1
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 MARCH 31, 2001
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.
39,275,814 shares of $0.001 par value common stock
outstanding as of April 30, 2001.
2
EPL TECHNOLOGIES, INC.
INDEX
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001 AND DECEMBER 31, 2000 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 3
D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 16
SIGNATURES. 17
3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
*
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 126,367 $ 166,041
Restricted cash - current 362,845 382,570
Accounts receivable, net 3,511,596 4,535,696
Inventories 2,562,018 2,926,741
Prepaid expenses and other current assets 1,098,746 974,542
------------ ------------
Total Current Assets 7,661,572 8,985,590
------------ ------------
PROPERTY AND EQUIPMENT, Net 5,445,451 5,913,578
------------ ------------
OTHER ASSETS
Patents, net 642,942 671,061
Goodwill 1,637,395 1,720,405
Other intangibles, net 106,804 114,532
Restricted cash-non current 450,450 443,871
Deferred debt costs 0 785,181
Other noncurrent assets 112,015 90,895
------------ ------------
Total Other Assets 2,949,606 3,825,945
------------ ------------
TOTAL ASSETS $ 16,056,629 $ 18,725,113
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 6,979,231 $ 7,453,260
Accrued expenses 3,047,872 2,504,542
Other liabilities 2,106,966 2,444,060
Deferred gain on sale-leaseback, current portion 322,107 322,107
Short term revolving credit facilities with related parties 3,932,860 3,600,060
Short term convertible debt 1,000,000 1,000,000
Current portion of long-term debt and short term credit facilities 5,717,704 6,425,682
------------ ------------
Total Current Liabilities 23,106,740 23,749,711
LONG TERM DEBT 1,172,949 1,267,071
DEFERRED GAIN ON SALE-LEASEBACK, NONCURRENT PORTION 1,238,555 1,334,040
DEFERRED INCOME TAXES 285,454 259,945
------------ ------------
Total Liabilities 25,803,698 26,610,767
------------ ------------
SHAREHOLDERS' DEFICIT
Convertible Series A Preferred Stock 10,000 10,000
Convertible Series E Preferred Stock to be issued 650,000 0
Common Stock 39,488 37,492
Additional paid-in capital 71,013,534 69,136,145
Accumulated deficit (80,242,618) (76,079,646)
Treasury stock, at cost (138,160) (138,160)
Accumulated other comprehensive loss (1,079,313) (851,485)
------------ ------------
Total Shareholders' Deficit (9,747,069) (7,885,654)
------------ ------------
TOTAL LIABILITY AND SHAREHOLDERS' DEFICIT $ 16,056,629 $ 18,725,113
============ ============
* 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
(UNAUDITED)
Three Months Ended
March 31,
---------
2001 2000
----------- -----------
Sales $ 5,258,997 $ 6,052,123
Cost of sales 4,603,371 5,519,881
----------- -----------
Gross profit 655,626 532,242
OPERATING EXPENSES:
Selling, general and administrative expenses 1,522,904 2,169,882
Research and development costs 195,739 323,723
Gain on sale of fixed assets (85,035) (93,540)
Insurance proceeds (185,952) 0
Depreciation and amortization 393,281 522,655
----------- -----------
LOSS FROM OPERATIONS (1,185,311) (2,390,478)
Interest expense, net 2,775,152 1,343,523
----------- -----------
LOSS BEFORE INCOME TAX EXPENSE (3,960,463) (3,734,001)
Income tax expense 25,509 28,062
----------- -----------
NET LOSS $(3,985,972) (3,762,063)
Accretion, discount and dividends on preferred stock 177,000 539,745
----------- -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(4,162,972) $(4,301,808)
=========== ===========
Loss per common share - basic and diluted $ (0.11) $ (0.14)
=========== ===========
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)
Three Months Ended
March 31,
---------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,985,972) ($3,762,063)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization of debt issue costs 2,229,106 856,257
Depreciation and amortization 393,281 522,655
Amortization of deferred profit (85,035) (93,540)
Expenses paid with warrants for common stock 86,188 480,011
----------- -----------
2,623,540 1,765,383
Changes in assets and liabilities 1,176,183 (989,769)
----------- -----------
Net cash used in operating activities (186,249) (2,986,449)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (29,121) (1,188,514)
----------- -----------
Net cash used in investing activities (29,121) (1,188,514)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from new equity 650,000
Proceeds from short term debt 365,000 3,325,000
Repayment of short term debt (740,178)
Proceeds of long term debt 1,037,086
Repayment of long term debt (94,122) (73,443)
----------- -----------
Net cash provided by financing activities 180,700 4,288,643
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH (5,004) (354,829)
DECREASE IN CASH AND CASH EQUIVALENTS (39,674) (241,149)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 166,041 1,493,231
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 126,367 $ 1,252,082
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $ 177,000 $ 540,000
Issuance of warrants to lenders and consultants $ 25,300 $ 480,000
Issuance of warrants in connection with raising equity $ 291,200
Issuance of common stock for settlement of liabilities $ 83,800
Issuance of common stock in exchange for debt costs $ 1,362,500
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) that 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 accounting
principles generally accepted in the United States of America. Moreover, the
results of operations for the three months ended March 31, 2001 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 should be expected. This information must also be
read in connection with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
NOTE 2 - OPERATIONS AND FINANCING
EPL Technologies, Inc. (the "Company" or "EPL") is a leading designer,
developer, manufacturer and marketer of packaging technologies, which include a
range of proprietary perforated products, as well as proprietary produce
processing technologies and scientific and technical services. These products
and services are designed to maintain the quality and integrity of various types
of fresh-cut produce, as well as and address a number of other markets. The
Company designs and markets products to address the specific needs of a variety
of fresh-cut produce categories.
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 Company's operations, and thus it has had to finance
its operating losses externally principally through equity and debt financing.
Based on the losses in recent years and the accumulated deficit and negative
working capital as at December 31, 2000, the Company's independent public
auditors included a going concern uncertainty paragraph in their audit report
accompanying the Company's 2000 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 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 2001 and beyond, although there
can be no assurance that such will in fact be the case: (i) the decision by the
Company's management at the end of 2000 to discontinue corn operations under its
previous format, (see below), (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
and the relocation during 2000 of its potato processing to Reser's Pasco,
Washington facility, which operations are currently under review, (iii) further
exploitation of the Company's processing technologies, especially focusing on
the licensing arrangement with Monterey Mushrooms for fresh mushrooms, and (iv)
further exploitation of the Company's perforating technologies, as evidenced by
the new orders gained in produce packaging in the U.K. during 2000, together
with the various applications development projects currently in progress.
However, the Company will be required to seek additional and
longer-term debt or equity financing to fund operating requirements in 2001 and
repay and/or refinance existing short-term debt. In this regard, the Company is
currently exploring a number of options to raise additional capital. This
includes seeking additional equity, as well as long-term debt. Subsequent to the
year end, the Company has entered into an agreement with an institutional
investor to raise $5 million in new convertible preferred stock, which is
expected to close in the second quarter of 2001. The Company has engaged an
outside adviser to assist in its attempts to obtain long term financing. The
cost of such
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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:
March 31, 2001 December 31, 2000
-------------- -----------------
Raw Materials and Supplies $ 1,413,578 $ 1,410,928
Finished Goods 1,148,440 1,515,813
------------ ------------
Total Inventories $ 2,562,018 $ 2,926,741
=========== ===========
NOTE 4 - NOTES PAYABLE
In 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 $1,000,000. At March 31, 2001, $67,860, of
this credit facility was outstanding, excluding 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 the Company
granted the Company a credit facility of $3,500,000, which amount was fully
drawn as at March 31, 2001 and December 31, 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 and August 2000,
the Lenders agreed to defer the repayment date, as well as agreed to other
changes in the terms of facility. Under this restructuring, the Company issued a
total of 2,200,000 shares of Common Stock to the Lenders and 310,000 shares of
Common Stock to a third party which participated in the negotiation of the
restructuring. The market value on the dates of issuance was $2,911,250, which
was amortized into interest expense over the life of the agreed restructuring.
In November 2000, the facility was again restructured, including to defer
repayment until March 2001. Under this latest agreement, a further total of
1,850,000 shares were issued in March 2001, and charged into interest expenses
during the period December 2000 to February 2001, based on the market value at
those times (a total value of $1,362,500). Subsequent to the year end, repayment
has been deferred again to May 2001, as a result of which a total of 1,100,000
shares became issuable in March 2001 (with a value of $481,250), and in April
2001 a further total of 550,000 shares became issuable, with a value of
$343,750. In addition, interest continues to be accrued and will be paid upon
repayment of the debt balance. Repayment has been subsequently deferred again
until July 2001, as a result of which further shares may become issuable. As of
March 31, 2001, the effective interest rate of this facility, after including
all of the debt issue costs, including the value of the stock and warrants
issued, was approximately 135%.
In February and March 2000, the Company, in a series of transactions,
borrowed from individual investors $3,175,000 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
fair value of the warrants ($4,711,000) has been amortized into interest expense
over the life of the debt. During the first quarter and subsequently, agreement
has been reached to extend the repayment date on this balance for a period up to
90 days. Interest will continue to accrue at a rate of 10% per annum. In
consideration for this extension, warrants to purchase 6,000 shares of Common
Stock per $100,000 will be issued. In addition, a one-time finance charge of 3%
of the outstanding capital balance has been agreed, which will be paid in
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8
shares of common stock. This additional charge has been expensed into interest
expense during the first quarter of 2001. The fair value attributable to the
additional warrants will be amortized into interest expense over the extension
period.
In November 2000 the Company obtained a loan from an institutional
investor totaling $1,000,000. The loan, which is secured on the assets of EPL
Flexible Packaging, Inc., excluding inventory, is for a period of 6 months and
bears interest at 10% per annum. The loan is convertible into shares of
Preferred Stock upon request. These shares of Preferred Stock would have a
coupon of 10% per annum and are in turn convertible into shares of Common Stock
at a conversion price of $1.00 per share. The loan agreement provides for the
conversion terms to be amended if the Company undertakes a major financing (as
defined by the loan agreement) on more favorable terms. To date no such
financing has been completed. In connection with this loan the Company issued
warrants to acquire a total of 400,000 shares of Common Stock at an exercise
price of $1.00 per share. Given that this loan can be converted immediately, the
fair value of the warrants ($204,000) has been charged into interest expense
upon issuance. The effective interest rate of this facility, assuming the loan
is not converted and after including the value of the warrants issued, is
approximately 51%.
In January 2001, the Company obtained a loan from a director of the
Company in the amount of $65,000. This loan, which is unsecured, is for a period
of six months and carries interest at the rate of 10% per annum. In connection
with this loan, the Company issued warrants to acquire a total of 65,000 shares
of Common Stock at an exercise price of $0.50 per share. The fair value of the
warrants ($25,350) is being amortized into interest expense over the life of the
debt.
Also in January 2001, the Company obtained a loan from an investor
holding over 5% of the outstanding Common Stock, in the amount of $300,000. This
loan, which is unsecured, is for a period of six months and carries interest at
the rate of 10% per annum. In connection with this loan, the Company is due to
issue 400,000 shares of Common Stock. The market value of the shares ($325,000)
is being amortized into interest expense over the life of the debt.
Interest charged in relation to related party loans totaled
approximately $114,000 for the three months ended March 31, 2001. The interest
payable at March 31, 2001 was approximately $364,000, and is included within
accrued expenses on the Company's balance sheet.
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, 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 (dividends in arrears at March 31, 2001
totaled $1,424,768). During the three months ended March 31, 2001, no
shareholder holding shares of Series A Stock elected to exercise their right of
conversion, leaving 10,000 shares of Series A Stock outstanding at March 31,
2001.
The Company also had 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 March 31, 2001 totaled $270,092. The outstanding dividends on the Series C
Stock at March 31, 2001 totaled $49,239.
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"). During
1999 all of the remaining Series D Stock was converted.
During the three months ended March 31, 2001, the Company received
$650,000 in connection with the issuance of 650 shares of Series E Convertible
Preferred Stock (the "Series E Stock"). This stock, which was issued subsequent
to the end of the quarter, carries a dividend of 10% per annum, payable in
cash/or shares at the Company's option. It is convertible into shares of Common
Stock at a fixed conversion rate of $0.65 per share, and comes equal voting
rights to the common shares, based on the underlying number of common shares
after conversion. The Series E Stock is entitled to a preference over the common
shares upon the liquidation of the Company.
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NOTE 6 - ISSUANCE OF COMMON STOCK
A total of 1,994,863 shares of Common Stock were issued, in
transactions not involving a public offering under the Securities Act of 1933,
as amended, during the three months ended March 31, 2001. Thus a total of
39,275,814 shares of Common Stock were outstanding at March 31, 2001 (December
31, 2000 - 37,280 951), excluding the 210,610 shares held as Treasury Stock. Of
the total shares issued in the quarter, 1,650,000 shares of Common Stock were
issued to the Lenders in connection with the restructuring of the credit
facility as detailed in Note 4 above and 200,000 shares of Common Stock to a
third party which participated in the negotiation of the restructuring. The
value of these shares ($1,362,500) was amortized as interest expense over the
then remaining period of the facility. Additionally, 144,863 shares of Common
Stock were issued in settlement of liabilities totaling approximately $83,800.
At March 31, 2001, the Company had 1,500,000 shares issuable in
connection with various financing agreements (See Note 4). The earned value
of these shares ($643,250) has been recorded in additional paid in capital.
NOTE 7 - ISSUANCE OF WARRANTS AND OPTIONS
During the three months ended March 31, 2001, no new options were
granted. During the same period, the Company issued warrants to acquire 300,000
shares of Common Stock in relation to the conversion of the Series D Stock,
which conversion was completed in December 1999. 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 ($167,000) was amortized to
accretion, discount and dividends in the first quarter of 2001. The Company also
granted further warrants to acquire 404,000 shares of Common Stock in relation
to equity raised in prior periods. The value of these warrants ($291,240) was
charged against additional paid in capital in the first quarter of 2001. As
mentioned in Note 4 above, warrants to acquire 65,000 shares of Common Stock
were issued during the first quarter of 2001 in relation to a new note payable.
The fair value of these warrants ($25,350) will be amortized into interest
expense over the initial six month life of the note.
At March 31, 2001, the Company had warrants outstanding and exercisable
to purchase 10,743,114 shares of Common Stock at a weighted average price of
$1.29 per share (9,974,114 shares at a weighted average price of $1.35 at
December 31, 2000). In addition, at March 31, 2001, the Company had 1,713,125
options outstanding and exercisable to purchase shares of Common Stock at a
weighted average price of $7.52 per share (2,032,125 shares at a weighted
average price of $7.60 at December 31, 2000).
At March 31, 2001, the Company had 200,000 warrants issuable in
connection with the conversion of the Series D Stock. The value of these
warrants ($100,000) has been recorded in additional paid in capital.
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 March 31,
2001 and 2000, the potential common shares have an antidilutive effect on the
net loss per common share for common shareholders.
NOTE 9 - COMPREHENSIVE LOSS
The total comprehensive loss for the three months ended March 31, 2001
and 2000 was $4,213,800 and $4,116,892 respectively. The adjustment to arrive at
the total comprehensive loss for each period consists of foreign currency
translation.
NOTE 10 - INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION
The Company is a leading developer and marketer of integrated 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
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10
processing and are sold primarily in the United States. This category also
includes activities of the Company's fresh- cut potato products (2000 also
includes fresh-cut corn 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.
Three Months Ended March 31,
----------------------------
2001 2000
Sales:
Processing technologies and related activities $ 252,235 $ 590,616
Packaging materials 5,006,762 5,461,507
----------- -----------
Total sales $ 5,258,997 $ 6,052,123
=========== ===========
Loss from Operations:
Processing technologies and related activities $(1,004,650) $(2,173,418)
Packaging materials (180,661) (217,060)
----------- -----------
Loss from operations $(1,185,311) $(2,390,478)
=========== ===========
NOTE 11 - INSURANCE PROCEEDS
As discussed more fully in the Company's consolidated financial
statements for the year ended December 31, 2000, the Company's Spanish
subsidiary Fabbri was hit by floods at the end of 2000. Insurance claims have
been filed, currently in excess of $1,000,000. While a damage claim for
approximately $330,000 has been made and recorded in the Company's consolidated
financial statements as of and for the year ended December 31, 2000, amounts for
the business interruption claims are only recorded when the claims are settled
and received. During the three months ended March 31, 2001 quarter,
approximately $186,000 was received and has been recorded separately in the
Company's income statement. The majority of costs associated with this claim
have been recorded within cost of sales.
NOTE 12 - CLOSURE OF CORN OPERATIONS
In December 2000, management decided to cease the operations of its
corn business, previously carried out through its Newcorn Co LLC (Newcorn)
affiliate. As a result, in the year ended December 31, 2000, the Company wrote
down the value of the inventory and fixed assets at Newcorn to their estimated
net realizable values. In addition, a charge for various exit costs was made,
totaling $947,000. During the three months ended March 31, 2001, approximately
$260,000 of this provision was utilized.
NOTE 13 - 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 was adopted by the Company
effective January 1, 2001. The adoption of SFAS No 133 had no impact on the
Company's consolidated financial position or results from 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, manufacturer and marketer of
packaging technologies, which include a range of proprietary perforated
products, as well as proprietary produce processing technologies and scientific
and technical services. These products and services are designed to maintain the
quality and integrity of fresh-cut produce, as well as address a number of other
markets. The Company designs and markets products to address the specific needs
of a variety of fresh-cut produce categories. The foundation of the Company's
systems solutions is its proprietary produce processing 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 aids, 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 address the particular
post harvest needs of specific vegetables. The Company markets these packaging
products to produce growers and processors. The Company has launched major
initiatives to seek to maximize the opportunities for its range of perforated
products. These products are marketed for use in pharmaceutical, bakery,
snackfood, consumer goods, healthcare, confectionery and industrial markets.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Sales. Sales decreased from $6,052,000 in the three months ended March
31, 2000 to $5,259,000 in the three months ended March 31, 2001, a decrease of
$793,000 or 13%. Sales of processing technologies and related activities
decreased from $590,000 in the three months ended March 31,2000 to $252,000 in
the three months ended March 31, 2001, a decrease of $338,000 or 57%. Of this
decline, 81% was due to a reduction in sales of corn products as detailed below.
Sales of US packaging materials decreased from $941,000 in the three months
ended March 31, 2000 to $778,000 in the three months ended March 31, 2001, a
decrease of $163,000 or 17%. Sales of UK packaging materials increased from
$2,835,000 in the three months ended March 31, 2000 to $3,236,000 in the three
months ended March 31, 2001, an increase of $401,000 or 14%. Sales of European
packaging materials fell from $1,686,000 in the three months ended March 31,
2000 to $993,000 in the three months ended March 31, 2001, a decrease of
$693,000 or 41%.
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 quarter of 2001, and
accounted for approximately 81% ($273,000) of the decline in this business
segment. As discussed more fully in the Company's annual report on Form 10-K
for the fiscal year ended December 31, 2000, at the end of 2000 the management
decided that it was appropriate to discontinue its corn operations under its
previous format. Accordingly, there was no revenue from fresh-cut corn in the
first quarter of 2001.
Most of the remaining fall in this segment was due to lower sales from
microbiological testing work. This follows the decision during the quarter to
sell certain assets of the Company's Pure Produce subsidiary. This subsidiary
was forecasting continued losses, and it was therefore believed to be more
appropriate for it to function outside of the Company. Certain costs continued
to be incurred during the first quarter of 2001, and therefore the full benefit
of this action will not be seen until the second quarter of 2001 onwards.
There was also a fall in the sales of fresh-cut potato products,
although the revenue in this area is not material to the group as a whole. The
Company is currently reviewing its options in relation to this activity, given
the Company's stated objective of achieving group operational profitability.
These decreases were offset by an increase in revenue from processing
technologies, mainly as a result of the announcement in early 2000 of an
exclusive licensing arrangement with Monterey Mushrooms for its Mushroom
Fresh(R) processing technology. During the last few months, the Company has been
discussing the nature of its licensing relationship with Penn State University.
These discussions were precipitated by Penn State's claim that the Company had
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12
breached certain of its obligations under the license with them (a claim the
Company believes is without merit). However, the Company has agreed to consider
Penn State's proposal to terminate the license and enter into a new
non-exclusive license covering the same technology, which modified license the
Company believes will not have a material adverse effect on its ability to
penetrate the fresh mushroom market. Subsequent to the end of the quarter, the
Company informed Penn State that it had terminated the license agreement with
them. In addition, during December, the license granted to Monterey Mushrooms
was changed to become non-exclusive. Although such revenue is currently not
material, the Company believes that these arrangements with Monterey Mushrooms
will have a material contribution to processing technology revenue in 2001 and
beyond, although there can be no assurance that this will be the case. The
Company is also following up on potential opportunities for processing
technologies and scientific and technical services in Europe.
The decrease in U.S. packaging material sales was principally
attributable to the adverse timing differences in shipments to large customers
compared to the same period of 2000. The Company is currently 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 quarter of 2001. 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 2001 and
onwards. There can be no assurance, however, that the Company will in fact
obtain this business.
Sales of U.K. packaging materials increased by 14% in U.S. dollar
terms, but increased 28% in local currency terms. The increase 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. 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 increase in sales of U.K. packaging materials is expected to
continue during 2001 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 business in the
area of cooked meat pastry products and the Company believes it is the market
leader in this industry segment. There was a further decline in revenue from
snack food packaging, continuing the Company's previously stated objective of
reducing its historic dependency on this low margin area, and move to higher
margin products. New business continues 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. Other applications are currently
under development, which, if successful, could have a material impact on sales
revenues in 2001, although there can be no assurance that this development will
result in new business.
The 41% decline in sales of European packaging materials was due mainly
to (i) the impact of flood damage that occurred at the Fabbri factory in late
October 2000, and (ii) an adverse movement in exchange rates when converting
sales into U.S. dollars, which moved approximately 6% in the first quarter of
2001 as compared with the same period of 2000. It is anticipated that adverse
currency conversion rates in the short term will affect Spanish sales as
reported in US dollars as compared to the prior year period. The flood damage
restricted Fabbri's sales revenues in the final two months of 2000. With a delay
in the receipt of insurance proceeds, and with limited availability of capital,
this restriction on sales revenue has continued into 2001 and is expected to
adversely impact Fabbri's sales revenues at least through the first half of
2001. Once these issues have been resolved, Fabbri will look to integrate its
activities more with the U.K. subsidiary, not only to leverage its scientific
and technical knowledge base, but also to be able to offer customers a pan
European service offering. This will also take advantage of the U.K.'s expertise
in perforating.
Gross Profit. Gross profit increased from $532,000 in the three months
ended March 31, 2000 to $656,000 in the three months ended March 31, 2001, an
increase of $124,000 or, as a percentage of sales, from 8.8% to 12.5%. The
reported increase reflected the lack of losses in the corn operations in 2001,
following the cessation of operations at the end of 2000. In addition, there was
also a significant improvement in the results of the potato operations,
following the completion at the end of the 2000 first quarter of the relocation
of the potato processing facility to Reser's Pasco, Washington facility. There
was also a further gain in the U.K. 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
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13
a fall in the gross profit in European packaging, caused principally by the
lower sales volumes, as well as additional impact of the floods which limited
revenue generation, but where costs continue to be incurred. During the period,
approximately $186,000 of these costs were reimbursed under business
interruption claims, and have been recognized separately in the financial
statements. Further monies are expected, but these will only be recognized upon
receipt of such funds.
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 and thus effectively understate the
true operating gross profit. Although the benefits of this expense have started
to contribute to incremental sales revenue and gross profit, it is expected to
increase significantly in the U.K. and other areas as the Company moves forward
with various projects, although there can be no assurance that such will be the
case.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $2,170,000 in the three months ended
March 31, 2000 to $1,523,000 in the three months ended March 31, 2001, a
decrease of $647,000 or 30%. This decrease reflects (i) a reduction in overheads
generally, including a reduction in professional fees and (ii) a reduction in
overheads at the Company's corn operations following the cessation of operations
at the end of 2000. The decrease was also despite an increase of $41,000 to
$86,000 in non-cash charges relating to the amortization of the fair value of
warrants issued.
Research and Development Costs. Research and development costs
decreased from $324,000 in the three months ended March 31, 2000 to $196,000 in
the three months ended March 31, 2001, a decrease of $128,000 or 40%. This
reduction reflects the reallocation of resources from development to application
and execution, as well as lower costs following a reduction in headcount and
lower costs following the sale of certain assets of the Company's Pure Produce
subsidiary and the transfer of the associated activity. The Company continues to
expense all development costs, whether product, market or sales related, in the
year incurred, and thus costs are incurred prior to the benefits, if any, that
may be expected to be realized from such expense.
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, $85,000 of this total profit was
recognized in the first quarter of 2001. 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.
Depreciation and Amortization. Depreciation and amortization decreased
from $523,000 in the three months ended March 31, 2000 to $393,000 in the three
months ended March 31, 2001, a decrease of $130,000 or 25%. This is mainly as a
result of the asset writedown in 2000 relating to the remaining fixed assets in
the Company's corn operations.
Insurance Proceeds. Insurance proceeds represent monies received during
the 2001 first quarter in connection with the business interruption claim
mentioned in Note 11 to the Company's condensed consolidated financial
statements. These monies are only recorded in the Company's financial statements
when the claims are settled and paid. The majority of the costs associated with
business interruption claims have been recorded within cost of sales, without
which the Company's gross profit would have been higher.
Loss from Operations. Loss from operations decreased from $2,390,000 in
the three months ended March 31, 2000 to $1,185,000 in the three months ended
March 31, 2001, an improvement of $1,205,000 or 50%. The decrease in the loss
was primarily due to a net decrease in total operating expenses, (selling,
general and administrative expenses and research and development costs) which
decreased $775,000 or 31% over the first quarter of 2000. In addition, there was
an improvement in gross margin, despite the lower sales. 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 progress continues to be made to exploit the commercial value
of the Company's technologies and that the foundation for future sustainable
growth has been considerably strengthened.
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14
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 fully reflect this activity.
Interest Expense. Interest charges rose from $1,344,000 in the first
quarter of 2000 to $2,775,000 in the first quarter of 2001. This increase
principally reflects additional finance charges arising from additional shares
of Common Stock granted upon the restructuring of the facility with the Lenders
as described in Note 4 to the Company's condensed, consolidated financial
statements. In addition, there is a fair value provision in 2000 and 2001 for
warrants granted in the first quarter of 2000 in connection with the debt
financing completed in the first quarter of 2000. Of the total charges in the
current quarter, $2,486,000 (90%) represented such non-cash charges.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock decreased from $540,000 for the three
months ended March 31, 2000 to $177,000 in the three months ended March 31,
2001, a decrease of $363,000 or 67%. The decrease was due to a lower adjustment
in 2001 for the fair value of warrants issued during the first quarter of 2001,
as compared with the fair value adjustment for warrants issued during the first
quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCE
The consolidated financial statements of the Company have been prepared
on a going concern basis, which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business, and do not reflect any adjustments that might result if the Company is
unable to continue as a going concern. The Company has incurred net losses,
exclusive of accretion, discount and dividends on preferred stock, of
$7,781,366, $14,415,788 and $24,261,514 in 1998, 1999 and 2000, respectively,
incurred cash losses from operations of $7,151,732, $6,045,420 and $8,192,543 in
1998, 1999 and 2000 respectively, had an accumulated deficit of $76,079,646 and
had negative working capital of $14,764,121 as of December 31, 2000. For the
three months ended March 31, 2001, the Company incurred a further net loss of
$3,985,972, a cash loss from operations of $186,249 and had negative working
capital at March 31, 2001 of $15,445,168. Within this negative working capital
is approximately $4,175,000 of short term debt that is repayable during the
second quarter of 2001. As explained more fully in Note 7 to the Company's
consolidated financial statements, the Company has reached agreement to defer
some of this for a period of up to 90 days, and is in discussions to defer
repayment of the balance. Additionally, the Company's $1.0 million convertible
debt is currently due for repayment at the end of May 2001. In addition, the
Company was not in compliance with one of the asset covenants with the Bank of
Scotland during the final quarter of 2000 and the first quarter of 2001, and
consequently the loans may be called for repayment at any time. 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. 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 financing.
The factors described above have caused the Company's independent
public auditors to include a going concern uncertainty paragraph in their audit
report accompanying the Company's 2000 Consolidated Financial Statements. The
paragraph states that the Company's recurring losses from operations, negative
working capital and accumulated deficit raise substantial doubt about its
ability to continue as a going concern and cautions that the financial
statements do not include any adjustments that might result should the Company
be unable to continue as a going concern.
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 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 2001 and beyond, although there
can be no assurance that such will in fact be the case: (i) the decision by the
Company's management at the end of 2000 to discontinue corn operations under its
previous format, (see Note 3 to the Company's 2000 consolidated financial
statements), (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 and the relocation
during 2000 of its potato processing to Reser's Pasco, Washington facility,
(iii) further exploitation of the
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15
Company's processing technologies, especially focusing on the licensing
arrangement with Monterey Mushrooms for fresh mushrooms, and (iv) further
exploitation of the Company's perforating technologies, as evidenced by the new
orders gained in produce packaging in the U.K. during 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 2001 and repay and/or
refinance existing short-term debt. In this regard, the Company is currently
exploring a number of options to raise additional capital over and above that
mentioned above. This includes seeking additional equity, as well as long-term
debt. Subsequent to the year end, the Company has entered into an agreement with
an institutional investor to raise $5 million in new convertible preferred
stock, which is expected to close in the second quarter of 2001. The Company has
engaged an outside adviser to assist in its attempts to obtain long term
financing. 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.
At March 31, 2001, the Company had $126,000 in unrestricted cash and
short term investments, compared with $166,000 at December 31, 2000, a decrease
of $40,000. In addition, the Company had $363,000 of restricted cash - current
and $450,000 of restricted cash - noncurrent. During the three months ended
March 31, 2001, $186,000 was used in operating activities and $29,000 was used
in investing activities to purchase fixed assets. The decrease in cash used in
operating activities of $2,800,000 in 2001 compared to 2000 reflects the reduced
net loss attributable to cash items in 2001, together with a decrease in working
capital.
Total financing activities during the three months ended March 31, 2001
provided net cash of $181,000, compared with net cash provided of $4,289,000 in
2000. The generation in 2001 was primarily from the proceeds of new share
issuances ($650,000) and short-term debt ($365,000) offset by repayment of short
and long-term debt. In the same period of 2000, the Company had proceeds from
short-term debt of $3,325,000 and long-term debt of $1,037,000, offset by
repayments of long-term debt.
As of March 31, 2001, the Company had fully drawn $568,700 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
(5.50% as of March 31, 2001). The Company also has a short-term line of credit
with the Bank of Scotland for up to approximately $2,132,000, subject to the
level of receivables, which bears interest of 1.75% over bank base rate. At
March 31, 2001, approximately $1,477,000 had been drawn under this facility. In
conjunction with this new facility, the Company also has an additional
short-term line of credit with the Bank of Scotland, carrying interest at 1.75%
over bank base rate, under which the Company had drawn approximately $292,000 as
of March 31, 2001. 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 the final quarter of 2000 and the first quarter of 2001, the Company was
not in compliance with one of the asset covenants. Consequently the loans may be
called for repayment at any time. To date, the bank of Scotland has not imposed
any financial penalties for this non-compliance.
The Company, through its subsidiary, EPL Flexible Packaging, Inc., has
a short term credit facility of $100,000 with Old Second National Bank of
Aurora, which facility was fully drawn at March 31, 2001. 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 (6.75% as at March 31, 2001).
Newcorn has two equipment financing loans with General Electric Capital
Corporation ("GECC") and Santa Barbara Bank & Trust ("SBBT") secured by
specifically identified capital assets. At March 31, 2001, approximately
$242,000 and $190,000 were outstanding under the GECC and SBBT loans,
respectively.
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. At March 31, 2001, approximately $67,900 was outstanding, excluding
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.
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 March 31, 2001 and December 31, 2000. The facility carries a
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16
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
and August 2000, the Lenders agreed to defer the repayment date, as well as
agreed to other changes in the terms of facility. Under this restructuring, the
Company issued a total of 2,200,000 shares of Common Stock to the Lenders and
310,000 shares of Common Stock to a third party which participated in the
negotiation of the restructuring. The market value on the dates of issuance was
$2,911,250, which was amortized into interest expense over the life of the
agreed restructuring. In November 2000, the facility was again restructured,
including to defer repayment until March 2001. Under this latest agreement, a
further total of 1,850,000 shares were issued in March 2001, and charged into
interest expenses during the period December 2000 to February 2001, based on the
market value at those times (a total value of $1,362,500). Subsequent to the
year end, repayment has been deferred again to May 2001, as a result of which a
total of 1,100,000 shares became issuable in March 2001 (with a value of
$481,250), and in April 2001 a further total of 550,000 shares became issuable,
with a value of $343,750. In addition, interest continues to be accrued and will
be paid upon repayment of the debt balance. Repayment has been subsequently
deferred again until July 2001, as a result of which further shares may become
issuable. As of March 31, 2001, the effective interest rate of this facility,
after including all of the debt issue costs, including the value of the stock
and warrants issued, was approximately 135%.
In February and March 2000, the Company, in a series of transactions,
borrowed from individual investors $3,175,000 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
fair value of the warrants ($4,711,000) has been amortized into interest expense
over the life of the debt. During the first quarter and subsequently, agreement
has been reached to extend the repayment date on this balance for a period up to
90 days. Interest will continue to accrue at a rate of 10% per annum. In
consideration for this extension, warrants to purchase 6,000 shares of Common
Stock per $100,000 will be issued. In addition, a one-time finance charge of 3%
of the outstanding capital balance has been agreed, which will be paid in shares
of common stock. This additional charge has been expensed into interest expense
during the first quarter of 2001. The fair value attributable to the additional
warrants will be amortized into interest expense over the extension period.
In November 2000 the Company obtained a loan from an institutional
investor totaling $1,000,000. The loan, which is secured on the assets of EPL
Flexible Packaging, Inc., excluding inventory, is for a period of 6 months and
bears interest at 10% per annum. The loan is convertible into shares of
Preferred Stock upon request. These shares of Preferred Stock would have a
coupon of 10% per annum and are in turn convertible into shares of Common Stock
at a conversion price of $1.00 per share. The loan agreement provides for the
conversion terms to be amended if the Company undertakes a major financing (as
defined by the loan agreement) on more favorable terms. To date no such
financing has been completed. In connection with this loan the Company issued
warrants to acquire a total of 400,000 shares of Common Stock at an exercise
price of $1.00 per share. Given that this loan can be converted immediately, the
fair value of the warrants ($204,000) has been charged into interest expense
upon issuance. The effective interest rate of this facility, assuming the loan
is not converted and after including the value of the warrants issued, is
approximately 51%.
In January 2001, the Company obtained a loan from a director of the
Company in the amount of $65,000. This loan, which is unsecured, is for a period
of six months and carries interest at the rate of 10% per annum. In connection
with this loan, the Company issued warrants to acquire a total of 65,000 shares
of Common Stock at an exercise price of $0.50 per share. The fair value of the
warrants ($25,350) is being amortized into interest expense over the life of the
debt.
Also in January 2001, the Company obtained a loan from an investor
holding over 5% of the outstanding Common Stock, in the amount of $300,000. This
loan, which is unsecured, is for a period of six months and carries interest at
the rate of 10% per annum. In connection with this loan, the Company is due to
issue 400,000 shares of Common Stock. The market value of the warrants
($325,000) is being amortized into interest expense over the life of the debt.
At March 31, 2001, the Company had warrants outstanding and exercisable
to purchase 10,743,114 shares of Common Stock at a weighted average price of
$1.29 per share. In addition, at March 31, 2001, the Company had 1,713,125
options outstanding and exercisable to purchase shares of Common Stock at a
weighted average price of $7.52 per share. At December 31, 2000, there were no
material commitments for capital expenditures.
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17
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.
ITEM 3. QUANTITATIVE AND 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 U.S. 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
U.S. dollars, British pounds and Spanish pesetas. In 2000 the revenue generated
from these sources amounted to $7,612,000 (27.4%), $14,194,000 (51%) and
$6,008,000 (21.6%) respectively. For the three months ended March 31, 2001, the
revenue generated from these sources amounted to $1,030,000 (19.7%), $3,208,000
(61.3%) and $993,000 (19.0%) respectively. The total long-lived assets
denominated in these currencies as at December 31, 2000 amounted to $2,319,000
(25.9%), $5,941,000 (66.4%) and $695,000 (7.7%) respectively. The exchange rate
between the U.S. dollar and the British pound has historically been very stable,
although the dollar rose during the second half of 2000. The U.S. dollar is
approximately 11% higher in the first quarter of 2001 against the British pound,
as compared with the same period in 2000. The Company does not believe that this
is a significant exchange rate risk for the Company. The U.S. dollar rose
against the Spanish peseta during 1999 and 2000, although it fell back at the
end of 2000. Comparing the first quarter of 2001 against the same period in
2000, the U.S. dollar rose by approximately 6% against the Spanish peseta.
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18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 3.1 Amended and Restated Articles of Incorporation
of EPL Technologies, Inc., as amended to date
Exhibit 11.0 Computation of Loss per share
b) Reports on Form 8-K
None.
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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: May 14, 2001 /s/ Paul L. Devine
-------------------------------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: May 14, 2001 /s/Timothy B. Owen
-------------------------------------------
Timothy B Owen
(Principal Financial and Accounting Officer)
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