1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended JUNE 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number: 001-15333
EPL TECHNOLOGIES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0990658
- --------------------- --------------
(State of incorporation) (I.R.S. Employer Identification Number)
2 INTERNATIONAL PLAZA, SUITE 245
PHILADELPHIA, PA 19113-1507
--------------------- ------------
(Address of principal executive offices) (Zip Code)
(610) 521-4400
------------------
(Telephone number, including area code)
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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
32,965,618 shares of $0.001 par value common stock
outstanding as of June 30, 2000.
2
EPL TECHNOLOGIES, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000
AND 1999 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 3
D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9
CONDITION AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 19
SIGNATURES. 20
3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2000 1999
------------- ----------------
(Unaudited) *
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 333,854 $ 587,589
Restricted cash - current 381,355 394,516
Accounts receivable, net 5,585,921 5,318,724
Inventories 4,499,606 4,225,435
Prepaid expenses and other current assets 5,870,418 2,552,115
------------ ------------
Total Current Assets 16,671,154 13,078,379
------------ ------------
PROPERTY AND EQUIPMENT, Net 9,251,403 8,862,422
OTHER ASSETS
Patents, net 750,536 783,535
Goodwill 2,285,245 2,493,793
Other intangibles, net 123,719 145,448
Restricted cash-non current 507,457 511,126
Other noncurrent assets 72,115 124,000
------------ ------------
Total Other Assets 3,739,072 4,057,902
------------ ------------
TOTAL ASSETS $ 29,661,629 $ 25,998,703
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 8,409,488 $ 9,645,801
Accrued expenses 2,320,815 1,615,006
Other liabilities 1,953,211 1,704,707
Deferred gain on sale-leaseback, current portion 359,985 359,985
Short term revolving credit facilities with related parties 3,710,060 3,877,000
Current portion of long-term debt and short term credit facilities 5,385,094 1,918,572
------------ ------------
Total Current Liabilities 22,138,653 19,121,071
LONG TERM DEBT 1,904,935 1,340,527
DEFERRED GAIN ON SALE-LEASEBACK, NONCURRENT PORTION 1,458,620 1,670,700
DEFERRED INCOME TAXES 240,229 191,196
------------ ------------
Total Liabilities 25,742,437 22,323,494
------------ ------------
SHAREHOLDERS' EQUITY
Convertible Series A Preferred Stock 60,000 60,000
Common Stock 33,177 30,776
Additional paid-in capital 65,182,613 54,916,708
Accumulated deficit (60,051,254) (50,270,041)
Treasury stock, at cost (138,160) (138,160)
Foreign currency translation adjustment (1,167,184) (924,074)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,919,192 3,675,209
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,661,629 $ 25,998,703
============ ===========
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
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EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
2000 1999 2000 1999
------------- ------------ ----------- -----------
Sales $ 13,988,125 $ 16,049,179 $ 7,936,002 $ 8,291,649
Cost of sales 12,592,847 15,627,529 7,072,966 7,913,711
------------- ------------ ----------- -----------
Gross profit 1,395,278 421,650 863,036 377,938
Selling, general and administrative expenses 4,287,084 3,856,078 2,117,202 1,933,458
Research and development costs 676,424 1,129,942 352,701 547,585
Depreciation and amortization 1,068,185 1,070,427 545,530 544,935
------------- ------------ ----------- -----------
Net loss from operations (4,636,415) (5,634,797) (2,152,397) (2,648,040)
Interest expense, net 4,230,659 172,566 2,887,136 123,004
Gain on sale of fixed assets (187,080) 0 (93,540) 0
Net loss from unconsolidated affiliates 0 13,904 0 17,717
------------- ------------ ----------- -----------
Loss before income tax expense (8,679,994) (5,821,267) (4,945,993) (2,788,761)
Income tax expense 56,124 0 28,062 0
------------- ------------ ----------- -----------
Net loss $ (8,736,118) $ (5,821,267) $(4,974,055) $(2,788,761)
Deduct:
Accretion, discount and dividends on 1,048,091 245,833 508,346 122,000
preferred stock ------------- ------------ ----------- -----------
Net loss for common shareholders $ (9,784,209) $ (6,067,100) $(5,482,401) $(2,910,761)
============ =========== ========== ==========
Loss per common share $ (0.31) $ (0.51) $ (0.17) $ (0.24)
============ =========== ========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
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EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
2000 1999
---------- ---------
OPERATING ACTIVITIES:
Net loss $ (8,736,118) $ (5,821,267)
Adjustments to reconcile net loss to net cash
Used in operating activities: 4,737,414 1,070,427
Net loss from unconsolidated affiliates 0 (13,904)
Changes in assets and liabilities (744,062) 4,415,679
----------- -----------
Net cash used in operating activities (4,742,766) (349,065)
--------- -------
INVESTING ACTIVITIES:
Purchase of fixed assets (1,336,850) (855,225)
----------- ---------
Net cash used in investing activities (1,336,850) ( 855,225)
--------- --------
FINANCING ACTIVITIES:
Proceeds from the exercise of options/warrants 0 158,750
Proceeds from issuance of common stock, net 2,205,000 0
Proceeds from short term debt 3,325,000 1,125,000
Repayment of short term debt (222,673) 0
Proceeds from long term debt 1,037,086 0
Repayment of long term debt (275,423) (344,646)
-------- ----------
Net cash provided from financing activities 6,068,990 939,104
------------ --------
EFFECT OF EXCHANGE RATE CHANGE ON CASH (243,109) (785,142)
--------- -------------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (253,735) (1,050,328)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 587,589 1,831,139
---------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 333,854 $ 780,811
========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $1,048,091 $245,833
Issuance of common stock debt costs $1,725,000
Issuance of warrants to lenders and consultants $1,798,000
The accompanying notes are an integral part of these condensed financial
statements.
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EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information of EPL Technologies, Inc. and Subsidiaries (the
"Company") included herein is unaudited; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair statement of results for the
interim period.
The financial information has been prepared in accordance with generally
accepted accounting principles for interim financial information, the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly it does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Moreover, the results
of operations for the six months and three months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the full year. At this
stage of the Company's development, month to month and quarter to quarter
anomalies in operating results are expected. This information must also be read
in connection with the Company's Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1999.
NOTE 2 - OPERATIONS AND FINANCING
EPL Technologies, Inc. develops, manufactures and markets complementary
proprietary technologies designed to maintain the quality and integrity of
fresh-cut produce. The Company's primary products are processing technologies
and packaging technologies and materials, together with a range of scientific
and technical services that the Company believes support and complement its
product offerings. The process by which the Company develops and sells its
systems solutions for certain kinds and varieties of fresh-cut produce is both
expensive and time-consuming. Although the Company believes it has improved its
sales efforts significantly, the Company's product development and sales process
continues to be lengthy and resource-intensive and could limit the Company's
growth. Additionally, limited awareness of the Company and its products in the
marketplace and the highly fragmented nature of the fresh-cut produce industry
may extend the Company's product development and sales process. The Company does
not believe that this process is likely to shorten significantly. Management
believes that success in this sales process with large processors is the primary
basis for developing sustainable growth in revenues, which will enable the
Company to achieve profitable operations in this area of the business, although
there can be no assurance such will be the case. The nature of the packaging
materials business is such that the sales process is shorter than that for
processing technologies, but there is still an approval process to be completed
with new customers prior to sale.
The Company's continued ability to operate is dependent upon its ability
to maintain adequate financing and to achieve levels of revenue necessary to
support the Company's cost structure, and the financial statements have been
prepared on that basis. Historically, the Company's revenues have not been
sufficient to fund the development of the Company's business, and thus it has
had to finance its operating losses externally principally through equity or
debt financing. Based on the losses in recent years and the accumulated deficit
and negative working capital as at December 31, 1999, the Company's independent
public auditors included a going concern uncertainty paragraph in their audit
report accompanying the Company's 1999 Consolidated Financial Statements.
To address the current financial situation, the Company has undergone a
number of operational improvements as well as made significant investments in
development and marketing activities related to its various processing
technology businesses and packaging businesses in 1999 and 1998, which the
Company's management believes will improve cash flows from operations. The
Company expects that the following, amongst others, should contribute to an
improvement in the financial performance of the Company in the year 2000 and
beyond, although there can be no assurance that such will in fact be the case :
(i) the restructuring of the corn business and the reduction in ongoing
overheads of that operation, (ii) an agreement with Reser's Fine Foods, Inc.
("Reser's") for Reser's to process and supply EPL Food with all of EPL Food's
fresh-cut potato requirements, (iii) the Company's completion subsequent to the
year end of the relocation of its potato processing equipment and production and
shipment of fresh-cut potato products commenced from Reser's Pasco, Washington
facility, (iv) further exploitation of the Company's processing technologies, as
evidenced by the exclusive licensing arrangement with Monterey Mushrooms for
mushrooms entered into subsequent to year-end, and (v) further exploitation of
the Company's perforating technologies, both in the U.S.
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and the U.K., as evidenced by the new orders gained in produce packaging in the
U.K. during the fourth quarter of 1999 and first half of 2000, together with the
various applications development projects currently in progress.
At June 30, 2000 the Company had available borrowing facilities remaining
in the U.S., U.K. and Spain of approximately $239,000. One country's operations
can obtain advances from another. The Company will be required to seek
additional and longer-term debt or equity financing to fund operating
requirements in 2000 and repay and/or refinance existing short term debt. The
Company is currently due to repay a credit facility granted by two investment
funds affiliated with the Company in September 2000 in the amount of $3,500,000.
In this regard, the Company is currently exploring a number of options to raise
additional capital. The cost of such additional financing arrangements may not
be acceptable to the Company and could result in significant dilution to the
Company's existing shareholders. No assurances can be given that the Company
will be successful in raising additional capital and failure to raise such
capital, if needed, could have a material adverse effect on the Company's
business, financial condition and results of operations
NOTE 3 - INVENTORIES
Inventories consisted of the following:
June 30, 2000 December 31, 1999
------------- -----------------
Raw Materials and Supplies $2,601,934 $ 2,320,560
Finished Goods 1,897,672 1,904,875
---------- ----------
Total Inventories $ 4,499,606 $ 4,225,435
========== =========
NOTE 4 - NOTES PAYABLE
In March 1999, Paul L. Devine, the Company's Chairman and Chief
Executive Officer, agreed to extend to the Company, on a short term basis, a
revolving credit facility in an amount up to $500,000, which was increased to
$1,000,000 in June 1999. At June 30, 2000, $210,000 of this credit facility was
outstanding, excluding accrued interest. The Company's obligations under this
facility are unsecured and amounts outstanding thereunder bear interest at a
rate of nine percent (9%) per annum. Mr Devine has agreed to defer repayment of
the remaining balance owed to him until such time as the Company is able to do
so. The Company has agreed to pay all reasonable out-of-pocket expenses incurred
by Mr. Devine in connection with advancing funds to the Company under this
facility.
In December 1999, two investment funds affiliated with an existing
affiliated investor of the Company (the Lenders), granted the Company a credit
facility of $3,500,000, which amount was fully drawn at June 30, 2000. The
facility carries interest at the rate of 10% per annum and is secured by a
pledge of certain assets of the Company. In connection with this facility, the
Company issued two million shares of Common Stock and issued a warrant to
acquire 350,000 shares of Common Stock at an exercise price of $0.50 per share.
The effective interest rate of this facility, after including all of the debt
issue costs including the value of the stock and warrants issued, is
approximately 154%. The facility was repayable in June 2000. However, in May
2000, the lenders agreed to defer the repayment date until September 2000, as
well as agree to other changes in the terms of the facility. In connection with
this restructuring, the Company issued an aggregate of one million shares of
Common Stock to the Lenders and 150,000 shares of Common Stock to a third party
which participated in the negotiation of the restructuring. Based on the market
value at the date of issuance, the shares had a value of $1,725,000. Such value
was recorded as deferred debt costs on the balance sheet under prepaid expenses
and other current assets and is being amortized into interest expense over the
life of the debt.
In February and March 2000, the Company, in a series of transactions,
borrowed from individual investors $3,275,000 for a period of 12 months. The
loans, which are unsecured, carry interest at the rate of 10% per annum. In
connection with these loans, the Company issued warrants to acquire a total of
1,637,500 shares of Common Stock at an exercise price of $1.00 per share. The
effective interest rate of this facility, after including the
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value of the warrants issued, is approximately 150%. The fair value of the
warrants was recorded as deferred fair value costs on the balance sheet under
prepaid expenses and other current assets and is being amortized into interest
expense over the life of the debt.
NOTE 5 - CONVERTIBLE PREFERRED STOCK
The Company's 10% Series A Convertible Preferred Stock (the "Series A
Stock"), which has been issued up to its authorized limit of 3,250,000 shares,
was issued at a price of $1.00 per share, with each share of Series A Stock
carrying the option to convert into common shares at a rate of $1.50 per share.
The Series A Stock carries equal voting rights to the common shares, based on
the underlying number of common shares after conversion. The Series A Stock
carries a dividend rate of 10% per annum, payable in cash and/or common shares
($1.50 per share) at the Company's option. The outstanding dividends at June 30,
2000 totaled $1,423,692. During the three months ended June 30, 2000, no
shareholder holding shares of Series A Stock elected to exercise the right of
conversion, leaving 60,000 shares of Series A Stock outstanding at June 30,
2000.
The Company also had a Series B and Series C Preferred Stock, all of
which were converted during 1997 and 1998 respectively. The Series B Stock
carried a dividend of 10% per annum, payable in cash and/or shares ($9.40 per
share) at the Company's option. The outstanding dividends on the Series B Stock
at June 30, 2000 totaled $270,092. The outstanding dividends on the Series C
Stock at June 30, 2000 totaled $49,239.
At the Annual Meeting of the Company held on July 21, 1997, the
shareholders of the Company approved an increase in the number of shares of
Board Designated Preferred Stock reserved for issuance from 2,000,000 to
4,000,000 shares. During 1997, the Company issued a further 12,500 shares of
Board Designated Preferred Stock - designated Series D Convertible Preferred
Stock - at an aggregate consideration, before associated costs and expenses, of
$12,500,000, to three new institutional investors (the "Series D Stock"). Such
issuance was made under Regulation D under the Securities Act of 1933, as
amended, in a transaction not involving a public offering. In connection with
the issuance of the Series D Stock, the Company issued warrants to purchase
201,614 shares of the Company's Common Stock at an exercise price of 130% of the
closing price on the issuance date (i.e. $20.16 per share). During 1999 all of
the remaining Series D Stock was converted.
NOTE 6 - ISSUANCE OF COMMON STOCK
A total of 2,400,000 shares of Common Stock were issued, in
transactions not involving a public offering under the Securities Act of 1933,
as amended, during the six months ended June 30, 2000. 1,250,000 shares were
issued to a number of institutional investors in a private placement, raising
gross proceeds of $2,250,000. In addition, in connection with the restructuring
of the credit facility with the Lenders detailed in Note 4 above, a further
1,000,000 shares of Common Stock were issued to the Lenders and 150,000 shares
of Common Stock to a third party which participated in the negotiation of the
restructuring. The value of these shares will be amortized as interest expense
over the remaining period of the facility.
NOTE 7 - ISSUANCE OF WARRANTS
During the six months ended June 30, 2000, warrants to acquire a total
of 2,777,500 shares of Common Stock were issued. Warrants to acquire a total of
1,637,500 shares of Common Stock were issued in connection with new loans
totalling $3,275,000, as detailed in Note 4 above. The value ascribed to these
warrants ($4,711,000) has been recorded as deferred debt costs and is being
amortized into interest expense over the 12 month life of the loans, commencing
in March 2000. The Company issued warrants to acquire 375,000 shares of Common
Stock to consultants in lieu of cash compensation for advisory services provided
in the second quarter and over the next nine months. The value of these warrants
($391,000) is being recorded as selling, general and administrative expenses in
the Company's statement of operations over the expected service period of 12
months. The Company also issued a further warrant to acquire 100,000 shares of
Common Stock to an employee of the Company. These were granted
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with an exercise price based on the market value at the date of the agreement.
Other warrants to acquire 65,000 shares of Common Stock were issued, with an
ascribed value of $98,900. Of this $13,800 was expensed to selling, general and
administrative expenses, and $85,100 was expensed to interest expense. Finally,
the Company also issued warrants to acquire 600,000 shares of Common Stock in
relation to the conversion of the Series D Stock, which conversion was completed
in December 1999, as provided in the Series D Stock conversion agreements. After
the expiration of each 30 day period, warrants to purchase a further 100,000
shares of Common Stock will be due to be issued, at an exercise price of $0.52
per share, until such time as the shares of Common Stock issued upon conversion
of the Series D Stock are registered. The value ascribed to these warrants
($1,025,100) was amortized immediately upon issuance to accretion, discount and
dividends in the first six months of 2000, $528,200 in the first quarter of 2000
and $496,900 in the second quarter of 2000.
NOTE 8 - NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the loss applicable
to common shareholders by the weighted average number of common shares and
common shares outstanding during the period. For the periods ended June 30, 2000
and 1999, the potential common shares have an antidilutive effect on the net
loss per common share for common shareholders. Accordingly, diluted net loss per
common share for common shareholders has not been presented.
NOTE 9 - COMPREHENSIVE LOSS
The total comprehensive loss for the three months ended June 30, 2000
and 1999 was $4,862,335 and $3,118,927 respectively, and $7,534,072 and
$6,606,409 for the six months ended June 30, 2000 and 1999 respectively. The
adjustment to arrive at the total comprehensive loss for each period consists of
foreign currency translation.
NOTE 10 - INDUSTRY SEGMENT INFORMATION
The Company is a leading developer and marketer of produce systems
solutions specifically designed to address the needs of the rapidly growing
market for fresh-cut produce. These products fall into two major
classifications: processing technologies and related activities and packaging
materials. Processing technologies are designed to inhibit the enzymatic
degradation that causes fruits and vegetables to begin to deteriorate
immediately after processing and are sold primarily in the United States. This
category also includes activities of the Company's fresh-cut corn and potato
products, as well as provision of scientific and technical services in the
United States. The Company's produce packaging business involves perforating,
converting and printing of flexible packaging, including technologies and
processes that are proprietary to the Company, which are marketed in North and
South America, the United Kingdom and Continental Europe.
The following table summarizes the Company's financial information by
industry segment.
Six months ended Three months ended
June 30, 2000 June 30, 1999 June 30, 2000June 30, 1999
Sales:
Processing technologies and related activities $ 2,199,105 $ 4,731,608 $1,608,489 $2,922,282
Packaging materials 11,789,020 11,317,571 6,327,513 5,369,367
----------- ----------- --------- ---------
Total sales $ 13,988,125 $16,049,179 $7,936,002 $8,291,649
=========== =========== ========= =========
Net (Loss) Income from Operations:
Processing technologies and related activities (4,394,160) (5,678,333) (2,220,742) (2,599,767)
Packaging materials (242,255) 43,536 68,345 (48,273)
----------- ----------- --------- ---------
Total net (loss)income from operations $(4,636,415) $(5,634,797) $(2,152,397) $(2,648,040)
=========== =========== ========= =========
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NOTE 11 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts collectively referred to as derivatives,
and for hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the consolidated balance sheet and measure
those statements at fair value. This statement, as amended, is effective for
fiscal years beginning after June 15, 2000. The Company has not yet determined
the impact SFAS No.133 will have on its consolidated financial position or
results of operations.
In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements ("SAB No. 101"). SAB No. 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC, and is required to be adopted in the fourth quarter of fiscal years
beginning after December 15, 1999. The Company has not yet determined the impact
SAB No. 101 will have on its consolidated financial position or results of
operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is a leading developer and marketer of produce systems
solutions specifically designed to address the needs of the rapidly growing
market for fresh-cut produce. In this regard, the Company develops, manufactures
and markets proprietary produce processing technologies, packaging technologies,
and scientific and technical services, which are specifically designed to
maintain the quality and integrity of fresh-cut produce. The foundation of the
Company's systems solutions is its proprietary produce processing aid
technology, which inhibits the natural enzymatic degradation of fruits and
vegetables after they have been processed. Fresh-cut fruits and vegetables that
are treated with the Company's proprietary processing aids better maintain their
natural characteristics such as color, texture, taste and smell. The use of the
Company's processing technologies allows for increased availability of certain
fresh-cut produce products, such as sliced apples, potatoes and corn. The
Company has concluded that the use of the Company's processing technologies, in
accordance with the Company's recommended protocols, is "generally recognized as
safe" ("GRAS") under FDA regulations. The Company also uses a variety of film
technologies to create packaging specifically designed to complement and enhance
the effectiveness of the Company's processing technologies by allowing fruits
and vegetables to "breathe" after they have been cut and packaged. The Company
markets these packaging products to produce growers and processors. In addition,
the Company's scientific and technical services, which include food safety and
microbiological testing, provide fresh produce processors with expertise in food
safety, post-harvest horticulture and processing techniques, and support the
cross-marketing efforts for the Company's other products. The Company believes
its processing technologies are safe and environmentally "friendly" and,
together with its packaging and scientific and technical services, add
significant value to the businesses of its customers. In addition to its systems
solutions for fresh-cut produce, the Company also markets flexible packaging, an
increasing amount of which is perforated, for a range of applications, including
bakery, industrial and healthcare amongst others.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Sales. Sales decreased from $16,049,000 in the six months ended June
30, 1999 to $13,988,000 in the six months ended June 30, 2000, a decrease of
$2,061 000 or 13%. Sales of processing technologies and related activities
decreased from $4,732,000 in the six months ended June 30, 1999 to $2,199,000 in
the six months ended June 30, 2000, a decrease of $2,533,000 or 54%. Sales of
U.S. packaging materials increased from $1,247,000 in the six months ended June
30, 1999 to $1,695,000 in the six months ended June 30, 2000, an increase of
$448,000 or 36%. Sales of U.K. packaging materials increased from $5,546,000 in
the six months ended June 30, 1999 to $6,868,000 in the six months ended June
30, 2000, an increase of $1,322,000 or 24%. Sales of European packaging
materials fell from $4,525,000 in the six months ended June 30, 1999 to
$3,226,000 in the six months ended June 30, 2000, a decrease of $1,299,000 or
29%.
The decrease in sales of processing technologies and related activities
was mainly due to the lower sales revenue from fresh-cut corn sold through the
Company's majority-owned affiliate, Newcorn, in the first six months of 2000,
and accounted for approximately 82% of the decline in this business segment
During 1999 and early 2000 the Company restructured the corn operations and
withdrew from the market. This withdrawl also involved not only a reduction in
overheads, thus reducing the breakeven level of sales, but also a complete
reappraisal of the sales and purchasing model. The Company has identified the
need for changes in the way it promotes its corn to major customers, to help
support the year round model, and has been implementing such changes
accordingly. In addition, the Company intends to focus its sales efforts on food
service, as well as to develop its traditional retail market. In relation to
this market extension, the Company is also extending the range of corn products
available, and plans to introduce further new products during 2000 onwards. The
benefits of this are already starting to be seen, as sales in the second quarter
of 2000 were higher than those in the first quarter of 2000.
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During the first quarter of 2000, the Company completed the relocation
of its potato processing equipment from Somis, California to Pasco, Washington.
The production and shipment of fresh-cut potato products commenced in March from
the Pasco, Washington facility of Reser's. During this relocation period the
Company withdrew a number of products from the market and thus there was a fall
in revenue while the processing line was relocated. The products are now back in
production. This relocation followed the signing in October 1999 of a strategic
five-year manufacturing and co-pack agreement with Reser's, under which Reser's
will process and supply EPL Food with all of EPL Food's fresh-cut potato product
requirements. As stated earlier, this relocation caused some disruption to
shipments and also caused the Company to restrict its sales and marketing
activities until such time as the relocation was completed. The volumes shipped
in the second quarter of 2000 rose over those achieved in the first quarter of
2000.
In addition to the above mentioned copack agreement, Reser's will
process and supply EPL Food with a new range of blanched (partially cooked)
potato products to be sold by EPL Food under the Fresh Alternatives (TM) brand.
The Fresh Alternatives (TM) brand has been made available to EPL Food by the
Sholl Group II, Inc., the exclusive licensee of The Pillsbury Company's Green
Giant (R) Fresh brand name. The Company has already commenced sales of these
blanched potato products, although such sales did not have a material impact on
sales revenue in the first half of 2000. In addition, the Company and Reser's
agreed to enter into a related five-year non-exclusive license agreement for the
Company's proprietary processing technology for potatoes. The Company currently
believes these arrangements for both fresh and blanched potato products will
have a material positive impact on the sales revenue of EPL Food in the balance
of 2000 and beyond, although there can be no assurance such will be the case.
During the first quarter of 2000, the Company announced an exclusive
licensing arrangement with Monterey Mushrooms for its Mushroom Fresh (R)
processing technology, and indeed generated its first revenue during the second
quarter of 2000. Although currently not material in group terms, the Company
believes that these arrangements will have a material contribution to processing
technology revenue in 2000 and beyond, although there can be no assurance that
this will in fact be the case. In addition, product testing continues on other
vegetables, and in some cases has been expanded or accelerated, and significant
costs have been incurred to date that are yet to yield material revenues. The
Company is also following up on potential opportunities for processing
technologies and scientific and technical services in Europe.
The 36% increase in U.S. packaging material sales was principally
attributable to increasing sales of perforated products, as well as timing
differences in shipments to large customers compared to the same period of 1999.
The Company continues to be engaged in discussions with a number of potential
customers for new product applications and markets, especially in relation to
the Company's proprietary perforating capabilities. These include applications
in the consumer goods, produce, horticultural, bakery and pharmaceutical
industries, amongst others. Some initial orders have been received during the
first half of 2000. Should further such orders be forthcoming, the Company
expects that such new orders would make a material contribution to sales revenue
in the balance of 2000 and onwards. There can be no assurance, however, that the
Company will obtain these orders. As part of the Company's desire to better
exploit its perforation technologies in the U.S., the Company and ANC have
agreed to unwind their joint venture and are discussing various alternative
relationships going forward. In May 2000 the Company signed a two year
manufacturing and supply agreement with Procter & Gamble to provide a key
component for a new consumer product. This component, to be manufactured at a
U.S. facility of the Company's U.S. packaging business, involves the use of
proprietary technology. The product and its expected volume have not been
identified for competitive reasons. Shipments of the component to Procter &
Gamble are expected to commence during the year 2000. The U.S. packaging
facility is being expanded to better manage the increased volume and production
demands of this new agreement.
The 24% increase in U.K. packaging material sales was principally
attributable to an increase in the sales of packaging to the produce industry.
This increase is expected to become more noticeable as the year progresses and
the volume of produce packaging increases, and compares with the first quarter
increase of 4.4%. The Company is now the main supplier of produce packaging to
processors supplying most of the main food retailers in the U.K., and this
market segment now represents the largest single segment of the U.K. business.
The Company believes that its
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efforts to change product mix represent a more stable foundation for sustainable
and more profitable growth, although there can be no assurance that the Company
will be successful in these efforts. The year 2000 is expected to see a full
year's benefit of the increased orders, which is expected to generate a material
increase in revenue during 2000 and beyond, although there can be no assurance
that such additional revenue will be obtained. In addition, the Company's
proprietary micro-perforating technology has enabled the Company to win new
orders in the area of cooked meat pastry products and the Company believes it is
the market leader in this industry segment. New orders continue to be gained in
the area of "breathable" packaging and the Company has recently increased its
production capacity in this area to handle the forecast volume increase. During
the first quarter of 2000, the U.K. operation installed an 8 color press to
further enhance its tactical abilities. Other applications are currently under
development, which, if successful, could have a material impact on sales
revenues in 2000, although there can be no assurance that this development will
result in new orders.
The decline in sales of European packaging materials was due mainly to
(i) an adverse movement in exchange rates when converting sales into US dollars,
which moved approximately 13% in the first half of 2000 as compared with the
first half of 1999, and (ii) a delay and subsequent reduction in the citrus
harvest for 1999/2000, as compared with the 1998/1999 period, While adverse
currency conversion rates are expected at least in the short term to affect
Spanish sales as reported in US dollars as compared to the year ago period, the
Company expects sales volumes to increase from the first half 2000 levels. The
Company, through its Spanish subsidiary Fabbri Artes Graficas Valencia, SA,
("Fabbri"), is targeting further expansion not only in Spain but in other
European countries. In addition, Fabbri is reducing its dependency on the citrus
crop by increasing its sales of packaging materials used in fresh produce and
other areas. Fabbri is also seeking to expand its limited revenue derived from
South American countries through existing and new contacts. Furthermore, Fabbri
is working increasingly closely with the U.K. business not only to leverage the
scientific and technical knowledge base, but to be able to offer customers a
pan-European service offering. The increased technical base is reflected in the
launch of the Company's Respire(R) brand of "breathable" packaging for fresh
produce into Europe, from which Fabbri has already begun to gain new business,
although it did not have a material impact on sales revenue in the first quarter
of 2000.
Gross Profit. Gross profit increased from $422,000 in the six months
ended June 30, 1999 to $1,395,000 in the six months ended June 30, 2000, an
increase of $974,000 (231%) or, as a percentage of sales, from 2.6% to 10%. This
increase reflected the considerably reduced losses in the corn operations,
following the restructuring that occurred at the end of 1999. Further benefits
from this are expected to be seen as the year progresses and the volume of corn
processed increases. In addition, there was an improvement in the results of the
potato operations, following the completion at the end of the first quarter of
the relocation of the potato processing facility to Reser's Pasco, Washington
facility. Again, further benefits of this will be seen as the year rolls out and
volumes of potatoes processed increases. The gross margin in the US packaging
business also improved, as a result of improved volumes and a more beneficial
sales mix. There was also a further gain in the UK packaging margin, also
reflecting significant volume increases, resulting in improved economies of
scale, as well as a continuing improvement in product mix. These gains were
offset by a fall in the gross profit in European packaging. This was impacted by
the lower sales volumes, which impacted margins disproportionately given the
level of fixed costs, as well as the adverse conversion rates mentioned above.
Gross profit from period-to-period may also be impacted by pricing
pressures on Newcorn's corn business primarily attributable to the extent to
which bulk corn is available in regions where Newcorn's fresh-cut corn products
are sold, which is largely a function of the timing of and variations in
regional harvest yields. The Company has restructured the way it buys bulk corn
so as to minimize any fixed volumes it is required to take. This provides the
Company with options as to how much it is committed to take, with additional
amounts available on the spot market.
In addition, the Company continues to accelerate the development of
certain applications for its proprietary micro-perforating technology. These
costs are primarily expensed as incurred. Although the benefits of this expense
have started to contribute to incremental sales revenue and gross profits, it is
expected to increase significantly in the U.K. and other areas as the Company
moves through 2000 and beyond, although there can be no assurance that such will
be the case.
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14
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $3,856,000 in the six months ended June
30, 1999 to $4,287,000 in the six months ended June 30, 2000, an increase of
$431,000 or 11%. This increase was due primarily to (i) 143,000 of non-cash
charges relating to the amortization of the fair value of warrants issued, (ii)
the continuing and accelerating development of the Company's sales and marketing
efforts, particularly in the area of packaging and perforation development, and
(iii) other one time costs, including additional professional fees. The
Company's sales and marketing efforts with respect to processing technologies
and related activities are primarily focused on fresh-cut potatoes, apples and
mushrooms, together with packaging and perforation applications. It also
reflects the change in the nature of development costs incurred, as some
products move from the product development stage to market development. This is
evidenced by a greater fall in research and development costs as outlined below.
Research and Development Costs. Research and development costs
decreased from $1,130,000 in the six months ended June 30, 1999 to $676,000 in
the six months ended June 30, 2000, a decrease of $454,000 or 40%. The reduction
reflects the onging reallocation of resources from development to application
and execution. The Company continues to expense all development costs, whether
product, market or sales related, as incurred, and thus costs are incurred prior
to the benefits, if any, that may be expected to be realized from such expense.
The Company expects that research and development costs will continue at no less
than recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization decreased
marginally from $1,070,000 in the six months ended June 30, 1999 to $1,068,000
in the six months ended June 30, 2000, a decrease of $2,000 or 0.2%.
Loss from Operations. Loss from operations decreased from $5,635,000 in
the six months ended June 30, 1999 to $4,636,000 in the six months ended June
30, 2000, an improvement of $999,000 or 18%. The decrease in the loss was
primarily due to the significant improvement in gross margins, despite the lower
sales revenue. In addition, there was a net fall in total operating expenses,
excluding depreciation and amortization, and excluding the amortization of the
fair value of the warrants mentioned above, of approximately $143,000. Further
improvements are expected in this regard, and management believes that the
infrastructure costs can be further leveraged as sales continue to develop.
Management believes that considerable commercial progress continues to be made
and that the foundation for future sustainable growth has been considerably
strengthened. However, because all development costs are expensed as they are
incurred, together with the fact that such expense is necessarily incurred
before the benefits of increased sales and improved margins can be seen, the
Company's financial results do not yet reflect this activity.
Interest Expense The increase in interest charges from the charge of
$173,000 in the six months to June 30, 1999 principally reflects the non-cash
cost amortization of deferred finance costs brought forward from 1999, together
with additional finance charges arising from the additional shares of Common
Stock granted upon the restructuring of the facility with the Lenders as
described in Note 4 above. In addition, there is a fair value provision for
warrants granted in the first quarter of 2000 in connection with the first
quarter financing described in Note 4 to the Company's financial statements. Of
the total charge in the six month period of $4,231,000, $3,657,000 (86%)
represents the aforementioned non-cash costs. In addition, the level of debt in
the first six months of 2000 was considerably higher than the same period in
1999.
Gain on sale of fixed assets. As noted in the Company's 1999
consolidated financial statements, the Company completed a sale and leaseback of
the land and building at its Spanish trading subsidiary, Fabbri, with an
unrelated third party, in July 1999. The Company raised gross proceeds, before
costs and taxes, of PTS800,000,000 (approximately $5,100,000). The Company
expects to realize a total pretax profit of approximately $2,303,000 on this
transaction. For financial reporting purposes, $187,000 of this total profit was
recognized in the first half of 2000. The remaining balance will be recognized
over the eight year life of the associated leaseback. The tax on this profit can
be deferred for up to 10 years under Spanish tax rules.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock increased from $246,000 for the six
months ended June 30, 1999 to $1,048,000 in the six months ended June 30, 2000,
an increase of $802,000, or 326%. The increase was due to an adjustment
reflecting the fair value of warrants issued
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15
during the first half of 2000, which totaled $1,025,000 in the period. Most of
the expense in 1999 related to an appreciation provision on the Series D Stock,
all of which Stock was converted by December 31, 1999.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Sales. Sales decreased from $8,292,000 in the three months ended June
30, 1999 to $7,936,000 in the three months ended June 30, 2000, a decrease of
$356,000 or 4%. Sales of processing technologies and related activities in the
US decreased from $2,922,000 in the three months ended June 30, 1999 to
$1,608,000 in the three months ended June 30, 2000, a decrease of $1,314,000 or
45%. Sales of U.S. packaging materials increased from $567,000 in the three
months ended June 30, 1999 to $754,000 in the three months ended June 30, 2000,
an increase of $187,000 or 33%. Sales of U.K. packaging materials increased from
$2,830,000 in the three months ended June 30, 1999 to $4,033,000 in the three
months ended June 30, 2000, an increase of $1,203,000 or 42%. Sales of European
packaging materials decreased from $1,973,000 in the three months ended June 30,
1999 to $1,541,000 in the three months ended June 30, 2000, a decrease of
$432,000 or 22%.
The decrease in sales of processing technologies and related activities
was mainly due to the lower sales revenue from fresh-cut corn sold through,
Newcorn in the quarter, and accounted for approximately 82% of the decline in
this business segment As mentioned above, the Company restructured the corn
operations and withdrew from the market during the end of 1999 and into 2000.
The restructuring of the business and Newcorn's business model is already
beginning to show some impact, as sales in the second quarter of 2000 were
significantly higher than those in the first quarter of 2000, although still
significantly lower than the same period in 1999, as sales are rebuilt.
As stated earlier, the relocation of the potato processing equipment to
Reser's Pasco, Washington facility caused some disruption to shipments and also
caused the Company to restrict its sales and marketing activities until such
time as the relocation was completed. Subsequent to the end of the first
quarter, the company recommenced shipments, and as a result the volumes shipped
in the second quarter rose over those achieved in the first quarter.
Following the announcement of an exclusive licensing arrangement with
Monterey Mushrooms for its Mushroom Fresh (R) processing technology in the first
quarter of 2000, the Company started shipments during the second quarter. The
Company currently believes that these arrangements will have a material
contribution to processing technology revenue in 2000 and beyond, although there
can be no assurance that this will in fact be the case. In addition, product
testing continues on other vegetables, and in some cases has been expanded or
accelerated, and significant costs have been incurred to date that are yet to
yield material revenues. The Company is also following up on potential
opportunities for processing technologies and scientific and technical services
in Europe.
The 33% increase in U.S. packaging material sales over the 1999 second
quarter was principally attributable to increasing sales of perforated products,
as well as timing differences in shipments to large customers compared to the
same period of 1999. The Company continues to be engaged in discussions with a
number of potential customers for new product applications and markets,
especially in relation to the Company's proprietary perforating capabilities.
These include applications in the consumer goods, produce, horticultural, bakery
and pharmaceutical industries, amongst others. Some initial orders have been
received during the second quarter of 2000. Should further such orders be
forthcoming, the Company expects that such new business would make a material
contribution to sales revenue in the balance of 2000 and onwards. There can be
no assurance, however, that the Company will in fact obtain these new orders. As
part of the Company's desire to better exploit its perforation technologies in
the U.S., the Company and ANC have agreed to unwind their joint venture and are
discussing various alternative relationships going forward. In May 2000 the
Company signed a two year manufacturing and supply agreement with Procter &
Gamble to provide a key component for a new consumer product. This component, to
be manufactured at a U.S.facility of the Company's U.S. packaging business,
involves the use of proprietary technology. The product and its expected volume
have not been identified for competitive reasons. Shipments of the component to
Procter & Gamble are expected to commence during the year 2000. The U.S.
packaging facility is being expanded to better manage the increased volume and
production demands of this new agreement.
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16
The 42% increase in U.K. packaging material sales as compared to the
1999 second quarter was principally attributable to an increase in the sales of
packaging to the produce industry, as well as packaging for cooked meat pastry
products. The Company is now the main supplier of produce packaging to
processors supplying most of the main food retailers in the U.K., and this
market segment now represents the largest single segment of the U.K. business.
The Company believes that its efforts to change product mix represent a more
stable foundation for sustainable and more profitable growth, although there can
be no assurance that the Company will be successful in these efforts. The year
2000 is expected to see a full year benefit of the increased new orders , which
is expected to generate a material increase in revenue during 2000 and beyond,
although there can be no assurance that such additional revenue will be
obtained. The 8 color press installed in the first quarter has enabled the
Company to further enhance its tactical abilities. Other applications are
currently under development, which, if successful, could have a material impact
on sales revenues in 2000, although there can be no assurance that this
development will result in new orders.
The decline in sales of European packaging materials was due mainly to
(i) an adverse movement in exchange rates when converting sales into U.S.
dollars, which moved approximately 12% in the second quarter of 2000 as compared
with the second quarter of 1999, and (ii) a delay and subsequent reduction in
the citrus harvest for 1999/2000, as compared with the 1998/1999 period, While
adverse currency conversion rates are expected at least in the short term to
affect Spanish sales as reported in U.S. dollars as compared to the year ago
period, the Company expects sales volumes to increase from the first half 2000
levels. The Company is targeting further expansion not only in Spain but in
other European countries. In addition, Fabbri is reducing its dependency on the
citrus crop by increasing its sales of packaging materials used in fresh produce
and other areas. Fabbri is also seeking to expand its limited revenue derived
from South American countries through existing and new contacts. Furthermore,
Fabbri is working increasingly closely with the U.K. business not only to
leverage the scientific and technical knowledge base, but to be able to offer
customers a pan-European service offering.
Gross Profit. Gross profit increased from $378,000 in the three months
ended June 30, 1999 to $863,000 in the three months ended June 30, 2000, an
increase of $485,000 (128%) or, as a percentage of sales, from 4.6% to 10.9%.
This increase reflected the considerably reduced losses in the corn operations,
following the restructuring that occurred at the end of 1999. In addition, there
was an improvement in the results of the potato operations, following the
completion during the 2000 first quarter of the relocation of the potato
processing facility to Reser's Pasco, Washington facility. The Company believes
further benefits of this will be seen as the year rolls out and volumes of
potatoes processed increases. The gross margin in the US packaging business also
improved, as a result of improved volumes and a more beneficial sales mix. There
was also a further gain in the UK packaging margin, also reflecting significant
volume increases, resulting in improved economies of scale, as well as a
continuing improvement in product mix. These gains were offset by a fall in the
gross profit in European packaging. This was impacted by the lower sales
volumes, which impacted margins disproportionately given the level of fixed
costs, as well as the adverse conversion rates mentioned above.
Gross profit from period-to-period may also be impacted by pricing
pressures on Newcorn's corn business primarily attributable to the extent to
which bulk corn is available in regions where Newcorn's fresh-cut corn products
are sold, which is largely a function of the timing of and variations in
regional harvest yields. The Company has restructured the way it buys bulk corn
so as to minimize any fixed volumes it is required to take. This provides the
Company with options as to how much it is committed to take, with additional
amounts available on the spot market.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1,933,000 in the three months ended June
30, 1999 to $2,117,000 in the three months ended June 30, 2000, an increase of
$184,000 or 9.5%. This increase was due primarily to (i) non-cash charges of
$98,000 relating to the amortization of the fair value of warrants issued in the
first and second quarters, (i) the continuing and accelerating development of
the Company's sales and marketing efforts, particularly in the area of packaging
and perforation development, and (iii) other one time costs, including
additional professional fees. The Company's sales and marketing efforts with
respect to processing technologies and related activities are primarily focused
on fresh-cut potatoes, apples and mushrooms, together with packaging and
perforation applications. It also reflects the change in the nature of
development costs incurred, as some products move from the prodcut development
stage to market development. This is evidenced by the $195,000 decrease in
research and development costs outlined below.
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Research and Development Costs. Research and development costs
decreased from $548,000 in the three months ended June 30, 1999, to $353,000 in
the three months ended June 30, 2000, a decrease of $195,000 or 36%. The
reduction reflects the onging reallocation of resources from development to
application and execution. The Company continues to expense all development
costs, whether product, market or sales related as incurred and thus costs are
incurred prior to the benefits, if any, that may be expected to be realized from
such expense. The Company expects that research and development costs will
continue at no less than recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization increased
marginally from $545,000 in the three months ended June 30, 1999, to $546,000 in
the three months ended June 30, 2000, an increase of $1,000 or 0.2%.
Loss from Operations. Loss from operations decreased from $2,648,000 in
the three months ended June 30, 1999 to $2,152,000 in the three months ended
June 30, 2000, a decrease of $496,000 or 19%. The decrease in the loss was
primarily due to the significant improvement in gross margins, despite the
slightly lower sales revenue. In addition, there was a net fall in total
operating expenses, excluding depreciation and amortization, and excluding the
amortization of the fair value of the warrants mentioned above, of approximately
$98,000. Further improvements are expected in this regard, and management
believes that the infrastructure costs can be further leveraged as sales
continue to develop. Management believes that considerable commercial progress
continues to be made and that the foundation for future sustainable growth has
been considerably strengthened. However, because all development costs are
expensed as they are incurred, together with the fact that such expense is
necessarily incurred before the benefits of increased sales and improved margins
can be seen, the Company's financial results do not yet reflect this activity.
Interest Expense The increase in interest charges from the $123,000
charge in the 1999 second quarter principally reflects the non-cash cost
amortization of deferred finance costs brought forward from 1999, together with
additional finance charges arising from the additional shares of Common Stock
granted upon the restructuring of the facility as mentioned above. In addition,
there is a fair value provision for warrants granted in the first quarter of
2000 in connection with the first quarter financing described in Note 4 to the
Company's financial statements. Of the total charge in the quarter of
$2,887,000, $2,366,000 (82%) represents the aforementioned non-cash costs. In
addition, the level of debt in the first six months of 2000 was considerably
higher than the same period in 1999.
Gain on sale of fixed assets. As noted in the Company's 1999
consolidated financial statements, the Company completed a sale and leaseback of
the land and building at its Spanish trading subsidiary, Fabbri, with an
unrelated third party, in July 1999. The Company raised gross proceeds, before
costs and taxes, of PTS800,000,000 (approximately $5,100,000). The Company
expects to realize a total pretax profit of approximately $2,303,000 on this
transaction. For financial reporting purposes, $93,000 of this total profit was
recognized in the second quarter of 2000. The remaining balance will be
recognized over the eight year life of the associated leaseback. The tax on this
profit can be deferred for up to 10 years under Spanish tax rules.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock increased from $122,000 in the three
months ended June 30, 1999 to $508,000 in the three months ended June 30, 2000,
an increase of $386,000. The increase was due to an adjustment of $496,000
reflecting the fair value of warrants issued during the second quarter of 2000.
Most of the expense in 1999 related to an appreciation provision on the Series D
Stock, all of which Stock was converted by December 31, 1999.
YEAR 2000 COMPLIANCE
The term "year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and the
performance of date-sensitive calculations by computers and other equipment as
the year 2000 is approached and reached. During late 1998 and 1999, the Company
adopted a written plan (the "EPL Y2K Plan") which outlined the actions the
Company planned to take to identify and address year 2000 issues. The EPL Y2K
Plan required each of the Company's business units to prepare a compliance plan
(a
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"Unit Plan") which (i) summarized efforts taken to identify, prioritize and
address year 2000 issues facing such business unit, (ii) estimated the extent to
which these year 2000 issues have been addressed, and (iii) flagged foreseeable
problems.
The EPL Y2K Plan called for each Unit Plan to identify, prioritize and
address both "internal" year 2000 issues (those arising from such unit's
computer hardware and software, embedded chips and unit practices with respect
to date entry) and "external" year 2000 issues (those arising by virtue of
material relationships with customers and suppliers which have year 2000
issues). The Company received and reviewed Unit Plans from each of its business
units and completed its identification of year 2000 issues that might reasonably
have had a material impact on the Company's operations. The completed
development of its remediation plans for such material issues during the second
quarter of 1999 and performed most of the required remediation during the third
quarter of 1999. Early in the fourth quarter of 1999, the Company completed its
already substantially performed identification and prioritization of, and
communication with, critical suppliers, distributors and customers to determine
the extent to which the Company might have been vulnerable to external year 2000
issues. While no material risks were identified, the Company developed
contingency plans as noted below to address external parties' potential
shortcomings.
The total cost of the Company's year 2000 project, excluding the cost
of using internal resources, was approximately $100,000 and funded through
operating cashflows. Of this total cost, approximately $30,000 was attributable
to the purchase of new hardware and software and was capitalized in accordance
with the Company's current policies, with the remaining $70,000 was expensed as
incurred during 1999. Contingency plans to address possible business
interruptions resulting from internal or external Year 2000 factors were in
place by the end of November 1999. These contingency plans included stockpiling
raw materials, increasing inventory levels, securing alternate sources of
supply, scheduling non mission-critical activities during the first week of
2000, making contingency arrangements for funds transfer, establishing back-up
means of communication and other measures.
As a result of the Company's internal efforts and preparation, together
with that of our suppliers and customers, no business interruptions of any kind
resulted from Year 2000 causes. The operations will continue to be reviewed in
relation to the possibility of delayed effects that might arise.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $1,222,666 in cash and short term
investments, (including $381,355 of restricted cash - current and $507,457 of
restricted cash - non current) compared with $1,493,231 (including $394,516 of
restricted cash - current and $511,126 of restricted cash - non current) at
December 31, 1999, a decrease of $270,565. During the six months ended June 30,
2000, $4,759,596 was used in operating activities. In addition, $1,336,850 was
used in investing activities to purchase fixed assets. The increase in cash used
in operating activities of $4,410,531 in the six months ended June 30, 2000
compared to the same period in 1999 reflects the increased net loss, offset by
increased non-cash adjustments and an increase in working capital as suppliers'
outstanding balances were reduced (as opposed to 1999 when supplier accounts
were increased).
Total financing activities during the six months ended June 30, 2000
generated $6,068,990, compared with $939,104 generated in the same period in
1999. The generation in 2000 was primarily from the proceeds of short term debt
($3,325,000), the proceeds of long term debt ($1,037,000) and the net proceeds
from the issuance of common stock ($2,205,000), offset by repayments of short
and long term debt. In 1999 the generation was primarily from the proceeds of
short term debt, net of repayments of long term debt.
As of June 30, 2000, the Company had fully drawn $605,600 under an
existing line of credit with the Bank of Scotland, entered into by its
subsidiary EPL Technologies (Europe) Limited which bears interest of 2% over
bank base rate (6.0% as of June 30, 2000). The Company also had a short-term
line of credit with the Bank of Scotland for up to approximately $1,514,000
which also carried interest of 2% over bank base rate. During the period, the
Company agreed with the Bank of Scotland to convert the short term line of
credit into a similar facility based more closely on the level of outstanding
receivables, which will release more funds to the Company as the Company grows.
Under this new facility, the Company's new limit is approximately $2,271,000,
subject to the level of receivables, and carries interest of 1.75% over bank
base rate. At June 30, 2000, approximately $1,592,300 had been drawn under this
facility. The lines of credit are collateralized by the assets of EPL
Technologies (Europe)
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Limited and its subsidiaries. The debt agreements with the Bank of Scotland
contain certain covenants applicable to the results of operations of these
businesses which provide for maintenance of minimum asset levels and minimum
earnings before interest and tax to external interest ratios.
During 1999 the Company, through its Spanish subsidiary Fabbri,
finalized with BankInter an unsecured line of credit for PTS50,000,000 ($287,400
at $1.00:PTS 174). The remaining balance drawn under the facility was repaid
during the second quarter of 2000 and no amount was outstanding thereunder as at
June 30, 2000. The facility carries interest of 1.0% over BankInter base rate
(3.965% as of June 30, 2000). There are no covenants applicable to the facility.
During the final quarter of 1999, the Company, through its subsidiary,
EPL Flexible Packaging, Inc., was granted a short term credit facility of
$100,000 with Old Second National Bank of Aurora. This facility is secured upon
the inventory of EPL Flexible Packaging, Inc. and carries interest at a rate of
1.5% over the banks prime rate (9% as at June 30, 2000). There are no covenants
applicable to this facility. As at June 30, 2000, the entire $100,000 had been
drawn under this facility.
At the end of the third quarter of 1998, Newcorn entered into two
equipment financing loans with General Electric Capital Corporation ("GECC") and
Santa Barbara Bank & Trust ("SBBT") secured by specifically identified capital
assets. The GECC loan is for approximately $549,000 for a term of 48 months
bearing interest at 10.25% per annum. The SBBT loan is for approximately
$466,000 for a term of 48 months payable in equal monthly installments bearing
interest at 10.5% per annum. At June 30, 2000, approximately $369,000 and
$340,000 were outstanding under the GECC and SBBT loans, respectively.
In March 1999, Paul L. Devine, the Company's Chairman and Chief
Executive Officer, agreed to extend to the Company on a short term basis a
revolving credit facility in an amount of up to $500,000, which amount was
increased to $1,000,000 in June 1999. At June 30, 2000 $210,000 of the credit
facility was outstanding, excluding accrued interest. The Company's obligations
under this facility are unsecured, and amounts outstanding thereunder bear
interest at a rate of nine percent (9%) per annum. The Company's Chairman has
agreed to defer repayment of the remaining balance owed to him until the Company
is able to do so. The Company has agreed to pay all reasonable out-of-pocket
expenses incurred by Mr. Devine in connection with advancing funds to the
Company under this facility.
In December 1999 two investment funds affiliated with the Company
granted the Company a credit facility of $3,500,000, which amount was fully
drawn as at December 31, 1999 and June 30, 2000. The facility carries a stated
interest at the rate of 10% per annum and is secured by a pledge of certain
assets of the Company. In connection with this facility, the Company issued two
million shares of Common Stock and issued a warrant to acquire 350,000 shares of
Common Stock at an exercise price of $0.50 per share. In May 2000, the Lenders
agreed to defer the repayment date until September 2000, as well as agree to
other changes in the terms of the facility. In connection with this
restructuring, the Company issued an aggregate of one million shares of Common
Stock to the Lenders and 150,000 shares of Common Stock to a third party which
participated in the negotiation of the restructuring. Based on the market value
at the date of issuance, the shares had a value of $1,725,000. Such value was
recorded as deferred debt costs on the balance sheet under prepaid expenses and
other current assets and is being amortized in interest expense over the life of
the debt.
In February and March 2000, the Company, in a series of transactions,
borrowed from individual investors $3,275,000 for a period of 12 months. The
loans, which are unsecured, carry interest at the rate of 10% per annum. In
connection with these loans, the Company issued warrants to acquire a total of
1,637,500 shares of Common Stock at an exercise price of $1.00 per share.
At June 30, 2000, the Company had warrants outstanding and exercisable
to purchase 6,889,114 shares of common stock at a weighted average price of
$1.29 per share. In addition, at June 30, 2000, the Company had 2,073,125
options outstanding and exercisable to purchase shares of common stock at a
weighted average price of $7.77 per share. At June 30, 2000, there were no
material commitments for capital expenditures.
The Company's continued ability to operate is dependent upon its
ability to maintain adequate financing and to achieve levels of revenue
necessary to support the Company's cost structure, and the financial statements
have been prepared on that basis. Historically, the Company's revenues have not
been sufficient to fund the development of the Company's business, and thus it
has had to finance its operating losses externally principally through equity or
debt financing. This, together with the fact that the Company has incurred net
losses, exclusive of accretion, discount and dividends on preferred stock, of
$7,187,000, $7,781,000 and $14,416,000 in 1997, 1998 and 1999 respectively, had
an accumulated deficit of $50,270,000 and negative working capital as of
December 31, 1999. These factors caused the Company's independent public
auditors to include a going concern uncertainty paragraph in their audit
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report accompanying the Company's 1999 Consolidated Financial Statements.
To address the current financial situation, the Company has undergone a
number of operational improvements as well as made significant investments in
development and marketing activities related to its various processing
technology businesses and packaging businesses in 1999 and 1998, which the
Company's management believes will improve cash flows from operations. The
Company expects that the following, amongst others, should contribute to an
improvement in the financial performance of the Company in the year 2000 and
beyond, although there can be no assurance that such will in fact be the case :
(i) the restructuring of the corn portion of the processing aids business
segment and the reduction in ongoing overheads of that operation, (ii) the
agreement with Reser's for Reser's to process and supply EPL Food with all of
EPL Food's fresh-cut potato requirements, (iii) the Company's completion
subsequent to the year end of the relocation of its potato processing equipment
and production and shipment of fresh-cut potato products commenced from Reser's
Pacso, Washington facility, (iv) further exploitation of the Company's
processing technologies, as evidenced by the exclusive licensing arrangement
with Monterey Mushrooms for mushrooms entered into subsequent to year-end, and
(v) further exploitation of the Company's perforating technologies, as evidenced
by the new orders gained in produce packaging in the U.K. during the fourth
quarter of 1999 and first half of 2000, together with the various applications
development projects currently in progress.
At June 30, 2000, the Company had available borrowing facilities
remaining in the U.S., U.K. and Spain of approximately $239,000. The Company
will be required to seek additional and longer-term debt or equity financing to
fund operating requirements in 2000 and repay and/or refinance existing short
term debt. The Company is currently due to repay a credit facility granted by
two investment funds affiliated with the Company in September 2000 in the amount
of $3,500,000. In this regard, the Company is currently exploring a number of
options to raise additional capital. The cost of such additional financing
arrangements may not be acceptable to the Company and could result in
significant dilution to the Company's existing shareholders. No assurances can
be given that the Company will be successful in raising additional capital and
failure to raise such capital, if needed, could have a material adverse effect
on the Company's business, financial condition and results of operations.
FORWARD LOOKING STATEMENTS
Statements in the foregoing discussion that are not statements of
historical fact and reflect the intent, belief or expectations of the Company
and its management regarding the anticipated impact of events, circumstances and
trends should be considered forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not guarantees of future performance, and actual results may vary
materially from those projected in the forward-looking statements. Meaningful
factors that might affect such results include, but are not limited to: a) the
Company's needs for capital, including capital for acquisitions, which needs
have been and are expected to continue to be substantial, and its potential
inability to obtain additional financing on satisfactory terms, b) the Company's
product development and sales process, which is lengthy and resource intensive,
c) the uncertainty of demand for, or the market acceptance of, the Company's
products and services, d) the Company's limited resources and experience in
marketing and selling its products and services, e) personnel resources and
production requirements and potential difficulties in cross-marketing and
managing multiple product lines, f) the Company's potential inability to
identify and acquire acceptable acquisition targets, to the extent necessary to
fulfill its expansion plans, and its potential inability to successfully
integrate any such acquisitions into its operations, g) potential product
obsolescence and short product life cycles, h) potential competition,
particularly in the market for produce packaging, from companies with greater
financial, management and other resources, i) the unpredictability and
volatility of the market for agricultural products, j) changes in U.S. and
foreign regulation, k) difficulty with research and development and sales and
marketing activities regarding new and existing products, including extension of
necessary time periods or increase in expense for product introduction and
market penetration, l) potential difficulties in obtaining or protecting
intellectual property rights or the infringement of proprietary or other rights
of the Company by third parties, m) raw material availability and pricing, n)
loss of services of key employees of the Company and o) delays in the Company's
ability to bring into production Newcorn's new processing facilities, as well as
other information contained in the Company's other filings with the Securities
and Exchange Commission.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 11.0 - Computation of Loss per share
b) Reports on Form 8-K
On April 20, 2000 the Company issued a report on Form 8-K in
connection with the inadvertent filing of its Annual Report on
Form 10K.
ITEM 7A. QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses its unsecured and secured lines of credit,
equipment financing loans, notes payable and capital leases to finance a
significant portion of its operations. These on-balance sheet financial
instruments, to the extent they provide for variable rates of interest, expose
the Company to interest rate risk resulting from changes in the related banks'
base rates. The majority of the Company's indebtedness, which is denominated in
US dollars, is currently at fixed rates of interest, and thus the Company
believes it does not have any material interest rate risk.
The Company derives its revenues from its subsidiaries which
account in US dollars, British pounds and Spanish pesetas. In 1999 the revenue
generated from these sources amounted to $10,205,000 (33.6%), $11,486,000 (38%)
and $8,616,000 (28.4%) respectively. The total long-lived assets denominated in
these currencies as at December 31, 1999 amounted to $7,027,000 (54.5%),
$5,087,000 (39.3%) and $806,000 (6.2%) respectively. The exchange rate between
the US dollar and the British pound was very stable during 1999, fluctuating by
approximately 4%, and has also been very stable over the last few years. The
Company does not believe that this is a significant exchange rate risk for the
Company. The exchange rate between the US dollar and the Spanish peseta has
fallen by an average of approximately 13% in the six months ended June 30, 2000
as compared with the same period in 1999, and by approximately 12% in the three
months ended June 30, 2000 as compared with the same period in 1999.
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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.
EPL TECHNOLOGIES, INC.
Date: August 14, 2000 /s/ Paul L. Devine
---------------------------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: August 14, 2000 /s/ Timothy B. Owen
---------------------------------------
(Principal Financial and Accounting Officer)