<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended September 30, 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 or (I.R.S. Employer Identification No.)
Organization)
15821 Ventura Boulevard, 5/th/ 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 [_]
<PAGE>
On October 20, 2000, e4L, Inc.'s ("e4L") wholly-owned United States
subsidiary, Quantum North America, Inc. (d/b/a, e4L North America) ("QNA") filed
a voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Central District of
California. QNA's Chapter 11 bankruptcy is proceeding as Case No. SV00-19482-GM.
On October 20, 2000, e4L's wholly-owned United Kingdom subsidiary, Quantum
International Limited ("QIL") filed a petition in the High Court of Justice,
Chancery Division Companies Court in the United Kingdom seeking a grant of an
administrative order. As a result, QIL is operating under administration,
whereby an administrator has been retained by QIL for the purpose of either
reorganizing or liquidating QIL's business for the benefit of creditors similar
to a Chapter 11 proceeding in the United States.
At November 1, 2000 there were 45,707,340 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.
<PAGE>
e4L, Inc.
---------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
Facing Sheet.............................................................................................. 1
Index..................................................................................................... 3
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2000 and March 31, 2000.......... 4
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2000 and 1999......................................... 5
Condensed Consolidated Statements of Operations for the
six months ended September 30, 2000 and 1999........................................... 6
Condensed Consolidated Statements of Cash Flows for the
three and six months ended September 30, 2000 and 1999................................. 7
Notes to Unaudited Condensed Consolidated Financial Statements.......................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................... 16
Part II. Other Information
Item 1. Legal Proceedings....................................................................... 28
Item 6. Exhibits and Reports on Form 8-K........................................................ 28
Signatures................................................................................................ 29
</TABLE>
-3-
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
e4L, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
--------------- -------------
<S> <C> <C>
ASSETS (Unaudited) (See Note 1)
------
Current assets:
Cash and cash equivalents............................................................ $ 1,126 $ 1,087
Restricted cash...................................................................... 1,993 1,538
Accounts receivable, net............................................................. 10,807 18,036
Due from affiliate, net.............................................................. - 2,221
Inventories, net..................................................................... 6,960 18,588
Prepaid media........................................................................ 279 1,370
Deferred costs....................................................................... - 2,802
Prepaid expenses and other current assets............................................ 925 3,418
Deferred income taxes................................................................ 3,334 3,334
------------- -------------
Total current assets............................................................... 25,424 52,394
Property and equipment, net............................................................ 1,455 5,763
Excess of cost over net assets of acquired businesses and
other intangible assets, net......................................................... 9,049 12,595
Other assets........................................................................... 487 858
------------- -------------
Total assets......................................................................... $ 36,415 $ 71,610
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable..................................................................... $ 5,445 $ 17,527
Accrued expenses..................................................................... 12,081 13,092
Deferred revenue..................................................................... 241 795
Due to officer....................................................................... - 256
Income taxes payable................................................................. 1,388 324
Deferred income taxes................................................................ 915 915
Current portion of long-term debt and capital lease obligations...................... 122 5,180
------------- -------------
Total current liabilities.......................................................... 20,192 38,089
Pre-petition liabilities subject to compromise......................................... 43,930 -
Long-term debt and capital lease obligations........................................... - 3,611
Deferred income taxes.................................................................. 2,419 2,419
Other liabilities...................................................................... 1,392 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; issued
46,562,548 and 42,241,135 shares, at September 30, and March 31, 2000,
respectively......................................................................... 466 422
Additional paid-in capital......................................................... 200,131 199,982
Retained deficit..................................................................... (214,844) (165,397)
------------- -------------
(14,246) 35,008
Treasury stock, 855,208 shares, at cost at September 30, and March 31, 2000........ (6,557) (6,557)
Foreign currency translation adjustment............................................ (10,715) (9,902)
------------- -------------
Total shareholders' equity....................................................... (31,518) 18,549
------------- -------------
Total liabilities and shareholders' equity....................................... $ 36,415 $ 71,610
============= =============
</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>
Three Months Ended September 30,
----------------------------------
2000 1999
----------------- --------------
<S> <C> <C>
Revenue:
Product..................................................................... $ 20,767 $ 71,075
Commission and other........................................................ 375 2,515
----------- ------------
Net revenue.................................................................. 21,142 73,590
Operating costs and expenses:
Media....................................................................... 12,596 24,699
Product and other direct.................................................... 20,821 42,903
Selling, general and administrative......................................... 5,136 7,852
Depreciation, amortization and non-cash compensation........................ 1,154 1,302
Unusual Items............................................................... 18,128 -
----------- ------------
Total operating costs and expenses........................................... 57,835 76,756
----------- ------------
Loss from operations (36,693) (3,166)
Other (income)/expenses:
Loss on equity investment in BuyItNow.com, LLC.............................. 175 1,173
Interest expense, net....................................................... 634 432
----------- ------------
Loss before income taxes..................................................... (37,502) (4,771)
Income taxes................................................................ - 85
----------- ------------
Net loss..................................................................... $ (37,502) $ (4,856)
=========== ============
Net loss per common share - basic and diluted................................ $ (0.86) $ (0.19)
=========== ============
Weighted average number of common shares outstanding -
Basic and diluted........................................................... 44,189 32,677
=========== ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-5-
<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended September 30,
-----------------------------------
2000 1999
----------------- --------------
<S> <C> <C>
Revenue:
Product................................................................... $ 57,130 $ 138,180
Commission and other...................................................... 740 3,632
Net revenue................................................................ 57,870 141,812
-------------- ------------
Operating costs and expenses:
Media..................................................................... 21,057 50,025
Product and other direct.................................................. 48,748 82,411
Selling, general and administrative....................................... 11,188 15,467
Depreciation, amortization and non-cash compensation...................... 2,267 2,590
Unusual Items............................................................. 18,128 -
-------------- ------------
Total operating costs and expenses......................................... 101,388 150,493
-------------- ------------
Loss from operations (43,518) (8,681)
Other (income)/expenses:
Loss on equity investment in BuyItNow.com, LLC.......................... 4,781 1,173
Interest expense, net................................................... 1,148 714
-------------- ------------
Loss before income taxes................................................... (49,447) (10,568)
Income taxes............................................................ - 170
-------------- ------------
Net loss................................................................... $ (49,447) $ (10,738)
============== ============
Net loss per common share - basic and diluted.............................. $ (1.16) $ ( 0.42)
============== ============
Weighted average number of common shares outstanding -
Basic and diluted........................................................ 43,411 32,340
============== ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-6-
<PAGE>
e4L, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended September 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................ $ (49,447) $ (10,738)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 1,955 2,276
Non-cash loss on equity investment in BuyItNow.com, LLC............................ 320 650
Write-off of impaired goodwill..................................................... 3,159 -
Write-off of fixed assets.......................................................... 2,659 -
Non-cash compensation.............................................................. 313 314
Changes in operating assets and liabilities, net................................... 13,536 (9,098)
Other.............................................................................. 24,269 (1,367)
----------- -----------
Net cash used in operating activities................................................... (3,089) (17,963)
Cash flows from investing activities:
Additions to property and equipment................................................ (108) (502)
----------- -----------
Net cash used in investing activities................................................... (108) (502)
Cash flows from financing activities:
Proceeds from long-term debt........................................................... 41,046 111,947
Payments on long-term debt, notes payable and capital lease obligations................ (37,851) (103,245)
Net proceeds from issuance of preferred stock.......................................... - 4,519
Exercise of stock options and warrants................................................. - 1,939
----------- -----------
Net cash provided by financing activities............................................... 3,195 15,160
Effect of exchange rates on cash and cash equivalents................................... 41 (1,024)
----------- -----------
Net decrease in cash and cash equivalents.......................................... 39 (4,329)
Cash and cash equivalents, beginning of period.......................................... 1,087 7,574
----------- -----------
Cash and cash equivalents, end of period................................................ $ 1,126 $ 3,245
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements
-7-
<PAGE>
e4L
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2000
1. Basis of Presentation - Chapter 11 and Administration Proceedings
On October 20, 2000, e4L, Inc.'s ("e4L") wholly-owned United States
subsidiary, Quantum North America, Inc. (d/b/a, e4L North America) ("QNA") filed
a voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code ("Chapter 11") in the United States Bankruptcy Court for the Central
District of California ("Bankruptcy Court"). QNA's Chapter 11 bankruptcy is
proceeding as Case No. SV00-19482-GM. Also on October 20, 2000, e4L's
wholly-owned United Kingdom subsidiary, Quantum International Limited ("QIL")
filed a petition in the High Court of Justice, Chancery Division Companies Court
in the United Kingdom ("Court of Justice") seeking a grant of an administrative
order ("Administration"). As a result, QIL will operate under Administration,
whereby an administrator has been retained by QIL for the purpose of either
reorganizing or liquidating QIL's business for the benefit of creditors similar
to a Chapter 11 proceeding in the United States. e4L is presently contemplating
filing Chapter 11 for two of its other wholly-owned United States subsidiaries,
Positive Response Television, Inc. and DirectAmerica Corporation (d/b/a, Quantum
Television).
e4L and certain of e4L's United States subsidiaries were not included
in the Chapter 11 filings. The subsidiaries are inactive and/or the results of
their operations and financial position are not material to the consolidated
financial statements. In addition, the Chapter 11 and Administration proceedings
did not impact e4L's Austral-Asian businesses.
Under Chapter 11 and Administration, any litigation claims,
pre-petition indebtedness and other contractual obligations may not be enforced
against the affected e4L subsidiaries as of the respective filing dates; and the
parties affected thereby may file claims within the appropriate court
jurisdiction (e.g., bankruptcy court for United States subsidiaries).
The accompanying condensed consolidated financial statements of e4L,
Inc. and subsidiaries have been prepared on a going concern basis, which
contemplates the continuity of operations, realization of assets and liquidation
of liabilities in the ordinary course of business. However, as a result of the
Chapter 11 and Administration filings, the realization of assets and liquidation
of liabilities are subject to uncertainty. While under the protection of Chapter
11 or Administration, e4L's affected subsidiaries may, in the normal course of
business, sell or otherwise dispose of assets and liquidate or settle
liabilities for amounts other than those reflected in the unaudited condensed
consolidated financial statements. Further, a plan of reorganization or
liquidation (or similar plan under Administration) could materially change the
amounts and classifications reported in the consolidated historical financial
statements, which do not give effect to any adjustments to the carrying value of
assets or amounts of liabilities that might be necessary as a consequence of a
plan of reorganization or liquidation.
In addition, except as otherwise disclosed, the accompanying unaudited
condensed consolidated financial statements of 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 and six month periods ended September 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.
8
<PAGE>
Liabilities Under Chapter 11 and Administration Proceedings; Liabilities Subject
to Compromise
Generally, in the Chapter 11 and Administration cases, substantially
all unsecured liabilities as of the Chapter 11 or Administration petition dates,
as the case may be, are subject to compromise or other treatment under a plan of
reorganization or plan of liquidation to be confirmed by the Bankruptcy Court
after submission to any required vote by affected parties (or similar proceeding
under Administration). For financial reporting purposes, those liabilities and
obligations whose treatment and satisfaction is dependent on the outcome of the
Chapter 11 or Administration cases have been segregated and classified as
"pre-petition liabilities subject to compromise" under reorganization
proceedings in the condensed consolidated balance sheet. Generally, all actions
to enforce or otherwise effect repayment of pre-Chapter 11 or Administration
liabilities as well as all pending litigation against the Chapter 11 or
Administration debtors are stayed while the debtors continue their business
operations as debtors-in-possession under Chapter 11 or similar proceeding under
Administration.
Schedules have been filed by the Debtors with the Bankruptcy Court
setting forth the assets and liabilities of the debtors as of the bankruptcy
petition date as reflected in their respective accounting records. The debtors
will notify all known claimants subject to the bar date of their need to file a
proof of claim with the Bankruptcy Court. A bar date is the date by which claims
against the company must be filed if the claimants wish to receive any
distribution in the Chapter 11 cases. Differences between amounts shown by the
debtors and eventual claims filed by creditors will be investigated and will be
either amicably resolved or adjudicated before the Bankruptcy Court. The
ultimate amount of and settlement terms for such liabilities are subject to an
approved plan of reorganization and accordingly are not presently determinable.
Under the Bankruptcy Code, the debtors may elect to assume or reject real estate
leases, employment contracts, personal property leases, service contracts and
other prepetition executory contracts, subject to Bankruptcy Court approval.
Claims for damages resulting from the rejection of real estate leases and other
executory contracts will be subject to separate bar dates. Similar proceedings
are applicable under Administration subject to the jurisdiction of the Court of
Justice.
The debtors have not reviewed all real estate leases for assumption or
rejection. The pre-petition liabilities subject to compromise include a reserve
for an estimated amount that may be claimed by lessors with respect to such real
estate leases through September 30, 2000. The debtors will continue to analyze
their real estate leases and executory contracts and may assume or reject
additional leases and contracts. The principal categories of obligations
classified as liabilities subject to compromise under reorganization proceedings
are identified below. The amounts below in total may vary significantly from the
stated amount of proofs of claim that will be filed with the Bankruptcy Court or
Court of Justice and may be subject to future adjustment depending on Bankruptcy
Court or Court of Justice action, further developments with respect to potential
disputed claims, determination as to the value of any collateral securing
claims, or other events. Additional claims may arise from the rejection of
additional real estate leases and executory contracts by the Chapter 11 or
Administration debtors.
Accounts payable, trade $ 12,602
Accrued expenses 11,610
Deferred rent on operating leases 1,872
Term loan and line of credit 12,011
Deferred revenue 5,835
--------
Total $ 43,930
========
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 September 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.
9
<PAGE>
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 Six months ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss................................................................. $ (37,502) $ (4,856) $ (49,447) $ (10,738)
Effect of beneficial conversion features and accrued
dividends on convertible preferred stock............................... (390) (1,430) (789) (1) (2,739)
------------- ----------- ------------ ------------
Adjusted net loss-basic and diluted earnings per share................... $ (37,892) $ (6,286) $ (50,236) $ (13,447)
------------- ----------- ------------ ------------
Weighted average shares outstanding - basic and diluted.................. 44,189 32,677 43,411 32,340
------------- ----------- ------------ ------------
Basic and diluted earnings per share (1) ................................ $ (0.86) $ (0.19) $ (1.16) $ (0.42)
============= =========== ============ ============
</TABLE>
(1) Preferred stock convertible into approximately 22.9 million and 31.4 million
shares of common stock, and stock options and warrants to purchase common
stock exercisable into approximately 17.1 million and 16.7 million shares of
common stock have been excluded from the calculation of diluted loss per
share for the three and six month periods ended September 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 and $170,000 for the three and
six month periods ended September 30, 1999, respectively, due to tax liabilities
associated with its Australasian operations. A valuation allowance has been
provided for income tax benefits on United States and certain foreign losses and
loss carryovers. The income tax benefits have been fully reserved until
realized.
4. Comprehensive Income
Comprehensive income for the three and six month periods ended September
30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net Loss................................................................. $ (37,502) $ (4,856) $ (49,447) $ (10,738)
Foreign currency translation adjustments................................. (250) 17 (813) (297)
------------ ---------- ----------- -----------
Total comprehensive loss................................................. $ (37,752) $ (4,839) $ (50,260) $ (11,035)
============ ========= =========== ===========
</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,
wholesale/retail distribution 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.
10
<PAGE>
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 Six months ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net revenue:
United States...................................................... $ 8,302 $ 51,313 $ 29,851 $ 94,896
Europe............................................................. 1,856 6,608 4,706 13,880
Austral-Asia....................................................... 10,988 15,651 23,312 33,002
Production and corporate........................................... (4) 18 1 34
---------- ----------- ---------- -----------
Total.............................................................. $ 21,142 $ 73,590 $ 57,870 $ 141,812
========== =========== ========== ===========
EBITDA:
United States...................................................... $ (14,061) $ 648 $ (16,999) $ (778)
Europe............................................................. (842) (138) (2,365) 86
Austral-Asia....................................................... (181) 1,862 728 3,660
Production and corporate........................................... (2,327) (4,236) (4,487) (9,059)
---------- ----------- ---------- -----------
Total.............................................................. $ (17,411) $ (1,864) $ (23,123) $ (6,091)
========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
-------------- ----------------
September 30, March 31,
2000 2000
-------------- ----------------
<S> <C> <C>
Identifiable assets:
United States....................................................... $ 7,886 $ 33,606
Europe.............................................................. 2,484 4,702
Austral-Asia........................................................ 23,458 26,192
Production and corporate............................................ 2,587 7,110
------------- --------------
Total............................................................... $ 36,415 $ 71,610
============= ==============
</TABLE>
The reconciliation of adjusted EBITDA to loss before income taxes is set
forth below (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
EBITDA........................................................ $ (17,411) $ (1,864) $ (23,123) $ (6,091)
Less:
Depreciation, amortization and non-cash compensation 1,154 1,302 2,267 2,590
Unusual charges .............................................. 18,128 - 18,128 -
Loss on equity investment in BuyItNow.com, LLC.... 175 1,173 4,781 1,173
Interest expense.............................................. 634 432 1,148 714
---------- ----------- ----------- ----------
Loss before income taxes...................................... $ (37,502) $ (4,771) $ (49,447) $ (10,568)
========== =========== =========== ==========
</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 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
11
<PAGE>
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 September 7, 1999, e4L consummated a transaction with BuyItNow, Inc.
("Buyitnow") pursuant to which e4L and Buyitnow formed BuyItNow LLC. Buyitnow
LLC was formed through the contribution by Buyitnow of substantially all of its
assets and liabilities, and the contribution by e4L of, among other things,
e4L's (i.) on-line business of "As Seen on TV" products, and (ii.) a commitment
to promote Buyitnow LLC within e4L programs for a three year term. 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 September 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 September 30, 2000, e4L recorded a loss on its equity
investment of approximately $0.2 million.
A summary of Buyitnow LLC unaudited condensed consolidated financial
information for the three months ended August 31, 2000 is as follows:
Condensed Consolidated Statement of Operations: (in thousands)
<TABLE>
<CAPTION>
BuyItNow LLC
------------
<S> <C>
Operating data:
Net revenue....................................................... $ 21,360
EBITDA............................................................ $ (853)
Net income (loss)................................................. $ (975)
Balance sheet information:
Working capital................................................... $ (2,680)
Total assets...................................................... $ 12,078
Members equity (deficit).......................................... $ 4,745
</TABLE>
Due to systems problems, Promenade LLC was unable to provide timely accurate
financial information.
7. Preferred Stock Outstanding
The following table summarizes the issued and outstanding shares of
Preferred Stock at:
September 30, March 31,
2000 2000
------------ ---------
Series B Convertible Preferred Stock............ 5,000 5,000
Series D Convertible Preferred Stock............ 14,406 16,779
Series E Convertible Preferred Stock............ 7,445 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
8. Commitment & Contingencies
Litigation
In October, 2000, OSA International, Ltd. ("OSA"), filed a complaint
against e4L seeking an application for ex parte for a Writ of Attachment for
non-payment of a purported obligation owed to OSA in the amount of $553,515. e4L
believes that this claim will be stayed under Chapter 11.
In September, 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
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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. e4L believes that this claim will be stayed under Chapter 11.
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. e4L believes that this claim will be
stayed under Chapter 11.
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.
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 was 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 NYSE did not
accept e4L's business 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. e4L's business plan has been reviewed by
the NYSE, and in light of the Chapter 11 and Administration filings, the NYSE
has made a recommendation to the Securities and Exchange Commission ("SEC") that
e4L's common stock be de-listed, and the NYSE has suspended trading of e4L's
common stock as of November 16, 2000. The de-listing of e4L's common stock from
trading on the NYSE is expected to have adverse effects on e4L and its
stockholders. Notwithstanding the foregoing, on November 17, 2000, e4L's common
stock was listed for trading on the OTC Bulletin Board ("OTCBB"). See also,
"Factors That May Affect 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
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<PAGE>
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
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. Senior Debt - Defaults and Payment Demands; Debtor-In-Possession Loan
In December 1998, QNA entered into a three-year credit agreement (the
"Credit Agreement") with Foothill Capital Corporation ("Foothill"). The Credit
Agreement provided 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. In February 2000, QNA amended the Credit Agreement whereby it obtained a
$5.0 million term loan ("Term Loan").
On September 20, 2000, QNA received a Notice of Default with respect to
the Credit Agreement and Term Loan for the (i.) failure by QNA to maintain the
minimum tangible net worth required by the Loan Agreement, and (ii.) receipt by
e4L of a "going concern" qualification with respect to its audited financial
statements for the year ended March 31, 2000. On October 5, 2000, QNA received a
demand for payment pursuant to the Loan Agreement whereby Foothill demanded
immediate payment of principal and interest due thereunder of approximately
$11.7 million. Then on October 9, 2000, Foothill demanded payment of the
approximately $11.7 million outstanding from e4L pursuant to a General
Continuing Guaranty entered into by e4L and Foothill in connection with the Loan
Agreement.
As a result of the Chapter 11 filing, no principal or interest payments
will be made on most prepetition debt without Bankruptcy Court approval or until
a plan of reorganization providing for the repayment terms has been confirmed by
the court and becomes effective. Interest on prepetition obligations has not
been accrued after the Chapter 11 petition date except that interest expense and
principal payments will continue to be recorded on capital lease obligations
unless the leases are rejected by the debtors.
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<PAGE>
On November 2, 2000, QNA received preliminary approval from the
Bankruptcy Court pursuant to which it received debtor-in-possession financing in
a maximum amount of up to $1.5 million from Foothill ("DIP Financing"). While
approved, the DIP Financing is subject to further review by and the discretion
of the Bankruptcy Court, which may, from time to time, modify the amounts that
may be borrowed by QNA. In connection with Foothill's agreement to provide the
DIP Financing, e4L and QNA agreed to the appointment of John Grigsby and
Associates, Inc., a financing consulting firm, to act as responsible officers in
charge of QNA.
10. Customer Orders and Refunds
As a result of QNA's financial difficulties, QNA had been unable to
complete shipment of certain customer orders or process certain customer
refunds. As a result, as of September 30, 2000, QNA was unable to complete
shipment of approximately $9.0 million of customer orders, many of which either
all or a portion of the customer's costs had already been charged to customer
credit cards. QNA was also unable to process approximately $4.0 million of
customer refunds, which requested refunds have subsequently increased due to
QNA's inability to ship the customer orders. QNA has been working with its
vendors, including its credit card processor, to complete shipment of these
customer orders, and as of November 15, 2000 had completed shipment of
approximately $5.0 million of such orders.
As a result of QNA's Chapter 11 filing, it is likely that any customer
refunds will be stayed under Chapter 11, and that the responsibility for any
customer refunds will ultimately fall upon the customer's credit card company or
QNA's credit card processor. In light of the foregoing customer refunds, an
estimated portion of these refunds has been included under pre-petition
liabilities subject to compromise in the condensed consolidated financial
statements as of September 30, 2000.
15
<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
On October 20, 2000, QNA filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District of California. QNA's Chapter 11 bankruptcy is
proceeding as Case No. SV00-19482-GM. Also on October 20, 2000, e4L's
wholly-owned United Kingdom subsidiary, QIL filed a petition seeking
Administration, whereby an administrator has been retained by QIL for the
purpose of either reorganizing or liquidating QIL's business for the benefit of
creditors similar to a Chapter 11 proceeding in the United States. e4L is
presently contemplating Chapter 11 filings for two other wholly-owned United
States subsidiaries, Positive Response Television, Inc. and DirectAmerica
Corporation (d/b/a, Quantum Television). On November 2, 2000, QNA received
preliminary approval from the Bankruptcy Court pursuant to which it received
debtor-in-possession financing in a maximum amount of up to $1.5 million from
Foothill ("DIP Financing"). While approved, the DIP Financing is subject to
further review by and the discretion of the Bankruptcy Court.
As a result of the Chapter 11 and Administration proceedings, QNA and
QIL have effectively shut-down their respective business operations. Under
Chapter 11, e4L will attempt to reestablish operations for QNA, however, there
are no assurances that it will be successful in doing so. While it is presently
too early to tell, under Administration it is likely that QIL will either be
liquidated or sold for the benefit of its creditors, with little or no value to
be realized by e4L.
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.
Subject to the outcome of the Chapter 11 and/or Administration
proceedings, 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 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 utilization and leveraging of its global marketing
presence and media access, the continued development and marketing of innovative
products to attempt to enhance its existing programs, the emphasis on developing
other means of revenue generation such as through membership services, as well
as wholesale/retail
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<PAGE>
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 60.8% and 48.4% of
e4L's revenue being generated outside of the United States for the three and six
month periods ended September 30, 2000, respectively. 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" or
"EBITDA Deficit" and "EBITDA Margin" or "EBITDA Margin Deficit." EBITDA or
EBITDA Deficit consists of net income or net loss before interest, provision for
income taxes, depreciation and amortization, non-cash compensation, unusual
items and other income or expense. EBITDA Margin or EBITDA Deficit Margin
represents EBITDA or EBITDA Deficit, as the case may be, as a percentage of net
revenue. EBITDA or EBITDA Deficit 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 or
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 or EBITDA Deficit 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 Six months ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net revenue..................................................... 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Media......................................................... 59.6 33.6 36.4 35.3
Product and other direct...................................... 98.5 58.3 84.2 58.1
Selling, general and administrative........................... 24.3 10.7 19.2 10.9
Depreciation, amortization and non-cash Compensation.......... 5.5 1.8 3.9 1.8
Unusual charges............................................... 85.7 - 31.3 -
---------- -------- --------- --------
Total operating costs and expenses............................ 273.6 104.3 175.2 106.1
---------- -------- --------- --------
Loss from operations............................................ (173.6) (4.3) (75.2) (6.1)
Other:
Loss on equity investment in BuyItNow LLC..................... 0.8 1.6 8.3 0.8
Interest expense.............................................. 3.0 0.6 2.0 0.5
---------- -------- --------- --------
Loss before income taxes........................................ (177.4) (6.5) (85.4) (7.5)
Income taxes.............................. ..................... - 0.1 - 0.1
---------- -------- --------- --------
Net loss........................................................ (177.4%) (6.6%) (85.4%) (7.6%)
========== ======== ========= ========
</TABLE>
Three Months Ended September 30, 2000 As Compared to Three Months Ended
-----------------------------------------------------------------------
September 30, 1999
------------------
17
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Net revenue was $21.1 million for the three months ended September 30,
2000 as compared to $73.6 million for the three months ended September 30, 1999,
a decrease of $ 52.5 million or 71.3%.
Net revenue in the United States for the three months September 30,
2000 was $8.3 million as compared to $ 51.3 million for the three months ended
September 30, 1999, a decrease of $43.0 million or filing 83.8%. The decrease
was primarily attributable to the filing of Chapter 11 of QNA and working
capital constraints, which resulted in lower media expenditures, and no new
programs and product offerings having been "rolled-out" during the current
period.
International net revenue for the three months ended September 30, 2000
was $12.8 million as compared to $22.3 million for the three months ended
September 30, 1999, a decrease of $9.4 million or 42.3%. The decrease was
attributable to a combination of, among other things, the Administration of QIL,
fewer new products, reduced media expenditures in Europe resulting from the loss
of media contracts, working capital constraints, and adverse economic
conditions in Australia.
e4L's sales return rate was 24.6 and 16.2 for each of the three month
periods ended September 30, 2000 and 1999, respectively. This increased overall
return rate was attributable to working capital constraints which caused delays
in receiving goods from suppliers and shipment to customers.
Operating Costs and Expenses
Total operating costs and expenses were $57.8 million for the three
months ended September 30, 2000 as compared to $76.8 million for the three
months ended September 30, 1999, a decrease of $18.9 million or 24.7%. The
fiscal year 2001 decrease was primarily attributable to the decrease in net
revenue of 71.3%, working capital constraints, 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 $12.6 million for the three months ended September
30, 2000 as compared to $24.7 million for the three months ended September 30,
1999, a decrease of $12.1 million or 49.0%. e4L's worldwide ratio of media
purchases to net revenue increased to 59.6% for the three months ended September
30, 2000 as compared to 33.6% for the three months ended September 30, 1999. The
increase in media purchases as a percentage of net revenue was attributable to
the recognition of deferred media costs of $3.4 million as a result of the
Chapter 11 filing of QNA and elimination of the allocation of media expenditures
in connection with e4L's investment in Buyitnow LLC. Austral-Asia media
purchases as a percent of revenue remained consistent at 19.8% for the three
months ended September 30, 1999 and 2000.
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 $20.8 million
for the three months ended September 30, 2000 as compared to $42.9 million for
the three months ended September 30, 1999, a decrease of $22.1 million or 51.5%.
The decrease was primarily attributable to the decrease in net revenue. As a
percentage of net revenue, product and other direct costs were 98.5% for the
three months ended September 30, 2000 as compared to 58.3% for the three months
ended September 30,1999. The increase as a percentage of net revenue was
attributable to the liquidation of inventory at lower margins in order to
provide working capital, 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. In addition, the Chapter 11 filing of QNA and
Administration of QIL resulted in the recognition of deferred cost as no
corresponding revenue will be recognized to offset such costs. Austral-Asia
product cost as a percentage of net revenue increased from 59.2% for the three
months ended September 30,1999 to 65.6% for the three months ended September 30,
2000 due primarily to product mix and lower sales volume.
Selling, General and Administrative
Selling, general and administrative expense was $5.1 million for the
three months ended September 30, 2000 as compared to $7.9 million for the three
months ended September 30, 1999, a decrease of $2.7 million or 34.6%. The
decrease in selling, general and administrative expense was attributable to
e4L's workforce reductions in the United States and Europe made necessary in
light of the Chapter 11 filing of QNA and the Administration of QIL. Selling,
general and administrative expense as a percentage of net revenue increased to
24.3% for the three months ended September 30, 2000 from 10.7% for the three
months ended September 30, 1999, principally attributable to the effects of
certain fixed costs in relation to the 71.3% decrease in net revenue.
Depreciation, Amortization and Non-cash Compensation
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<PAGE>
Depreciation, amortization and non-cash compensation were $1.2 million
for the three months ended September 30, 2000 as compared to $1.3 million for
the three months ended September 30, 1999, a decrease of $0.1 million, or 11.4%.
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.
Unusual Charges
During the three months ended September 30, 2000 e4L recorded unusual
charges of $18.1 million. This amount is mainly due to accounting for the
Chapter 11 filing of QNA and Administration of QIL. Items included in Unusual
Charges are fixed asset write-offs of $2.6 million, asset valuation writedowns
in QNA and QIL of $6.9 million, a goodwill write-off of $3.2 million relating to
QNA and QIL, $0.8 million relating to realized foreign currency losses due to
write-offs of intercompany accounts and balance sheet translation accounts, $3.8
million in additional liability attributable to additional contract cancellation
costs of e4L's Eutelstat satellite lease, and approximately $0.8 million
attributable to restructuring of the Austral-Asian business, which restructuring
is an attempt eliminate redundancies and exit certain unprofitable markets.
Loss on Equity Investments in BuyItNow.com, LLC
During the three months ended September 30, 2000, e4L recorded a loss
on its equity investment in Buyitnow LLC of $0.2 million compared to a loss of
$1.2 million during the three months ended September 30, 1999. 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 $0.6 million for the three months ended September
30, 2000, as compared to $0.4 million for the three months ended September 30,
1999, an increase of $0.2 million or 46.8%. This increase was attributable to an
increase in e4L's average interest rate from 10.5% for the three months ended
September 30, 1999, to 19.9% for the three months ended September 30, 2000.
Income Taxes
e4L recorded income tax expense of $85,000 for the three months ended
September 30, 1999 attributable to its Austral-Asian operations. Income tax
benefits have not been recorded during the three month periods ended September
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 ($17.4) million for the three months ended September
30, 2000 as compared to an EBITDA Deficit of ($1.9) million for the three months
ended September 30, 1999, an increase in the deficit of $15.5 million. EBITDA
deficit margin was (82.4%) and (2.5%) during the three month periods ended
September 30, 2000 and 1999, respectively.
Net Loss
e4L incurred a net loss of $37.5 million for the three months ended
September 30, 2000, as compared to a net loss of $4.9 million for the three
months ended September 30, 1999. The increased net loss resulted from the
Chapter 11 filing of QNA and Administration of QIL resulting in Unusual Charges
of $18.1 million. In addition, working capital constraints resulted in lower
revenues as media expenditures were reduced, and adequate working capital was
not available to purchase products to bring to market in a timely fashion.
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Six Months Ended September 30, 2000 As Compared to Six Months Ended September
-----------------------------------------------------------------------------
30, 1999
--------
Net revenue was $57.9 million for the six months ended September 30,
2000 as compared to $141.8 million for the six months ended September 30, 1999,
a decrease of $83.9 million or 59.2%.
Net revenue in the United States for the six months September 30, 2000
was $29.9 million as compared to $94.9 million for the six months ended
September 30, 1999, a decrease of $65.0 million or 68.5%. The decrease was
primarily attributable to the Chapter 11 filing of QNA resulting in working
capital constraints, which resulted in lower media expenditures, and no new
programs and product offerings having been "rolled-out" during the current
period.
International net revenue for the six months ended September 30, 2000
was $28.0 million as compared to $46.9 million for the six months ended
September 30, 1999, a decrease of $18.9 million or 40.2%. The decrease was
attributable to a combination of, among other things, the Administration of QIL,
fewer new products, reduced media expenditures in Europe resulting from the loss
of media contracts, working capital constraints, and adverse economic conditions
in Australia.
e4L's sales return rate was 19.1% and 16.8% for each of the six month
periods ended September 30, 2000 and 1999, respectively. This increased overall
return rate was attributable to working capital constraints which caused delays
in receiving goods from suppliers and shipment to customers.
Operating Costs and Expenses
Total operating costs and expenses were $101.4 million for the six
months ended September 30, 2000 as compared to $150.5 million for the six months
ended September 30, 1999, a decrease of $49.1 million or 32.6%. The fiscal year
2001 decrease was primarily attributable to the decrease in net revenue of
59.2%, 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 $21.1 million for the six months ended September
30, 2000 as compared to $50.0 million for the six months ended September 30,
1999, a decrease of $29.0 million or 57.9%. e4L's worldwide ratio of media
purchases to net revenue increased to 36.4% for the six months ended September
30, 2000 as compared to 35.3% for the six months ended September 30, 1999. The
increase in media purchases as a percentage of net revenue was attributable to
the recognition of deferred media costs of $3.4 million as a result of the
Chapter 11 filing of QNA and elimination of the allocation of media expenditures
in connection with e4l's investment in Buyitnow LLC in the current quarter.
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 $48.7 million
for the six months ended September 30, 2000 as compared to $82.4 million for the
six months ended September 30, 1999, a decrease of $33.7 million or 40.8%. The
decrease was primarily attributable to the decrease in net revenue. As a
percentage of net revenue, product and other direct costs were 84.2% for the six
months ended September 30, 2000 as compared to 58.1% for the six months ended
September 30, 1999. In addition, the Chapter 11 filing of QNA and the
Administration of QIL resulted in recognition of certain deferred costs to which
no corresponding revenues will be realized. 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 $11.2 million for the
six months ended September 30, 2000 as compared to $15.5 million for the six
months ended September 30, 1999, a decrease of $4.3 million or 27.7%. The
decrease in selling, general and administrative expense was attributable to
e4L's workforce reductions in the United States and Europe made necessary in
light of the Chapter 11 filing of QNA and the Administration of QIL. Selling,
general and administrative expense as a percentage of net revenue increased to
19.3% for the six months ended September 30, 2000 from 10.9% for the six months
ended September 30, 1999, principally attributable to the effects of certain
fixed costs in relation to the 59.2% decrease in net revenue.
Depreciation, Amortization and Non-cash Compensation
Depreciation, amortization and non-cash compensation were $2.3 million
for the six months ended September 30, 2000 as compared to $2.6 million for the
six months ended September 30, 1999, a decrease of $0.3 million, or 12.5%. The
decrease in depreciation and amortization was attributable to the write-off of
goodwill and
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other intellectual properties associated with the Direct America and "Flying
Lure" businesses during fiscal year 2000, which reduced amortization expense.
Unusual Charges
During the six months ended September 30, 2000 e4L recorded unusual
charges of $18.1 million. This amount is mainly due to accounting for the
Chapter 11 filing of QNA and the Administration of QIL. Items included in
Unusual Charges are fixed asset write-offs of $2.6 million, asset valuation
writedowns in QNA and QIL of $6.9 million, a goodwill write-off of $3.2 million
relating to QNA and QIL, $0.8 million relating to realized foreign currency
losses due to write-offs of intercompany accounts and balance sheet translation
accounts, $3.8 million in additional liability attributable to additional
contract cancellation costs of e4L's Eutelstat satellite lease, and
approximately $0.8 million attributable to restructuring of the Austral-
Asian business, which restructuring is an attempt to eliminate redundancies and
exit certain unprofitable markets.
Loss on Equity Investments in BuyItNow.com, LLC
During the six months ended September 30, 2000, e4L recorded a loss on
its equity investment in Buyitnow LLC of $4.8 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 six months ended September
30, 2000, as compared to $0.7 million for the six months ended September 30,
1999, an increase of $0.4 million or 60.83%. This increase was attributable to
an increase in e4L's average interest rate from 10.0% for the six months ended
September 30, 1999, to 18.6% for the six months ended September 30, 2000.
Income Taxes
e4L recorded income tax expense of $170,000 for the six months ended
September 30, 1999 attributable to its Austral-Asian operations. Income tax
benefits have not been recorded during the six month period ended September 30,
2000 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 ($23.1) million for the six months ended September
30, 2000 as compared to an EBITDA Deficit of ($6.1) million for the six months
ended September 30, 1999, an increase in the deficit of $17.0 million . EBITDA
deficit margin was (40.0%) and (4.3%) during the six month periods ended
September 30, 2000 and 1999, respectively.
Net Loss
e4L incurred a net loss of $49.5 million for the six months ended
September 30, 2000, as compared to a net loss of $10.7 million for the six
months ended September 30, 1999. The increased net loss resulted from the
Chapter 11 filing of QNA and Administration of QIL resulting in unusual charges
of $18.1 million. In addition, working capital constraints resulted in lower
revenues as media expenditures were reduced, and adequate working capital was
not available to purchase products to bring to market in a timely fashion.
Liquidity and Capital Resources
e4L's working capital was $5.2 million at September 30, 2000 as
compared to $14.3 million at March 31, 2000, a decrease of $9.1 million.
Operating activities for the six months ended September 30, 2000 resulted in a
use of cash of $3.0 million. e4L's cash flow from operations during the six
months ended September 30, 2000 was adversely impacted by the net loss of
approximately $49.5 million.
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Consolidated accounts receivable decreased by $9.5 million, or 46.7%,
primarily due to a decrease in United States accounts receivables of $9.3
million. United States accounts receivable decreased due to lower sales volume
and a $1.6 million increase in the receivables allowance, due to the Chapter 11
filing of QNA. Consolidated inventories decreased $11.6 million or 62.6%. This
decrease was attributable to a $9.1 million decrease in United States inventory
resulting from the liquidation of slow moving inventory through wholesale
distribution channels, minimal inventory purchased, and a $1.4 million increase
in the obsolescence provision due to the Chapter 11 filing of QNA. Austral-Asian
inventories decreased by $2.0 million due mainly to working capital constraints.
Due to the Chapter 11 filing of QNA and Administration of QIL, all
liabilities of these subsidiaries has been classified as prepetition liabilities
subject to compromise. In addition, $6.9 million of additional valuation
reserves have been recorded against these two entities' operating assets, and
all of the fixed assets and goodwill relating to these entities has been written
off. As a result, the balance sheet at September 30, 2000 primarily represents
the assets and liabilities of e4L, Quantum Television and the Austral-Asian
entities.
During September 2000, QIL subleased a satellite transponder, which
sublease commenced on August 1, 2000 with annual payments of 3.0 million Euros
($2.9 million as of September 30, 2000) during the first year, and 3.4 million
Euros ($3.2 million as of September 30, 2000) each year thereafter through March
30, 2010. However, in light of QIL's Administration proceedings and non-payment
of lease payments by QIL to the primary lessor, BT Broadcast Services Plc
("BTBS"), BTBS has terminated the satellite lease agreement and has notified e4L
of BTBS's intention to seek payment from e4L under a parent company guarantee
for past due amounts and a termination fee in the aggregate amount of
approximately 10.3 million Euros (approximately $8.7 million as of September 30,
2000). An additional $3.4 million has been included in Unusual Charges to cover
the shortfall between the required payment and amounts previously recorded by
QIL.
In December 1998, e4L entered into a three-year credit agreement with a
senior lender (the "Credit Agreement"). The Credit Agreement provided 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, QNA 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.
On September 20, 2000, QNA received a Notice of Default with respect to
the Credit Agreement and Term Loan for the (i.) failure by QNA to maintain the
minimum tangible net worth required by the Loan Agreement, and (ii.) receipt by
e4L of a "going concern" qualification with respect to its audited financial
statements for the year ended March 31, 2000. On October 5, 2000, QNA received a
demand for payment pursuant to the Loan Agreement whereby Foothill demanded
immediate payment of principal and interest due thereunder of approximately
$11.7 million. Then on October 9, 2000, Foothill demanded payment of the
approximately $11.7 million outstanding from e4L pursuant to a General
Continuing Guaranty entered into by e4L and Foothill in connection with the Loan
Agreement. At September 30, 2000, e4L had a total of $12.0 million in
outstanding under the Credit Agreement and Term Loan.
e4L's foreign revenue is subject to currency exchange risk. To the
extent e4L incurs expenses (e.g. order fulfillment and media costs) in local
currencies that are based upon locally denominated sales volume, this exposure
is reduced significantly. e4L monitors exchange rate and/or forward contracts
when appropriate and, depending upon market and other conditions, may attempt to
hedge its currency risk. During the quarter ended September 30, 2000 e4L entered
into no forward contracts to hedge its Japanese Yen position. At September 30,
2000, e4L has no outstanding forward contracts to hedge its Japanese Yen
position or any other foreign currencies. In the long term,
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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 six month period ended September 30, 2000. For the immediate term, e4L
must depend upon its Australasian businesses to fund its corporate working
capital requirements, and will depend upon debtor-in-possession financing
through Foothill to fund QNA's working capital requirements. On a long-term
basis, however, in order to improve e4L's liquidity position, e4L will need 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, the ability
to successfully leverage its media, and the ability to obtain additional debt or
equity financing.. These plans may only be implemented if QNA is successful in
funding its short-term working capital requirements, and an eventual plan of
reorganization is approved by the United States Bankruptcy Court with respect to
QNA. 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. 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.
Factors That May Affect Future Performance
e4L Has Historically Suffered Losses Which Have Adversely Affected Cash Flow;
Going Concern; Insolvency Proceedings
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 $49.4 million for the six months ended September 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. On
October 20, 2000, QNA filed a voluntary petition for relief under Chapter 11.
QNA's Chapter 11 bankruptcy is proceeding as Case No. SV00-19482-GM. Also on
October 20, 2000, e4L's wholly-owned United Kingdom subsidiary, QIL filed a
petition seeking Administration, whereby an administrator has been retained by
QIL for the purpose of either reorganizing or liquidating QIL's business for the
benefit of creditors similar to a Chapter 11 proceeding in the United States. In
late November 2000, e4L's wholly-owned United States subsidiaries, Positive
Response Television, Inc. and DirectAmerica Corporation (d/b/a, Quantum
Television), are expected to file voluntary petitions for relief under Chapter
11. Under Chapter 11, QNA will attempt to seek debtor-in-possession financing
from Foothill, in order to fund the Chapter 11 reorganization proceedings.
e4L's cash position is pressured by the losses incurred during each of
its prior four fiscal years ended March 31, and during the current six month
period ended September 30, 2000. For the immediate term, e4L must depend upon
its Austral-Asian businesses to fund its corporate working capital requirements,
and will depend upon debtor-in-possession financing through Foothill to fund
QNA's working capital requirements. Over the long-term, e4L must implement new
strategies designed to increase net revenue, reduce costs and return it to
profitability; and e4L must seek alternative forms of financing, the
availability of which is uncertain. Moreover, in order to begin to attempt to
address these long-term objectives, a plan of reorganization for QNA must be
approved by the United States Bankruptcy Court, or e4L and QNA will be forced to
go out of business. No assurances can be given that e4L will be able to either
of these immediate term or long-term objectives.
As a result of the Chapter 11 filing and Administration proceedings,
QNA and QIL have effectively shut-down their respective business operations.
Under Chapter 11, e4L will attempt to reestablish operations for QNA, however,
there are no assurances that it will be successful in doing so.
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;
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. 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
Australasian 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
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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 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.
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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. 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. e4L's business plan has
been reviewed by the NYSE, and in light of the Chapter 11 and Administration
filings, the NYSE has made a recommendation to the Securities and Exchange
Commission ("SEC") that e4L's common stock be de-listed, and the NYSE has
suspended trading of e4L's common stock as of November 16, 2000. The de-listing
of e4L's common stock from trading on the NYSE is expected to have adverse
effects on e4L and its stockholders. Notwithstanding the foregoing, on November
17, 2000, e4L's common stock was listed for trading on the OTC Bulletin Board
("OTCBB").
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.
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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.
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 November 15, 2000, there are approximately 45.7 million
shares of e4L common stock issued and outstanding, nearly all of which are
freely tradable. In addition, approximately 39.9 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 13.4 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 5.0 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 $0.25
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 September 30, 2000:
e4L filed a Current Report on Form 8-K dated August 21, 2000 reporting
under Item 5 that a non-binding letter of intent pursuant to which Graybox, LLC
had committed to provide to e4L up to $10.0 million in financing had been
terminated.
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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: November 17, 2000 /s/ Stephen C. Lehman
---------------------------------------------
Stephen C. Lehman
Chairman of the Board of Directors and
Chief Executive Officer; Chief Financial
Officer and Principal Accounting Officer
29
