<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended June 30, 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
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 [_]
At July 31, 2000 there were 44,527,148 issued and outstanding shares of
registrant's common stock, par value $.01 per share, net of 855,208 shares of
common stock held in treasury.
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e4L, Inc.
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INDEX
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<TABLE>
Page
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<S> <C>
Facing Sheet............................................................................................................... 1
Index...................................................................................................................... 2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2000 and
March 31, 2000......................................................................................... 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2000 and 1999.............................................................. 4
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 2000 and 1999.............................................................. 5
Notes to Unaudited Condensed Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................................... 12
Part II. Other Information
Item 1. Legal Proceedings...................................................................................... 21
Item 6. Exhibits and Reports on Form 8-K....................................................................... 21
Signatures................................................................................................................. 22
</TABLE>
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<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>
June 30, March 31,
2000 2000
-------------- --------------
ASSETS (Unaudited) (See Note 1)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 1,420 $ 3,389
Restricted cash...................................................................... 1,885 1,538
Accounts receivable, net............................................................. 17,834 18,036
Due from affiliate, net.............................................................. 1,144 2,221
Inventories, net..................................................................... 12,643 18,588
Prepaid media........................................................................ 2,317 1,370
Deferred costs....................................................................... 3,307 2,802
Prepaid expenses and other current assets............................................ 4,234 3,418
Deferred income taxes................................................................ 3,334 3,334
--------------- --------------
Total current assets............................................................... 48,118 54,696
Property and equipment, net............................................................. 5,012 5,763
Excess of cost over net assets of acquired businesses and
other intangible assets, net......................................................... 12,387 12,595
Other assets............................................................................ 963 858
--------------- --------------
Total assets.......................................................................... $ 66,480 $ 73,912
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Overdraft checks..................................................................... $ 1,763 $ 2,302
Accounts payable..................................................................... 17,438 17,527
Accrued expenses..................................................................... 12,712 13,092
Deferred revenue..................................................................... 1,563 795
Due to officer....................................................................... - 256
Income taxes payable................................................................. 1,119 324
Deferred income taxes................................................................ 915 915
Current portion of long-term debt and capital lease obligations...................... 10,087 5,180
--------------- --------------
Total current liabilities.......................................................... 45,597 40,391
Long-term debt and capital lease obligations............................................ 3,621 3,611
Deferred income taxes................................................................... 2,419 2,419
Other liabilities....................................................................... 8,758 8,942
Shareholders' equity:
Preferred stock $0.01 par value; authorized 10,000,000 shares (Note 7)............... 1 1
Common stock, $0.01 par value; authorized 150,000,000 shares;
43,995,734 and 42,241,135 shares, at June 30, and March 31, 2000,
respectively...................................................................... 442 422
Additional paid-in capital........................................................... 200,006 199,982
Retained deficit..................................................................... (177,342) (165,397)
--------------- --------------
23,107 35,008
Treasury stock, 855,208 shares, at cost at June 30, and March 31, 2000............... (6,557) (6,557)
Foreign currency translation adjustment.............................................. (10,465) (9,902)
--------------- --------------
Total shareholders' equity......................................................... 6,085 18,549
--------------- --------------
Total liabilities and shareholders' equity......................................... $ 66,480 $ 73,912
=============== ==============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenue:
Product.................................................................... $ 36,363 $ 67,105
Commission and other....................................................... 365 1,117
------------ -----------
Net revenue................................................................. 36,728 68,222
Operating costs and expenses:
Media...................................................................... 8,461 25,326
Product and other direct................................................... 27,927 39,508
Selling, general and administrative........................................ 6,052 7,615
Depreciation, amortization and non-cash compensation....................... 1,113 1,288
------------ -----------
Total operating costs and expenses.......................................... 43,553 73,737
------------ -----------
Loss from operations (6,825) (5,515)
Other (income)/expenses:
Loss on equity investment in BuyItNow.com, LLC............................. 4,606 -
Interest expense, net...................................................... 514 282
------------ -----------
Loss before income taxes.................................................... (11,945) (5,797)
Income taxes............................................................... - 85
------------ -----------
Net loss.................................................................... $(11,945) $ (5,882)
============ ===========
Net loss per common share - basic and diluted............................... $ (0.29) $ (0.22)
============ ===========
Weighted average number of common shares outstanding -
Basic and diluted.......................................................... 42,634 32,003
============ ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................................... $ (11,945) $ (5,882)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 956 1,131
Amortization of loan discount............................................... 64 -
Non-cash loss on equity investment in BuyItNow.com, LLC..................... 160 -
Non-cash compensation....................................................... 157 157
Changes in operating assets and liabilities, net............................ 3,473 (6,392)
Other....................................................................... (616) (882)
------------- -------------
Net cash used in operating activities.......................................... (7,751) (11,868)
Cash flows from investing activities:
Additions to property and equipment......................................... (74) (378)
------------- -------------
Net cash used in investing activities.......................................... (74) (378)
Cash flows from financing activities:
Proceeds from long-term debt................................................ 28,543 57,850
Payments on long-term debt, notes payable and capital lease obligations..... (23,690) (52,785)
Exercise of stock options and warrants...................................... 40 1,499
------------- -------------
Net cash provided by financing activities...................................... 4,893 6,564
Effect of exchange rates on cash and cash equivalents.......................... 963 (19)
------------- -------------
Net decrease in cash and cash equivalents................................ (1,969) (5,701)
Cash and cash equivalents, beginning of period................................. 3,389 7,574
------------- -------------
Cash and cash equivalents, end of period....................................... $ 1,420 $ 1,873
============= =============
</TABLE>
See notes to unaudited condensed consolidated financial statements
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<PAGE>
e4L
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 2000
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 months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2001. 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, 2000.
The balance sheet at March 31, 2000 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required under generally accepted accounting principles for
complete financial statement presentation.
Impact of Recently Issued Accounting Pronouncements
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
derivatives are accounted for depending on the use of the derivative and whether
the derivative qualifies for hedge accounting. SFAS No. 133, as amended by
Statement of Financial Accounting Standards 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.
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 or deducted
from net loss to arrive at net loss applicable to common shareholders.
The following table sets forth the computation of basic and diluted
net loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------------------------
2000 1999
--------------------- ------------------
<S> <C> <C>
Net loss......................................................... $ (11,945) $ (5,882)
Effect of beneficial conversion features and accrued
dividends on convertible preferred stock ........................ (400) (1,309)
--------------------- ------------------
Adjusted net loss-basic and diluted earnings per share........... $ (12,345) $ (7,191)
===================== ==================
Weighted average shares outstanding - basic and diluted 42,634 32,003
===================== ==================
Basic and diluted earnings per share (1) ........................ $ ( 0.29) $ (0.22)
===================== ==================
</TABLE>
6
<PAGE>
(1) Preferred stock convertible into approximately 25.1 million and 30.4
million shares of common stock, and stock options and warrants to purchase
common stock exercisable into approximately 17.1 million and 16.9 million
shares of common stock have been excluded from the calculation of diluted
loss per share for the three months ended June 30, 2000 and 1999,
respectively, as the effect of such securities is anti-dilutive.
3. Income Taxes
e4L recorded income tax expense of $85,000 for the three months ended
June 30, 1999, due to tax liabilities associated with its Austral-Asian
operations. A valuation allowance has been provided for income tax benefits on
United States and certain foreign losses and loss carryovers, and have been
fully reserved until realized.
4. Comprehensive Income
Comprehensive income for the three month period ended June 30, 2000
and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------------------------------
2000 1999
------------------------ ---------------------
<S> <C> <C>
Net Loss.................................................. $ (11,945) $ (5,882)
Foreign currency translation adjustments................. (563) (314)
------------------------ ---------------------
Total comprehensive loss.................................. $ (12,508) $ (6,196)
======================== =====================
</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 of the
notes to e4L's audited financial statements included in its annual report on
Form 10-K for the fiscal year ended March 31, 2000. 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 property and equipment, and intangible
assets.
Information with respect to e4L's operations by geographic area, is
set forth below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------------------------------
2000 1999
------------------------ ---------------------
<S> <C> <C>
Net revenue:
United States.......................................... $ 21,549 $ 43,583
Europe................................................. 2,850 7,272
Austral-Asia........................................... 12,324 17,352
Production and corporate............................... 5 15
------------------------ ---------------------
Total.................................................. $ 36,728 $ 68,222
======================== =====================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------------------------------
2000 1999
------------------------ ---------------------
<S> <C> <C>
EBITDA:
United States.......................................... $ (2,938) $ (1,426)
Europe................................................. (1,523) 224
Austral-Asia........................................... 909 1,798
Production and corporate............................... (2,160) (4,823)
------------------------ ---------------------
Total.................................................. $ (5,712) $ (4,227)
======================== =====================
</TABLE>
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
------------------------ ---------------------
<S> <C> <C>
Identifiable assets:
United States.......................................... $ 30,801 $ 35,908
Europe................................................. 5,082 4,702
Austral-Asia........................................... 25,304 26,192
Production and corporate............................... 5,293 7,110
------------------------ ---------------------
Total.................................................. $ 66,480 $ 73,912
======================== =====================
</TABLE>
The reconciliation of adjusted EBITDA to loss before income taxes is set
forth below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------------------------------
2000 1999
------------------------ ---------------------
<S> <C> <C>
Adjusted EBITDA........................................... $ (5,712) $ (4,227)
Less:
Depreciation, amortization and non-cash compensation... 1,113 1,288
Loss on equity investment in BuyItNow.com, LLC......... 4,606 -
Interest expense, net.................................. 514 282
----------------------- ---------------------
Loss before income taxes .............................. $ (11,945) $ (5,797)
======================= =====================
</TABLE>
6. Investments
On May 17, 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 $1.9 million, depending upon the date such
option is exercised.
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. The tangible assets and liabilities contributed by e4L to
Buyitnow LLC were not material. On June 2, 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 respective assets and liabilities.
Through its 41% equity ownership in Buyitnow LLC, e4L indirectly owns 28% of BIN
Inc.
e4L has accounted for its investment in Buyitnow LLC using the equity
method, as this entity is not majority owned or controlled by e4L. During the
three months ended June 30, 2000, e4L recorded a loss on its equity investment
of approximately $4.6 million. Included in e4L's balance sheet at June 30, 2000
is a $1.1 million of accounts receivable from Buyitnow LLC, and a $0.1 million
accounts receivable from Promenade.
8
<PAGE>
A summary of Buyitnow LLC and Promenade LLC's unaudited condensed
consolidated financial information for the three months ended June 30, 2000 is
as follows:
Condensed Consolidated Statement of Operations:
<TABLE>
<CAPTION>
Buyitnow LLC Promenade LLC
------------------ --------------
<S> <C> <C>
Operating data:
Net revenue.................................................... $ 13,975 $ 2,217
EBITDA......................................................... $ (14,140) $ 116
Net income (loss).............................................. $ (28,419) $ 110
Balance sheet information:
Working capital................................................ $ 4,188 $ (744)
Total assets................................................... $ 10,593 $ 1,122
Members equity (deficit)....................................... $ 7,774 $ (677)
</TABLE>
7. Preferred Stock Outstanding
The following table summarizes the issued and outstanding shares of
Preferred Stock at:
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
------------------------ ---------------------
<S> <C> <C>
Series B Convertible Preferred Stock............ 5,000 5,000
Series D Convertible Preferred Stock............ 16,539 16,779
Series E Convertible Preferred Stock............ 7,741 9,925
Series F Convertible Preferred Stock............ 5,000 5,000
Series G Convertible Preferred Stock............ 5,000 5,000
Series H Convertible Preferred Stock............ 5,000 5,000
</TABLE>
8. Commitment & Contingencies
Litigation
In June, 2000, a proposed class action suit was filed in the United
States District Court for the District of New Jersey alleging, among other
things, that e4L and other named defendants engaged in unlawful price fixing
with respect to the sale of the Ab Roller Plus product. e4L is vigorously
contesting the action. At this time, e4L cannot predict the outcome of this
matter.
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.
Regulatory Matters
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.
9
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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, 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.
In June 2000, e4L received notice from the New York Stock Exchange ("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, on July 29, 2000, e4L submitted 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. The business plan is currently
being reviewed by the NYSE's Listing and Compliance Committee for final
disposition, and will either accept or reject the plan. Furthermore, during
August 2000, e4L received a notice from the NYSE that the trading price of its
common stock on the NYSE fell 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 per share within six months or as soon as possible thereafter in the
event a shareholder meeting is required to effect such increase. 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."
During July 1998, in accordance with applicable regulations, e4L notified
the CPSP of a problem that was occurring with respect to 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 reviewed the
additional information, and during August 2000 made a preliminary determination
that the Red Devil product "makes a substantial product hazard." Accordingly,
the CPSC has requested that voluntary corrective action be undertaken by e4L to,
among other things, notify consumers about the Red Devil product problem, recall
and replace the product's plastic locking mechanism and venturi tube components,
and establish a reimbursement plan to encourage action to recall this product.
In addition, the CPSC has notified e4L that civil penalties should be assessed
against it for purportedly failing to timely notify the CPSC about the product
defects. e4L is vigorously contesting this action. However, because of
uncertainties inherent in this process e4L cannot predict the outcome of this
matter at this time. As a result, no amounts have been recorded in anticipation
of any loss as a result of this contingency. However, in the event the CPSC
prevails on its claim and forces e4L into a recall of the Red Devil product and
assesses civil penalties against e4L, management of e4L presently 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.
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
10
<PAGE>
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.
Other Matters
e4L, in the normal course of business, is or has been a party to litigation
relating to trademark and copyright infringement, product liability, contract-
related disputes, and other matters. e4L has also, from time to time, received
correspondence from persons purporting to be shareholders alleging various
claims. It is e4L's policy to vigorously defend all such claims and enforce its
rights in these matters. e4L does not believe any of these matters either
individually or in the aggregate, will have a material adverse effect on e4L's
results of operations or financial condition.
9. Potential Funding Commitment
On July 10, 2000, e4L executed a non-binding letter of intent pursuant to
which it received a commitment for $10 million of funding from Graybox, LLC, a
Los Angeles-based interactive technology and marketing venture capital fund.
Closing of the funding is subject to normal closing conditions, including
completion of definitive documentation and due diligence.
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; (ii.) the
development of new products, product sales and media, including sales via
electronic commerce; (iii.) competition for customers of 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 Form 10-Q and
include statements regarding the intent, belief or current expectations of e4L
and its board of directors and officers with respect to various aspects of e4L
and its business. e4L's ability to predict results or the effect of any 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 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 to generate incremental
revenue, 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 database
rental. e4L's direct response television programming is viewed as a vehicle to
generate a customer base which it attempts to utilize 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 has resulted in approximately 41.3% of e4L's
revenue being generated outside of the United States for the three months ended
June 30, 2000. 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, outbound telemarketing
and Internet marketing, among others.
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.
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, non-cash compensation and other
income or expense. 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
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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>
Three Months Ended
June 30,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Net revenue..................................................... 100.0% 100.0%
Operating costs and expenses:
Media......................................................... 23.0 37.1
Product and other direct...................................... 76.1 57.9
Selling, general and administrative........................... 16.5 11.2
Depreciation, amortization and non-cash compensation.......... 3.0 1.9
------- -------
Total operating costs and expenses............................ 118.6 108.1
------- -------
Loss from operations............................................ (18.6) (8.1)
Other (income)/expenses:
Loss on equity investment in Buyitnow.com LLC................. 12.5 -
Interest expense.............................................. 1.4 0.4
------- -------
Loss before income taxes........................................ (32.5) (8.5)
Income taxes.................................................. - 0.1
------- -------
Net loss........................................................ (32.5%) (8.6%)
------- -------
</TABLE>
Three Months Ended June 30, 2000 As Compared to Three Months Ended June 30, 1999
--------------------------------------------------------------------------------
Net revenue was $36.7 million for the three months ended June 30, 2000 as
compared to $68.2 million for the three months ended June 30, 1999, a decrease
of $31.5 million or 46.2%.
Net revenue in the United States for the three months June 30, 2000 was
$21.6 million as compared to $43.6 million for the three months ended June 30,
1999, a decrease of $22.0 million or 50.6%. The decrease was primarily
attributable to working capital constraints, which resulted in lower media
expenditures, and fewer new programs and product offerings "rolled-out" during
the current period.
International net revenue for the three months ended June 30, 2000 was
$15.1 million as compared to $24.6 million for the three months ended June 30,
1999, a decrease of $9.5 million or 38.4%. The decrease was attributable to a
combination of, among other things, fewer new products, reduced media
expenditures in Europe resulting from the loss of two media contracts and
working capital constraints, and adverse economic conditions in Australia.
e4L's sales return rate was 15.6% and 17.3% for each of the three month
periods ended June 30, 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 as a percentage of total sales.
Operating Costs and Expenses
Total operating costs and expenses were $43.6 million for the three months
ended June 30, 2000 as compared to $73.7 million for the three months ended June
30, 1999, a decrease of $30.1 million or 40.9%. The fiscal year 2001 decrease
was primarily attributable to the decrease in net revenue of 46.2%, 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 $8.5 million for the three months ended June 30, 2000
as compared to $25.3 million for the three months ended June 30, 1999, a
decrease of $16.8 million or 66.6%. e4L's worldwide ratio of media purchases to
net revenue decreased to 23.0% for the three months ended June 30, 2000 as
compared to 37.1% for the three months ended June 30, 1999. The decrease in
media purchases as a percentage of net revenue was attributable to
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the allocation of approximately $4.4 million in United States media costs to
Buyitnow LLC, which costs are recorded as a loss on investment. In addition,
e4L's wholesale/retail revenue which carries no direct media costs, have
increased in both the United States and the Austral-Asian region.
Product and Other Direct Costs
Product and other direct costs consist of the cost of inventory and
materials, freight, television program production, commission and royalties,
order fulfillment, in-bound telemarketing, credit card authorization and
processing and warehousing. Product and other direct costs were $27.9 million
for the three months ended June 30, 2000 as compared to $39.5 million for the
three months ended June 30, 1999, a decrease of $11.6 million or 29.3%. The
decrease was primarily attributable to the decrease in net revenue. As a
percentage of net revenue, product and other direct costs were 76.0% for the
three months ended June 30, 2000 as compared to 57.9% for the three months ended
June 30, 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 $6.1 million for the three
months ended June 30, 2000 as compared to $7.6 million for the three months
ended June 30, 1999, a decrease of $1.5 million or 20.5%. The decrease in
selling, general and administrative expense was attributable to e4L's continued
cost reduction efforts. Selling, general and administrative expense as a
percentage of net revenue increased to 16.5% for the three months ended June 30,
2000 from 11.2% for the three months ended June 30, 1999, principally
attributable to the effects of certain fixed costs in relation to the 46.2%
decrease in net revenue.
Depreciation, Amortization and Non-cash Compensation
Depreciation, amortization and non-cash compensation were $1.1 million for
the three months ended June 30, 2000 as compared to $1.3 million for the three
months ended June 30, 1999, a decrease of $0.2 million, or 13.6%. The decrease
in depreciation and amortization was attributable to the write-off of goodwill
and other intellectual properties associated with the Direct America and "Flying
Lure" businesses during fiscal year 2000, which reduced amortization expense.
Loss on Equity Investments in BuyItNow.com, LLC
During the three months ended June 30, 2000, e4L recorded a loss on its
equity investment in Buyitnow LLC of $4.6 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 $0.5 million for the three months ended June 30, 2000,
as compared to $0.3 million for the three months ended June 30, 1999, an
increase of $0.2 million or 82.3%. This increase was attributable to an increase
in e4L's average interest rate from 9.4% for the three months ended June 30,
1999, to 16.8% for the three months ended June 30, 2000.
Income Taxes
e4L recorded income tax expense of $85,000 for the three months ended June
30, 1999 attributable to its Austral-Asian operations. Income tax benefits have
not been recorded during either of the three month periods ended June 30, 2000
and 1999 with respect to 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 ($5.7) million for the three months ended June 30, 2000
as compared to an EBITDA Deficit of ($4.2) million for the three months ended
June 30, 1999, an increase in the deficit of $1.5 million or
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35.1%. EBITDA deficit margin was (15.6%) and (6.2%) during the three month
periods ended June 30, 2000 and 1999, respectively.
Net Loss
e4L incurred a net loss of $11.9 million for the three months ended June
30, 2000, as compared to a net loss of $5.9 million for the three months ended
June 30, 1999.
Liquidity and Capital Resources
e4L's working capital was $2.5 million at June 30, 2000 as compared to
$14.3 million at March 31, 2000, a decrease of $11.8 million. Operating
activities for the three months ended June 30, 2000 resulted in a use of cash of
$7.8 million. e4L's cash flow from operations during the three months ended June
30, 2000 was adversely impacted by the net loss of approximately $11.9 million.
Consolidated accounts receivable decreased by $0.8 million, or 4.0%,
primarily due to a decrease in United States accounts receivables of $1.6
million and an increase in European accounts receivable of $0.9 million. United
States accounts receivable decreased due to lower sales volume. Consolidated
inventories decreased $5.9 million or 32.0%. This decrease was attributable to a
$4.8 million decrease in United States inventory resulting from the liquidation
of slow moving inventory through wholesale distribution channels.
During June 2000, e4L's European subsidiary, Quantum International Limited,
subleased a satellite transponder. The sublease commenced on August 1, 2000 with
annual payments of 3.0 million Euros ($2.9 million as of June 30, 2000) during
the first year, and 3.4 million Euros ($3.2 million as of June 30, 2000) each
year thereafter through March 30, 2010.
On July 10, 2000, e4L executed a non-binding letter of intent pursuant to
which it received a commitment for $10 million from Graybox, LLC, a Los Angeles-
based venture capital fund. Closing of the funding is subject to normal closing
conditions, including completion of definitive documentation and due diligence.
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 June 30, 2000, e4L had $9.2 million in total availability under its
term loan and senior credit facility, of which $8.9 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 June
30, 2000. e4L is currently in default with regard to one of its loan covenants
contained in the Credit Agreement and Term Loan. Discussions with e4L's senior
lender are ongoing with respect to a waiver of this covenant, however, in these
circumstances, the senior lender may take action to accelerate the repayment of
outstanding loans.
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
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upon market and other conditions, may attempt to hedge its currency risk. During
the quarter ended June 30, 2000 e4L entered into forward contracts to hedge its
Japanese Yen position resulting in an immaterial loss. At June 30, 2000, e4L has
no outstanding forward contracts to hedge its Japanese Yen position or any other
foreign currencies. 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, significant currency devaluation and economic downturn in certain
foreign regions may have an adverse impact on e4L's operating results and cash
flows in fiscal year 2001. 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 four fiscal years ended March 31, and during the current
quarter ended June 30, 2000. In order to improve e4L's liquidity position, e4L
needs to continue to implement certain plans and actions necessary to return its
business to profitability, including the introduction of successful new
products, the deployment of wholesale/retail and electronic commerce strategies,
and the ability to successfully leverage its media. 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. In order to fund its current working capital requirements, e4L
will have to obtain additional debt or equity financing. 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 July 31, 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. 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 Have Adversely Affected Cash Flow;
Going Concern
e4L incurred significant losses in four of its last five fiscal years. e4L
reported a net loss of approximately $35.9 million for fiscal year March 31,
2000 and $11.9 million for the quarter ended June 30, 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. 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.
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;
. 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.
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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 working capital constraints have resulted
in reduced media availability and limited new product offerings which 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 (e.g., Austral-
Asia). The economic environment in the Austral-Asian region has in the past had
an adverse effect on e4L.
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 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 ongoing ability to introduce successful new
products to supplement or replace existing products as they mature through their
product life cycles. e4L's three to five most successful products each year
typically account for a substantial portion 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. No assurances can be
given 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
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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, 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 broadcast 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.
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 a 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, on July 29, 2000, e4L submitted 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. The business plan is currently being reviewed by
the NYSE's
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Listing and Compliance Committee for final disposition, and the NYSE will either
accept or reject the plan. Furthermore, during August 2000, e4L received a
notice from the NYSE that the trading price of e4L's common stock on the NYSE
fell 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 per share within
six months or as soon as possible thereafter in the event a shareholder meeting
is required to effect such increase. If e4L's common stock were delisted from
trading on the NYSE, it would have severe negative effects on e4L and its
stockholders.
During July 1998, in accordance with applicable regulations, e4L notified
the CPSP of a problem that was occurring with respect to 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 reviewed the
additional information, and during August 2000 made a preliminary determination
that the Red Devil product "makes a substantial product hazard." Accordingly,
the CPSC has requested that voluntary corrective action be undertaken by e4L to,
among other things, notify consumers about the Red Devil product problem, recall
and replace the product's plastic locking mechanism and venturi tube components,
and establish a reimbursement plan to encourage action to recall this product.
In addition, the CPSC has notified e4L that civil penalties should be assessed
against it for purportedly failing to timely notify the CPSC about the product
defects. e4L is vigorously contesting this action. However, because of
uncertainties inherent in this process e4L cannot predict the outcome of this
matter at this time. As a result, no amounts have been recorded in anticipation
of any loss as a result of this contingency. However, in the event the CPSC
prevails on its claim and forces e4L into a recall of the Red Devil product and
assesses civil penalties against e4L, management of e4L presently cannot predict
whether the outcome of this matter will have a material adverse impact on e4L's
financial condition or results of operations.
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.
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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 July 31, 2000, there are approximately 44.5 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 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 aggregate 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 $1.00 per share, the Series G Convertible Preferred Stock and Series H
Convertible Preferred Stock would be convertible into 10.0 million shares of e4L
common stock (excluding conversion of unpaid dividends). Furthermore, in recent
months the price of e4L's common stock has traded below the initial conversion
price of $2.9575 per share, and more recently below $1.00 per share. In the
event holders of the Series G and Series H preferred stock seek to convert their
shares in such quantities that causes e4L to issue new shares of its common
stock equal to 20% or more of its outstanding shares, e4L would need to seek
shareholder approval. In the event shareholder approval is not obtained, the
holders of the Series G and Series H preferred stock could require that e4L
redeem in cash all or a portion of their then outstanding shares.
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Part II. Other Information
Item 1. Legal Proceedings
The information contained in Note 8, "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 8 have, where applicable, been the subject of disclosure in e4L's
previously filed reports on Form 10-Q and/or Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein or incorporated by
reference herein:
Exhibit 27 - Financial Data Schedule
(b) e4L filed the following Current Report on Form 8-K during the three
month period ended June 30, 2000:
e4L filed a Current Report on Form 8-K dated May 18, 2000 reporting
under Item 5, that e4L had acquired a 50% interest in Promenade Membership
Services, LLC, a provider of discount membership shopping clubs and services to
consumers and businesses.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
e4L, Inc.
Date: August 18, 2000 /s/ Stephen C. Lehman
-------------------------------------------
Stephen C. Lehman
Chairman of the Board of Directors and
Chief Executive Officer
Date: August 18, 2000 /s/ Daniel M. Yukelson
-------------------------------------------
Daniel M. Yukelson
Executive Vice President/Finance and
Chief Financial Officer, and Secretary
(Principal Accounting Officer)
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