 20,125 --
Anthony M. Vercillo..... -- -- 25,000 75,000 -- $9,375
</TABLE>
--------
(1) Values are calculated by subtracting the exercise price from the fair
market value as of the exercise date or fiscal year end, as appropriate.
Values are reported before any taxes associated with exercise or
subsequent sale of the underlying stock. The closing market price of e4L's
Common Stock on March 31, 2000 was $2.125.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
Stephen C. Lehman, Chairman of the Board of Directors and Chief Executive
Officer.
On January 29, 1999, e4L entered into an Employment Agreement with Mr.
Lehman pursuant to which Mr. Lehman serves as Chairman of the Board and Chief
Executive Officer of e4L from March 1, 1999 through October 22, 2001 at an
annual minimum base salary of $500,000. In addition to the base salary payable
pursuant to the Employment Agreement, provided e4L is profitable on an
earnings before depreciation, amortization, income taxes and interest expense
("EBITDA") basis, Mr. Lehman is entitled to receive a bonus in an amount to be
determined by the Compensation Committee of the Board of Directors or the
Board of Directors. Effective November 1, 1999, Mr. Lehman voluntarily reduced
his base salary to $275,000 per annum. The Compensation/Stock Option Committee
has not yet made a final determination as to alternative consideration or
repayment to Mr. Lehman for his voluntary salary reduction.
Mr. Lehman is also entitled to participate in all group medical and dental,
hospitalization, health and accident, group life, travel, disability or
similar plans or programs of e4L, and 401(k) and stock purchase
38
<PAGE>
programs and any other programs that e4L provides to other executives of e4L.
Mr. Lehman is also entitled to certain fringe benefits, including personal
financial and legal counseling, not to exceed the sum of $10,000 annually, and
an automobile allowance of $15,000 per annum. Pursuant to the Employment
Agreement, Mr. Lehman is eligible to participate in e4L's qualified and non-
qualified stock option plan(s). To the extent that Mr. Lehman is granted stock
options, such stock options shall have an exercise price equal to the closing
price of e4L's Common Stock on the date of grant, be exercisable for ten
years, and vest on a schedule to be determined by the Compensation Committee
of the Board of Directors or the Board of Directors, but in no event shall
such vesting period be more than three years.
In the event of a Constructive Termination of the Employment Agreement (as
defined in the Employment Agreement), e4L will be required to pay Mr. Lehman
2.99 times Mr. Lehman's base salary in effect on the date of such Constructive
Termination. If Mr. Lehman's employment is terminated either by Mr. Lehman's
voluntary action or "For Cause" (as defined in the Employment Agreement), e4L
will pay Mr. Lehman's base salary that has accrued as of the date of
termination, in addition to any bonus owed and accrued vacation pay. In the
event of a Change of Control (as defined in the Employment Agreement), and if
either (i.) the Change of Control results in the termination of Mr. Lehman's
employment during the first 180 days after such Change of Control, or
(ii.) following a Change of Control, e4L or any successor to e4L fails to
assume, in writing, all obligations of e4L to perform the Employment
Agreement, e4L shall pay Mr. Lehman 2.99 times Mr. Lehman's base salary in
effect at the time of such Change of Control. In the event Mr. Lehman's
employment is terminated as a result of a Change of Control or Constructive
Termination, and the aggregate of all payments or benefits made or provided to
Mr. Lehman under the Employment Agreement constitute a Parachute Payment (as
defined by the Internal Revenue Code of 1986, as amended), e4L shall pay to
Mr. Lehman an additional amount equal to 100% of the Excise Tax (as defined in
the Employment Agreement) on the Parachute Payment.
Pursuant to the Employment Agreement, e4L has agreed to indemnify Mr.
Lehman to the maximum extent permitted by law and to pay Mr. Lehman's expenses
(including legal fees) in respect of Mr. Lehman's right to indemnification
under the Employment Agreement, subject to a later determination as to Mr.
Lehman's ultimate right to receive such payment.
Eric R. Weiss, Vice Chairman of the Board of Directors, President and Chief
Operating Officer.
On January 29, 1999, e4L entered into an Employment Agreement with Mr.
Weiss pursuant to which Mr. Weiss serves as Vice Chairman of the Board of
Directors and Chief Operating Officer of e4L from March 15, 1999 through
October 22, 2001 at an annual minimum base salary of $387,000 (during fiscal
year 2001, Mr. Weiss was also appointed as President). In addition to the base
salary payable pursuant to the Employment Agreement, provided e4L is
profitable on an EBITDA basis, Mr. Weiss is entitled to receive a bonus in an
amount to be determined by the Compensation Committee of the Board of
Directors or the Board of Directors. Effective November 1, 1999, Mr. Weiss
voluntarily reduced his base salary to $225,000 per annum. The
Compensation/Stock Option Committee has not yet made a final determination as
to alternative consideration or repayment to Mr. Weiss for his voluntary
salary reduction.
Mr. Weiss is also entitled to participate in all group medical and dental,
hospitalization, health and accident, group life, travel, disability or
similar plans or programs of e4L, and 401(k) and stock purchase programs and
any other programs that e4L provides to other executives of e4L. Mr. Weiss is
also entitled to certain fringe benefits, including personal financial and
legal counseling, not to exceed the sum of $10,000 annually, and an automobile
allowance of $15,000 per annum. Pursuant to the Employment Agreement, Mr.
Weiss is eligible to participate in e4L's qualified and non-qualified stock
option plan(s). To the extent that Mr. Weiss is granted stock options, such
stock options shall have an exercise price equal to the closing price of e4L's
Common Stock on the date of grant, be exercisable for ten years, and vest on a
schedule to be determined by the Compensation Committee of the Board of
Directors or the Board of Directors, but in no event shall such vesting period
be more than three years.
In the event of a Constructive Termination of the Employment Agreement (as
defined in the Employment Agreement), e4L will be required to pay Mr. Weiss
2.99 times Mr. Weiss' base salary in effect on the date of
39
<PAGE>
such Constructive Termination. If Mr. Weiss' employment is terminated either
by Mr. Weiss' voluntary action or For Cause (as defined in the Employment
Agreement), e4L will pay Mr. Weiss' base salary that has accrued as of the
date of termination, in addition to any bonus owed and accrued vacation pay.
In the event of a Change of Control (as defined in the Employment Agreement),
and if either (i) the Change of Control results in the termination of Mr.
Weiss' employment during the first 180 days after such Change of Control, or
(ii) following a Change of Control, e4L or any successor to e4L fails to
assume, in writing, all obligations of e4L to perform the Employment
Agreement, e4L shall pay Mr. Weiss 2.99 times Mr. Weiss' base salary in effect
at the time of such Change of Control. In the event Mr. Weiss' employment is
terminated as a result of a Change of Control or Constructive Termination, and
the aggregate of all payments or benefits made or provided to Mr. Weiss under
the Employment Agreement constitute a Parachute Payment (as defined by the
Internal Revenue Code of 1986, as amended), e4L shall pay to Mr. Weiss an
additional amount equal to 100% of the Excise Tax (as defined in the
Employment Agreement) on the Parachute Payment.
Pursuant to the Employment Agreement, e4L has agreed to indemnify Mr. Weiss
to the maximum extent permitted by law and to pay Mr. Weiss' expenses
(including legal fees) in respect of Mr. Weiss' right to indemnification under
the Employment Agreement, subject to a later determination as to Mr. Weiss'
ultimate right to receive such payment.
Daniel M. Yukelson, Executive Vice President/Finance, Chief Financial Officer,
and Secretary.
On January 29, 1999, e4L entered into an Employment Agreement with Mr.
Yukelson pursuant to which Mr. Yukelson serves as Executive Vice
President/Finance, Chief Financial Officer and Secretary of e4L from March 1,
1999 through October 22, 2001 at an annual minimum base salary of $225,000. In
addition to the base salary payable pursuant to the Employment Agreement,
provided e4L is profitable on an EBITDA basis, Mr. Yukelson is entitled to
receive a bonus in an amount to be determined by the Compensation Committee of
the Board of Directors or the Board of Directors. Effective November 1, 1999,
Mr. Yukelson reduced his base salary to $190,000 per annum. The
Compensation/Stock Option Committee has not yet made a final determination as
to alternative consideration or repayment to Mr. Yukelson for his voluntary
salary reduction.
Mr. Yukelson is also entitled to participate in all group medical and
dental, hospitalization, health and accident, group life, travel, disability
or similar plans or programs of e4L, and 401(k) and stock purchase programs
and any other programs that e4L provides to other executives of e4L Mr.
Yukelson is also entitled to certain fringe benefits, including personal
financial and legal counseling, not to exceed the sum of $10,000 annually, and
an automobile allowance of $15,000 per annum. Pursuant to the Employment
Agreement, Mr. Yukelson is eligible to participate in e4L's qualified and non-
qualified stock option plan(s). To the extent that Mr. Yukelson is granted
stock options, such stock options shall have an exercise price equal to the
closing price of e4L's Common Stock on the date of grant, be exercisable for
ten years, and vest on a schedule to be determined by the Compensation
Committee of the Board of Directors or the Board of Directors, but in no event
shall such vesting period be more than three years.
In the event of a Constructive Termination of the Employment Agreement (as
defined in the Employment Agreement), e4L will be required to pay Mr. Yukelson
2.99 times Mr. Yukelson's base salary in effect on the date of such
Constructive Termination. If Mr. Yukelson's employment is terminated either by
Mr. Yukelson's voluntary action or For Cause (as defined in the Employment
Agreement), e4L will pay Mr. Yukelson's base salary that has accrued as of the
date of termination, in addition to any bonus owed and accrued vacation pay.
In the event of a Change of Control (as defined in the Employment Agreement),
and if either (i.) the Change of Control results in the termination of Mr.
Yukelson's employment during the first 180 days after such Change of Control,
or (ii.) following a Change of Control, e4L or any successor to e4L fails to
assume, in writing, all obligations of e4L to perform the Employment
Agreement, e4L shall pay Mr. Yukelson 2.99 times Mr. Yukelson's base salary in
effect at the time of such Change of Control. In the event Mr. Yukelson's
employment is terminated as a result of a Change of Control or Constructive
Termination, and the aggregate of all payments or benefits made or provided to
Mr. Yukelson under the Employment Agreement constitute a Parachute Payment (as
defined by the Internal Revenue Code of 1986, as amended), e4L shall pay to
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<PAGE>
Mr. Yukelson an additional amount equal to 100% of the Excise Tax (as defined
in the Employment Agreement) on the Parachute Payment.
Pursuant to the Employment Agreement, e4L has agreed to indemnify Mr.
Yukelson to the maximum extent permitted by law and to pay Mr. Yukelson's
expenses (including legal fees) in respect of Mr. Yukelson's right to
indemnification under the Employment Agreement, subject to a later
determination as to Mr. Yukelson's ultimate right to receive such payment.
Anthony Vercillo
On November 15, 1998, e4L entered into an Employment Agreement with Mr.
Vercillo pursuant to which Mr. Vercillo was employed as Senior Vice
President--Global Operations. In May 1999, Mr. Vercillo was named Executive
Vice President--Operations. Pursuant to his employment agreement, Mr. Vercillo
currently receives a base salary of $200,000 per annum. Mr. Vercillo is also
entitled to an automobile allowance of $1,200 per month. Mr. Vercillo also
received options to purchase 75,000 shares of e4L common stock at an exercise
price of $4.1875 per share and warrants to purchase 25,000 shares of e4L
common stock at an exercise price of $1.32 per share pursuant to his
employment agreement. Mr. Vercillo's employment agreement does not contain any
change in control provisions.
41
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On June 15, 2000, there were outstanding and entitled to vote approximately
43,087,980 shares of Common Stock, 5,000 shares of Series B Preferred Stock
(each share of which is entitled to 14.8 votes on all non-election matters),
and 7,764.5 shares of Series E Preferred Stock (each share of which is
entitled to 666 votes on all matters). The following table sets forth certain
information at June 15, 2000 with respect to the beneficial ownership of
shares of Common Stock by (i) each of the members of the Board of Directors,
(ii) each executive officer of e4L and (iii) all Directors and executive
officers of e4L as a group. The address for each person listed in the
following table is 15821 Ventura Boulevard, 5th Floor, Los Angeles,
California, 91436.
Number of Issued and Outstanding
Shares of Stock Owned
<TABLE>
<CAPTION>
Percent of Common
Total Number of Shares Stock Percent of
of Common Stock Beneficially Total Voting
Name Beneficially Owned(2)(3) Owned(4)(5) Power(4)(6)
---- ------------------------ ----------------- ------------
<S> <C> <C> <C>
Stephen C. Lehman....... 5,098,093 10.6% 9.5%
Eric R. Weiss (7)....... 1,797,399 4.0% 3.6%
Daniel M. Yukelson...... 583,156 1.3% 1.2%
Stuart D. Buchalter..... 10,000 * *
David E. Salzman........ 677,073 1.5% 1.4%
Andrew M. Schuon........ 51,623 * *
Anthony M. Vercillo..... 38,333 * *
All executive officers
and Directors as a
group (7 persons)...... 8,255,677 16.1% 14.6%
</TABLE>
--------
* Less than 1%.
(1) To e4L's knowledge, except as noted below, each Director and executive
officer listed above has sole voting and investment power (with his
spouse, in certain circumstances) with respect to all shares indicated as
beneficially owned by such Director or executive officer.
(2) Includes shares which may be acquired upon the exercise of immediately
exercisable outstanding employee stock options in accordance with Rule
13d-3 under the Exchange Act as follows: Mr. Lehman: 125,000; Mr. Weiss:
62,500; Mr. Yukelson: 25,000; Mr. Buchalter: 5,000; Mr. Salzman: 10,000;
Mr. Schuon: 5,000; and Mr. Vercillo: 8,333.
(3) Includes shares which may be acquired upon the exercise of immediately
exercisable warrants in accordance with Rule 13d-3 under the Exchange Act
as follows: Mr. Lehman: 2,010,641; Mr. Weiss: 494,017; Mr. Yukelson:
311,303; Mr. Salzman: 27,010; Mr. Schuon: 1,768; and Mr. Vercillo: 25,000.
(4) All percentages are rounded to the nearest tenth of a percent.
(5) Based on 43,087,980 shares issued and outstanding as of June 15, 2000, as
determined in accordance with Rule 13d-3.
(6) Based on 48,338,369 shares issued and outstanding as of June 15, 2000,
including all shares of Common Stock owned and all shares of Common Stock
issuable upon conversion of Series B Preferred Stock and Series E
Preferred Stock owned, but not including options to purchase Common Stock
or warrants exercisable into Common Stock.
(7) Includes shares of Common Stock held by the Eric R. Weiss Charitable
Remainder Trust.
42
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information at June 15, 2000 with
respect to each person, known by e4L to beneficially own more than 5% of the
Common Stock as determined in accordance with Rule 13d-3. The information set
forth below is derived, without independent investigation on the part of e4L,
from the most recent filings made by such persons on Schedule 13D and Schedule
13G pursuant to Rule 13d-3.
<TABLE>
<CAPTION>
Total Number
of Shares of Percent
Common Stock Common Stock Percent of
Common Preferred Beneficially Beneficially Total Voting
Stock(2) Stock Owned(3) Owned(4)(5) Power(4)(6)
--------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Jacor Communications
Company(7)............. 3,672,138 6,971.0 8,319,472 16.2% 14.7%
50 East River Center
Boulevard, 12th Floor
Covington, Kentucky
41011
Safeguard Scientifics,
Inc.(8)................ 3,672,260 -- 3,672,260 8.0% 7.2%
800 The Safeguard
Building
435 Devon Park Drive
Wayne, Pennsylvania
19087
</TABLE>
--------
(1) To e4L's knowledge, except as otherwise indicated in the footnotes to this
table, each of the persons named in this table has sole voting and
investment power with respect to all shares of Common Stock reported as
beneficially owned by such person.
(2) In accordance with Rule 13d-3, includes shares which may be acquired upon
the exercise of immediately exercisable outstanding stock options and
warrants.
(3) In accordance with Rule 13d-3, includes shares of Common Stock issuable
upon the conversion of Series B Preferred Stock and Series E Preferred
Stock.
(4) All percentages are rounded to the nearest tenth of a percent.
(5) Based on 43,087,980 shares issued and outstanding as of June 15, 2000, as
determined in accordance with Rule 13d-3.
(6) Based on 48,338,369 shares issued and outstanding as of June 15, 2000,
which assumes conversion of all outstanding shares of Series B Preferred
Stock and Series E Preferred Stock, as determined in accordance with Rule
13d-3.
(7) Based on information contained in a Schedule 13D dated November 2, 1998.
Jacor Communications Company is an indirect, wholly-owned subsidiary of
Clear Channel Communications, Inc.
(8) Based on information contained in a Schedule 13G dated November 18, 1998
filed by Safeguard Scientifics, Inc. ("Safeguard") on December 31, 1998.
All shares listed as beneficially owned by Safeguard are held in the name
of Safeguard Scientifics (Delaware), Inc. ("SSD"). SSD is a wholly owned
subsidiary of Safeguard. Safeguard and SSD each have shared voting and
investment power with respect to such shares.
43
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a description concerning transactions which may not
otherwise be described herein by and between e4L and/or its affiliates, and
other persons or entities affiliated with e4L or its affiliates. e4L is of the
view that each of such transactions was on terms no less favorable to e4L than
would otherwise have been available to e4L in transactions with unaffiliated
third parties, if available at all.
Broadcast.com Agreement
On August 23, 1998, e4L entered into an exclusive services agreement with
Broadcast.com pursuant to which Broadcast.com has agreed to provide complete
Internet broadcasting services for e4L's direct response television
programming. Pursuant to the terms of the service agreement, e4L is required
to pay Broadcast.com (i) an advance fee of $250,000, (ii) a monthly fee of
$41,666 for three months; (iii) a monthly fee of $83,333 for the remaining
eighteen months of the agreement, and (iv) certain programming and encoding
fees. Mark Cuban is the Chief Executive Officer of Broadcast.com and was also
a member of the investor group which assumed operational control of e4L in
October 1998. The agreement was ratified by the unanimous vote of the
disinterested members of the Board of Directors. e4L terminated its agreement
with Broadcast.com during the fiscal year ended March 31, 2000.
Legal Services
Stuart D. Buchalter, a Director of e4L, is Of Counsel to the California law
firm of Buchalter, Nemer, Fields and Younger, which from time to time provides
legal services to e4L.
Settlement of Executive Officer Loans and Advance
During March 1998, e4L entered into an employment agreement with a former
executive officer pursuant to which, among other things, e4L loaned the
executive $545,000 with interest at the prime rate of interest plus 1
1/2 percent ("Note"). As collateral for the loan, the executive originally
pledged 339,784 shares of e4L common stock owned by the executive, which
collateral was subsequently released by e4L between April 1999 and October
1999. The executive also held an allowance from e4L in the amount of $18,000
("Advance"), bearing no interest, and acted as a surety for a debt owing to
e4L in the amount of $44,376 at December 31, 1999 ("Surety Loan").
During January 2000, e4L and the executive entered into a settlement
agreement and mutual release ("Settlement Agreement") with respect to the
amounts owed and certain other claims. Under the terms of the Settlement
Agreement, e4L agreed to forgive the Note and interest due thereon of
$660,454, the Advance was offset against certain amounts owed to the executive
by e4L, and the executive agreed to repay the Surety Loan and interest on or
before March 31, 2000, which amount was paid. In addition, certain employee
stock options granted to the executive were extended through December 31,
2000, and the executive's employment with e4L was terminated effective March
31, 2000.
Sales to BuyItNow.com, LLC
During the year ended March 31, 2000, e4L recognized net revenue of
approximately $8.7 million attributable to product sales to Buyitnow LLC, of
which $2.2 million was included in accounts receivable at March 31, 2000.
Officer Advances
During January and March 2000, certain executive officers advanced $804,500
and $250,000, respectively, to e4L, which advanced amounts bore interest at
9.5% per annum. All unpaid balances as of March 31, 2000 were subsequently
repaid in April and May 2000.
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K.
(a) Financial Statements and Schedules
Following is a list of the consolidated financial statements of e4L and
supplementary data submitted in a separate section of this report.
. Report of Independent Auditors.
. Consolidated Balance Sheets as of March 31, 2000 and 1999.
. Consolidated Statements of Operations for the Years ended March 31,
2000, 1999 and 1998.
. Consolidated Statements of Stockholders' Equity for the Years ended
March 31, 2000, 1999, and 1998.
. Consolidated Statements of Cash Flows for the Years ended March 31,
2000, 1999, and 1998.
. Notes to Consolidated Financial Statements.
The following is a list of the schedules filed as part of this Annual Report
on Form 10-K.
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(b) Reports on Form 8K filed in the fourth quarter of fiscal year 2000:
e4L filed a Current Report on Form 8-K dated March 21, 2000, reporting
under Item 5, the consummation of a transaction pursuant to which two
institutional investors purchased an aggregate of $5.0 million of e4L's newly-
created Series G Preferred Stock, and $5.0 million of e4L's newly-created
Series H Preferred Stock.
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
3.1(1) Certificate of Incorporation
3.2(2) Certificate of Amendment to the Certificate of Incorporation,
dated October 23, 1998
3.3(3) Certificate of Amendment to the Certificate of Incorporation,
dated February 25, 1998
3.4(4) By-laws
3.5(5) Amendment to By-laws dated February 1992
3.6(4) Amendment to By-laws dated April 1995
4.1(1) Specimen copy of stock certificate for shares of Common Stock of
e4L
4.2(6) Rights Agreement dated as of January 3, 1994
4.3(6) Amendment No. 1 to Rights Agreement, dated as of March 6, 1994
4.4(7) Amendment No. 2 to Rights Agreement, dated as of September 26,
1994
4.5(7) Amendment No. 3 to Rights Agreement, dated as of September 30,
1994
4.6(7) Amendment No. 4 to Rights Agreement, dated as of November 30, 1994
4.7(8) Amendment No. 5 to Rights Agreement, dated as of August 14, 1997
4.8(9) Amendment No. 6 to Rights Agreement, dated as of January 5, 1998
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
4.9(2) Amendment No. 7 to Rights Agreement, dated as of August 11, 1998
4.10(6) Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock
4.11(10) Form of Warrant to Purchase Common Stock of e4L's dated November
24, 1995, issued to various persons concerning an aggregate of
500,000 shares at an exercise price of $10.00 per share
4.12(8) Form of Warrant issued in connection with the Series C Convertible
Preferred Stock
4.13(11) Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock
4.14(11) Form of Warrant issued in connection with the Series D Convertible
Preferred Stock
4.15(11) Amendment to Form of Warrant issued in connection with the Series
C Convertible Preferred Stock
4.16(12) Certificate of Designations, Preferences and Rights with the
Series F Convertible Preferred Stock.
4.17(12) Form of e4L's Warrant issued in connection with the Series F
Convertible Preferred Stock.
4.18(12) Form of BuyItNow Warrant issued in connection with the Series F
Convertible Preferred Stock.
4.19(13) Certificate of Designations of the Series G Convertible Preferred
Stock.
4.20(13) Certificate of Designations of the Series H Convertible Preferred
Stock. Form of Warrant issued in connection with the Series G
Convertible Preferred Stock and
4.21(13) Series H Convertible Preferred Stock.
4.22(14) Form of Warrant issued to Foothill Capital Information.
4.23(14) Form of Warrant issued to certain affiliates of Reedland Capital
Partners.
10.1(15) Amended and Restated 1991 Stock Option Plan
10.2(15) 401(k) Plan Document
10.3(16) Lease for 7822 S. 46th Street, Phoenix, Arizona
10.4(17) Lease, dated March 6, 1996, by and between Stoll Moss Theaters
Limited and Quantum International Limited
10.5(8) Registration Rights Agreement, dated September 4, 1997, among e4L
and the Series C Investors
10.6(8) Securities Purchase Agreement, dated September 4, 1997, among e4L
and the Series C Investors
10.7(18) Amended and Restated Non Incentive Stock Option Agreement between
e4L and Robert N. Verratti, dated as of January 28, 1998
10.8(11) Amendment No. 1 to Registration Rights Agreement by and among e4L
and the Series D Investors
10.9(9) Lease, dated November 26, 1996, by and between Encino Terrace
Center and Positive Response Television, Inc. and DirectAmerica
Corporation.
10.10(2) Stock Purchase Agreement, dated August 11, 1998, by and between
e4L and TMC.
10.11(19) Loan and Security Agreement, by and between Quantum North America,
Inc. ("QNA") and Foothill Capital Corporation ("Foothill"), dated
as of December 1, 1998.
10.12(19) Copyright Security Agreement, by QNA in favor of Foothill, dated
as of December 1, 1998.
10.13(19) Patent Security Agreement, by QNA in favor of Foothill, dated as
of December 1, 1998.
10.14(19) Trademark Security Agreement, by QNA in favor of Foothill, dated
as of December 1, 1998.
10.15(19) Stock Pledge Agreement, between QNA and Foothill, dated as of
December 1, 1998.
10.16(19) Holdings Trademark Security Agreement, by e4L in favor of
Foothill, dated as of December 1, 1998.
10.17(19) Patent Security Agreement, by e4L in favor of Foothill, dated as
of December 1, 1998.
10.18(19) Stock Pledge Agreement, among Positive Response Television, Inc.,
National Media Holdings, Inc., Suzanne Paul Holdings Pty Limited
and Foothill, dated as of December 1, 1998.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
10.19(19) Copyright Security Agreement, by e4L in favor of Foothill, dated
as of December 1, 1998.
10.20(19) Subordination Agreement, between Foothill and the subsidiaries of
e4L, dated as of December 1, 1998.
10.21(19) Subordination Agreement, between Foothill and e4L, dated as of
December 1, 1998.
10.22(19) Stock Pledge Agreement, between e4L and Foothill, dated as of
December 1, 1998.
10.23(3) Employment Agreement, dated as of January 29, 1999, by and between
Stephen C. Lehman and e4L.
10.24(3) Employment Agreement, dated as of January 29, 1999, by and between
Eric R. Weiss and e4L.
10.25(3) Employment Agreement, dated as of January 29, 1999, by and between
Daniel M. Yukelson and e4L
10.26(12) Registration Rights Agreement dated as of August 27, 1999, by and
among e4L and the Series F Investors.
10.27(12) Securities Purchase Agreement dated as of August 27, 1999, among
e4L and the Series F Investors.
10.28(13) Form of Subscription Agreement, dates as of March 21, 2000,
between e4L and the Series G and Series H Investors.
10.29(13) Form of Registration Rights Agreement, dates as of March 21, 2000,
between e4L and the Series G and Series H Investors.
10.30(20) Amendment No. 1 to Loan and Security Agreement, by and between QNA
and Foothill, dated as of November 19, 1999
10.31(20) Amendment No. 2 to Loan and Security Agreement, by and between QNA
and Foothill, dated as of January 21, 2000
10.32(20) Amendment No. 3 to Loan and Security Agreement, by and between QNA
and Foothill, dated as of February 8, 2000
21.1(20) Subsidiaries of e4L
23.1(20) Consent of Independent Auditors
27.1(20) Financial Data Schedule
</TABLE>
--------
(1) Incorporated by reference to e4L's Registration Statement on Form S-1
(Reg. No. 33-26778) filed January 31, 1989.
(2) Incorporated by reference to e4L's Current Report on Form 8-K dated
October 23, 1998 filed October 3, 1998.
(3) Incorporated by reference to e4L's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 filed June 29, 1999.
(4) Incorporated by reference to e4L's Registration Statement on Form S-3
(Reg. No. 33-35301) filed June 8, 1990.
(5) Incorporated by reference to e4L's Annual Report on Form 10-K for fiscal
year ended March 31, 1992 filed June 26, 1992.
(6) Incorporated by reference to e4L's Annual Report on Form 10-K for fiscal
year ended March 31, 1994 filed July 14, 1994.
(7) Incorporated by reference to e4L's Annual Report on Form 10-K for fiscal
year ended March 31, 1995 filed June 29, 1995.
(8) Incorporated by reference to e4L's Current Report on Form 8-K dated
September 18, 1997 filed September 24, 1997.
(9) Incorporated by reference to e4L's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 filed July 8, 1998.
47
<PAGE>
(10) Incorporated by reference to e4L's Quarterly Report on Form 10-Q for the
period ended December 31, 1995 filed February 15, 1996.
(11) Incorporated by reference to e4L's Registration Statement on Form S-3
(Reg. No. 333-48217) filed January 31, 1998.
(12) Incorporated by reference from e4L's Quarterly Report on Form 10-Q for
the period ended September 30, 1999.
(13) Incorporated by reference from e4L's Current Report on Form 8-K dated
March 23, 2000.
(14) Incorporated by reference to e4L's Registration Statement on Form S-3
(Reg. No. 333-34532) filed on April 11, 2000.
(15) Incorporated by reference to e4L's Proxy Statement in connection with
Annual Meeting of Stockholders held on February 22, 1995.
(16) Incorporated by reference to e4L's Quarterly Report on Form 10-Q for the
period ended September 30, 1993 filed November 12, 1993.
(17) Incorporated by reference to e4L's Quarterly Report on Form 10-Q for the
period ended June 30, 1996 filed August 13, 1996.
(18) Incorporated by reference to e4L's Quarterly Report on Form 10-Q for the
period ended December 31, 1997 filed February 13, 1998.
(19) Incorporated by reference to e4L's Quarterly Report on Form 10-Q for the
period ended December 31, 1998 filed February 19, 1999.
(20) Filed herewith.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
e4L, Inc.
Date: July 13, 2000
By: /s/ Stephen C. Lehman
___________________________________
Stephen C. Lehman
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: July 13, 2000
By: /s/ Daniel M. Yukelson
___________________________________
Daniel M. Yukelson
Executive Vice President / Finance
and Chief Financial Officer, and
Secretary (Principal Accounting
and Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates so indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen C. Lehman Chief Executive Officer and July 13, 2000
____________________________________ Chairman of the Board of
Stephen C. Lehman Directors (Principal
Executive Officer)
/s/ Eric R. Weiss President, Chief Operating July 13, 2000
____________________________________ Officer and Vice Chairman
Eric R. Weiss of the Board of Directors
/s/ Stuart D. Buchalter Director July 13, 2000
____________________________________
Stuart D. Buchalter
/s/ David E. Salzman Director July 13, 2000
____________________________________
David E. Salzman
/s/ Andrew M. Schuon Director July 13, 2000
____________________________________
Andrew M. Schuon
</TABLE>
49
<PAGE>
e4L, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
Three years ended March 31, 2000
Contents
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Shareholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
e4L, Inc.
We have audited the accompanying consolidated balance sheets of e4L, Inc.
(formerly National Media Corporation) as of March 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 2000. Our
audits also included the financial statement schedule included in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
e4L's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of e4L, Inc. at March 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2000, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements have been prepared
assuming e4L will continue as a going concern. As more fully described in Note
1, e4L has incurred net losses of $35.9 million, $43.6 million and $56.8
million in each of the three years in the period ended March 31, 2000. These
losses have adversely impacted e4L's working capital position and have limited
its ability to purchase sufficient television media and inventory, and incur
product development and direct response program production costs. These
matters raise substantial doubt about e4L's ability to continue as a going
concern. Management's plans in regards to these matters are more fully
described in Note 1. Accordingly, the financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts of classifications of liabilities that
may result from the outcome of this uncertainty.
Ernst & Young LLP
Los Angeles, California
June 26, 2000
F-2
<PAGE>
e4L, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 1,087 $ 7,574
Restricted cash........................................ 1,538 524
Accounts receivable, net of the allowance for doubtful
accounts and sales returns of $5,744 and $12,059 at
March 31, 2000 and 1999, respectively................. 18,036 35,681
Due from affiliate, net................................ 2,221 --
Inventories, net....................................... 18,588 16,229
Prepaid media and program production................... 1,370 836
Deferred costs......................................... 2,802 3,329
Prepaid expenses and other............................. 3,418 1,050
Deferred income taxes.................................. 3,334 2,309
--------- ---------
Total current assets................................. 52,394 67,532
Property and equipment, net (Note 3)..................... 5,763 8,119
Excess of cost over net assets of acquired businesses and
other intangible assets, less accumulated amortization
of $5,890 and $7,643 at March 31, 2000 and 1999,
respectively (Note 2)................................... 12,595 21,737
Other assets............................................. 858 1,127
--------- ---------
Total assets......................................... $ 71,610 $ 98,515
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable....................................... $ 17,527 $ 18,174
Accrued expenses (Note 4).............................. 13,092 24,831
Deferred revenue....................................... 795 511
Due to officers........................................ 256 --
Income taxes payable................................... 324 476
Deferred income taxes.................................. 2,687 1,146
Current portion of long-term debt and capital lease
obligations (Note 5).................................. 5,180 8,119
--------- ---------
Total current liabilities............................ 39,861 53,257
Long-term debt and capital lease obligations (Note 5).... 3,611 135
Deferred income taxes.................................... 647 1,163
Other liabilities........................................ 8,942 6,213
Commitments and contingencies (Notes 12 and 13)
Shareholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000
shares (Note 6)....................................... 1 1
Common stock, $.01 par value; authorized 150,000,000
shares; issued 42,241,135 and 32,347,284 shares at
March 31, 2000 and 1999, respectively................. 422 323
Additional paid-in capital............................. 199,982 183,540
Retained deficit....................................... (165,397) (129,489)
--------- ---------
35,008 54,375
Treasury stock, 855,208 and 874,044 shares at cost at
March 31, 2000 and 1999, respectively................. (6,557) (6,701)
Notes receivable, officer.............................. -- (545)
Foreign currency translation adjustment................ (9,902) (9,382)
--------- ---------
Total shareholders' equity........................... 18,549 37,747
--------- ---------
Total liabilities and shareholders' equity........... $ 71,610 $ 98,515
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
e4L, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Product............................... $ 229,872 $ 321,052 $ 272,710
Commission and other.................. 11,239 6,798 5,764
----------- ----------- -----------
Net revenue............................. 241,111 327,850 278,474
Operating costs and expenses:
Media................................. 71,994 113,567 91,904
Product and other direct.............. 146,449 189,382 167,538
Selling, general, and administrative.. 29,017 37,931 48,150
Depreciation, amortization and non-
cash compensation.................... 5,449 6,794 7,073
Write-off of impaired goodwill........ 7,537 11,300 14,546
Unusual charges....................... 6,354 20,238 1,875
----------- ----------- -----------
Total operating costs and expenses...... 266,800 379,212 331,086
----------- ----------- -----------
Loss from operations.................... (25,689) (51,362) (52,612)
Other (income)/expenses:
Gain on sale of investment............ -- (6,544) --
Loss on equity investment in Buyitnow
LLC.................................. 8,506 -- --
Interest expense...................... 1,713 3,216 3,457
----------- ----------- -----------
Loss before income taxes and
extraordinary item..................... (35,908) (48,034) (56,069)
Income taxes............................ -- 440 700
----------- ----------- -----------
Loss before extraordinary item.......... (35,908) (48,474) (56,769)
Extraordinary item--gain on
extinguishment of debt................. -- 4,876 --
----------- ----------- -----------
Net loss................................ $ (35,908) $ (43,598) $ (56,769)
=========== =========== ===========
Net loss per common share--basic and
diluted:
Loss before extraordinary item........ $ (1.16) $ (1.88) $ (2.31)
Extraordinary item--gain on
extinguishment of debt............... -- 0.18 --
----------- ----------- -----------
Net loss per common share............... $ (1.16) $ (1.70) $ (2.31)
=========== =========== ===========
Weighted average number of common shares
outstanding:
Basic and diluted..................... 34,691,000 27,054,000 24,904,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
e4L, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except number of shares)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------- ---------------
Accumulated
Additional Retained Notes Other
Comprehensive Number of Par Number of Par Paid-In Earnings Treasury Receivable, Comprehensive
Income (Loss) Shares Value Shares Value Capital (Deficit) Stock Officer Income (Loss)
------------- ---------- ----- --------- ----- ---------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March
31, 1997........ 24,752,792 $248 95,000 $ 1 $ 127,764 $ (29,122) $(4,244) $ -- $ (6,087)
Net loss........ $(56,769) -- -- -- -- -- (56,769) -- -- --
Foreign currency
translation
adjustment...... (3,993) -- -- -- -- -- -- -- -- (3,993)
--------
Comprehensive
loss............ $(60,762) -- -- -- -- -- -- -- -- --
========
Conversion of
preferred
stock........... 137,500 1 (13,750) -- (1) -- -- -- --
Exercise of
stock options
and warrants.... 363,333 4 -- -- 1,737 -- -- (139) --
Issuance of
shares for
acquisition..... 909,091 9 -- -- 4,991 -- -- -- --
Issuance of
shares for
litigation
settlement...... 100,000 1 -- -- 888 -- -- -- --
Issuance of
Series D
preferred stock,
net............. -- -- 20,000 -- 19,690 -- -- -- --
Repurchase of
treasury
shares.......... -- -- -- -- -- -- (2,570) -- --
Issuance of
shares under
401(k) plan..... -- -- -- -- -- -- 12 -- --
Premium on
preferred
stock........... -- -- -- -- (643) -- -- -- --
Amortization of
stock option
compensation.... -- -- -- -- 1,875 -- -- -- --
Issuance of
warrant in
connection with
debt............ -- -- -- -- 688 -- -- -- --
Costs of
secondary
offering........ -- -- -- -- (14) -- -- -- --
---------- ---- ------- ---- --------- --------- ------- ----- --------
Balance, March
31, 1998........ 26,262,716 263 101,250 1 156,975 (85,891) (6,802) (139) (10,080)
Net loss........ $(43,598) -- -- -- -- -- (43,598) -- -- --
Foreign currency
translation
adjustment...... 698 -- -- -- -- -- -- -- -- 698
--------
Comprehensive
loss............ $(42,900) -- -- -- -- -- -- -- -- --
========
Conversion of
preferred
stock........... 2,418,227 24 (77,632) -- (24) -- -- -- --
Exercise of
stock options
and warrants.... 3,666,341 36 -- -- 10,337 -- -- -- --
Issuance of
Series E
preferred
stock........... -- -- 20,000 -- 17,595 -- -- -- --
Issuance of
shares under
401(k) plan..... -- -- -- -- (83) -- 101 -- --
Write off
(issuance) of
note receivable,
net............. -- -- -- -- -- -- -- (406) --
Premium on
preferred
stock........... -- -- -- -- (846)
Amortization of
stock warrant
compensation.... -- -- -- -- (414) -- -- -- --
---------- ---- ------- ---- --------- --------- ------- ----- --------
Balance, March
31, 1999 ....... 32,347,284 323 43,618 1 183,540 (129,489) (6,701) (545) (9,382)
Net loss........ $(35,908) -- -- -- -- -- (35,908) -- -- --
Foreign currency
translation
adjustment...... (520) -- -- -- -- -- -- -- -- (520)
--------
Comprehensive
loss............ $(36,428) -- -- -- -- -- -- -- -- --
========
Conversion of
preferred
stock........... 8,577,052 86 (11,914) -- 287 -- -- -- --
Exercise of
stock options
and warrants.... 1,316,799 13 -- -- 2,767 -- 134 -- --
Issuance of
preferred stock,
net............. -- -- 15,000 -- 14,105 -- -- -- --
Forgiveness of
note
receivable...... -- -- -- -- -- -- -- 545 --
Premium on
preferred
stock........... -- -- -- -- (1,663) -- -- -- --
Issuance of
warrants in
connection with
debt............ -- -- -- -- 429 -- -- -- --
Issuance of
warrants to
Buyitnow........ -- -- -- -- 523 -- -- -- --
Issuance of
shares under
401(k) plan..... -- -- -- -- (4) -- 10 -- --
Issuance of
warrants to
settle
litigation...... -- -- -- -- 152 -- -- -- --
Stock
compensation
related to stock
options and
warrants........ -- -- -- -- 859 -- -- -- --
Costs associated
with Series E
preferred
stock........... -- -- -- -- (1,013) -- -- -- --
---------- ---- ------- ---- --------- --------- ------- ----- --------
Balance, March
31, 2000........ 42,241,135 $422 46,704 $ 1 $ 199,982 $(165,397) $(6,557) $ -- $ (9,902)
========== ==== ======= ==== ========= ========= ======= ===== ========
<CAPTION>
Total
Shareholders'
Equity
-------------
<S> <C>
Balance, March
31, 1997........ $ 88,560
Net loss........ (56,769)
Foreign currency
translation
adjustment...... (3,993)
Comprehensive
loss............ --
Conversion of
preferred
stock........... --
Exercise of
stock options
and warrants.... 1,602
Issuance of
shares for
acquisition..... 5,000
Issuance of
shares for
litigation
settlement...... 889
Issuance of
Series D
preferred stock,
net............. 19,690
Repurchase of
treasury
shares.......... (2,570)
Issuance of
shares under
401(k) plan..... 12
Premium on
preferred
stock........... (643)
Amortization of
stock option
compensation.... 1,875
Issuance of
warrant in
connection with
debt............ 688
Costs of
secondary
offering........ (14)
-------------
Balance, March
31, 1998........ 54,327
Net loss........ (43,598)
Foreign currency
translation
adjustment...... 698
Comprehensive
loss............ --
Conversion of
preferred
stock........... --
Exercise of
stock options
and warrants.... 10,373
Issuance of
Series E
preferred
stock........... 17,595
Issuance of
shares under
401(k) plan..... 18
Write off
(issuance) of
note receivable,
net............. (406)
Premium on
preferred
stock........... (846)
Amortization of
stock warrant
compensation.... (414)
-------------
Balance, March
31, 1999 ....... 37,747
Net loss........ (35,908)
Foreign currency
translation
adjustment...... (520)
Comprehensive
loss............ --
Conversion of
preferred
stock........... 373
Exercise of
stock options
and warrants.... 2,914
Issuance of
preferred stock,
net............. 14,105
Forgiveness of
note
receivable...... 545
Premium on
preferred
stock........... (1,663)
Issuance of
warrants in
connection with
debt............ 429
Issuance of
warrants to
Buyitnow........ 523
Issuance of
shares under
401(k) plan..... 6
Issuance of
warrants to
settle
litigation...... 152
Stock
compensation
related to stock
options and
warrants........ 859
Costs associated
with Series E
preferred
stock........... (1,013)
-------------
Balance, March
31, 2000........ $ 18,549
=============
</TABLE>
F-5
<PAGE>
e4L, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Operating activities
Net loss........................................ $ (35,908) $(43,598) $(56,769)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 4,823 6,794 7,073
Extraordinary gain on extinguishment of debt.. -- (4,876) --
Gain on sale of investment.................... -- (6,544) --
Non-cash portion of unusual charges........... -- 6,636 --
Write-off of impaired goodwill................ 7,537 11,300 14,546
Amortization of loan discount................. 43 581 555
Provision for deferred rent expense........... (202) 180 497
Non-cash executive compensation............... 626 (414) 1,875
Non-cash loss on equity investment in
BuyItNow.com, LLC............................ 523 -- --
Changes in assets and liabilities net of
effects of disposition of business:
Decrease (increase) in:
Accounts receivable........................ 15,311 (6,740) 846
Income tax receivable...................... -- 341 (341)
Inventory.................................. (2,504) 4,107 7,882
Prepaid media and show production costs.... (534) 3,261 3,634
Deferred costs............................. 527 862 (873)
Prepaid expenses and other................. (2,371) 183 247
Increase (decrease) in:
Accounts payable........................... (1,322) (3,135) (1,111)
Accrued expenses........................... (11,509) 1,772 (1,547)
Deferred revenue........................... 284 396 (571)
Income taxes payable....................... (152) 476 (552)
Other...................................... 2,485 3,018 5,031
--------- -------- --------
Net cash used in operating activities........... (22,343) (25,400) (19,578)
Investing activities
Additions to property and equipment............. (1,421) (1,811) (2,244)
Investment in common stock...................... -- (488) --
Proceeds from sale of investment in common
stock.......................................... -- 7,032 1,025
--------- -------- --------
Net cash (used in) provided by investing
activities..................................... (1,421) 4,733 (1,219)
Financing activities
Net proceeds from issuance of preferred stock... $ 14,105 $ 17,595 $ 19,690
Proceeds from borrowings under credit facility.. 181,032 68,920 --
Repayment of borrowings under credit facility... (184,209) (61,722) --
Proceeds from long-term debt.................... 5,000 2,184 17,259
Principal payments on long-term debt and capital
lease obligations.............................. (900) (27,928) (5,122)
Exercise of stock options and warrants.......... 2,914 10,355 1,602
Payments to investment banker................... (191) -- --
Payments of accrued dividends................... (172) -- --
Advances to officers, net....................... -- (406) --
--------- -------- --------
Net cash provided by financing activities....... 17,579 8,998 33,429
Effect of changes in exchange rate on cash and
cash equivalents, net.......................... (302) 1,328 1,225
--------- -------- --------
(Decrease) increase in cash and cash
equivalents.................................... (6,487) (10,341) 13,857
Cash and cash equivalents, beginning of year.... 7,574 17,915 4,058
--------- -------- --------
Cash and cash equivalents, end of year.......... $ 1,087 $ 7,574 $ 17,915
========= ======== ========
Supplemental disclosures of cash flow
information
Cash payments for:
Interest...................................... $ 1,781 $ 2,246 $ 3,201
Income taxes.................................. $ -- $ -- $ 1,456
Supplemental schedule of non-cash investing and
financing activities
Common stock issued in acquisitions............. $ -- $ -- $ 5,000
Common stock reacquired from escrow............. $ -- $ -- $ 2,570
Common stock issued upon exercise of stock
options........................................ $ -- $ -- $ 139
Common stock issued for management incentive
plan, 401(k) plan, and board of
directors' stock grant......................... $ 10 $ 18 $ 13
Common stock issued for litigation settlement... $ -- $ -- $ 800
Deemed dividend on preferred stock.............. $ 1,663 $ 846 $ 643
Issuance of detachable warrants with debt....... $ 429 $ -- $ 688
Purchase of property and equipment financed
under capital leases $ -- $ -- $ 416
Forgiveness of officer loan..................... $ 660 $ -- $ --
</TABLE>
See accompanying notes.
F-6
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
1. Basis of Presentation, Description of Business and Summary of Significant
Accounting Policies
Basis of Presentation
e4L, Inc. formerly National Media Corporation and subsidiaries (e4L or the
Company) incurred net losses of $35.9 million, $43.6 million and $56.8 million
in each of the three years in the period ended March 31, 2000 principally due
to reduced sales volume of its products, working capital limitations impacting
its ability to purchase sufficient television media and inventory, unusual and
restructuring charges, and costs of operations that were not in line with
sales volume. These matters raise substantial doubt about e4L's ability to
continue as a going concern. e4L is currently evaluating and working on
various strategic options, including a potential sale of its Austral-Asian
businesses, identification of a strategic partner, implementation of plans to
further reduce costs, and identification of alternative sources of equity
and/or debt financing.
The consolidated financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of e4L's business. e4L's ability to continue
as a going concern is dependent upon various factors including, among others,
its ability to consummate the sale of all or a portion of its business,
implement the other plans and actions described above, and return to
profitability and liquidity. As further described in Note 17, e4L has signed a
letter of intent with two venture capital companies with regard to the sale of
75% of its Austral-Asian businesses for net proceeds of approximately $38
million. e4L will likely be required to utilize a portion of the proceeds to
repay to its senior lender a portion of the outstanding borrowings under
existing credit facilities. The satisfactory consummation of the sale is
essential for e4L to meet current operating requirements. Until the sale is
consummated, there can be no assurance that e4L will have sufficient funds to
finance its operations, which continue to incur losses, through March 31,
2001. However, management believes that the sale of the Austral-Asian
businesses will successfully be consummated, and the proceeds therefrom will
be sufficient to meet e4L's operating requirements for the foreseeable future.
Accordingly, the financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts of classifications of liabilities that may result
from the outcome of this uncertainty.
Description of Business
e4L is engaged in the direct marketing and sale of consumer products,
principally through direct response television programming, wholesale/retail
distribution and electronic commerce. Primarily through its direct response
television programming, e4L markets consumer products throughout the world.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of e4L, Inc. and
its wholly owned subsidiaries Quantum North America, Inc. (d/b/a, e4L North
America), DirectAmerica Corporation (d/b/a, e4L Television), Quantum
International Limited, Quantum International (Japan) Company Limited (QIJ),
Quantum Prestige Pty Limited (QPL), Suzanne Paul Pty Limited (SP) and each of
their respective wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
F-7
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and notes to the consolidated financial statements. Estimates are
routinely made for, among other things, inventory obsolescence, goodwill,
sales returns and allowances, valuations of stock options and warrants to
purchase common stock, allowances for bad debts, and contingencies. Actual
results could differ from these estimates.
Revenue Recognition and Allowance for Returns
Product sales, shipping and handling and retail royalty revenue are
recognized when the product is shipped and, where applicable, the thirty (30)
day free trial period has expired. In many instances, e4L's policy is to
unconditionally refund the total price of merchandise returned by customers
within thirty (30) days of receipt. e4L provides an allowance, based upon
experience, for merchandise returns.
e4L membership fee royalties derived from marketing agreements with third
party membership companies are recognized upon expiration of the refund period
or, when applicable, expiration of the membership company's right of offset,
whichever is later.
Concentration of Credit Risk
Financial instruments which potentially expose e4L to concentration of
credit risk consist primarily of cash equivalents and accounts receivable. At
times e4L maintains cash balances in excess of Federal Deposit Insurance
Corporation or equivalent foreign insurance limits. e4L's accounts receivable
consist primarily of a large quantity of insignificant customer balances and
amounts due from wholesale customers. e4L monitors individual accounts in
order to minimize the risk of loss and generally does not require collateral.
Cash and Cash Equivalents
e4L considers all highly liquid investments with maturities of three months
or less when purchased to be cash equivalents. Restricted cash represents cash
pledged as collateral for a credit card processor, an office lease and
outstanding foreign exchange forward contracts.
Inventory
Inventory consists principally of products purchased for resale, and is
stated at lower of cost (first-in, first-out) or market. The reserve for
obsolete inventory was $1,838,000 and $4,913,000 at March 31, 2000 and 1999,
respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method based on the estimated useful
lives of the assets or underlying lease terms, which are generally 3 to
10 years.
Excess of Cost Over Net Assets Acquired and Other Intangible Assets
Excess of cost over net assets acquired (e.g., goodwill) is being amortized
using the straight-line method, generally over periods of 10 to 20 years.
Other intangible assets are being amortized using the straight-line
F-8
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
method over periods of 2 to 5 years. Amortization expense for excess of cost
over net assets acquired and other intangible assets was $1,430,000,
$2,141,000, and $3,015,000 for the years ended March 31, 2000, 1999 and 1998,
respectively.
The recoverability of excess cost over net assets acquired and other
intangible assets is evaluated periodically, at least annually, by an analysis
of operating results for each acquired business, significant events or changes
in business-environment, and if necessary, independent appraisal.
During the year ended March 31, 2000, indicators of impairment existed with
respect to e4L's wholly owned subsidiary DirectAmerica, Inc. and its Flying
Lure business. In light of reductions in e4L's in-house television production
activities, DirectAmerica's excess cost over net assets acquired has been
impaired. The impairment of excess cost over net assets acquired of the Flying
Lure business resulted from the reduction in net revenue of and future
prospects for this product. Accordingly, e4L wrote-off the remaining excess
cost over net assets acquired of $5,877,000 and $1,660,000 with respect to
DirectAmerica and Flying Lure, respectively.
During the year ended March 31, 1999, indicators of impairment existed with
respect to e4L's wholly owned subsidiaries Prestige Marketing Limited
(predecessor to Quantum Prestige Marketing Pty Limited) and Prestige Marketing
International Limited (collectively, Prestige) and Suzanne Paul Holdings Pty
Limited and each of its respective operating subsidiaries (collectively,
Suzanne Paul). Accordingly, e4L engaged an independent appraiser to evaluate
the underlying assets of these subsidiaries. The independent appraiser
determined that the excess cost over net assets acquired balance had been
impaired and, therefore, e4L wrote off $11,300,000 of excess cost over net
assets acquired attributable to the two subsidiaries during the year ended
March 31, 1999.
Because indicators of impairment (losses, asset write-offs, etc.) existed
during the year ended March 31, 1998, e4L's management determined there was no
future benefit or likelihood of positive cash flows from its wholly owned
subsidiary, Positive Response Television, Inc. (PRTV). As a result, e4L wrote
off the then remaining $14,546,000 of excess cost over net assets acquired
during the year ended March 31, 1998.
Program Production Costs
During each of the years ended March 31, 2000 and 1999, costs related to
the production of e4L's direct response television programs are expensed as
incurred. Prior to the year ended March 31, 1999, costs related to the
production of e4L's direct response television programs were capitalized and
amortized over the estimated useful life of the related product, generally 12
to 24 months. Show production costs were $9,955,000, $14,767,000 and
$14,845,000 for the years ended March 31, 2000, 1999 and 1998, respectively.
As more fully described in Note 10, the year ended March 31, 1999 included
$2,621,000 of annual charges attributable to the write-down of certain prepaid
show production costs. The years ended March 31, 2000, 1999 and 1998 included
$2,453,000, $1,100,000 and $1,608,000, respectively, attributable to
unsuccessful direct response television programs.
Deferred Revenue and Costs
Deferred revenue consists of funds received by e4L for products ordered,
but not shipped and for membership fees received, but not recognized as
income. Related media and certain direct costs are deferred and expensed as
the orders are shipped. e4L also defers certain media and telemarketing costs
on product orders where funds have not yet been received, and expenses these
costs as the orders are shipped.
F-9
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Income Taxes
e4L uses the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and
liabilities, and are measured using estimated statutory tax rates and laws
that will be in effect when the differences are expected to reverse. Income
tax benefits have not been recorded during the current period on United States
and certain foreign losses. These benefits will be recorded when realized or
at such time it is determined these benefits are likely to be realized,
reducing the effective tax rate on future United States and foreign earnings.
Per Share Amounts
Net loss per share has been computed in accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS No. 128). In computing per share amounts,
deemed dividends on preferred stock have been deducted from net loss to arrive
at net loss per common share.
Foreign Currency Translation
Results of operations for e4L's foreign subsidiaries are translated using
the average exchange rates in effect during the periods presented, while
assets and liabilities are translated into United States dollars using the
exchange rate in effect at the balance sheet date. Resulting translation
adjustments are recorded as a component of shareholders' equity. Currency
gains and losses relating to operations are recorded as selling, general and
administrative expenses. Net gains (losses) recorded during the years ended
March 31, 2000, 1999 and 1998 were $325,000, $(2,160,000) and $(1,833,000),
respectively.
Periodically, e4L enters into foreign exchange forward contracts to hedge
the risks associated with certain anticipated transactions. These contracts
are primarily in Japanese yen and generally have maturities that do not exceed
one year. e4L defers recognition of gain or loss on changes in the market
value of these contracts until such time as the hedge transaction is complete.
The resulting gain or loss recognized on these contracts is included in
selling, general and administrative expenses. At March 31, 2000, e4L had
outstanding $0.9 million in notional foreign exchange contracts with maturity
dates through May 2000. e4L does not hold or issue forward contracts for
trading purposes.
Stock Option Plans
e4L accounts for employee stock options in accordance with Accounting
Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees,"
and its related interpretations. No compensation expense is recognized for
e4L's employee stock options which have an exercise price equal to or above
the market price of e4L's common stock on the date of the grant.
Comprehensive Income
In April 1998, e4L adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Comprehensive income is defined as the
change in equity from transactions and other events and circumstances,
excluding transactions resulting from investments by owners and distributions
to owners. The difference between net income (loss) and comprehensive income
(loss) results from foreign currency translation adjustments.
F-10
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current financial statement presentation.
Impact of Recently Issued Accounting Pronouncements
During 1998, the 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 the derivative qualifies
for hedge accounting. SFAS No. 133, as amended by Statement No. 137, is
effective for financial statements for all fiscal quarters of fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to
have a material impact on the financial position or results of operations of
e4L.
2. Investments
During June 1999, e4L consummated a transaction 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) e4L's commitment to promote Buyitnow LLC within its
programs for a three year term. In addition, e4L issued warrants to purchase
500,000 shares of e4L common stock to Buyitnow. 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
year ended March 31, 2000, e4L recorded a loss on its equity investment in
Buyitnow LLC of approximately $8.5 million. Included in e4L's balance sheet at
March 31, 2000 is a $2.2 million net account receivable from Buyitnow LLC.
During June 2000, Buyitnow LLC and pcWonders.com, Inc. contributed
substantially all of their assets and liabilities to a newly formed entity,
Buyitnow Incorporated (BIN Inc.). BIN Inc. is presently 27.5% owned by e4L.
A summary of Buyitnow LLC's unaudited condensed consolidated financial
information for the 10-month period ended March 31, 2000 is as follows:
<TABLE>
<S> <C>
Operating data:
Net revenue..................................................... $ 10,427
EBITDA.......................................................... $(12,933)
Net (loss)...................................................... $(25,934)
Balance sheet information:
Working capital................................................. $ 2,162
Total assets.................................................... $ 10,330
Members' equity................................................. $ 6,040
</TABLE>
F-11
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
3. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Furniture, fixtures, and office equipment............ $ 18,888 $ 18,143
Leasehold improvements............................... 2,373 2,290
Equipment acquired under capital leases.............. 1,284 1,308
---------- ----------
22,545 21,741
Less accumulated depreciation and amortization....... (16,782) (13,622)
---------- ----------
Total................................................ $ 5,763 $ 8,119
========== ==========
</TABLE>
Depreciation and amortization expense for property and equipment, including
equipment acquired under capital leases, was $3,393,000, $4,653,000 and
$4,058,000 for the years ended March 31, 2000, 1999 and 1998, respectively.
4. Accrued Expenses
Accrued expenses include the following (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
---------------------
2000 1999
---------- ----------
<S> <C> <C>
Dividends............................................. $ 2,552 $ 1,432
Legal fees and settlements............................ 1,565 3,624
Restructuring......................................... 1,548 6,800
Other................................................. 7,427 12,975
---------- ----------
Total accrued expenses................................ $ 13,092 $ 24,831
========== ==========
</TABLE>
5. Long-Term Debt and Obligations Under Capital Leases
Long-term debt and obligations under capital leases consist of the
following (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
---------------------
2000 1999
---------- ----------
<S> <C> <C>
Revolving credit facility............................. $ 4,021 $ 7,198
Term loan, net of discount............................ 4,614 --
Notes payable--other.................................. -- 834
Capital lease obligations............................. 156 222
---------- ----------
8,791 8,254
Less current portion.................................. 5,180 8,119
---------- ----------
Long-term portion..................................... $ 3,611 $ 135
========== ==========
</TABLE>
e4L believes the carrying value of long-term debt and obligations under
capital leases approximate fair value.
F-12
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
In December 1998, e4L entered into a three-year credit agreement with a
senior lender (the Credit Agreement). The Credit Agreement, as amended,
provides for a revolving credit facility with a maximum commitment of $20.0
million, of which up to $7.5 million may be in the form of outstanding letters
of credit. Borrowings under the Credit Agreement are limited to a borrowing
base consisting of certain eligible United States accounts receivable and
inventory, as defined. Outstanding borrowings under the Credit Agreement bear
interest, at the option of e4L, at the United States Prime lending 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. The effective interest
rate on e4L's debt was approximately 11.9% and 15.9% for the years ended March
31, 2000 and 1999, respectively. During February 2000, the term of the Credit
Agreement was extended one year through December 2002.
In February 2000, e4L amended the Credit Agreement whereby it obtained a
$5.0 million term loan (Term Loan). The Term Loan bears interest at the rate
of 13% per annum, and is due in December 2002 concurrent with the expiration
of the Credit Agreement. In connection with the Term Loan, e4L granted to its
senior lender five-year warrants to purchase 325,000 shares of its common
stock at an exercise price of $2.5625 per share. The warrants have been valued
at $429,000 using the Black-Scholes valuation method. The corresponding loan
discount is being amortized over the life of the loan and is included in
interest expense.
Principal payments under the Term Loan are $1,295,000, $2,220,000 and
$1,485,000 during each of the years ended March 31, 2001, 2002 and 2003,
respectively.
The Credit Agreement is collateralized by a lien on substantially all of
the assets of e4L's United States subsidiaries, and a pledge of the stock of
e4L's foreign subsidiaries. The Credit Agreement contains certain financial
covenants, with respect to, among other matters, payment of dividends,
maintenance of tangible net worth, and restrictions on borrowings and
purchases of fixed assets.
At March 31, 2000, e4L had no letters of credit outstanding, and
approximately $2.9 million of remaining availability under the Credit
Facility.
In October 1998, e4L repaid approximately $21.5 million of debt outstanding
under a credit agreement with its former principal lender at a twenty-five
percent discount. The repayment resulted in a $4.9 million gain on
extinguishment of debt which is reflected in the statement of operations as an
extraordinary item. In addition, in January 1999, e4L repaid a $10.0 million
note payable due to ValueVision International, Inc. (ValueVision).
Principal payments under various capital lease obligations are $100,000,
$46,000, $6,000 and $4,000 during each of the years ended March 31, 2001,
2002, 2003 and 2004, respectively.
6. Capital Transactions
Series G and H Convertible Preferred Stock
During March 2000, e4L consummated a transaction pursuant to which two
institutional investors (the Preferred Investors) purchased an aggregate of
(i) $5 million of e4L's newly created Series G Convertible Preferred Stock,
stated value $1,000 per share (the Series G Preferred Stock) and $5 million of
e4L's newly-created Series H Convertible Preferred Stock, stated value $1,000
per share (the Series H Preferred Stock and, collectively with the Series G
Preferred Stock, the G/H Preferred Stock). The G/H Preferred Stock is
convertible into the number of shares e4L's common stock, as is determined by
dividing (i) the aggregate stated value of the Preferred Stock being converted
by (ii) the conversion price then in effect, which shall initially be
F-13
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
set at $2.9575 per share of Common Stock (the Fixed Conversion Price), which
was 130% of the ten (10) day average closing price of the Common Stock prior
to the closing date of the transaction. Beginning on December 21, 2000 (and on
each six-month anniversary thereafter, each a Reset Date), the conversion
price will be reset to the lesser of (i) the Fixed Conversion Price or (ii)
100% of the average of the ten lowest trade prices on each of ten trading days
out of the 20 trading days on which the lowest trade prices occurred
immediately preceding a Reset Date.
Following December 21, 2000, if e4L's common stock trades at greater than
$4.50 per share for any 20 consecutive trading days, then the conversion price
of the Series G Preferred Stock shall be $2.9575 per share thereafter.
Following December 21, 2000, if e4L's common stock trades at greater than
$5.50 per share for any 20 consecutive trading days, then the conversion price
of the Series H Preferred Stock shall be $2.9575 per share thereafter. The G/H
Preferred Stock pays a dividend equal to 4% per annum, payable quarterly,
commencing June 1, 2000, in cash or as an accretion to the stated value of the
G/H Preferred Stock, at e4L's option. At March 31, 2000, the outstanding
shares of G/H Preferred Stock are convertible into 3,381,234 shares of e4L
common stock.
The G/H Preferred Stock is subject to redemption in certain circumstances
as set forth in the certificates of designations. In connection with the
issuance of the G/H Preferred Stock, e4L issued warrants to purchase an
aggregate of 659,340 shares of e4L common stock to the Preferred Investors.
The warrants are exercisable until March 21, 2005 at an exercise price of
$2.9575 per share of Common Stock (subject to anti-dilution adjustments). e4L
also issued to the investors warrants to purchase from e4L an aggregate of
250,000 common units of BuyItNow LLC, which are exercisable until March 21,
2005 at an exercise price equal to $5.00 per unit.
Except under certain circumstances, no holder of the G/H Preferred Stock or
the related warrants is entitled to convert or exercise such securities to the
extent that the shares to be received by such holder upon such conversion or
exercise would cause such holder to beneficially own more than 4.9% of e4L's
common stock.
The G/H Preferred Stock carries no voting rights except as otherwise
provided by Delaware General Corporation Law. Its liquidation preference is
equal to the face amount plus any accrued premiums, and is senior to e4L's
common stock and e4L's other series of preferred stock.
Series F Convertible Preferred Stock
During August 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 average closing trading price of the
e4L common stock on the New York Stock Exchange for the five trading days
prior to closing. The outstanding shares of Series F Preferred Stock are
currently convertible into a minimum of 1,061,010 shares of e4L common stock
at March 31, 2000.
The Series F Preferred Stock accrues a dividend 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 to purchase an aggregate of 50,000 shares of e4L
common stock to the Series F Investors (the Series F Warrants). 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 of Buyitnow LLC, which are exercisable until August 26,
2004 at an exercise price of $5.00 per underlying BuyItNow common unit.
F-14
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
The Series F Preferred Stock carries no voting rights except as otherwise
provided by Delaware General Corporation Law. Its liquidation preference is
equal to the face amount plus any accrued premiums, and is senior to e4L's
common stock and Series A Junior Participating Preferred Stock; is junior to
e4L's Series B Convertible Preferred Stock (Series B Preferred Stock), Series
D Convertible Preferred Stock (Series D Preferred Stock), Series E Convertible
Preferred Stock (Series E Preferred Stock) and Series G/H Preferred Stock.
Series E Convertible Preferred Stock
During the fiscal year ending March 31, 1999, e4L consummated a transaction
pursuant to which, among other things, operational control of e4L was acquired
by an investor group led by Stephen C. Lehman, e4L's Chairman of the Board of
Directors and Chief Executive Officer. In connection therewith, e4L sold to
the investor group $20.0 million of newly issued shares of Series E Preferred
Stock, $.01 par value per share with a face value of $1,000 per share (the
Transaction). The Series E Preferred Stock has a three-year term and is
automatically converted into e4L common stock at maturity, if not converted
prior thereto. The Series E Preferred Stock provided for a 4% coupon for one
year and is convertible into shares of e4L's common stock at a fixed
conversion price of $1.50 per share (subject to standard anti-dilution
adjustments). The 4% premium is payable, at e4L's option, in cash or shares of
e4L common stock, at the time of conversion or first anniversary date of
issuance. The premium is being recorded as a deemed dividend over the period
from the date of issuance to the earliest conversion date, for the purpose of
calculating earnings per share. Based upon the $1.50 per share fixed
conversion price, the Series E Preferred Stock is convertible into 6,616,873
shares of e4L's common stock at March 31, 2000, not including shares issuable
upon conversion of any accrued premium. As part of the Transaction, holders of
e4L's Series D Preferred Stock sold to the investor group $10.0 million of
Series D Preferred Stock and 992,942 warrants issued in connection with such
shares, and agreed to certain limitations regarding the sale of the Series D
Preferred Stock and e4L common stock issuable upon conversion and/or exercise
of the Series D Preferred Stock and underlying warrants (collectively, the
Series D Securities).
The Series E Preferred Stock is entitled to vote together with the holders
of e4L common stock as a single class of capital stock. Each share of Series E
Preferred Stock has 666 votes, which is equivalent to the number of shares of
common stock of the Series E Preferred Stock is convertible. The liquidation
preference for the Series E Preferred Stock is equal to the face amount of
$1,000 per share and is senior to e4L common stock, Series F Preferred Stock
and Series A Participating Preferred Stock, junior to e4L's Series B Preferred
Stock, and G/H Preferred Stock and pari passu with e4L's Series D Preferred
Stock.
In connection with the Transaction, Temporary Media Co., LLC (TMC), a
management company of which Mr. Lehman and two e4L officers are managing
members, was granted a five-year option to purchase up to 212,500 shares of
e4L's common stock, subject to certain vesting requirements, at an exercise
price of $1.32 per share and five-year warrants to purchase up to 3,762,500
shares of e4L's common stock at exercise prices ranging form $1.32 to $3.00
per share. 1,000,000 of the warrants may not be transferred to Mr. Lehman, his
associates or any employee of the management company. The granting of these
warrants resulted in a non-cash compensation charge of $626,000 during the
year ended March 31, 2000 and is included in depreciation, amortization and
non-cash compensation. During the year ended March 31, 1999, a non-cash
compensation charge of $274,000 was recorded and is included in unusual
charges. The remaining value attributed to the granting of these warrants is
being amortized evenly through the October 23, 2001 vesting period.
Series C and Series D Convertible Preferred Stock
During September 1997, e4L sold to two institutional investors (the Series
C Investors) 20,000 shares of its Series C Convertible Preferred Stock, $.01
par value per share (the Series C Preferred Stock), with a face value
F-15
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
of $1,000 per share, for an aggregate purchase price of $20,000,000, net of
costs of $310,000. The Series C Preferred Stock had a four-year term and
automatically converts into e4L's common stock at maturity, if not converted
earlier.
Immediately upon issuance, each share of Series C Preferred Stock was
convertible at the holder's option into such number of shares of e4L's common
stock, as determined by dividing the face value of the Series C Preferred
Stock (plus a 6% per annum accrued premium as of the conversion date) by (i)
if conversion occurred on or before March 17, 1998, a conversion price equal
to $6.06 per share (subject to adjustment), or (ii) if conversion occurred
after March 18, 1998, a conversion price equal to the lower of $6.06 per share
or the lowest daily volume weighted average sale price during the five days
immediately prior to such conversion. In connection with the investment, e4L
also issued warrants to the Series C Investors to acquire an aggregate of
989,413 shares of e4L common stock at an initial exercise price of $6.82 per
share. Such warrants are exercisable until September 17, 2002.
In January 1998, e4L entered into a Redemption and Consent Agreement with
the Series C Investors, pursuant to which e4L agreed to exchange the Series C
Preferred Stock for a newly issued Series D Preferred Stock containing terms
substantially similar to those of the Series C Preferred Stock, except that
the conversion price could be subject to reduction under certain
circumstances. In addition, e4L granted additional five-year warrants to
purchase up to 500,000 shares of e4L's common stock to the Series C investors.
The warrants had an exercise price of $6.82 per share, but were subject to
adjustment under certain circumstances. In exchange, the Series C Investors
agreed, among other things, to waive their right to convert their Series D
Preferred Stock into e4L's common stock at a per share price below $6.06 prior
to the earliest of the termination of the merger agreement with ValueVision or
June 1, 1998. The actual exchange of Series C Preferred Stock for Series D
Preferred Stock took place on April 14, 1998.
Upon termination of the merger agreement on June 1, 1998, the fixed
conversion price of the Series D Preferred Stock and the exercise price of the
Series D warrants were automatically adjusted to $1.073125 per share. As a
result, the outstanding shares of Series D Preferred Stock are convertible
into a minimum of 15,635,202 shares of e4L common stock at March 31, 2000, not
including shares issuable upon conversion of any accrued premium.
The Series D Preferred Stock carries a 6% annual premium payable, at e4L's
option, in cash or shares of e4L's common stock at the time of conversion. The
premium is being recorded as a deemed dividend from the date of issuance to
the date of conversion, for the purpose of calculating earnings per share.
Except under certain circumstances, no holder of the Series D Preferred
Stock or the related warrants is entitled to convert or exercise such
securities to the extent that the shares to be received by such holder upon
such conversion or exercise would cause such holder to beneficially own more
than 4.9% of e4L's common stock.
The Series D Preferred Stock carries no voting rights except as otherwise
provided by Delaware General Corporation Law. Its liquidation preference is
equal to the face amount plus any accrued premiums, and is senior to e4L's
common stock and Series A Junior Participating Preferred Stock and Series F
Preferred Stock; junior to e4L's Series B Preferred Stock and G/H Preferred
Stock; and pari passu with e4L's Series E Preferred Stock.
Series B Convertible Preferred Stock
In October 1994, e4L authorized the issuance of Series B Convertible
Preferred Stock, par value $.01 per share, consisting of 400,000 authorized
shares, of which a total of 255,796 shares were issued. At March 31, 2000,
there were 5,000 shares of Series B Preferred Stock outstanding.
F-16
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
The 5,000 shares of Series B Preferred Stock outstanding at March 31, 2000
are valued at $40.00 per share for conversion purposes and are presently
convertible, at the option of the holder, into 74,050 shares of e4L's common
stock at a price of $2.70 per share (subject to adjustment). The holders of
shares of Series B Preferred Stock shall be entitled to receive dividends
declared on e4L's common stock and have voting rights (except as the election
of directors) as if the shares of Series B Preferred Stock had been converted
into common stock.
In connection with the sale of the Series B Preferred Stock, e4L issued
255,796 warrants, each of which represent the right to purchase 12 shares
(subject to adjustment) of e4L's common stock. Warrants for 3,276,627 shares
of e4L common stock are currently exercisable at a price of $2.37 per share,
except warrants for 440,259 shares of e4L's common stock, which are currently
exercisable at a price of $2.54 per share. These warrants expire between
October 5, 2004 and December 19, 2004.
Preferred Stock Outstanding
The following table summarizes the issued and outstanding shares of
Preferred Stock at:
<TABLE>
<CAPTION>
March 31
-------------
2000 1999
------ ------
<S> <C> <C>
Series B Convertible Preferred Stock........................... 5,000 5,000
Series D Convertible Preferred Stock........................... 16,779 18,618
Series E Convertible Preferred Stock........................... 9,925 20,000
Series F Convertible Preferred Stock........................... 5,000 --
Series G Convertible Preferred Stock........................... 5,000 --
Series H Convertible Preferred Stock........................... 5,000 --
</TABLE>
There is a liquidation preference of $200,000, $18,803,296, $10,322,312,
$5,119,452, $5,005,479 and $5,005,479 for Series B, D, E, F, G and H
Convertible Preferred Stock, respectively.
Stock Purchase Rights
During January 1994, e4L distributed one preferred share purchase right on
each outstanding share of its common stock. The rights will become exercisable
only if, without e4L's consent or waiver, a person or group acquires 15% or
more of e4L's outstanding common stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% or
more of e4L's outstanding common stock. Each right will entitle shareholders
to buy one one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $40. In addition, upon the occurrence
of certain events, the holders of rights will have the right to receive, upon
exercise at the then-current exercise price, common stock (or, in certain
circumstances, cash, property, or other securities of e4L) having a value
equal to two times the exercise price of such right. In the event that e4L is
acquired in a merger or other business combination, or 50% or more of e4L's
assets or earning power is sold, proper provision will be made so that each
holder of such right will have an additional right to receive, upon exercise
at the then current exercise price of such right, common stock of the
acquiring or surviving company having a value equal to two times the exercise
price of the right. Any rights that are, or were, under certain circumstances,
beneficially owned by such 15% owner will immediately become null and void.
The holders of rights have no rights as stockholders of e4L. e4L has the
ability to redeem the rights at $.001 per right until the occurrence of
certain specified events.
F-17
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Warrants
Warrants outstanding at March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Shares
Acquired
Description Upon Exercise ExercisePrice ExpirationDate
----------- ------------- ------------- --------------
<S> <C> <C> <C>
Series B Preferred Stock
Warrants...................... 3,716,886 $2.37-$2.54 10/5-12/19/04
Series B Loan Warrants......... 3,005,652 $2.37 9/30/04
TMC Warrants................... 2,743,334 $1.32 8/11/03
TMC Warrants................... 350,000 $1.50 8/11/03
TMC Warrants................... 500,000 $3.00 8/11/03
Series C Warrants.............. 936,701 $1.07 9/17/02
Series D Warrants.............. 473,360 $1.07 1/4/03
Series F Warrants.............. 53,000 $4.71 8/26/04
Series G/H Warrants............ 759,340 $2.96 3/21/05
Term Loan Warrants............. 325,000 $2.56 2/8/05
BuyItNow, Inc. Warrants........ 500,000 $8.46 6/7/04
Settlement Warrants............ 400,000 $1.69 11/18/01
Investment Banker Warrants..... 54,229 $1.50 5/24/04
Loan Modification.............. 125,000 $5.19 9/18/02
Other.......................... 20,000 $3.81 12/7/02
----------
13,962,502
==========
</TABLE>
Settlement warrants were granted to settle a contract dispute. The value
attributed to these warrants has been expensed during the year ended March 31,
2000. These warrants were granted at the closing price of the Company's common
stock at the date of the grant.
Series B loan warrants were issued in connection with a $5.0 million term
loan provided to e4L in October 1994. As a result of the Transaction and other
matters, certain anti-dilution provisions of the Series B Warrants were
triggered, resulting in an increase in the number of shares of common stock
available upon exercise of the outstanding Series B Warrants from
approximately 2.3 million to 4.4 million and a decrease in the exercise price
from $4.80 per share to approximately $2.37 per share.
In connection with a loan modification agreement dated September 18, 1997,
between e4L and its former principal lender, e4L granted to its former
principal lender five-year warrants to acquire 125,000 shares of e4L's common
stock at a price of $5.1875 per share, the market price of e4L's common stock
as of the date of the grant.
At March 31, 2000, there were approximately 44,200,000 shares for e4L's
common stock reserved for conversion of preferred stock, for exercise of stock
options and warrants to purchase common stock and for issuance under e4L's
Management Incentive Plan.
7. Stock Options
e4L applies the provisions of APB Opinion 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its stock option
plans. No compensation has been recognized on options which have an exercise
price equal to or above the market price on the date of grant. The majority of
options are granted at exercise prices equal to or greater than the market
price of e4L's common stock at the date of grant. Had
F-18
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
compensation cost attributable to stock options been determined using fair
values at the grant dates as defined by SFAS No. 123, e4L's pro forma net loss
and net loss per share would have been as follows:
<TABLE>
<CAPTION>
Year ended March 31
----------------------------------------
2000 1999 1998
------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Pro forma net loss................ $ (37,840) $ (46,789) $ (62,316)
Pro forma loss per share:
Basic and diluted................ $ (1.22) $ (1.73) $ (2.50)
</TABLE>
Option valuation models use highly subjective assumptions to determine fair
value of traded options with no vesting or trading restrictions. Because
options granted by e4L have vesting requirements and cannot be traded, and
because changes in the assumptions can materially affect the estimate of fair
value, in management's opinion, the existing valuation models do not
necessarily provide a reliable measure of the fair value of employee stock
options.
For purposes of determining the pro forma disclosures, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model, with an estimated dividend yield of 0% and an expected
life of four years for the year ended March 31, 2000 and five years for the
years ended March 31, 1999 and 1998. Further, expected volatility of 91.6%,
104.5% and 50.0%, and risk-free interest rates of 6.5%, 6.5% and 6.4% have
been used in each of the years ended March 31, 2000, 1999 and 1998,
respectively. In accordance with the transition provisions of SFAS No. 123,
the pro forma disclosures presented above apply only to option grants and
stock awards dated on or after April 1, 1995. Therefore, because option grants
and awards generally vest over several years and additional awards are
expected to be made in the future, the pro forma results of operations should
not be considered representative of reported results of operations for future
years.
A maximum of 9,365,000 shares of e4L's common stock may be issued upon
exercise of incentive or non-incentive stock options granted as of March 31,
2000. All employees of e4L, as well as directors, officers, and third parties
providing services to e4L are eligible to participate in e4L's stock option
plan.
As an inducement to the execution of employment agreements with various
officers of e4L who entered into employment agreements after August 31, 1991,
as well as certain other agreements during the year ended March 31, 1998, the
Board of Directors authorized the grant of options to purchase up to 2,686,750
shares of common stock at exercise prices equal to at least the market price
at the time of grant with the exception of 700,000 stock options granted to a
former Chief Executive Officer and 50,000 stock options granted to two other
former executive officers. These 750,000 stock options contained a provision
that upon the occurrence of certain triggering events (such as a sale or
merger of e4L, or significant investment), the executives would have realized
a reduction of up to an aggregate of approximately $3.0 million in the
exercise price of their options. This $3.0 million charge was amortized from
November 13, 1997, the date of the agreement in principal with the former
Chief Executive Officer and other former executive officers, through June 30,
1998. Results of operations for the year ended March 31, 1998 includes $1.9
million in non-cash compensation expense in connection with these stock option
grants. The compensation expense charge, which was originally included in
unusual charges in the consolidated statement of operations as of March 31,
1998, was reversed as part of unusual charges during the year ended March 31,
1999 as no triggering event occurred as of the June 30, 1998 expiration date.
The 212,500 stock options granted to TMC resulted in compensation expense
of $249,000 which has been included in unusual charges during the year ended
March 31, 1999.
F-19
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
During the year ended March 31, 1998, 716,500 stock options originally
issued to Company employees, officers and directors were canceled and 358,250
stock options with exercise prices ranging from $7.00 to $8.325 were issued.
Stock options granted generally vest over a period ranging from the date of
grant up to a maximum of four years. Options may be exercised up to a maximum
of 10 years from the date of grant. The weighted-average remaining contractual
life of all outstanding options at March 31, 2000 is seven years.
A summary of e4L's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------
2000 1999 1998
------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 3,839,261 $6.67 4,471,862 $ 8.10 3,084,504 $13.11
Granted............... 738,250 $2.51 1,067,500 $ 3.90 2,686,250 $ 5.29
Exercised............. (207,900) $2.68 (982,697) $ 3.77 (33,333) $ 4.70
Cancelled............. (916,996) $5.48 (717,404) $12.28 (1,265,559) $13.92
--------- ----- --------- ------ ---------- ------
Outstanding at end of
year................... 3,452,615 $6.23 3,839,261 $ 6.67 4,471,862 $ 8.10
========= ===== ========= ====== ========== ======
<CAPTION>
March 31,
------------------------------------------------------------
2000 1999 1998
------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Exercisable at end of
year................... 2,445,344 $7.53 3,105,011 $ 7.12 2,612,279 $ 7.74
Nonexercisable at end of
year................... 1,007,271 $3.09 734,250 $ 4.80 1,859,583 $ 8.61
Shares available for
future grant........... 1,596,177 1,032,431 560,932
</TABLE>
As of March 31, 2000, 2,206,854 stock options have exercise prices ranging
from $1.32 to $4.88 with a weighted average price of $3.31, and 1,245,761
stock options have exercise prices ranging from $5.01 to $20.00 with a
weighted average price of $11.41. The weighted average fair value of stock
options granted during the years ended March 31, 2000, 1999 and 1998 was
$1.64, $3.44 and $2.58, respectively.
F-20
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
8. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss..................................... $(35,908) $(43,598) $(56,769)
Deemed dividend on convertible preferred
stock....................................... (4,439) (2,262) (643)
-------- -------- --------
Adjusted net loss for basic and diluted
earnings per share.......................... $(40,347) $(45,860) $(57,412)
======== ======== ========
Weighted average shares outstanding.......... 34,691 27,054 24,904
======== ======== ========
Basic and diluted earnings per share......... $ (1.16) $ (1.70) $ (2.31)
======== ======== ========
</TABLE>
Convertible preferred stock convertible into 26,768,369, 30,756,658 and
4,112,830 shares of common stock, and stock options and warrants to purchase
common stock exercisable into 17,415,117, 16,760,637 and 11,565,000 shares of
common stock for the years ended March 31, 2000, 1999 and 1998, respectively,
were not included in the computation of diluted earnings per share because of
losses incurred by e4L in each of those years.
9. Income Taxes
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March
31
------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Current:
Federal................................................. $ -- $ -- $ --
State................................................... 225 50 --
Foreign................................................. -- 390 700
----- ----- -----
225 440 700
Deferred:
Federal................................................. -- -- --
State................................................... -- -- --
Foreign................................................. (225) -- --
----- ----- -----
(225) -- --
----- ----- -----
Total..................................................... $ -- $ 440 $ 700
===== ===== =====
</TABLE>
Loss before income taxes was taxed under the following jurisdictions (in
thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
United States.................................. $(22,508) $(27,355) $(37,682)
Foreign........................................ (13,400) (15,803) (18,387)
-------- -------- --------
Total.......................................... $(35,908) $(43,158) $(56,069)
======== ======== ========
</TABLE>
F-21
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Significant components of e4L's deferred tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 47,847 $ 42,840
Alternative minimum tax credit carryforward............ -- 835
Accrued vacation and severance pay..................... 593 150
Inventory and accounts receivable reserves............. 4,115 6,411
Reserve for legal settlements.......................... 217 2,000
Restructuring accruals................................. 542 2,424
Other.................................................. 567 383
-------- --------
Total deferred tax assets................................ 53,881 55,043
Valuation allowance...................................... (50,547) (52,734)
-------- --------
Deferred tax assets, net of valuation allowance.......... 3,334 2,309
Deferred tax liabilities:
Prepaid media and other costs.......................... 383 614
Tax over book depreciation............................. 647 1,163
Other.................................................. 1,772 --
Deferred sales......................................... 532 532
-------- --------
Total deferred tax liabilities........................... 3,334 2,309
-------- --------
Net deferred tax asset................................... $ -- $ --
======== ========
</TABLE>
The increase in the valuation allowance is attributable to the increase in
United States and foreign net operating loss carryovers and other deferred tax
assets from March 31, 1999 to March 31, 2000.
A reconciliation of e4L's provision for income taxes to the provision for
income taxes at the United States federal statutory rate of 35% is as follows
(in thousands):
<TABLE>
<CAPTION>
Year ended March 31
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Tax benefit at statutory rate................ $(12,568) $(15,105) $(19,624)
Tax effect of net operating loss not
benefited................................... 9,898 10,046 14,394
Foreign income taxes in excess of U.S.
Federal statutory rate...................... -- 390 700
State and local income taxes................. -- 50 --
Nondeductible items, principally goodwill.... 2,670 5,059 5,230
-------- -------- --------
Income tax expense........................... $ -- $ 440 $ 700
======== ======== ========
</TABLE>
At March 31, 2000, e4L has the following loss and credit carryforwards for
tax purposes (in thousands):
<TABLE>
<CAPTION>
Amount Expiration
------- ----------
<S> <C> <C>
U.S. net operating loss................................... $94,900 2009-2020
Foreign net operating loss................................ 19,000 Unlimited
</TABLE>
F-22
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
A portion of the United States net operating loss carryover is attributable
to the exercise of employee stock options. If that portion of the loss
carryover attributable to the exercise of stock options is realized, the
resulting tax benefit will be recorded directly to shareholders' equity. For
financial reporting purposes, a valuation allowance has been recognized to
offset the deferred tax assets related to the entire United States net
operating loss carryover, because utilization of net operating loss carryovers
cannot be reasonably assumed. Such net operating loss carryovers may be
subject to limitation as a result of changes in the ownership of e4L.
10. Unusual Charges
During the year ended March 31, 2000, e4L wrote off capitalized costs of
$0.4 million attributable to the termination of e4L's intended merger with
Flageoli Limited and $5.9 million attributable to broker commissions and other
costs attributable to the sublease of e4L's European satellite transponder on
the Eutelstat satellite. Costs associated with the sublease are payable over
approximately a ten-year period.
In connection with the Transaction as more fully described in Note 6, in
fiscal year 1999 e4L adopted revised business strategies that reflect a
significant change in e4L's business model under the direction of its new
management team and board of directors. As a result, e4L has undertaken
specific actions to reduce its overall cost structure and transition its
business model from a television direct marketing company to an electronic
commerce and membership services company. Certain of these actions resulted in
pre-tax unusual charges during the year ended March 31, 1999 of $20.2 million,
including $12.5 million of restructuring charges.
The restructuring charges for the year ended March 31, 1999 are primarily
attributable to the following:
Closure of Philadelphia, Pennsylvania Headquarters. e4L made a decision
to close its former corporate headquarters in Philadelphia, Pennsylvania
and relocate its headquarters to its offices in Los Angeles, California.
Included in restructuring charges are $3.8 million of costs associated with
the termination of employees, loss on the subleasing of its office and
other commitments, and the write-down of assets that are no longer in use.
Such assets were sold or abandoned during the first quarter of fiscal year
2000. Approximately $1.3 million of accrued rent remains at March 31, 2000
to cover the difference between the actual lease payments and sublease
receipts. A total of 17 employees were terminated as part of e4L's plans to
close its corporate offices. Of the 17 employees affected, 16 had been paid
and/or left e4L as of March 31, 1999, and one has begun to receive his
severance package and had left e4L during fiscal year 2000. Approximately
$0.2 million remains accrued at March 31, 2000 to cover the remaining
payments to these employees.
Consolidation of New Zealand and Far East Business Offices, and Closure
of Australian Retail Stores. e4L made a decision to reduce the size of its
New Zealand work force, by consolidating its previously separate New
Zealand and Far East business offices within one location, and shutting
down unprofitable Australian retail stores. The restructuring charges of
$0.7 million are attributable to the costs associated with the termination
of employees, cancellation of leases and other commitments, and the
write-down of assets no longer in use. Such assets had been sold or
abandoned as of March 31, 1999. A total of 46 employees were terminated as
part of e4L's plans to consolidate the two offices and close certain retail
stores. Of the 46 employees affected, 32 had been paid and/or left e4L as
of March 31, 1999, and 14 had left e4L during the first quarter of the year
ended March 31, 2000.
Outsourcing of Certain Operations in the United States. e4L outsourced
various aspects of its Phoenix, Arizona fulfillment center, customer
service operations, and media agency business. As a result, during the
third quarter of the year ended March 31, 1999, e4L disposed of its media
agency subsidiary and is in the process of transitioning its fulfillment
and customer service functions to third parties. The costs expensed as of
March 31, 1999 of $3.4 million include costs primarily associated with the
termination of
F-23
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
employees, cancellation of leases and other commitments, and the write-down
of certain assets to fair market value. Approximately $0.7 million remains
accrued at March 31, 2000 for the remaining severance payments.
Closure of Certain Asian and Eastern European Markets. Due to the
economic downtime in Asia and Eastern Europe, the forecasted sales and
opportunities in these regions have decreased significantly from e4L
original plans. Accordingly, e4L made a decision to exit certain Asian and
Eastern European markets and/or transfer such markets to third party
licensee arrangements. The costs included in the restructuring charges of
$2.0 million are costs incurred in connection with the termination of 12
employees, all of which terminations were completed and paid as of March
31, 1999, and certain associated legal costs.
Write-down of Prepaid Production. Also included in the restructuring
charge is $2.6 million of costs related to the write-down of certain
prepaid costs attributable to the production of its direct response
television programming. e4L made a fundamental change in its strategy
involving the use of its programs. In connection with its revised business
model, new electronic commerce platform and other initiatives, e4L has
begun utilizing its programs not only for the sale of underlying products,
but has begun leveraging its programs and television media to promote
memberships to exploit its wholesale/retail and continuity business, and to
create list rental opportunities with respect to its customer base.
Other unusual charges for the year ended March 31, 1999 consist of the
following:
Shopping Club Start-Up Costs. $1.2 million of start-up costs associated
with the development and production of commercials related to e4L's
Everything4Less membership shopping club.
Eutelstat Satellite Contract. e4L entered into a long-term commitment to
lease a transponder on the Eutelstat satellite for the life of the
satellite. The satellite launched in April 1998, and e4L has an estimated
commitment of 10 to 12 years. In fiscal year 1999, e4L classified a portion
of the satellite contract as unfavorable, as it was estimated that it will
be unable to recover certain costs relating to its lease. Accordingly, e4L
has included in unusual charges $5.3 million and $5.9 million at March 31,
1999 and 2000, respectively, relating to its inability to recover the
remaining portion of costs attributable to the Eutelstat Satellite lease of
which $6.5 million remains accrued at March 31, 2000. e4L has entered into
a sublease for the remaining life of the contract effective August 1, 2000
which will cover all remaining future payments not covered in the accrual.
Change of Control Payments. As part of the Transaction, e4L recorded
severance charges of $1.8 million associated with the waiver of the change
of control provisions contained in the employment agreements of three
former executive officers.
Consulting Fees. In connection with the Transaction, e4L recorded a non-
cash charge of $0.2 million in connection with a five-year option to
purchase up to 212,500 shares of e4L common stock at an exercise price of
$1.32 per share that were granted to TMC. In addition, e4L recorded $0.4
million related to the termination of a consulting agreement.
Write-off of Merger Costs. In June 1998, e4L wrote off capitalized costs
of $0.7 million attributable to the termination of e4L's intended merger
with ValueVision.
Non-cash Executive Compensation. e4L had previously recorded compensation
expense of $1.9 million in connection with 750,000 stock options issued to
e4L's former chief executive officer and two other former executive
officers during fiscal year 1998. The stock options contained provisions
that, upon the occurrence of certain triggering events prior to June 30,
1998, the exercise price of the stock options would be reduced. The
previously recorded expense was reversed in the first quarter of fiscal
year 1999 as no triggering events occurred as of the June 30, 1998
expiration date.
F-24
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
11. Gain on Sale of Securities
In January 1999, e4L sold its investment in the common stock of Earthlink
Networks, Inc. (Earthlink), which had a cost of $488,000, for net proceeds of
$7.0 million, resulting in a gain of $6.5 million. The Earthlink stock was
acquired in December 1998 through the exercise of warrants to purchase the
stock.
12. Commitments and Contingencies
e4L rents warehouses, retail stores and office space under various
operating leases which expire through December 2013, including leases with
related parties as described in Note 13. Future minimum lease payments
(exclusive of real estate taxes and other operating expenditures) as of March
31, 2000 under noncancelable operating leases with initial or remaining terms
of one year or more are as follows as of each of the years ended March 31 (in
thousands):
<TABLE>
<S> <C>
2001................................................................. $ 4,516
2002................................................................. 3,597
2003................................................................. 2,635
2004................................................................. 2,217
2005................................................................. 2,225
Thereafter........................................................... 12,335
-------
$27,525
=======
</TABLE>
Rent expense under various operating leases aggregated $3,410,000,
$4,175,000 and $4,833,000 during the years ended March 31, 2000, 1999 and
1998, respectively. Subleased building space rental income aggregated
$485,000, $369,500 and $136,800 during the years ended March 31, 2000, 1999
and 1998, respectively.
In May 1999, e4L entered into two subleases related to its former
Philadelphia office which will generate rental income of approximately
$315,100, $330,500, $350,200, $362,500 and $377,900 during each of the years
ended March 31, 2001 to 2005 and $1,057,000 thereafter.
e4L has entered into employment agreements with certain of its executive
officers providing for base compensation, automobile allowance and other
incentives. Commitments under these agreements for base compensation and
automobile allowance are $1.2 million and $0.6 million in each of the years
ending March 31, 2001 and 2002, respectively. Each employment agreement also
provides for annual bonuses and stock option grants at the discretion of e4L's
board of directors.
During the year ended March 31, 2000, e4L expended $72.0 million on media
purchases, a portion of which were made under long-term agreements, including
long-term agreements with certain Pan-European satellite channels to purchase
a specific number of television hours per week at a minimum guaranteed amount.
These contracts expire at various dates through March 31, 2003. In addition,
e4L has a contract with respect to a European satellite transponder on the
Eutelstat satellite which continues through the year 2010. Total commitments
under these media contracts are $4,830,000 during the years ending March 31,
2001, 2002 and 2003; $3,733,200 in the years ending March 31, 2004 and 2005;
and $18,666,000 thereafter. During June 2000, e4L subleased substantially all
of its transponder capacity on the Eutelstat satellite, which sublease is to
commence on August 1, 2000 with annual sublease payments of 3 million Euros
($2.9 million as of March 31, 2000) during the first year, and 3.36 million
Euros ($3.2 million as of March 31, 2000) each year thereafter through March
30, 2010. At March 31, 2000, e4L recorded a $5.9 million charge attributable
to broker commissions and the excess of the minimum payments under the
satellite commitment over sublease amounts.
F-25
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
e4L has entered into an agreement with a former investment banker pursuant
to which e4L has guaranteed the market price of its common stock underlying
warrants issued to the investment banker, subject to certain limitations. In
the event the market price of its common stock is below the guaranteed price,
e4L has guaranteed minimum proceeds to the investment banker from the sale of
the common stock upon exercise of the warrants. e4L has paid approximately
$191,000 as of March 31, 2000 and anticipates paying an additional $960,000
during the year ended March 31, 2001 based on current stock prices.
13. Litigation and Regulatory Matters
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.
Regulatory Matters
During July 1998, in accordance with applicable regulations, e4L notified
the Consumer Products Safety Commission (CPSC) of a problem that was occurring
with respect to the first 20,000 units manufactured of its Red Devil Grill
product. At the time, e4L proposed, and the CPSC accepted, fixing the affected
part and other modifications. During February 1999 and October 1999, the CPSC
requested additional information from e4L about the grill to which the Company
responded. The CPSC is in the process of reviewing e4L's responses, and has
not yet made a determination of whether there are any additional problems with
the grill, and what, if any, corrective measures e4L will have to implement if
problems are found to be present. At present, management of e4L cannot predict
whether the outcome of this matter will have a material adverse impact on
e4L's financial condition or results of operations.
During the year ended March 31, 1997, in accordance with applicable
regulations, e4L notified the 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 results of operations.
In June 2000, e4L received notice from the NYSE that it is considered
"below criteria" with respect to its market capitalization and stockholders'
equity in accordance with the NYSE's Listed Company Manual regarding continued
listing criteria (the Listing Criteria). In accordance with the Listing
Criteria, e4L is required, on or
F-26
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
before July 29, 2000, to submit a business plan to the NYSE, which
demonstrated compliance with the $50.0 million minimum market capitalization
and stockholders' equity requirement contained in the Listing Standards within
18 months of submitting its plan, and to issue a press release disclosing the
fact that it is not in compliance with the Listing Criteria. Upon submission,
the business plan will be reviewed by the NYSE's Listing and Compliance
Committee for final disposition, and will either accept or reject the plan.
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.
14. Retirement Plan
All of e4L's U.S. full-time employees may participate in a 401(k) defined
contribution plan. e4L matches employee contributions at levels that depend on
the return on equity of e4L each year. e4L recognized $7,000, $17,000 and
$13,000 for the years ended March 31, 2000, 1999 and 1998, respectively, in
connection with this plan.
15. Related Party Transactions
Settlement of Executive Officer Loans and Advance
e4L entered into an employment agreement with an executive pursuant to
which, among other things, e4L loaned the executive $545,000 with interest at
the prime rate of interest plus 1-1/2 percent (Note). As collateral for the
Note, the executive originally pledged 339,784 shares of e4L common stock
owned by the executive, which collateral was subsequently released by e4L
between April 1999 and October 1999. The executive also held an allowance from
e4L in the amount of $18,000 (Advance), bearing no interest, and acted as a
surety for a debt owing to e4L in the amount of $44,376 at December 31, 1999
(Surety Loan).
During January 2000, e4L and the executive entered into a settlement
agreement and mutual release (Settlement Agreement) with respect to the
amounts owed under the Note, Advance, Surety Loan and certain other claims.
Under the terms of the Settlement Agreement, e4L agreed to forgive the Note
and interest due thereon of $660,454, the Advance was offset against certain
amounts owed to the executive by e4L, and the executive agreed to repay the
Surety Loan and interest on or before March 31, 2000, which amount was paid.
In addition, certain employee stock options granted to the executive were
extended through December 31, 2000, and the executive's employment with e4L
was terminated effective March 31, 2000.
Officer Advances
During the fourth quarter of the fiscal year ended March 31, 2000, certain
e4L executive officers advanced a total of $1,056,000 to e4L, which bore
interest at 9.5% per annum. The outstanding advances of $256,000 at March 31,
2000 were repaid subsequent to year end.
F-27
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
Other
e4L also entered into transactions with companies affiliated with various
board members and current and former executives for services including
printing, consulting, show production and professional services. During the
years ended March 31, 2000, 1999 and 1998, the total amount paid to these
companies for such services was approximately $698,000, $1,500,000 and
$501,000, respectively.
16. Segment and Geographic Information
e4L operates in one industry segment and is engaged in the direct marketing
of products principally through television. e4L evaluates performance and
allocates resources based on several factors, of which the primary financial
measure is adjusted EBITDA, earnings before interest, taxes, depreciation and
amortization and certain other charges as identified by management. Accounting
policies of the business segments are the same as those described in the
summary of significant accounting policies in Note 1. 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 direct response television programs and commercials,
develop product and general and administrative expenses. Production and
corporate assets primarily consist of corporate cash, fixed assets and
goodwill.
Segment information for fiscal year 1999 and 1998 has been restated to
conform to the current year presentation. The major difference is the change
in the measure of segment profit or loss to EBITDA as compared to operating
income (loss) presented in prior years. In addition, the current year
presentation does not reflect an allocation of production or corporate costs
to the geographic segments. This is consistent with management's review of its
financial performance. Information as to e4L's operations by geographic area,
is set forth below (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net revenue:
United States.............................. $152,986 $197,244 $123,087
Europe..................................... 22,537 65,194 66,423
Austral-Asia............................... 65,517 63,694 86,326
Other...................................... -- 1,419 2,136
Production and corporate................... 71 299 502
-------- -------- --------
Total........................................ $241,111 $327,850 $278,474
======== ======== ========
Adjusted EBITDA:
United States and Canada................... $ 2,110 $ 7,882 $ (1,351)
Europe..................................... (2,013) 4,583 (5,534)
Austral-Asia............................... 7,530 40 36
Other...................................... -- (442) (281)
Production and corporate................... (13,976) (25,093) (21,988)
-------- -------- --------
Total........................................ $ (6,349) $(13,030) $(29,118)
======== ======== ========
Depreciation, amortization and non-cash
compensation:
United States and Canada................... $ 2,770 $ 3,735 $ 3,474
Europe..................................... 282 284 411
Austral-Asia............................... 1,028 1,530 1,751
Other...................................... -- 5 6
Production and corporate................... 743 1,240 1,431
-------- -------- --------
Total........................................ $ 4,823 $ 6,794 $ 7,073
======== ======== ========
</TABLE>
F-28
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Unusual charges:
United States and Canada........................ $ -- $ 3,400 $ --
Europe.......................................... 5,943 7,124 --
Austral-Asia.................................... -- 2,655 --
Other........................................... -- -- --
Production and corporate........................ 411 7,059 1,875
------- ------- --------
Total............................................. $ 6,354 $20,238 $ 1,875
======= ======= ========
Extraordinary items:
United States and Canada........................ $ -- $ -- $ --
Europe.......................................... -- -- --
Austral-Asia.................................... -- -- --
Other........................................... -- -- --
Production and corporate........................ -- (4,876) --
------- ------- --------
Total............................................. $ -- $(4,876) $ --
======= ======= ========
Identifiable assets:
United States and Canada........................ $33,606 $45,357 $ 41,304
Europe.......................................... 4,702 11,654 21,944
Austral-Asia.................................... 26,192 30,317 46,334
Other........................................... -- 261 1,024
Production and corporate........................ 7,110 10,926 24,615
------- ------- --------
Total............................................. $71,610 $98,515 $135,221
======= ======= ========
</TABLE>
The reconciliation of adjusted EBITDA to loss before income taxes and
extraordinary items is set forth below (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Adjusted EBITDA.............................. $ (6,349) $(13,030) $(29,118)
Less:
Depreciation, amortization and non-cash
compensation.............................. 5,449 6,794 7,073
Write-off of impaired goodwill............. 7,537 11,300 14,546
Unusual charges............................ 6,354 20,238 1,875
Gain on sale of investment................. -- (6,544) --
Loss on equity investment in Buyitnow LLC.. 8,506 -- --
Interest expense........................... 1,713 3,216 3,457
-------- -------- --------
Loss before income taxes and extraordinary
item........................................ $(35,908) $(48,034) $(56,069)
======== ======== ========
</TABLE>
17. Subsequent Events
Investment in Promenade Membership Services, LLC
During May 2000, e4L acquired a fifty percent ownership interest in
Promenade Membership Services, LLC (Promenade) for consideration of $1.0
million in either cash, shares of e4L common stock, or shares of Buyitnow LLC
common units owned by e4L valued at $5.00 per share. The consideration is
payable on or before May 17, 2001. Promenade markets discount membership
buying services and clubs to consumers and businesses.
In connection with the acquisition of Promenade, e4L acquired an option to
purchase up to an additional thirty-five percent of the equity of Promenade
for cash consideration equal to between $1.2 million and $1.9 million,
depending upon the date such option is exercised. In addition, concurrent with
the closing of the
F-29
<PAGE>
e4L, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
acquisition, Promenade granted its chief executive officer an option to
purchase up to ten percent of the equity of Promenade for $200,000.
Sale of 75% Austral-Asia Business
During May 2000, e4L executed a Heads of Agreement (also known as a Letter
of Intent) with two venture capital companies with operations in Europe and
Asia, pursuant to which, among other things, the two companies and certain
members of management will purchase 75% of the equity of the e4L's
subsidiaries QIJ, QPL and SP for approximately $44 million (proceeds of
approximately $38 million, net of the repayment of intercompany debt and
payment of commissions). Closing of the transaction, which is anticipated to
occur during the beginning of e4L's second fiscal quarter of 2001, is subject
to normal closing conditions, including completion of satisfactory due
diligence and finalization of definitive agreements.
F-30
<PAGE>
SCHEDULE II
e4L, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning costs and end
Description of period expenses Deductions of period
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 2000:
Allowance for doubtful accounts
and refund..................... $12,059 $46,395 $51,553(1) $ 6,901
Inventory reserve............... $ 4,913 $ 2,796 $ 5,871(2) $ 1,838
Year ended March 31, 1999:
Allowance for doubtful accounts
and refund..................... $13,310 $71,446 $72,697(1) $12,059
Inventory reserve............... $ 6,519 $ 8,275 $ 9,881(2) $ 4,913
Year ended March 31, 1998:
Allowance for doubtful accounts
and refund..................... $11,678 $54,064 $52,432(1) $13,310
Inventory reserve............... $11,739 $ 6,535 $11,755(2) $ 6,519
</TABLE>
--------
(1) Uncollectible accounts written-off, net of recoveries and refunds on
products sold.
(2) Obsolete inventory written-off.
