Thursday, March 11, 1999

[Clarification: E4L (NYSE: ETV) CEO Stephen Lehman says the fully diluted sharecount is currently around 75.5 million. The company's SEC filings create some confusion on this point. Also, its Everything4Less site offers members a low-price guarantee on the 800,000 items it sells. If an authorized dealer sells the same item for less, E4L will reimburse its members 135% of the difference. Various restrictions apply. The text below now reflects these clarifications.]

E4L, Inc.
Phone: 818-461-6400
Website: http://www.E4L.com
Price (3/10/99): $7 5/8


New management, new financing, new strategy, new name. That's the abbreviated version of how this direct response TV advertiser has become an e-commerce play and seen its shares soar from around $1 last June to as high as $12 1/2 in November.

Known until late February as National Media (NYSE: NM), this company was in danger of being delisted from the Big Board as recently as August. But changes were afoot.

In July, the firm accepted a reorganization offer from an investment group led by new Chair/CEO Stephen Lehman, formerly CEO at Premier Radio, which was acquired by Jacor Communications (Nasdaq: JCOR), soon to be part of Clear Channel Communications (NYSE: CCU). Completed in late October, the transaction gave Lehman's group control of the company while paying down much of its long-term debt. Then in December, Wells Fargo's (NYSE: WFC) Foothill Capital agreed to provide a 3-year $20 million credit facility at prime plus 0.25%.

The new game plan involves leveraging the firm's thousands of hours of TV infomercials, and soon, radio programming, into an e-commerce business built around its new Everything4Less or E4L.com membership shopping club. The new management team views the infomercials mainly as a means of building the E4L brand.

Since the firm broadcasts over 3,000 half-hour infomercials per week in the U.S., reaching every TV household, investors looking for undiscovered e-commerce plays quickly discovered the new E4L.


Until recently, E4L was simply a money-losing direct response TV company reaching more than 370 million households in more than 70 countries with infomercials such as T-Fal Ingenio Fat Free Stackable Cookware, Susan Powter's Give Me Five, and Timeworks 4 Minute Workout. The new strategy basically inserts advertisements for the Everything4Less website into these infomercials.

The website is really just an E4L branded version of Cendant's (NYSE: CD) NetMarket.com, which offers 800,000 name brand products "at warehouse prices." Though anyone can buy from E4L, products sell at substantial discounts to people who pay the $75 membership fee -- which today also gets you a "free" $75 prepaid calling card from the extremely troubled SmarTalk (Nasdaq: SMTKQ).

E4L is also teaming up with Cendant to launch a membership-based shopping service in Japan that will include an e-commerce site.

Thanks to the company's connections to Jacor (now a major stockholder), E4L also plans to launch The Everything4Less Show, a live interactive shopping program that will be broadcast live over a national radio network as well as simulcast over the Internet through an exclusive deal with broadcast.com (Nasdaq: BCST).

The latest proxy says Lehman's investment group controls 26.6 million common share equivalents. Add in another 4 million shares issuable due to options and warrants, and the tally rises to 30.6 million shares, said to be 34% of the fully diluted shares. That would put the diluted share count at around 90 million, but Lehman says the actual number is closer to 75.5 million.


Income Statement
12-month sales: $344.8 million
12-month income: ($60.2 million)*
12-month EPS: ($2.41)*
Profit Margin: N/A
Market Cap: $232.9 million (Based on 30.55 million shares)
(*Includes $21 million in non-recurring charges in FY98; excludes significant potential dilution from warrants, options, and preferred stock.)

Balance Sheet
Cash: $12.5 million
Current Assets: $77.2 million
Current Liabilities: $63.4 million
Long-Term Debt: $5.8 million

Price-to-earnings: N/A
Price-to-sales: 0.68


Good question. E-commerce has caused investors to reevaluate what appeared to be known properties. For example, K-tel's (Nasdaq: KTEL) direct marketing experience and brand name made it appear to be a viable Internet play. Similarly, other companies with a valuable brand, established customer base, or regular marketing vehicle (like network broadcasts) have also been revalued based on their ability to leverage existing assets to build a Web business.

Lehman and his compatriots saw the opportunity afforded by infomercials and were willing to inject their own cash to make a go of it. When legitimate outside investors take such an interest in what appears to be a lousy business, turnaround junkies take note.


It's difficult to get a real handle on E4L's prospects at this early stage in its transformation, but the initial response to the new strategy appears promising.

Purchases of television time for the third quarter (ended December 31) rose 40% to $28.8 million. These infomercials drew half a million purchase orders. More infomercials and more dial-in customers represent increased opportunities for marketing the E4L website. In one recent campaign, for example, 60% of customers placing orders signed up for an Everything4Less trial membership. E4L expects to receive 2 million orders and 3 million additional customer calls in FY 2000.

The restructuring will also cut expenses by up to $10 million a year starting in FY 2000 thanks to reductions in things like wage-related costs and office and satellite leasing expenses.

A pre-tax charge of $21.7 million in the third quarter covered $1.2 million in E4L start-up costs in addition to numerous one-time expenses. These include $13.8 million in charges related to closing its Philadelphia headquarters, consolidating or closing business offices and retail stores in New Zealand and the Far East, outsourcing some North American operations, and severance payments.

Such housecleaning was no doubt required by the new strategy. Still, Sunbeam (NYSE: SOC) revealed how wholesale restructuring charges can give new management lots of room for managing future earnings. That's something to worry about.

Lehman's group injected $30 million into E4L, picking up $20 million in new Series E preferred stock and $10 million in old Series D convertible preferred plus nearly a million warrants. By repaying the $10 million demand note payable to ValueVision International (Nasdaq: VVTV), Lehman and crew have wiped out most of the company's long-term debt and kept ValueVision from converting that debt into 9.4 million shares of the new E4L at just $1.07 per share.

However, there's still tremendous dilution on the way. For example, the Series E preferred convert into 13.3 million shares at $1.50 per share. Warrants owned by the new management group convert into 3.8 million shares at prices ranging from $1.32 to $3.00. Also, just the warrants associated with the Series B preferred can be turned into 9.5 million shares at $2.37 per share. Shareowners voted October 23 to increase the authorized sharecount to 150 million.

The conversion of these various instruments into common stock may create a steady stream of working capital for E4L's expansion. But they also spell massive dilution and a tremendous overhang of shares, even assuming the turnaround strategy works well. There's not yet much evidence to suggest that it will.

Still, an Internet shopping club that offers real bargain-basement value in exchange for a membership fee could prove a very sensible business model. E4L highlights some favorable cost comparisons with the likes of Buy.com, Value America, CompUSA (NYSE: CPU), and Shopping.com (OTC: IBUY). Yet, many products look relatively expensive.

For example, an Iomega (NYSE: IOM) 100 MB Zip USB drive costs $135.00 for members ($149.95 for non-members) at Everything4Less while Onsale's (Nasdaq: ONSL) atCost sells it for just $123.48, or $11.52 less.

However, E4L offers club members a low-price guarantee on the 800,000 items it stocks. If an authorized dealer sells the same item for less, E4L will reimburse its members 135% of the difference. So with the Zip drive, members would get a $15.55 rebate. The offer isn't valid on books, music, or videos. Various other restrictions apply, too.

While E4L's business model offers the potential for huge leverage, I think Web-based shopping clubs must sell at guaranteed low prices, on all products, in order to compete. Eventually, that will mean literally "at cost." Add in the likely dilution and the novelty of E4L's branding strategy, and there are still just too many questions about this company. In the realm of high-risk e-commerce speculations, though, it's worth keeping an eye on.


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