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 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: 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.
33,678,951 shares of $0.001 par value common stock
outstanding as of October 31, 2000.
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EPL TECHNOLOGIES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 18
SIGNATURES. 19
3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
*
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 160,315 $ 587,589
Restricted cash-current 354,207 394,516
Accounts receivable, net 4,475,554 5,318,724
Inventories 4,196,673 4,225,435
Prepaid expenses and other current assets 3,296,894 2,552,115
------------ ------------
Total Current Assets 12,483,643 13,078,379
------------ ------------
PROPERTY AND EQUIPMENT, Net 8,891,849 8,862,422
OTHER ASSETS
Patent, net 725,530 783,535
Goodwill 2,176,573 2,493,793
Other intangibles, net 112,877 145,448
Restricted cash-non current 514,503 511,126
Other noncurrent assets 68,615 124,000
------------ ------------
Total Other Assets 3,598,098 4,057,902
------------ ------------
TOTAL ASSETS $ 24,973,590 $ 25,998,703
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,153,215 $ 9,645,801
Accrued expenses 2,311,813 1,615,006
Other liabilities 1,442,329 1,704,707
Deferred gain on sale-leaseback, current portion 359,985 359,985
Short term revolving credit facilities with related parties 3,660,060 3,877,000
Current portion of long-term debt 5,666,811 1,918,572
------------ ------------
Total Current Liabilities 21,594,213 19,121,071
LONG TERM DEBT 1,706,107 1,340,527
DEFFERED GAIN ON SALE-LEASEBACK, NONCURRENT PORTION 1,370,749 1,670,700
DEFERRED INCOME TAXES 268,291 191,196
------------ ------------
Total Liabilities 24,939,360 22,323,494
------------ ------------
SHAREHOLDERS' EQUITY
Convertible Series A Preferred Stock 10,000 60,000
Common Stock 33,890 30,776
Additional paid-in capital 66,839,698 54,916,708
Accumulated deficit (65,440,847) (50,270,041)
Treasury Stock, at cost (138,160) (138,160)
Foreign currency translation adjustment (1,270,351) (924,074)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 34,230 3,675,209
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 24,973,590 $ 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)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Sales $ 20,939,820 $ 22,697,053 $ 6,951,695 $ 6,647,874
Cost of sales 18,778,760 22,125,642 6,185,913 6,498,113
------------ ------------ ------------ ------------
Gross profit 2,161,060 571,411 765,782 149,761
Selling, general and administrative expenses 6,351,824 5,766,072 2,064,740 1,909,994
Research and development costs 1,009,332 1,541,469 332,908 411,527
Depreciation and amortization 1,590,951 1,599,968 522,766 529,541
------------ ------------ ------------ ------------
Net loss from operations (6,791,047) (8,336,098) (2,154,632) (2,701,301)
Interest expense, net 7,253,380 368,204 3,022,721 195,638
Gain on sale of fixed assets (273,899) (541,822) (86,819) (541,822)
Net loss (income) from unconsolidated affiliates 12,510 (1,394)
------------ ------------ ------------ ------------
Loss before income tax (benefit) expense $(13,770,528) $ (8,174,990) $ (5,090,534) $ (2,353,723)
Income tax (benefit) expense 84,186 66,551 28,062 66,551
------------ ------------ ------------ ------------
Net Loss $(13,854,714) $ (8,241,541) $ (5,118,596) $ (2,420,274)
Deduct:
Accretion, discount and dividends on 1,319,658 353,107 271,567 107,274
------------ ------------ ------------ ------------
preferred stock
Net loss for common shareholders $(15,174,372) $ (8,594,648) $ (5,390,163) $ (2,527,548)
============ ============ ============ ============
Loss per common share $ (0.47) $ (0.70) $ (0.16) $ (0.19)
============ ============ ============ ============
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)
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------ ------------
OPERATING ACTIVITIES:
Net loss $(13,854,714) $ (8,241,541)
Adjustments to reconcile net loss to net cash
Used in operating activities: 8,074,870 1,599,968
Net loss from unconsolidated affiliates (12,510)
Changes in assets and liabilities 122,150 4,884,071
------------ ------------
Net cash (used) in operating activities (5,657,694) (1,770,012)
------------ ------------
INVESTING ACTIVITIES:
Purchase of fixed assets (1,355,543) (1,110,948)
Proceeds from sale of fixed assets 5,146,000
------------ ------------
Net cash (used in) provided from investing activities (1,355,543) 4,035,052
------------ ------------
FINANCING ACTIVITIES:
Proceeds from the exercise of options/warrants 0 158,750
Proceeds from issuance of common stock, net 3,035,360 0
Net proceeds from short term debt 3,606,717 526,900
Repayment of short term debt (272,673) 0
Proceeds from long term debt 1,037,086 0
Repayment of long term debt (474,251) (2,393,717)
------------ ------------
Net cash provided from (used in) financing activities 6,932,239 (1,708,067)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGE ON CASH (346,276) (1,061,694)
------------ ------------
(DECREASE) IN CASH AND CASH EQUIVALENTS (427,274) (504,721)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 587,589 1,831,139
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 160,315 $ 1,326,418
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $ 1,319,658 $ 353,107
Issuance of common stock debt costs $ 2,123,438
Issuance of warrants to lenders and consultants $ 3,091,100
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 nine months and three months ended September 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 packaging technologies and
materials and processing technologies, 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 products 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, together with
the exploitation of its perforating technologies, 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 2000, 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
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potato requirements, (iii) the Company's completion subsequent to December 31,
1999 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 earlier this year, and (v) further exploitation of the
Company's perforating technologies, both in the U.S. 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 nine months of 2000, together with the various
applications development projects currently in progress.
The Company will be required to seek additional and longer-term debt or
equity financing to fund operating requirements in the final quarter of 2000 and
beyond, and to repay and/or refinance existing short term debt. It had no
significant available existing borrowing facilities remaining at September 30,
2000. The Company is currently due to repay a credit facility granted by two
investment funds affiliated with the Company in December 2000 in the amount of
$3,500,000. This credit facility, together with the loans of $3,275,000 referred
to in Note 4 below, comprised the majority of the $9,100,000 working capital
deficit as of September 30, 2000. 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:
September 30, 2000 December 31, 1999
------------------ -----------------
Raw Materials and Supplies $ 2,438,541 $ 2,320,560
Finished Goods 1,758,132 1,904,875
------------------ -----------------
Total Inventories $ 4,196,673 $ 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 September 30, 2000, $160,000 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 September 30, 2000. The
facility carries interest at the rate of 12% 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 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 was amortized into interest expense over the life of
the initial debt agreement. This amortization was complete as at September 30,
2000. In August 2000, the lenders agreed to further restucture the facility,
including to defer repayment until December 2000. Under this agreement,
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further shares will be issuable in October and November 2000 (450,000 shares and
485,000 shares respectively), depending on the repayment date, the value of
which will be charged into interest expense at that time. As the loan was not
repaid as at September 1, 2000, 425,000 shares will be issuable and were charged
into interest expense in September 2000 ($398,438, based on the market value as
at September 1, 2000). 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 137%.
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 value
of the warrants issued, is approximately 150%. The fair value of the warrants
was recorded as deferred finance 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
September 30, 2000 totaled $1,424,268. During the nine months ended September
30, 2000, one shareholder holding 50,000 shares of Series A Stock elected to
exercise the right of conversion, leaving 10,000 shares of Series A Stock
outstanding at September 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 September 30, 2000 totaled $270,092. The outstanding dividends on the
Series C Stock at September 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 3,113,333 shares of Common Stock were issued, in
transactions not involving a public offering under the Securities Act of 1933,
as amended, during the nine months ended September 30, 2000. 1,750,000 shares
were issued to a number of institutional investors in a private placement,
raising gross proceeds of $2,875,000. 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 were amortized as
interest expense over the then remaining period of the facility. A further
33,333 shares of Common Stock were issued upon conversion of the 50,000 shares
of Series A Stock detailed in Note 5, 20,000 shares of Common Stock were issued
in settlement of liabilities totaling $30,000, and 160,000 shares (valued at
$160,000) were issued in relation to the raising of new equity.
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NOTE 7 - ISSUANCE OF WARRANTS
During the nine months ended September 30, 2000, warrants to acquire
a total of 3,362,500 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 450,000 shares
of Common Stock to consultants in lieu of cash compensation for advisory
services provided in the second and third quarters and over the next nine
months. The value of these warrants ($469,000) 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,
together with a warrant to acquire 100,000 shares of Common Stock to a former
director of the Company. These were granted 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. A total of 410,000 warrants were
issued in relation to the raising of new equity. The value ascribed to this
($363,850), has been recorded as a reduction to the related additional paid in
capital.
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. A
further 300,000 warrants will be issuable for the third quarter of 2000. The
value to be ascribed to these warrants ($261,000) was amortized to accretion,
discount and dividends in the third 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
September 30, 2000 and 1999, the potential common shares have an antidilutive
effect on the net loss per common share.
NOTE 9 - COMPREHENSIVE LOSS
The total comprehensive loss for the three months ended September
30, 2000 and 1999 was $5,221,764 and $2,696,826 respectively, and $14,200,991
and $9,303,235 for the nine months ended September 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 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
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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:
Nine months ended Three months ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Sales:
Processing technologies and related activities $ 3,581,938 $ 6,735,750 $ 1,382,833 $ 2,004,142
Packaging materials 17,357,882 15,961,303 5,568,862 4,643,732
------------ ------------ ------------ ------------
Total sales $ 20,939,820 $ 22,697,053 $ 6,951,695 $ 6,647,874
============ ============ ============ ============
Net (Loss) Income from Operations:
Processing technologies and related activities (6,557,631) (8,240,994) (2,153,525) (2,556,055)
Packaging materials (233,416) (95,104) (1,107) (145,246)
------------ ------------ ------------ ------------
Total net (loss) income from operations $ (6,791,047) $ (8,336,098) $ (2,154,632) $ (2,701,301)
============ ============ ============ ============
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,
will be adopted by the Company effective January 1, 2001. The Company has not
yet completed its assessment of the impact that SFAS No.133 will have on its
consolidated financial position or results of operations, but it does not
believe that such impact will be material.
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 does not believe that adoption of
SAB No. 101 has had a material impact on its consolidated financial position or
results of operations.
NOTE 12 - SUBSEQUENT EVENTS
At the end of October 2000, the Valencia region and surrounding area
in Spain was hit by catastrophic thunderstorms and flash floods, causing damage
estimated at $160,000,000. These severe weather conditions caused material
damage to the equipment, premises and inventory located at the Valencia plant of
the Company's Spanish subsidiary Fabbri Artes Graficas Valencia, SA, ("Fabbri").
Although the Company believes it has adequate insurance to cover the damage
suffered by Fabbri, which damage is still being assessed, it is likely that the
damage will adversely impact Fabbri's fourth quarter 2000 and first quarter 2001
sales revenues. The Company is unable to quantify the impact at this time, as
any estimate also depends on the extent of damage suffered by Fabbri's
customers and the citrus crop in the areas affected. Fabbri generated sales
revenue of $4,280,000 in the nine months ended September 30, 2000.
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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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Sales. Sales decreased from $22,697,000 in the nine months ended
September 30, 1999 to $20,940,000 in the nine months ended September 30, 2000, a
decrease of $1,757,000 or 7.7%. Sales of processing technologies and related
activities in the US and Europe decreased from $6,736,000 in the nine months
ended September 30, 1999 to $3,582,000 in the nine months ended September 30,
2000, a decrease of $3,154,000 or 47%. Sales of US packaging materials increased
significantly from $1,852,000 in the nine months ended September 30, 1999 to
$2,530,000 in the nine months ended September 30, 2000, an increase of $678,000
or 37%. Sales of UK packaging materials increased from $8,316,000 in the nine
months ended September 30, 1999 to $10,548,000 in the nine months ended
September 30, 2000, an increase of $2,232,000 or 27%. Sales of European
packaging materials decreased from $5,793,000 in the nine months ended September
30, 1999 to $4,280,000 in the nine months ended September 30, 2000, a decrease
of $1,513,000 or 26%.
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 nine
months of 2000, this 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 withdrawal 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, in order to help support the year round model, and has begun to
implement such changes accordingly. In addition, the Company intends to launch a
sales effort into food service, where appropriate, 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 2001 onwards. The Company intends to largely
withdraw from the corn market during November and December 2000 and January
2001. Given the previous experience of the business, the Company did not
previously contract for corn growing during this period in order to maintain a
favorable risk profile. Some sales may be made based upon spot market purchases.
It is anticipated that the business will be able
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12
to return to the market when appropriate during the first quarter of 2001.
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. These products
were put back into production during the second and third quarters. This
transition has taken longer than expected and the Company is only just getting
back into production after several distribution tests and studies. 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.
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 nine months 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 began generating revenue during the second and third
quarters of 2000. Although such revenue is currently not material, 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 37% 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.
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. The U.S.
packaging facility has been expanded to better manage the increased volume and
production demands of this new agreement. 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 to date. 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
The 27% increase in U.K. packaging material sales was principally
attributable to an increase in the sales of packaging to the produce industry.
This rate of increase has been growing, and compares with 24% for the first six
months and 4.4% for the first three months. Although unable to quantify the
amount, the Company believes the growth was adversely impacted by fuel strikes
in the U.K. in September, which disrupted sales of the Company's products and
those of its customers. 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's benefit of the increased orders,
which is expected to generate a material increase in revenue during 2001 and
beyond, although there can be no assurance that
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13
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 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 2001 and
beyond, although there can be no assurance that this development will result in
new orders.
The 26% 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 16% in the first nine months of 2000 as
compared with the first nine months 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 2000
levels achieved to date. The exact timing of this increase is uncertain, and as
noted in note 12 to the condensed consolidated financial statements, it is
likely that sales volume will be impacted adversely in the 2000 fourth quarter
and 2001 first quarter by the flood damage incurred at the Fabbri factory.
Through Fabbri, the Company is targeting further expansion not only in Spain but
in other European countries. In addition, Fabbri is planning to reduce 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 nine months of 2000.
Gross Profit. Gross profit increased from $571,000 in the nine
months ended September 30, 1999 to $2,161,000 in the nine months ended September
30, 2000, an increase of $1,590,000 or, as a percentage of sales, from 2.5% to
10.3%. 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 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 are expected in the final quarter and beyond as the
business development progresses 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, 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, caused by
the lower sales volumes.
Gross profit from period-to-period may also be impacted by pricing
pressures on Newcorn's corn operations primarily attributable to the extent to
which bulk corn is available in regions where Newcorn's fresh-cut corn products
are sold. At the end of 1999 and into 2000 the Company restructured the way it
buys bulk corn so as to minimize any fixed volumes it is required to take. This
provides the Company, where appropriate, with options to buy product as well as
additional amounts sometimes being 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $5,766,000 in the nine months ended
September 30, 1999 to $6,352,000 in the nine months ended September 30, 2000, an
increase of $586,000 or 10%. This increase was due primarily to (i) $260,000 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 costs,
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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 significant fall
in research and development costs as outlined below.
Research and Development Costs. Research and development costs
decreased from $1,541,000 in the nine months ended September 30, 1999 to
$1,009,000 in the nine months ended September 30, 2000, a decrease of $532,000
or 35.0%. The reduction reflects the ongoing 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 from $1,600,000 in the nine months ended September 30, 1999 to
$1,591,000 in the nine months ended September 30, 2000, a decrease of $9,000 or
0.6%.
Loss from Operations. Loss from operations decreased from $8,336,000
in the nine months ended September 30, 1999 to $6,791,000 in the nine months
ended September 30, 2000, a decrease of $1,545,000 or 18.5%. 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 the amortization of the
fair value of the warrants mentioned above, of over $200,000. 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 $368,000 in the nine months to September 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 nine month period of $7,253,000, $6,382,000 (88%)
represents the aforementioned non-cash costs. In addition, the level of debt in
the nine months ended September 30, 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. The Company raised gross proceeds, before costs and
taxes, of PTS 800,000,000 (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, $274,000 of this total profit has been
recognized in the nine months ended September 30, 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 $353,000 for the nine
months ended September 30, 1999 to $1,320,000 in the nine months ended September
30, 2000, an increase of $967,000 or 274%. This non-cash increase was due to an
adjustment reflecting the fair value of warrants issued during the first nine
months of 2000, which totaled $1,286,000 (97%) of the total charge in the
period. Most of the expense on 1999 related to an appreciation provision on the
Series D Stock, all of which Stock was converted by December 31, 1999.
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15
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Sales. Sales increased from $6,648,000 in the three months ended
September 30, 1999 to $6,952,000 in the three months ended September 30, 2000,
an increase of $304,000 or 4.6%. Sales of processing technologies and related
activities in the US decreased from $2,004,000 in the three months ended
September 30, 1999 to $1,383,000 in the three months ended September 30, 2000, a
decrease of $621,000 or 31%. Sales of US packaging materials increased from
$605,000 in the three months ended September 30, 1999 to $835,000 in the three
months ended September 30, 2000, an increase of $230,000 or 38%. Sales of UK
packaging materials increased from $2,770,000 in the three months ended
September 30, 1999 to $3,681,000 in the three months ended September 30, 2000,
an increase of $911,000 or 33%. Sales of European packaging materials decreased
from $1,268,000 in the three months ended September 30, 1999 to $1,053,000 in
the three months ended September 30, 2000, a decrease of $215,000 or 17%.
As with the change in sales revenue in the nine months ended
September 30, 2000, the decrease in sales of processing technologies and related
activities during the third quarter of 2000 was mainly due to the lower sales
revenue from fresh-cut corn sold through Newcorn in the quarter, and accounted
for approximately 83% of the decline in this business segment
Following the disruption of the relocation to Reser's earlier in the
year, sales activity recommenced during the period, although the benefits from
this will not be seen until the fourth quarter of 2000 and beyond.
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,
which continued into the third quarter. The Company currently believes that
these arrangements will have a material contribution to processing technology
revenue in 2001 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 38% increase in U.S. packaging material sales over the 1999
third 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 U.S. packaging facility has been expanded to
better manage the increased volume and production demands of this new agreement.
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. 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
The 33% increase in U.K. packaging material sales as compared to the
1999 third 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. Although unable to quantify the amount, the Company believes the
growth was adversely impacted by fuel strikes in the U.K. in September, which
disrupted sales of the Company's products and those of its customers. 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 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 17% decline in sales of European packaging materials, which was
smaller than in either of the first two quarters, was due mainly to an adverse
movement in exchange rates when converting sales into U.S. dollars, which moved
approximately 18% in the third quarter of 2000 as compared with the third
quarter of 1999. 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 continue
to increase from the first half 2000 levels. In the short term the exact timing
of this increase is uncertain, and as noted in note 12 to the condensed
consolidated financial statements, it is likely that Fabbri's sales revenue will
be adversely impacted in the 2000 fourth quarter and the 2001 first quarter by
the flood damage incurred at the Fabbri factory at the end of October. The
Company is targeting further expansion not only in Spain but in other European
countries. In addition,
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Fabbri is planning to reduce 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 $150,000 in the three
months ended September 30, 1999 to $766,000 in the three months ended September
30, 1999, an increase of $616,000 or, as a percentage of sales, from 2.3% to
11%. 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, 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, caused by the lower sales volumes.
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. At the end of 1999 and into 2000 the Company restructured the way it
buys bulk corn so as to minimize any fixed volumes it is required to take. This
provides the Company, where appropriate, with options to buy product as well as
additional amounts sometimes being available on the spot market.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1,910,000 in the three months ended
September 30, 1999 to $2,065,000 in the three months ended September 30, 2000,
an increase of $155,000 or 8.1%. This increase was due primarily to (i) non-cash
charges of $117,000 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 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 the $79,000 decrease in research and development costs outlined
below.
Research and Development Costs. Research and development costs
decreased from $412,000 in the three months ended September 30, 1999, to
$333,000 in the three months ended September 30, 2000, a decrease of $79,000 or
19%.The reduction reflects the ongoing 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 from $530,000 in the three months ended September 30, 1999, to
$523,000 in the three months ended September 30, 2000, a decrease of $7,000 or
1.3%.
Loss from Operations. Loss from operations decreased from $2,701,000
in the three months ended September 30, 1999 to $2,155,000 in the three months
ended September 30, 2000, a decrease of $546,000 or 20%. 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 the amortization of the
fair value of the warrants mentioned above, of approximately $41,000. 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
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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
$196,000 in the three months to September 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 three month period of $3,023,000, $2,726,000 (90%)
represents the aforementioned non-cash costs. In addition, the level of debt in
this period 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. The Company raised gross proceeds, before costs and
taxes, of PTS 800,000,000 (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, $87,000 of this total profit has been
recognized in the current period. 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 $107,000 in the three
months ended September 30, 1999 to $272,000 in the three months ended September
30, 2000, an increase of $165,000. The increase was due to an adjustment
reflecting the fair value of warrants issued in 2000, which totaled $261,000
(96%) of the total charge 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had $1,029,000 in cash and short
term investments, (including $354,200 of restricted cash - current and $514,500
of restricted cash - non current) compared with $1,493,200 (including $394,500
of restricted cash-current and $511,100 of restricted cash - non current) at
December 31, 1999, a decrease of $464,200. During the nine months ended
September 30, 2000, $5,657,700 was used in operating activities. In addition,
$1,355,500 was used in investing activities to purchase fixed assets. The
increase in cash used in operating activities of $3,887,700 in the nine months
ended September 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 nine months ended September
30, 2000 provided $6,932,200, compared with $1,708,000 used in the same period
in 1999. The generation in 2000 was primarily from the proceeds of short term
debt ($3,606,000), the proceeds of long term debt ($1,037,000) and the net
proceeds from the issuance of common stock ($3,035,000), offset by repayments of
short and long term debt. In 1999 the net cash used in financing activities
arose mainly from the repayment of long term debt.
As of September 30, 2000, the Company had fully drawn $591,400 under
its 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
(6.00% as of September 30, 2000). The Company also has a short-term line of
credit with the Bank of Scotland for up to approximately $2,271,000, subject to
the level of receivables, which bears interest of 1.75% over bank base rate. At
September 30, 2000, approximately $2,044,000 had been drawn under this facility.
The lines of credit are collateralized by the assets of EPL Technologies
(Europe) 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 PTS 50,000,000
($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.
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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 bank's prime rate (9.5% as of September 30, 2000).
There are no covenants applicable to this facility. As of September 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 September 30, 2000, approximately $350,000 and
$260,000 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 was increased to
$1,000,000 in June 1999. At September 30, 2000 approximately $160,000 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 September 30, 2000. The facility carries a
stated interest at the rate of 12% 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 was amortized into interest expense over the life
of the initial debt agreement. This amortization was complete as at September
30, 2000. In August 2000, the lenders agreed to further restucture the facility,
including to defer repayment until December 2000. Under this agreement, further
shares will be issuable, in October and November 2000 (450,000 shares and
485,000 shares respectively), depending on the repayment date, the value of
which will be charged into interest expense at that time. As the loan was not
repaid as at September 1, 2000, 425,000 shares will be issuable and were charged
into interest expense in September 2000 ($398,438, based on the market value as
at September 1, 2000)
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 September 30 2000, the Company had warrants outstanding and
exercisable to purchase 7,474,114 shares of common stock at a weighted average
price of $1.33 per share. In addition, at September 30, 2000, the Company had
2,176,625 options outstanding and exercisable to purchase shares of common stock
at a weighted average price of $7.27 per share. At September 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, caused the Company's independent public auditors to include 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 2000,
which the Company's management
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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 December 31, 1999 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 earlier in 2000, 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 to date in 2000,
together with the various applications development projects currently in
progress.
The Company will be required to seek additional and longer-term debt
or equity financing to fund operating requirements in the final quarter of 2000
and beyond, and to repay and/or refinance existing short term debt. It had no
significant available existing borrowing facilities remaining at September 30,
2000. The Company is currently due to repay a credit facility granted by two
investment funds affiliated with the Company in December 2000 in the amount of
$3,500,000. This credit facility, together with the loans of $3,275,000 referred
to in Note 4 to the condensed consolidated financial statements, comprised the
majority of the $9,100,000 working capital deficit as of September 30, 2000. 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
The discussions above include certain forward looking statements
regarding the Company's expectations of gross margin, expenses, market
penetration, success in obtaining large new customers, possible acquisitions,
access to capital, new product introduction, trends affecting the Company's
financial condition or results of operations, the Company's financing plans and
the Company's business and growth strategies, including raising additional debt
or equity financing. Actual results may vary materially from such expectations.
Meaningful factors that might affect such results include: a) the Company's
needs for capital, including for acquisitions, which needs have been and,
particularly in the short term, are expected to continue to be substantial, and
its potential inability to obtain additional financing on satisfactory terms or
in satisfactory amounts, 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) financial and personnel resource 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 activities regarding new products, including extension of necessary
time periods or increase in expense for product introduction, 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, o) changes in the Company's product mix and strategic focus and p)
delays in the Company's ability to relocate its Newcorn processing facilities,
as well as other information contained in the Company's 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
At the Company's annual meeting of shareholders held on July 6,
2000, shareholders re-elected Paul L. Devine (28,975,249 votes in favor, 16,416
votes withheld), W Ward Carey (28,972,905 votes in favor, 18,760 votes withheld)
and Al S. Clausi (28,965,705 votes in favor, 25,960 votes withheld) as directors
of the Company.
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
None
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. For the nine months ended September 30,
2000, the revenue generated from these sources amounted to $6,111,600 (29.1%),
$10,548,200 (50.4%) and $4,280,000 (20.5%) 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 16% in the nine months
ended September 30, 2000 as compared with the same period in 1999, and by
approximately 18% in the three months ended September 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: November 13, 2000 /s/ Paul L. Devine
--------------------------------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: November 13, 2000 /s/ Timothy B. Owen
--------------------------------------------
Timothy B. Owen
(Principal Financial and Accounting Officer)
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