<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________ .
Commission file number 1-6715
e4L, Inc.
------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-2658741
- --------------------------------------------------------------------------------
(State or Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
15821 Ventura Boulevard, 5th Floor
Los Angeles, California 91436
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (818) 461-6400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
There were 37,938,825 issued and outstanding shares of registrant's common
stock, par value $.01 per share, at January 31, 2000, net of 855,208 shares of
common stock held in treasury as of such date.
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e4L, Inc.
---------
INDEX
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Facing Sheet...................................................................... 1
Index............................................................................. 2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 1999
and March 31, 1999..................................................... 3
Condensed Consolidated Statements of Operations for the
three months ended December 31, 1999 and 1998......................... 4
Condensed Consolidated Statements of Operations for the
nine months ended December 31, 1999 and 1998.......................... 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1999 and 1998.......................... 6
Notes to Unaudited Condensed Consolidated Financial
Statements............................................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 12
Part II. Other Information
Item 1. Legal Proceedings............................................. 24
Item 6. Exhibits and Reports on Form 8-K.............................. 24
Signatures........................................................................ 25
</TABLE>
-2-
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
e4L, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
-------------- -------------
(Unaudited) (See Note 1)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......................................................................... $ 608 $ 7,574
Restricted cash.................................................................................... 2,836 524
Accounts receivable, net........................................................................... 26,289 35,681
Inventories, net................................................................................... 21,530 16,229
Prepaid media...................................................................................... 1,516 836
Deferred costs..................................................................................... 2,077 3,329
Prepaid expenses and other current assets.......................................................... 2,375 1,050
Deferred income taxes.............................................................................. 2,595 2,595
------------ -------------
Total current assets.............................................................................. 59,826 67,818
Property and equipment, net......................................................................... 6,313 8,119
Excess of cost over net assets of acquired businesses and
other intangible assets, net....................................................................... 20,666 21,737
Other assets........................................................................................ 1,103 1,127
------------ -------------
Total assets....................................................................................... $ 87,908 $ 98,801
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................................................................... $ 14,887 $ 18,174
Accrued expenses................................................................................... 19,293 25,017
Deferred revenue................................................................................... 2,648 511
Income taxes payable............................................................................... 655 476
Deferred income taxes.............................................................................. 1,552 1,552
Current portion of long-term debt and capital lease obligations.................................... 1,343 8,119
------------ -------------
Total current liabilities......................................................................... 40,378 53,849
Long-term debt and capital lease obligations........................................................ 13,091 135
Deferred income taxes............................................................................... 1,043 1,043
Other liabilities................................................................................... 4,281 6,027
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 10,000,000 shares; issued 5,000 shares Series B
convertible preferred stock at December 31, and March 31, 1999; 17,676 and 18,618 shares
Series D convertible preferred stock at December 31, and March 31, 1999, respectively;
14,195 and 20,000 shares Series E convertible preferred stock at December 31, and
March 31, 1999, respectively; and 5,000 shares Series F convertible preferred
stock at December 31, 1999........................................................................ 1 1
Common stock, $0.01 par value; authorized 150,000,000 shares; issued
38,348,490 and 32,347,284 shares, at December 31, and March 31, 1999,
respectively...................................................................................... 383 323
Additional paid-in capital......................................................................... 190,738 183,540
Retained deficit................................................................................... (145,830) (129,489)
------------ -------------
45,292 54,375
Treasury stock, 855,208 and 874,044 shares, at cost at December 31, and
March 31, 1999, respectively...................................................................... (6,557) (6,701)
Note receivable, officer........................................................................... - (545)
Foreign currency translation adjustment............................................................ (9,620) (9,382)
------------ -------------
Total shareholders' equity........................................................................ 29,115 37,747
------------ -------------
Total liabilities and shareholders' equity........................................................ $ 87,908 $ 98,801
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1999 1998
---------- ---------
<S> <C> <C>
Revenue:
Products................................................................. $51,378 $ 81,922
Commission and other..................................................... 3,169 1,237
---------- ---------
Net revenue............................................................... 54,547 83,159
Operating costs and expenses:
Media.................................................................... 12,723 28,807
Product and other direct................................................. 34,242 47,926
Selling, general and administrative...................................... 7,990 9,320
Depreciation, amortization and non-cash compensation..................... 1,308 1,544
Unusual charges.......................................................... 411 21,680
---------- ---------
Total operating costs and expenses........................................ 56,674 109,277
---------- ---------
Loss from operations (2,127) (26,118)
Other:
Loss on equity investment in BuyItNow.com, LLC......................... 2,957 -
Interest expense....................................................... 414 528
---------- ---------
Loss before income taxes and extraordinary item........................... (5,498) (26,646)
Income taxes........................................................... 105 105
---------- ---------
Loss before extraordinary item............................................ (5,603) (26,751)
Extraordinary item - gain on extinguishment of debt, net
of income taxes....................................................... - 4,876
---------- ---------
Net loss.................................................................. $(5,603) $(21,875)
========== =========
Net loss per common share - basic and diluted:
Loss before extraordinary item........................................ $(0.18) $(1.04)
Extraordinary item - gain on extinguishment of debt................... - 0.18
---------- ---------
Net loss per common share................................................. $(0.18) $( 0.86)
========== =========
Weighted average number of common shares outstanding -
Basic and diluted....................................................... 35,127 26,803
========== =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-4-
<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Products........................................................................ $189,558 $248,826
Commission and other............................................................ 6,801 4,152
-------- --------
Net revenue...................................................................... 196,359 252,978
Operating costs and expenses:
Media........................................................................... 62,748 87,942
Product and other direct........................................................ 116,653 146,184
Selling, general and administrative............................................. 23,457 29,585
Depreciation, amortization and non-cash compensation............................ 3,898 4,371
Unusual charges................................................................. 411 20,481
-------- --------
Total operating costs and expenses............................................... 207,167 288,563
-------- --------
Loss from operations ............................................................ (10,808) (35,585)
Other:
Loss on equity investment in BuyItNow.com, LLC.................................. 4,130 -
Interest expense................................................................ 1,128 3,030
-------- --------
Loss before income taxes and extraordinary item.................................. (16,066) (38,615)
Income taxes..................................................................... 275 335
-------- --------
Loss before extraordinary item................................................... (16,341) (38,950)
Extraordinary item - gain on extinguishment of debt, net
of income taxes................................................................. - 4,876
-------- --------
Net loss......................................................................... $(16,341) $(34,074)
======== ========
Net loss per common share - basic and diluted:
Loss before extraordinary item.................................................. $ (0.59) $ (1.55)
Extraordinary item - gain on extinguishment of debt............................. - 0.19
-------- --------
Net loss per common share........................................................ $ (0.59) $ (1.36)
======== ========
Weighted average number of common shares outstanding -
Basic and diluted............................................................... 33,269 $ 25,898
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-5-
<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
--------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (16,341) $(34,074)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 3,428 4,221
Gain on extinguishment of debt.......................................... - (4,876)
Non-cash loss on equity investment in BuyItNow.com, LLC................. 500 -
Non-cash compensation................................................... 470 (937)
Non-cash portion of unusual charges..................................... - 7,452
Changes in operating assets and liabilities, net........................ (4,942) 13,787
Other................................................................... (1,328) 3,608
--------- --------
Net cash used in operating activities........................................ (18,213) (10,819)
Cash flows from investing activities:
Additions to property and equipment...................................... (647) (871)
Investment in securities available for sale.............................. - (488)
--------- --------
Net cash used in investing activities........................................ (647) (1,359)
Cash flows from financing activities:
Proceeds from long-term debt................................................ 147,177 2,136
Payments on long-term debt, notes payable and capital lease obligations..... (140,997) (27,749)
Net proceeds from issuance of preferred stock............................... 4,449 17,943
Exercise of stock options and warrants...................................... 2,651 8,252
Loan to officer............................................................. - (406)
--------- --------
Net cash provided by financing activities.................................... 13,280 176
Effect of exchange rates on cash and cash equivalents........................ (1,386) 554
--------- --------
Net decrease in cash and cash equivalents.............................. (6,966) (11,448)
Cash and cash equivalents, beginning of period............................... 7,574 17,915
--------- --------
Cash and cash equivalents, end of period..................................... $ 608 $ 6,467
========= ========
</TABLE>
See notes to unaudited condensed consolidated financial statement
-6-
<PAGE>
e4L
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 1999
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of
e4L, Inc. and subsidiaries ("e4L") have been prepared in accordance with
generally accepted accounting principles for interim financial information, and
in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-
X. Accordingly, the financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for a
complete financial statement presentation. In the opinion of e4L's management,
all adjustments (consisting of normal, recurring items and accruals) considered
necessary for a fair presentation have been included. Results of operations for
the three month and nine month periods ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in e4L's annual report on Form 10-K
for the year ended March 31, 1999.
The balance sheet at March 31, 1999 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required under generally accepted accounting principles for
complete financial statement presentation.
Impact of Recently Issued Accounting Pronouncements
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets or liabilities
measured at fair value. Gains or losses resulting from changes in the values of
derivatives are accounted for depending on the use of the derivatives and
whether the derivatives qualify for hedge accounting. SFAS No. 133 will be
effective for e4L beginning in fiscal year 2001. The adoption of SFAS No. 133
is not expected to have a material impact on the financial position or results
of operations of e4L.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Per Share Amounts
Net loss per share has been computed in accordance with FASB's Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
In computing per share amounts, accrued dividends and the effect of beneficial
conversion features on preferred stock have been added/deducted from net loss to
arrive at net loss applicable to common shareholders.
The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Net loss...................................................... $(5,603) $(21,875) $(16,341) $(34,074)
Effect of beneficial conversion features and accrued
dividends on convertible preferred stock (1).............. (657) (1,200) (3,396) (1,187)
------- -------- -------- --------
Adjusted net loss-basic and diluted earnings per share........ $(6,260) $(23,075) $(19,737) $(35,261)
------- -------- -------- --------
Weighted average shares outstanding - basic and diluted....... 35,127 26,803 33,269 25,898
======= ======== ========= ========
Basic and diluted earnings per share (2)...................... $( 0.18) $ (0.86) $ ( 0.59) $ (1.36)
======== ======== ========= ========
</TABLE>
7
<PAGE>
(1) For nine months ended December 31, 1998, represents reversal of previously
recorded accrued premium on Series C Preferred Stock of $690, net of the
current premium earned on Series D Preferred Stock of $1,877.
(2) Convertible preferred stock convertible into 27.1 million and 31.7 million
shares of common stock, and stock options and warrants to purchase common
stock exercisable into 16.6 million and 17.0 million shares of common stock
have been excluded from the calculation of diluted loss per share as the
effect of such securities is anti-dilutive.
3. Income Taxes
e4L recorded income tax expense of $275,000 and $335,000 for the nine
months ended December 31, 1999 and 1998, respectively, due to tax liabilities
associated with its Austral-Asian operations. Income tax benefits on United
States and certain foreign losses and loss carryovers have been fully reserved
until realized.
4. Comprehensive Income
Comprehensive income for the three and nine month periods ended December
31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------------- -----------------------------
1999 1998 1999 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net Loss................................................... $(5,603) $(21,875) $(16,341) $(34,074)
Foreign currency translation adjustments.................. 59 2,616 (238) 674
Net unrealized gain on securities available for sale...... - 5,212 - 5,212
----------- ------------ ------------ -----------
Total comprehensive loss................................... $(5,544) $(14,047) $(16,579) $(28,188)
=========== ============ ============ ===========
</TABLE>
5. Segment and Geographic Information
e4L operates in one industry segment and is engaged in the direct marketing
of consumer products principally through direct response television and
electronic commerce. e4L evaluates performance and allocates resources based on
several factors, of which the primary financial measure is EBITDA, or earnings
before interest, taxes, depreciation and amortization, non-cash compensation
charges and other income (expense). e4L also excludes unusual charges and
income (loss) on investment in computing EBITDA.
Accounting policies of e4L's geographic business segments are the same as
those described in the summary of significant accounting policies set forth in
the notes to e4L's audited financial statements included in e4L's Form 10-K
with respect to its fiscal year ended March 31, 1999. Business segment assets
consist of the owned assets used in each geographic area. The production and
corporate components of EBITDA include the costs incurred to produce direct
response television programming, costs of product development and general and
administrative expense. EBITDA does not reflect an allocation of production or
corporate costs to the geographic business segments, which is consistent with
management's review of each segment's financial performance. Production and
corporate assets primarily consist of cash, property and equipment, and
intangible assets.
Information with respect to e4L's operations by geographic area, is set
forth below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- ----------------------------
1999 1998 1999 1998
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue:
United States.................................................. $31,376 $50,658 $126,272 $155,593
Europe......................................................... 4,727 15,548 18,607 48,562
Asia........................................................... 18,409 16,817 51,411 47,198
Other.......................................................... - 60 - 1,385
Production and corporate....................................... 35 76 69 240
------- ------- -------- --------
Total.......................................................... $54,547 $83,159 $196,359 $252,978
======= ======= ======== ========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
EBITDA:
United States.................................................. $ 1,873 $ 965 $ 1,095 $ 8,470
Europe......................................................... (1,217) 2,286 (1,131) 2,493
Asia........................................................... 2,298 1,241 5,958 (1,326)
Other.......................................................... - (9) - (448)
Production and corporate....................................... (3,362) (7,377) (12,421) (19,922)
---------- --------- ---------- ----------
Total.......................................................... $ (408) $(2,894) $ (6,499) $(10,733)
========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------- -------------
<S> <C> <C>
Identifiable assets:
United States................................................. $42,896 $45,357
Europe........................................................ 5,471 11,654
Asia.......................................................... 28,464 30,317
Other......................................................... - 261
Production and corporate...................................... 11,077 11,212
------------- -------------
Total......................................................... $87,908 $98,801
============= =============
</TABLE>
The reconciliation of EBITDA to loss before income taxes and extraordinary
item is set forth below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------- ---------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
EBITDA........................................................... $ (408) $ (2,894) $ (6,499) $(10,733)
Less:
Depreciation, amortization and non-cash compensation 1,308 1,544 3,898 4,371
Unusual charges .............................................. 411 21,680 411 20,481
Loss on equity investment in BuyItNow.com, LLC................ 2,957 - 4,130 -
Interest expense.............................................. 414 528 1,128 3,030
------- -------- -------- --------
Loss before income taxes and extraordinary item............... $(5,498) $(26,646) $(16,066) $(38,615)
======= ======== ======== ========
</TABLE>
6. Investment In BuyItNow.com, LLC
On June 7, 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.) a commitment to promote Buyitnow LLC within e4L programs for a three
year term. In addition, e4L issued 500,000 warrants to purchase e4L common stock
to Buyitnow. Concurrent with the closing, Clear Channel Communications, Inc.
acquired an approximate 6.0% equity interest in Buyitnow LLC in exchange for a
contribution of $12.5 million of radio broadcast and outdoor media. During June
1999, NBC Interactive, Inc. acquired an approximate 7.0% equity interest in
Buyitnow LLC in exchange for their contribution of $15.0 million of Internet
media. On November 16, 1999, Emmis Communications acquired an approximate 2.3%
interest in Buyitnow for a cash investment of $5.0 million. In exchange for its
contributions to Buyitnow LLC, and issuance of the warrants to Buyitnow, e4L
currently owns an approximate 41.0% equity interest in Buyitnow LLC. The
tangible assets and liabilities contributed by e4L to Buyitnow LLC were not
material.
e4L has accounted for its investment in Buyitnow LLC using the equity
method, as Buyitnow LLC is not majority owned or controlled by e4L. During the
three and nine months ended December 31, 1999, e4L recorded a loss on its equity
investment in Buyitnow LLC of approximately $3.0 million and $4.1 million,
respectively. Included in e4L's balance sheet at December 31, 1999 is a $1.4
million of account receivable from Buyitnow LLC.
9
<PAGE>
A summary of Buyitnow LLC's unaudited condensed consolidated financial
information is as follows:
Condensed Consolidated Statement of Operations:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
December 31, 1999 December 31, 1999
------------------ -------------------
<S> <C> <C>
Net revenue..................................................... $ 3,816 $ 6,739
Gross margin.................................................... $ 6 $ 128
Net loss........................................................ $(8,592) $(16,184)
Condensed Consolidated Statement of Financial Condition:
<CAPTION>
December 31, 1999
------------------
<S> <C>
Current assets.................................................. $ 4,272
Non-current assets.............................................. 6,175
-------
Total assets............................................... $10,447
=======
Current liabilities............................................. $12,653
Member's deficit................................................ (2,206)
-------
Total liabilities and members deficit...................... $10,447
=======
</TABLE>
7. Settlement of Executive Officer Loans and Advance
In March 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 ("Note") of which
$659,966 was owing at December 31, 1999. 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, 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. In addition, certain employee stock options granted to the executive were
extended through December 31, 2000, and the executive's employment with e4L is
to be terminated effective March 31, 2000.
8. Credit Agreement - Term Loan
In December 1998, e4L entered into a three-year credit agreement with a
senior lender (the "Credit Agreement") that provides for a revolving credit
facility with a maximum of $20.0 million. 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 e4L's 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.
9. Commitment & Contingencies
Litigation
In March 1999, Intervention, Inc., a California non-profit corporation
("Intervention"), filed a complaint for false advertising against e4L in the
Superior Court for Contra Costa County, alleging that e4L overstated the
effectiveness of one of its home exercise products in one of its direct response
television programs. e4L is vigorously contesting the action. At this time, e4L
cannot predict the outcome of this matter; however, even if Intervention were to
succeed on all of its claims, e4L does not believe that such results would have
a material adverse impact on e4L's results of operations or financial condition.
10
<PAGE>
In February 1999, e4L filed a complaint against The Media Group, Inc.
("TMG"), a direct marketing company located in Stamford, Connecticut, for
trademark infringement, declaratory relief, breach of written contract, breach
of oral contract, and other causes of action in the United States District Court
for the Central District of California. Shortly thereafter, TMG filed a separate
complaint in the Pennsylvania Court of Common Pleas for the County of
Philadelphia claiming that e4L allegedly breached a purported oral agreement to
provide TMG with a right of first refusal to market e4L's products with a retail
sale price of less than $99.00. The matters were settled during November 1999.
Regulatory Matters
During July 1998, in accordance with applicable regulations, e4L notified
the Consumer Products Safety Commission ("CPSC") of breakages that were
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, including incident reports to which
e4L responded. The CPSC reviewed e4L's responses, and made a preliminary
determination that e4L may not have fully complied with the CPSC's information
requests. e4L and the CPSC are discussing voluntary action to address the CPSC's
concerns, including further replacement of the affected components or product
recall. 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.
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.
10. Termination of Flageoli Transaction Agreement
On September 22, 1999, e4L executed a definitive agreement ("Flageoli
Transaction Agreement") to acquire Flageoli Limited, a Nevada limited liability
company ("Flageoli"). The Flageoli Transaction Agreement provided, among other
things, that the acquisition of Flageoli was to be consummated on or before
December 31, 1999. Effective on December 31, 1999, the Flageoli Transaction
Agreement expired, and the transaction has been mutually abandoned by e4L and
Flageoli. In connection with the abandonment of the transaction, e4L wrote off
$0.4 million of capitalized acquisition costs.
11. Subsequent Event
e4L is presently in discussions with two parties with respect to a
potential equity investment and/or the purchase of subordinated debentures from
e4L in amounts up to $10 million. During February 2000, e4L executed a non-
binding term sheet with one such party.
During February 2000, an executive advanced $0.5 million to e4L, which
advance has been repaid.
11
<PAGE>
CERTAIN FORWARD-LOOKING STATEMENTS
This Report contains certain "forward-looking" statements regarding potential
future events and developments affecting the business of e4L. Such statements
relate to, among other things, (i.) future operations of e4L, including the
impact of any Year 2000 issues encountered by e4L; (ii.) the development of new
products, product sales and media, including electronic commerce; (iii.)
competition for customers for e4L's products and membership services; (iv.) the
uncertainty of developing or obtaining rights to new products that will be
accepted by consumers; (v.) the timing of the introduction of new products into
the market; (vi.) the limited market life of e4L's products; and (vii.) other
statements about e4L or the direct response television, membership services or
electronic commerce industries.
Forward-looking statements may be indicated by the words "expects," "estimates,"
"anticipates," "intends," "predicts," "believes" or other similar expressions.
Forward-looking statements appear in a number of places in this Report and
include statements regarding the intent, belief or current expectations of e4L
and its board of directors and officers with respect to numerous aspects of e4L
and its business. e4L's ability to predict results or the effect of any pending
events on e4L's operating results is inherently subject to various risks and
uncertainties, including the risks attendant to competition for products,
customers and media access; the risks of doing business outside of the United
States; the uncertainty of developing or obtaining rights to new products that
will be accepted by the market; the limited market life of e4L's products; and
the effects of government regulation. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
e4L has historically been engaged in the direct marketing of consumer
products, primarily through direct response television programming (also known
as "infomercials") and more recently through wholesale/retail distribution and
electronic commerce on a global basis. In the United States, e4L has been
dependent on a limited number of successful products to generate a significant
portion of its net revenue. e4L's new strategies for future periods are designed
with the intent to reduce the risk associated with relying on a limited number
of successful products for a disproportionate amount of its revenue, expand
e4L's leverage of its media expenditures and tailor e4L's operations in the
United States to more efficiently deal with the cyclical nature of e4L's
business.
A key strategy for e4L's future is the expansion of its global direct
response, wholesale/retail, membership services, continuity and electronic
commerce businesses and the expansion of BuyItNow.com LLC ("Buyitnow LLC"). e4L
will do this by leveraging its media expenditures, first in the United States
and then internationally (i.e., using its media primarily as an advertising
vehicle to build brand awareness). This strategy encompasses the more effective
utilization and leveraging of its global marketing presence and media access,
the continued development and marketing of innovative products to enhance its
existing programs, the increased emphasis on developing other means of revenue
generation such as membership services, wholesale/retail distribution expanded
up-sell programs, continuity programs and use of customer list through rental
arrangements. e4L uses its direct response television programming to generate a
customer base which will be utilized in various other revenue generating
initiatives as opposed to the television direct response sale historically being
the end result of its business model or merely a one-time sale. e4L takes
advantage of product brand awareness created by its television direct response
programming globally, and also extends the sales life of its products through
alternative distribution channels. These alternative channels include
wholesale/retail arrangements, continuity sales programs and Internet marketing,
among others.
e4L's net revenue varies throughout the year. e4L's revenue has
historically been highest in its third and fourth fiscal quarters and lowest in
its first and second fiscal quarters due to seasonal fluctuations in the number
of television viewers. These seasonal trends have been and may continue to be
affected, however, by the timing and success of new product offerings, expansion
of e4L's wholesale/retail and continuity programs, and the potential growth in
e4L's electronic commerce and membership services businesses.
In the discussion and analysis that follows, e4L discusses "EBITDA Deficit"
and "EBITDA Deficit Margin." EBITDA Deficit consists of net income (loss) before
interest, provision for income taxes, depreciation and amortization, non-cash
compensation, other income (expense) and unusual charges. EBITDA Deficit Margin
represents EBITDA Deficit as a percentage of net revenue. EBITDA Deficit does
not represent cash flows as defined by generally accepted accounting principles
and does not necessarily indicate that cash flows are sufficient or non-
sufficient to fund all of e4L's liquidity requirements. EBITDA Deficit 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 Deficit
is a measure
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<PAGE>
of financial performance widely used in the media and Internet/electronic
commerce industries, and is useful to investors as a measure of e4L's financial
performance.
Results of Operations
The following table sets forth operating data of e4L as a percentage of net
revenue for the periods indicated below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue.......................................... 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Media.............................................. 23.3 34.6 32.0 34.8
Product and other direct........................... 62.8 57.6 59.4 57.8
Selling, general and administrative................ 14.6 11.2 11.9 11.7
Depreciation, amortization and non-cash
Compensation....................................... 2.4 1.9 2.0 1.7
Unusual charges.................................... 0.8 26.1 0.2 8.1
------- ------- ------- -------
Total operating costs and expenses................. 103.9 131.4 105.5 114.1
------- ------- ------- -------
Loss from operations................................. (3.9) (31.4) (5.5) (14.1)
Other:
Loss on equity investment in Buyitnow.com
LLC................................................ 5.4 - 2.1 -
Interest expense................................... 0.8 0.6 0.6 1.2
------ ------- ------- -------
Loss before income taxes and extraordinary item...... (10.1) (32.0) (8.2) (15.3)
Extraordinary item - gain on extinguishment of
debt, net of income taxes........................ - 5.9 - 1.9
------- ------- ------- -------
Net loss............................................. (10.3%) (26.3%) (8.3%) (13.5%)
======= ======= ======= =======
</TABLE>
Three Months Ended December 31, 1999 As Compared to Three Months Ended December
- -------------------------------------------------------------------------------
31, 1998
- --------
Net Revenue
Net revenue was $54.5 million for the three months ended December 31, 1999,
as compared to $83.2 million for the three months ended December 31, 1998, a
decrease of $28.7 million or 34.4%.
United States net revenue for the three months ended December 31, 1999 was
$31.4 million as compared to $50.7 million for the three months ended December
31, 1998, a decrease of $19.3 million or 38.1%. The decrease was primarily
attributable to fewer new direct response television programs and products
distributed during the three months ended December 31, 1999, as compared to the
comparable period in 1998, and focus on lower volume, higher margin
wholesale/retail and ancillary revenue sources. Wholesale/retail and other
ancillary revenue was $7.6 million for the three months ended December 31, 1999
as compared to $1.1 million for the three months ended December 31, 1998, an
increase of $6.5 million.
International net revenue for the three months ended December 31, 1999 was
$23.1 million as compared to $32.4 million for the three months ended December
31, 1998, a decrease of $9.3 million or 28.6%. The decrease was primarily
attributable to a $10.8 million, or 69.6%, decline in e4L's European net revenue
resulting from the loss of two media contracts during the fourth quarter of
fiscal year 1999. Austral-Asian net revenue increased approximately $1.6 million
or 9.5% for the three months ended December 31, 1999 as compared to the three
months ended December 31, 1998. This increase was due in part to a 21.2%
increase in Australian net revenues mainly attributable to wholesale/retail net
revenue and favorable currency fluctuations. In addition, International net
revenue was favorably impacted by a 7.0% increase in Japanese net revenue.
13
<PAGE>
Operating Costs and Expenses
Total operating costs and expenses were $58.5 million for the three months
ended December 31, 1999 as compared to $109.3 million for the three months ended
December 31, 1998, a decrease of $50.8 million or 46.4%. The decrease was
principally due to the decrease in net revenue and decreased unusual charges.
Media
Media expenditures were $12.7 million for the three months ended December
31, 1999 as compared to $28.8 million for the three months ended December 31,
1998, a decrease of $16.1 million or 55.8%. e4L's worldwide ratio of media
expenditures to net revenue decreased to 23.3% for the three months ended
December 31, 1999 as compared to 34.6% for the three months ended December 31,
1998. Media expenditures for the three months ended December 31, 1999 have been
reduced by approximately $3.1 million of United States media allocated in
connection with e4L's investment in Buyitnow LLC, as more fully described in
Note 6 to the unaudited Condensed Consolidated Financial Statements. Both media
expenditures and the worldwide ratio of media expenditures to net revenue
decreased due to decreased net revenue, increased wholesale/retail and ancillary
revenue which revenue generally requires less direct media, and the allocation
of media to Buyitnow LLC.
Product and Other Direct Costs
Product and other direct costs are principally variable and semi-variable,
and consist of the cost of product fulfillment and warehousing, television
program production, commissions and royalties, in-bound telemarketing, and
credit card processing fees. Product and other direct costs were $34.2 million
for the three months ended December 31, 1999 as compared to $47.9 million for
the three months ended December 31, 1998, a decrease of $13.7 million or 28.6%.
The decrease was primarily attributable to the decrease in net revenue.
Product and other direct costs as a percentage of net revenue increased to
62.8% during the three months ended December 31, 1999 as compared to 57.6% for
the three months ended December 31, 1998. United States and European product and
other direct costs increased as a percentage of net revenue and Austral-Asian
product and other direct costs decreased as a percentage of net revenue. The
increase in United States product and other direct costs as a percentage of net
revenue during the three month period was primarily attributable to increased
wholesale/retail revenue, which revenue carries higher product costs, but lower
media expenditures, and limited telemarketing charges.
The decrease in Austral-Asian product and other direct costs as a
percentage of net revenue was primarily attributable to cost reductions in
certain Austral-Asian markets made possible by e4L's restructuring efforts
during fiscal year 1999, including the closing of unprofitable markets and
emphasis on higher margin retail/wholesale distribution of products. The
increased European product and other direct costs as a percentage of net revenue
was attributable to changes in product mix, increased licensee and
wholesale/retail sales, and sales of third party products.
Selling, General and Administrative
Selling, general and administrative expense was $8.0 million for the three
months ended December 31, 1999 as compared to $9.3 million for the three months
ended December 31, 1998, a decrease of $1.3 million or 14.3%. The decrease was
attributable to e4L's continued cost reduction efforts, including its
restructuring during the second half of fiscal year 1999. Selling, general and
administrative expense as a percentage of net revenue increased from 11.2% for
the three months ended December 31, 1998 to 14.6% for the three months ended
December 31, 1999 due to decreased net revenue.
Depreciation, Amortization and Non-Cash Compensation
Depreciation, amortization and non-cash compensation were $1.3 million for
the three months ended December 31, 1999, as compared to $1.5 million for the
three months ended December 31, 1998, a decrease of $0.2 million or 15.3%. The
decrease was attributable to lower depreciation and amortization from the write-
off of a portion of goodwill associated with e4L's Australia and New Zealand
subsidiaries, and the write-off and/or acceleration of depreciation of certain
property and equipment in connection with e4L's restructuring efforts in fiscal
year 1999. The three months ended December 31, 1999 and 1998 include
approximately $150,000 of non-
14
<PAGE>
cash compensation attributable to certain warrants to purchase common stock
issued in connection with the Series E convertible preferred stock during fiscal
year 1999.
Unusual Charges
During the three months ended December 31, 1999, e4L wrote-off $0.4 million
of capitalized acquisition costs as more fully described in Note 10 to the
unaudited Condensed Consolidated Financial Statements.
During the three month period ending December 31, 1998, e4L adopted a
revised business plan under the direction of its new management team and board
of directors. As a result, e4L undertook specific actions to reduce its overall
cost structure and transition its business model from a television direct
marketing company to an electronic commerce company. Certain of these actions
resulted in pre-tax restructuring and unusual charges during the three months
ended December 31, 1998 of $21.7 million.
Loss on Equity Investment in BuyItNow.com, LLC
During the three months ended December 31, 1999, e4L recorded a loss on its
equity investment in Buyitnow LLC of $3.0 million. Because Buyitnow LLC is not
majority owned or controlled by e4L, e4L has accounted for its investment in
Buyitnow LLC under the equity method. The loss represents the write-down of
e4L's investment in Buyitnow LLC using the equity method of accounting.
Interest Expense
Interest expense was $0.4 million for the three months ended December 31,
1999, as compared to $0.5 million for the three months ended December 31, 1998,
a decrease of $0.1 million. This decrease was attributable to a decrease in
e4L's average interest rate from 15.0% for the three months ended December 31,
1998, to 10.0% for the three months ended December 31, 1999.
Income Taxes
e4L recorded income tax expense of $105,000 for the three months ended
December 31, 1999 and 1998, respectively, attributable to certain of its
Austral-Asian operations. Income tax benefits have not been recorded during the
respective periods for United States and certain foreign losses, and such
benefits have been fully reserved for. These benefits will be recorded when
realized, reducing the effective tax rate on future United States and certain
foreign earnings, if any.
Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA)
Deficit
EBITDA Deficit was $(0.4) million for the three months ended December 31,
1999 as compared to an EBITDA Deficit of $(2.9) million for the three months
ended December 31, 1998, an improvement of $2.5 million or 85.9%. EBITDA deficit
margin was (0.7)% and (3.5)% during the three month periods ended December 31,
1999 and 1998, respectively.
Net Loss
e4L incurred a net loss of $(5.6) million for the three months ended
December 31, 1999, as compared to $(21.9) million for the three months ended
December 31, 1998. During the three month period ended December 31, 1998, e4L
recorded an extraordinary gain on extinguishment of debt of $4.8 million.
Excluding the effects of the extraordinary item, net loss for the three months
ended December 31, 1998 was $(26.8) million.
Nine Months Ended December 31, 1999 As Compared to Nine Months Ended December
- -----------------------------------------------------------------------------
31, 1998
- --------
Net Revenue
Net revenue was $196.4 million for the nine months ended December 31, 1999,
as compared to $253.0 million for the nine months ended December 31, 1998, a
decrease of $56.6 million or 22.4%.
15
<PAGE>
United States net revenue for the nine months ended December 31, 1999 was
$126.3 million as compared to $155.8 million for the nine months ended December
31, 1998, a decrease of $29.5 million or 18.9%. The decrease was primarily
attributable to fewer new direct response television programs and products
distributed during the current nine month period and the focus on lower volume,
higher margin retail and ancillary revenue sources. Wholesale/retail and
ancillary revenue was $15.6 million for the nine months ended December 31, 1999
as compared to $4.1 million for the nine months ended December 31, 1998.
International net revenue for the nine months ended December 31, 1999 was
$70.0 million as compared to $97.1 million for the nine months ended December
31, 1998, a decrease of $27.1 million or 27.9%. The decrease was primarily
attributable to a $30.0 million or 61.7% decline in e4L's European net revenue
from the elimination of two media contracts during the fourth quarter of fiscal
year 1999. Austral-Asian net revenue increased approximately $4.2 million or
8.9% for the nine months ended December 31, 1999 as compared to the nine months
ended December 31, 1998. This increase was mainly attributable to a $3.5 million
increase in Japanese net revenue and a $2.0 million increase in Australian
wholesale/retail revenue in markets and favorable currency fluctuations. These
increases more than offset lower net revenue in other Asian markets resulting
from e4L's decision to close down operations in and/or convert certain markets
to third party licensee arrangements during the second half of fiscal year 1999.
Operating Costs and Expenses
Total operating costs and expenses were $209.0 million for the nine months
ended December 31, 1999 as compared to $288.6 million for the nine months ended
December 31, 1998, a decrease of $79.6 million or 27.6%. The overall decrease
was attributable due to the decrease in net revenue. The decrease in operating
costs is more fully described below.
Media
Media expenditures were $62.7 million for the nine months ended December
31, 1999 as compared to $87.9 million for the nine months ended December 31,
1998, a decrease of $25.2 million or 28.6%. e4L's worldwide ratio of media
expenditures to net revenue decreased to 32.0% for the nine months ended
December 31, 1999 as compared to 34.8% for the nine months ended December 31,
1998. The ratio of media expenditures to net revenue decreased due to the
overall increase in worldwide retail revenue which carry minimal media
expenditures, and the allocation of $3.3 million of media to Buyitnow LLC.
Product and Other Direct Costs
Product and other direct costs were $116.7 million for the nine months
ended December 31, 1999 as compared to $146.2 million for the nine months ended
December 31, 1998, a decrease of $29.5 million or 20.2%. The decrease was
primarily attributable to the decrease in net revenue. As a percentage of net
revenue, product and other direct costs were 59.4% for the nine months ended
December 31, 1999 and 57.8% for the nine months ended December 31, 1998.
While, in the aggregate, product and other direct costs as a percentage of
net revenue increased during the nine months ended December 31, 1999 as compared
to the nine months ended December 31, 1998, United States product and other
direct costs increased as a percentage of net revenue and international product
and other direct costs decreased as a percentage of net revenue. The increase in
United States product and other direct costs as a percentage of net revenue was
attributable to higher product return rates, higher telemarketing and product
fulfillment costs. The decrease in international product and other direct costs
as a percentage of net revenue was primarily attributable to the improved
performance in e4L's Austral-Asian markets and lower required inventory
reserves.
Selling, General and Administrative
Selling, general and administrative expense was $23.5 million for the nine
months ended December 31, 1999 as compared to $29.6 million for the nine months
ended December 31, 1998, a decrease of $6.1 million or 20.7%. The decrease was
attributable to e4L's continued cost reduction efforts, including its
restructuring during the second half of fiscal year 1999. Selling, general and
administrative expense as a percentage of net revenue
16
<PAGE>
increased slightly from 11.7% for the nine months ended December 31, 1998 to
11.9% for the nine months ended December 31, 1999 due to the 22.4% decrease in
net revenue.
Depreciation, Amortization and Non-Cash Compensation
Depreciation, amortization and non-cash compensation were $3.9 million for
the nine months ended December 31, 1999 as compared to $4.4 million for the nine
months ended December 31, 1998 a decrease of $0.5 million or 10.8%. The decrease
was attributable to lower depreciation and amortization resulting from the
write-down of a portion of goodwill associated with e4L's Australia and New
Zealand subsidiaries, and the write-down and/or acceleration of depreciation of
certain property and equipment in connection with e4L's restructuring efforts
during fiscal year 1999. Non-cash compensation is attributable to certain
warrants to purchase common stock granted in connection with the Series E
convertible preferred stock during fiscal year 1999, and certain non-employee
stock options. The nine months ended December 31, 1999 includes $0.5 million in
non-cash compensation as compared to $0.2 million for the nine months ended
December 31, 1998.
Unusual Charges
During the nine months ended December 31, 1999, e4L wrote-off $0.4 million
of previously capitalized acquisition costs as more fully described in Note 10
to the unaudited Condensed Consolidated Financial Statements.
During the nine months ended December 31, 1998, e4L adopted a revised
business plan under the direction of its new management team and board of
directors. As a result, e4L undertook specific actions to reduce its overall
cost structure and transition its business model from a television direct
marketing company to an electronic commerce company. Certain of these actions
had resulted in pre-tax restructuring and unusual charges during the nine months
ended December 31, 1998 of $20.5 million.
Loss on Equity Investment in BuyItNow.com LLC
During the nine months ended December 31, 1999, e4L recorded a loss on its
equity investment in Buyitnow LLC of $4.1 million. Because Buyitnow LLC is not
majority owned or controlled by e4L, e4L has accounted for its investment in
Buyitnow LLC under the equity method. The loss represents the write-down of
e4L's investment in Buyitnow LLC using the equity method of accounting.
Interest Expense
Interest expense was $1.1 million for the nine months ended December 31,
1999, as compared to $3.0 million for the nine months ended December 31, 1998, a
decrease of $1.9 million or 62.8% This decrease was attributable to a decrease
in e4L's average outstanding indebtedness from approximately $24.7 million
during the nine months ended December 31, 1998 to approximately $14.9 million
during the nine months ended December 31, 1999 from retirement of $21.5 million
in outstanding indebtedness to e4L's former principal lender in October 1998,
and repayment of $10.0 million of outstanding indebtedness to ValueVision
International, Inc., during December 1998. In addition, e4L's average interest
rate decreased from 16.4% for the nine months ended December 31, 1998, to 10.1%
for the nine months ended December 31, 1999.
Income Taxes
e4L recorded income tax expense of $0.3 million for each of the nine months
ended December 31, 1999 and 1998 attributable to certain of its Austral-Asian
operations. Income tax benefits have not been recorded during the respective
periods for United States and certain foreign losses, and e4L has fully reserved
for such benefits. These benefits will be recorded when realized, reducing the
effective tax rate on future United States and certain foreign earnings, if any.
Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA)
Deficit
EBITDA deficit was $(6.5) million for the nine months ended December 31,
1999 as compared to an EBITDA deficit of $(10.7) million for the nine months
ended December 31, 1998, an improvement of $4.2 million
17
<PAGE>
or 39.4%. EBITDA deficit margin was (3.3)% and (4.2)% during the nine month
periods ended December 31, 1999 and 1998, respectively.
Net Loss
e4L incurred a net loss of $(16.3) million for the nine months ended
December 31, 1999, as compared to a net loss of $(34.1) million for the nine
months ended December 31, 1998. The net loss before the extraordinary gain on
extinguishment of debt of $4.8 million was $(39.0) million for the nine months
ended December 31, 1998.
Liquidity and Capital Resources
e4L's working capital was $19.4 million at December 31, 1999 as compared to
$14.0 million at March 31, 1999, an increase of $5.4 million. This increase is
attributable to the re-classification of a portion of e4L's outstanding balance
under its senior credit facility from current to long-term at December 31, 1999
as compared to a current classification at March 31, 1999. e4L met its current
period cash requirements primarily through funding under its credit facility,
from the issuance of Series F convertible preferred stock, and exercise of stock
options and warrants. Operating activities for the nine months ended December
31, 1999 resulted in a use of cash of $18.2 million. e4L's cash flow from
operations during the nine months ended December 31, 1999 was adversely impacted
by the net loss of approximately $16.3 million.
The $2.3 million increase in restricted cash is attributable to credit card
deposits held by e4L's processor as a reserve for credit card chargebacks and
fees. The restricted cash balance may be adjusted periodically based upon e4L's
future credit card chargeback activity. Subsequent to December 31, 1999, the
restricted cash balance has been reduced by approximately $1.2 million.
Consolidated accounts receivable decreased $9.4 million, or 26.3% to $26.3
million at December 31, 1999 as compared to $35.7 million at March 31, 1999.
The decreased accounts receivable was primarily attributable to decreased
foreign receivables from lower European revenue and improved Austral-Asian
collections. The decrease in foreign accounts receivable were offset by
increased United States accounts receivable attributable to increased
wholesale/retail revenue and a receivable from Buyitnow LLC of $1.4 million,
which receivable did not exist at March 31, 1999, offset in part by lower direct
response television revenue. Subsequent payments received on the Buyitnow LLC
account receivable are current with schedules collections.
Consolidated inventory increased $5.3 million, or 32.7% to $21.5 million at
December 31, 1999 as compared to $16.2 million at March 31, 1999. The increased
inventory was primarily attributable to increased United States inventory levels
necessary to support new direct response products launched late during the third
fiscal quarter ending December 31, 1999 and the fourth fiscal quarter ending
March 31, 2000. The increased United States inventory was offset, in part, by
reduced foreign inventory balances resulting from continued efforts to reduce
inventory balance outside of the United States.
The increase in deferred revenue of $2.1 million at December 31, 1999 as
compared to March 31, 1999 is attributable to cash received for e4L's membership
services which will be recognized in future periods as such amounts are earned.
In February 2000, e4L entered into a further amendment of the Credit
Agreement pursuant to which 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. The Term
Loan also has a 3% financing fee payable with respect to any outstanding
balance. 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.
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.
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 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 connection with the issuance of the Series F Preferred Stock, e4L issued
warrants (the "Series F Warrants") to purchase an aggregate of 50,000 shares of
e4L common stock to the Series F Investors. The Series F Warrants are
exercisable until August 26, 2004, at an exercise price of $4.7125 per share of
e4L common stock
18
<PAGE>
(subject to adjustment in certain circumstances). e4L also issued to the Series
F Investors warrants to purchase 100,000 common units (the "Buyitnow Warrants")
of Buyitnow LLC. The Buyitnow Warrants are exercisable until August 26, 2004, at
an exercise price equal to the greater of (i.) $5.00 per unit or (ii.) the price
per unit at which Buyitnow receives equity financing of at least $10.0 million.
On September 22, 1999, e4L executed a definitive agreement ("Flageoli
Transaction Agreement") to acquire Flageoli Limited, a Nevada limited liability
company. The Flageoli Transaction Agreement provided, among other things, that
the acquisition of Flageoli was to be consummated on or before December 31,
1999. Effective on December 31, 1999, the Flageoli Transaction Agreement
expired, and the transaction was mutually abandoned by e4L and Flageoli.
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.
At January 31, 2000, e4L had $14.4 million in total availability under its
senior credit facility and over-line facility, of which $13.0 million was
outstanding as principal borrowings and there were no outstanding letters of
credit.
During February 2000, an executive officer advanced e4L $0.5 million, which
advance has been repaid.
e4L is presently in discussions with two parties with respect to a
potential equity investment and/or the purchase of subordinated debentures from
e4L in amounts up to $10 million. During February 2000, e4L executed a non-
binding term sheet with one such party.
e4L's foreign revenue is subject to currency exchange risk. To the extent
e4L incurs expenses in local currency that is based upon locally denominated
sales volume (order fulfillment and media costs), this exposure is reduced. e4L
monitors exchange rate and/or forward contracts when and where appropriate. At
December 31, 1999, e4L had outstanding forward contracts to hedge its Japanese
Yen position in the amount of $2.6 million. These contracts mature through
February 2000. e4L recognized an immaterial loss on forward contracts during
the period ended December 31, 1999. In the long term, e4L has the ability to
change the selling price of its products to a certain extent in order to react
to major currency fluctuations, which may reduce a portion of the risk
associated with local currency fluctuations. However, the significant currency
devaluation and the economic downturn being experienced in certain foreign
regions can have an adverse impact on e4L's operating results and cash flows in
fiscal year 2000. Currently, e4L's major foreign currencies are the European
Economic Union's Euro, Japanese yen, Australian dollar and New Zealand dollar,
each of which has been subject to recent fluctuations.
e4L's cash position continues to be pressured by the losses incurred during
each of its prior two fiscal years and during the nine months ended December 31,
1999. While e4L's credit facility has improved it's liquidity position, e4L
needs to continue to implement certain plans and actions designed to rebuild its
business, including the ability to utilize or sublease its interest in the
Eutelstat Satellite, the continued introduction of successful new products, the
ability to successfully leverage its media, and return to profitability in order
to improve e4L's liquidity position. No assurances can be given that any of the
actions will be successful.
Year 2000
Year 2000 remediation activities were successfully completed prior to
December 31, 1999 with minimal disruption, and as of February 14, 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
19
<PAGE>
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 Y2K expenses of approximately $1.2 million through December
31, 1999, of which $0.5 million was expensed during the third quarter of fiscal
year 2000.
Factors That May Affect Future Performance
e4L Has Historically Suffered Losses Which Has Adversely Affected Cash Flow
e4L incurred significant losses in four of its last five fiscal years. e4L
also reported a net loss of approximately $43.6 million for fiscal year 1999 and
a loss of $16.3 million during the nine months ended December 31, 1999. Because
of e4L's historical financial condition as well as other unfavorable conditions,
e4L developed a business plan and has begun implementing new strategies designed
to increase net revenue, reduce costs and return it to profitability. If the
business plan does not adequately address the circumstances and situations which
resulted in e4L's historic poor performance, e4L would be required to seek
alternative forms of financing, the availability of which is uncertain, or be
forced to go out of business.
The Direct Response Marketing and Electronic Commerce Industries Are Extremely
Competitive
e4L experiences extreme competition for products, customers and media
access in the direct response marketing and electronic commerce industries.
Accordingly, to be successful, e4L must:
. Accurately predict consumer needs, market conditions, including
consumers' acceptance of the Internet as a medium for commerce and
competition;
. Introduce successful products;
. Produce compelling direct response television programs and Internet sales
initiatives;
. Acquire appropriate amounts of media time;
. Manage its media time effectively;
. Fulfill customer orders timely and efficiently;
. Provide courteous and informative customer service;
. Maintain adequate vendor relationships and terms;
. Enhance successful products to generate additional sales;
. Expand the methods used to sell products, including greater use of the
Internet as a sales medium;
. Expand in existing geographic markets; and
. Integrate acquired companies and businesses efficiently.
e4L's 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 Asian
(including the South Pacific Rim) market. e4L actively seeks out new products,
new sources of products and alternative distribution channels, including
wholesale/retail and the Internet. e4L cannot be certain that inventors and
product manufacturers will select it to market their products. Significant
delays in product introductions or a lack of successful products could prevent
e4L from selling adequate amounts of its products and otherwise have a negative
effect on e4L's business.
e4L Depends Upon Foreign Sales For Revenue, Which Expose e4L To Additional Risks
e4L markets products to consumers in over 70 countries. In recent years,
e4L has derived approximately forty percent of its net revenue from sales to
customers outside the United States and Canada. e4L's largest international
markets are Europe and Asia, primarily Japan, Australia and New Zealand. The
economic downturn in the Asian region has had and, for the foreseeable future,
may continue to have, an adverse effect on e4L. e4L's international expansion
has caused an increase in its working capital requirements due to the additional
time required to deliver products abroad and receive payment from foreign
countries.
While e4L's foreign operations have the advantage of airing direct response
television programs that have already proven successful in the United States, as
well as successful direct response television programs produced by other
direct marketing companies with limited media access and distribution
capabilities, can be no assurances 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;
20
<PAGE>
. 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 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. Customer response to e4L's programming depends on
many variables, including the appeal of the products being marketed, the
effectiveness of the direct response program, the availability of competing
products and the timing and frequency of program airings. There can be no
assurance that e4L's programming will receive market acceptance.
e4L must have an adequate supply of inventory to meet consumer demand.
Most of e4L's products have a limited market life, so it is extremely important
that e4L generate maximum sales during this time period. If production delays
or shortages, poor inventory management or inadequate cash flow prevent e4L from
maintaining sufficient inventory, e4L could lose potential product sales, which
may never be recouped. In addition, unanticipated obsolescence of a product may
occur or problems may arise regarding regulatory, intellectual property, product
liability or other issues which adversely affect future sales of a product even
though e4L may still hold a large quantity of the product in inventory.
Accordingly, e4L's ability to maintain systems and procedures to effectively
manage its inventory is of critical importance to e4L's cash flow and results of
operations.
The average 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 and e4L's results of operations. In
addition, utilization of foreign manufacturers further exposes e4L to the
general risks of doing business abroad.
21
<PAGE>
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 have begun selling 'dark'
time, (i.e., the hours during which a network does not broadcast its own
programming) to third parties which may cause prices for such media to rise.
Significant increases in the cost of media time or significant decreases in
e4L's access to media could 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 has incurred
significant start-up costs in connection with the transponder lease. If e4L is
unable to use effectively or sell the remaining transponder media time, e4L's
future operations could be 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.
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.
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.
22
<PAGE>
e4L Places Great Reliance On Its Key Personnel
e4L's executive officers have substantial experience and expertise in
direct response sales and marketing, electronic commerce and media. In
particular, e4L is highly dependent on certain of its employees responsible for
product development and production of direct response television programs. If
any of these individuals leave e4L, e4L's business could be negatively affected.
e4L's Business Is Affected By Seasonality Issues
e4L's revenue varies throughout the year. e4L's revenue have historically
been highest in its third and fourth fiscal quarters and lower in its first and
second fiscal quarters due to fluctuations in the number of television viewers.
These seasonal trends have been and may continue to be affected by the timing
and success of new product offerings and the potential growth in e4L's
electronic commerce businesses.
e4L's Stock Price May Be Adversely Affected By Sales Of Its Convertible
Securities
Sales of a substantial number of shares of e4L's common stock in the public
market could adversely affect the market price of e4L's common stock
outstanding. As of January 31, 2000, there are approximately 37.9 million
shares of e4L Common Stock outstanding, nearly all of which are freely tradable.
In addition, approximately 43.2 million shares of e4L Common Stock are currently
reserved for issuance upon the exercise of outstanding options and warrants and
the conversion of convertible preferred stock. For example, approximately 16.4
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 9.1 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).
23
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The information contained in Note 9, "Commitments and Contingencies," to the
unaudited Condensed Consolidated Financial Statements in Part I of this report
is incorporated herein by reference. All of the matters referred to in Note 9
have been the subject of disclosure in e4L's previously filed reports on Form
10-Q and/or Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
27.1 Financial Data Schedule
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
e4L, Inc.
Date: February 14, 2000 /s/ Stephen C. Lehman
-------------------------------------------
Stephen C. Lehman
Chairman of the Board of Directors and
Chief Executive Officer
Date: February 14, 2000 /s/ Daniel M. Yukelson
------------------------------------------
Daniel M. Yukelson
Executive Vice President/Finance and
Chief Financial Officer, and Secretary
(Principal Accounting Officer)
25
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