UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 30, 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)
237 LANCASTER AVENUE, SUITE 2002
DEVON, PA 19333
________________________ ____________________________
(Address of principal (Zip Code)
executive offices)
(610) 254-8600
_________________________
(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.
45,583,525 shares of $0.001 par value common stock
outstanding as of October 31, 2001
EPL TECHNOLOGIES, INC.
INDEX
<Table>
<Caption>
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001
AND DECEMBER 31, 2000 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 2001 AND 2000 3
D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 21
SIGNATURES. 22
</Table>
PART I, ITEM 1
On November 19, 2001, the Company was advised by its independent accountant,
Deloitte & Touche LLP, that it resigned, effective immediately. On November 27,
2001, the Company filed Form 8-K with the required disclosures under Item 4,
"Change in Registrant's Certifying Accountant." The Company is actively seeking
to engage a new independent accountant to serve as its auditor. The accompanying
condensed consolidated financial statements have not been reviewed by an
independent accountant, as required by Rule 10-01(d) of Regulation S-X. The
Company will engage its new auditor to review the accompanying condensed
consolidated financial statements upon appointment.
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 200,818 $ 166,041
Restricted cash - current 552,559 382,570
Accounts receivable, net 4,230,830 4,535,696
Inventories 2,030,585 2,926,741
Prepaid expenses and other current assets 1,399,690 974,542
------------ ------------
Total Current Assets 8,414,482 8,985,590
------------ ------------
PROPERTY AND EQUIPMENT, Net 5,107,151 5,913,578
OTHER ASSETS
Patents, net 614,823 671,061
Goodwill 1,554,295 1,720,405
Other intangibles, net 99,076 114,532
Restricted cash-non current 0 443,871
Deferred debt costs 0 785,181
Other noncurrent assets 105,900 90,895
------------ ------------
Total Other Assets 2,374,094 3,825,945
------------ ------------
TOTAL ASSETS $ 15,895,727 $ 18,725,113
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,342,493 $ 7,453,260
Accrued expenses 3,773,785 2,504,542
Other liabilities 1,997,187 2,444,060
Deferred gain on sale-leaseback, current portion 322,107 322,107
Short term revolving credit facilities with related parties 4,438,860 3,600,060
Short term convertible debt 1,000,000 1,000,000
Current portion of long-term debt and short term credit facilities 6,658,301 6,425,682
------------ ------------
Total Current Liabilities 24,532,733 23,749,711
LONG TERM DEBT 922,390 1,267,071
DEFERRED GAIN ON SALE-LEASEBACK, NONCURRENT PORTION 1,153,518 1,334,040
DEFERRED INCOME TAXES 310,963 259,945
------------ ------------
Total Liabilities 26,919,604 26,610,767
------------ ------------
SHAREHOLDERS' EQUITY
Convertible Series A Preferred Stock 10,000 10,000
Convertible Series B Preferred Stock 5 0
Common Stock 42,025 37,492
Additional paid-in capital 74,014,670 69,136,145
Accumulated deficit (83,820,640) (76,079,646)
Treasury stock, at cost (138,160) (138,160)
Accumulated other comprehensive loss (1,131,777) (851,485)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (11,023,877) (7,885,654)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,895,727 $ 18,725,113
============ ============
</Table>
The accompanying notes are an integral part of these condensed financial
statements.
-1-
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales $ 10,613,236 $ 13,988,125 $ 5,354,239 $ 7,936,002
Cost of sales 9,360,761 12,592,847 4,757,390 7,072,966
------------ ------------ ------------ ------------
Gross profit 1,252,475 1,395,278 596,849 863,036
OPERATING EXPENSES
Selling, general and administrative expenses 2,936,331 4,287,084 1,413,427 2,117,202
Research and development costs 375,242 676,424 179,503 352,701
Gain on sale of fixed assets (170,071) (187,080) (85,036) (93,540)
Insurance proceeds (897,751) 0 (711,798) 0
Depreciation and amortization 807,494 1,068,185 414,213 545,530
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,798,770) (4,449,335) (613,460) (2,058,857)
Interest expense, net 5,589,206 4,230,659 2,814,054 2,887,136
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX EXPENSE (7,387,976) (8,679,994) (3,427,514) (4,945,993)
Income tax expense 51,018 56,124 25,509 28,062
------------ ------------ ------------ ------------
NET LOSS $ (7,438,994) $ (8,736,118) $ (3,453,023) $ (4,974,055)
Accretion, discount and dividends on 302,000 1,048,091 125,000 508,346
preferred stock ------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (7,740,994) $ (9,784,209) $ (3,578,023) $ (5,482,401)
============ ============ ============ ============
Loss per common share-basic and diluted $ (0.20) $ (0.31) $ (0.09) $ (0.17)
============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
-2-
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------
JUNE 30, JUNE 30,
2001 2000
----------- -----------
CASHFLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,438,994) $(8,736,118)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of fixed assets (4,500)
Amortization of debt issue costs 4,701,408 3,796,488
Depreciation and amortization 807,494 1,068,185
Amortization of deferred profit (170,071) (187,080)
Expenses paid with warrants/shares 105,688 64,800
----------- -----------
(5,440,019) 4,742,393
Changes in assets and liabilities 867,949 (749,041)
----------- -----------
Net cash used in operating activities (1,131,026) (4,742,766)
----------- -----------
CASHFLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (198,194) (1,336,850)
Proceeds of sale of fixed assets 44,727
----------- -----------
Net cash used in investing activities (153,467) (1,336,850)
----------- -----------
CASHFLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Preferred Stock 650,000
Proceeds from issuance of common stock, net 2,205,000
Proceeds from short term debt 1,368,062 3,325,000
Repayment of short term debt (296,643) (222,673)
Proceeds from long term debt 1,037,086
Repayment of long term debt (344,681) (275,423)
----------- -----------
Net cash provided from financing activities 1,376,738 6,068,990
----------- -----------
EFFECT OF EXCHANGE RATE CHANGE ON CASH (57,468) (243,109)
----------- -----------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 34,777 (253,735)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 166,041 587,589
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 200,818 $ 333,854
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $ 302,000 $ 1,048,091
Issuance of common stock in exchange for debt costs $ 3,016,750 $ 1,725,000
Issuance of common stock for settlement of liabilities $ 179,050 0
Issuance of warrants to lenders and consultants $ 514,900 $ 1,798,000
Issuance of warrants in connection with raising equity $ 1,027,700 0
The accompanying notes are an integral part of these condensed financial
statements.
-3-
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
financial statements of EPL Technologies, Inc. and Subsidiaries (the "Company"),
which are unaudited, include all normal and recurring adjustments necessary to
present fairly the Company's financial position as of June 30, 2001, and the
results of its operations and cash flows for the periods presented. The
accompanying condensed consolidated balance sheet as of December 31, 2000 is
derived from the Company's audited financial statements. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted as promulgated by Accounting Principles Board ("APB") Opinion No. 28 and
Rule 10.01 of Regulation S-X. The results of operations for the three and six
months ended June 30, 2001 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2001. Additionally, at this stage
of the Company's development, month-to-month and quarter-to-quarter anomalies in
operating results are expected. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto as of and for the year December 31, 2000, contained
in the Company's Annual Report on Form 10-K.
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) further exploitation of the Company's
processing technologies, and (iii) further exploitation of the Company's
perforating technologies, as evidenced by the new orders gained in produce
packaging in the U.K. during 2000 on, together with the various applications
-4-
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. In March 2001, the Company entered
into an agreement with an institutional investor to raise $5 million through the
issuance of new redeemable convertible preferred stock, which is expected to be
completed in the fourth quarter of 2001. The Company has engaged an outside
adviser to assist in its attempts to obtain additional 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.
NOTE 3 -- INVENTORIES
Inventories consisted of the following:
<Table>
<Caption>
June 30, 2001 December 31, 2000
------------- -----------------
Raw Materials and Supplies........... $1,024,663 $1,410,928
Finished Goods....................... 1,005,922 1,515,813
------------ -------------
Total Inventories................ $2,030,585 $2,926,741
============ =============
</Table>
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 June 30, 2001, $524,000 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. This will be
retrospectively increased to ten percent (10%) per annum to bring it into line
with other external indebtedness. 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
June 30, 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, first to May 2001, as a result of which a
total of 1,650,000 shares were issued (with a total value of $825,000), and
then to July 2001. Under this second extension, a further 2,550,000 shares are
issuable, with a value of $1,310,500. In addition, interest continues to be
-5-
accrued and will be paid upon repayment of the debt balance. Repayment has been
subsequently deferred again until January 2002, as a result of which a further
15,400,000 shares are issuable, with a total value of $4,614,500. As of
June 30, 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 166%.
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
"Notes"). The Notes, 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 the
Notes 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. During the second
quarter and subsequently, agreement has been reached to further extend the
repayment date on this balance for a period up to 90 days, and, in certain
circumstances, for up to 18 months on some balances. Interest will continue to
accrue at a rate of 10% per annum. In consideration for this second 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 second quarter of
2001. The fair value attributable to the additional warrants will be amortized
into interest expense over the extension period. In addition, the life of the
original warrants has been extended by 15 months to June 2006 and the exercise
price of the warrants reduced from $1.00 to $0.50. The fair value of this one
time change ($131,000) has been charged into interest expense in the second
quarter of 2001.
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) was charged into interest expense upon
issuance. During the second quarter of 2001 the lender agreed to defer repayment
for a period of 60 days. In consideration for this extension, the Company has
agreed to issue the lender 100,000 shares of Common Stock, plus a warrant for
the purchase of the 100,000 shares of Common stock, exercisable at $0.50 per
share. The fair value of the shares ($58,000) and the warrants ($50,000) will be
expensed into interest expense over the period of the extension. Subsequent to
the end of the third quarter of 2001, the lender has served a demand for
repayment, which the company has yet to meet. The effective
interest rate of this facility, assuming the loan is not converted and after
including the value of the warrants issued, is approximately 57%.
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. During June 2001, in line with other loan agreements, it was agreed to
issue the lender with 65,000 shares of common stock, (with a value of $28,600),
which will be expensed into interest expense over the period of the loan.
Subsequent to the end of the 2001 third quarter, this director has agreed to
defer repayment until April 2002. No further consideration has been granted in
return for this extension.
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 (the
"Affiliate Loan"). 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 400,000 shares of Common Stock. The market value of the
shares ($325,000) was amortized into interest expense over the life of the debt.
In May 2001, the Company obtained a further loan from a director of the
Company in the amount of $50,000. This loan, which is unsecured, is for a period
of six months and carries interest at the rate of 10% per
-6-
annum. In connection with this loan, the Company agreed to issue 50,000 shares
of Common Stock. The value of these shares ($22,000) is being amortized into
interest expense over the life of the debt. Subsequent to the end of the 2001
third quarter, this director has agreed to defer repayment until April 2002. No
further consideration has been granted in return for this extension.
In June 2001, the Company obtained a loan from an institutional investor in
the amount of $500,000. This loan, which is unsecured, is for a period of three
months and carries interest at the rate of 10% per annum. In connection with
this loan, the Company agreed to issue 325,000 shares of Common Stock. The value
of these shares ($162,175) is being amortized into interest expense over the
life of the debt. Subsequent to the end of the 2001 third quarter, the lender
has agreed to defer payment until December 31, 2001. In connection with this,
the Company has agreed to issue 300,000 restricted shares of common stock plus
warrants to purchase 600,000 of common stock at an exercise price of $0.30 per
share. The value of the shares and the fair value of the warrants will be
charged into interest expense during the final quarter of 2001.
Interest charged in relation to related party loans (excluding the non-cash
costs detailed above) totaled approximately $126,000 and $242,000 for the three
months and six months ended June 30, 2001. The interest payable at June 30, 2001
was approximately $515,000, 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 shares,
was issued at a price of $1.00 per share, with each share of Series A Stock
carrying the option to convert into common shares at a rate of $1.50 per share.
The Series A Stock carries equal voting rights to the common shares, based on
the underlying number of common shares after conversion. The Series A Stock
carries a dividend rate of 10% per annum, payable in cash and/or common shares
($1.50 per share) at the Company's option. The outstanding dividends at June 30,
2001 totaled $1,425,018. During the six months ended June 30, 2001, no
shareholder holding shares of Series A Stock elected to exercise the right of
conversion, leaving 10,000 shares of Series A Stock outstanding at June 30,
2001.
The Company also had a Series B and Series C Preferred Stock, all of which
were converted during 1997 and 1998 respectively. The Series B Stock carried a
dividend of 10% per annum, payable in cash and/or shares ($9.40 per share) at
the Company's option. The outstanding dividends on the Series B Stock at June
30, 2001 totaled $270,092. The outstanding dividends on the Series C Stock at
June 30, 2001 totaled $49,239.
During 1997, the Company issued 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 during the three
months ended June 30, 2001, 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 carries 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. During the three months ended June
30, 2001, holders of 175.5 shares of Series E Stock elected to exercise their
right of conversion, leaving 474.5 shares of Series E Stock outstanding as at
June 30, 2001. The outstanding dividends on the Series E Stock at June 30, 2001
totaled $15,031.
NOTE 6 - ISSUANCE OF COMMON STOCK
A total of 4,532,574 shares of Common Stock were issued, in transactions
not involving a public offering under the Securities Act of 1933, as amended,
during the six months ended June 30, 2001. Thus a total of 41,813,525 shares of
Common Stock were outstanding at June 30, 2001 (December 31, 2000 - 37,280,951),
excluding the 210,610 shares held as Treasury Stock. Of the total shares issued
during the period, 3,150,000 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 350,000 shares of Common Stock to a third party which participated
in the negotiation of the restructuring. The value of these shares ($2,184,000)
was amortized as interest expense over the then remaining period of the
facility. A further 400,000 shares of Common Stock were issued in connection
with the Affiliate Loan made to the Company, also as detailed in Note 4 above.
The value of these shares ($325,000) was amortized into interest expense over
the life of the loan. Additionally, 217,711 shares were issued in connection
with the repayment extension of the Notes, also as more fully detailed in Note 4
above. The value of these shares ($95,250) was charged into interest expense
during the six months ended June 30, 2001. Finally, 144,863 shares of Common
Stock were issued in settlement of liabilities totaling approximately $83,800,
and 270,000 shares of Common Stock were issued upon the conversion of 175.5
shares of Series E Stock (see Note 5 above).
At June 30, 2001, the Company had 2,865,000 shares issuable in
connection with various financing agreements (see Note 4). The earned value of
these shares ($1,463,000) has been recorded in additional paid in capital.
-7-
NOTE 7 - ISSUANCE OF OPTIONS AND WARRANTS
During the six months ended June 30, 2001, a total of 72,375 options
were granted. In addition, a total of 376,500 options expired unexercised. No
options were exercised during this period. As a result, at June 30, 2001, the
Company had 1,728,000 options outstanding and exercisable to purchase shares of
Common Stock at a weighted average price of $7.17 per share (2,032,125 shares at
a weighted average price of $7.60 at December 31, 2000).
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 during the period. The Company
also granted further warrants to acquire 2,254,000 shares of Common Stock in
relation to equity raised in the current and prior periods. The value of these
warrants ($1,027,740) was charged against additional paid in capital during the
period. As mentioned in Note 4 above, warrants to acquire 165,000 shares of
Common Stock were issued during the period in relation to two new notes payable.
The fair value of these warrants ($75,350) will be amortized into interest
expense over the initial lives of the notes.
At June 30, 2001, the Company had warrants outstanding and
exercisable to purchase 13,264,614 shares of Common Stock at a weighted average
price of $1.08 per share (9,974,114 shares at a weighted average price of $1.35
at December 31, 2000).
At June 30, 2001, the Company had 500,000 warrants issuable in
connection with the conversion of the Series D Stock. The value of these
warrants ($215,000) 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
June 30, 2001 and 2000, the potential common shares have an anti-dilutive effect
on the net loss per common share for common shareholders. Accordingly, diluted
net loss per common share for common shareholders has not been presented.
NOTE 9 - COMPREHENSIVE LOSS
The total comprehensive loss for the three months ended June 30,
2001 and 2000 was $3,505,487 and $4,862,336 respectively, and $7,719,286 and
$8,979,228 for the six months ended June 30, 2001 and 2000.
- 8 -
respectively. The adjustment to arrive at the total comprehensive loss for each
period consists of foreign currency translation.
NOTE 10 - INDUSTRY SEGMENT INFORMATION
The Company is a leading developer and marketer of produce systems
solutions specifically designed to address the needs of the rapidly growing
market for fresh-cut produce. These products fall into two major
classifications: processing technologies and related activities and packaging
materials. Processing technologies are designed to inhibit the enzymatic
degradation that causes fruits and vegetables to begin to deteriorate
immediately after processing and are sold primarily in the United States. This
category also included activities of the Company's fresh-cut corn and potato
products, as well as provision of scientific and technical services in the
United States. The Company's produce packaging business involves perforating,
converting and printing of flexible packaging, including technologies and
processes that are proprietary to the Company, which are marketed in North and
South America, the United Kingdom and Continental Europe.
The following table summarizes the Company's financial information by
industry segment.
<Table>
<Caption>
Six months ended Three months ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
Sales:
Processing technologies and related activities $ 509,014 $ 2,199,105 $ 256,779 $ 1,608,489
Packaging materials 10,104,222 11,789,020 5,097,460 6,327,513
----------- ----------- ----------- -----------
Total sales $10,613,236 $13,988,125 $ 5,354,239 $ 7,936,002
=========== =========== =========== ===========
Net (Loss) Income from Operations:
Processing technologies and related activities (2,113,148) (4,394,160) (1,108,500) (2,220,742)
Packaging materials 314,478 (55,175) 495,040 161,885
----------- ----------- ----------- -----------
Total net (loss) income from operations $(1,798,770) $(4,449,335) $ (613,460) $(2,058,857)
=========== =========== =========== ===========
</Table>
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 six months and three months ended June 30, 2001,
approximately $712,000 and $186,000 respectively 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 six months ended June 30, 2001, approximately
$540,000 of this provision was utilized.
NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS
-9-
In June 1998, the Financial Accounting Standards Board ("FASB")-issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting For
Derivative Instruments and Hedging Activities, which is effective for all fiscal
years beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
in a fair value hedge, the changes in the fair value of the derivative and the
hedged item are recognized in earnings. If the derivative is designated as a
cash flow hedge, changes in the fair value of the derivative are recorded in
other comprehensive income ("OCI"), and are recognized in the statement of
operations when the hedged item affects earnings. SFAS No. 133 defines new
requirements for designation and documentation of hedging relationships, as well
as ongoing effectiveness assessments in order to use hedge accounting. A
derivative that does not qualify as a hedge will be marked to fair value through
earnings. SFAS No. 133 was adopted by the company effective January 1, 2001, and
the adoption of this standard had no effect on the Company's consolidated
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, as amended, effective as of October 1, 2000, which summarizes the
SEC's views in applying generally accepted accounting principles to revenue
recognition. The adoption of this guideline had no effect on the Company's
consolidated financial statements.
In March 2000, the FASB issued Financial Accounting Series Interpretation
No. 44, Accounting for Certain Transactions involving Stock Compensation which
provides clarification to APB Opinion No. 25, Accounting for Stock Issued to
Employees. The adoption of this interpretation had no effect on the Company's
consolidated financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method. The Company adopted SFAS No. 141 on July 1, 2001, as required
by the new statement. Adoption of this statement had no effect on the Company's
consolidated financial statements. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 establishes revised reporting
requirements for goodwill and other intangible assets. Upon adoption of this
standard, the Company will no longer amortize goodwill, unless evidence of an
impairment exists. Goodwill will be evaluated for impairment on an annual basis.
The Company will adopt the provisions of SFAS No. 142 effective January 1, 2002,
and is currently evaluating all of the provisions of this standard, and the
impact that adoption of this standard will have on the Company's consolidated
financial statements. The Company has $1,554,295 of goodwill at June 30, 2001,
and has recorded $166,110 for goodwill amortization for the six month period
then ended.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses the accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The Company is currently evaluating the impact that
adoption of this standard will have on the Company's consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses the accounting and reporting
for impairment of long-lived assets and for long-lived assets to be disposed of.
SFAS No. 144, which supercedes SFAS No. 121, is effective for fiscal years
beginning after December 15, 2001. The Company will adopt the provisions of SFAS
No. 144 effective January 1, 2002, and is currently evaluating all provisions of
this standard, and the impact that adoption of this standard will have on the
Company's consolidated financial statements.
NOTE 14 - OTHER MATTERS
The Company is involved in various legal proceedings in the ordinary
course of business, none of which are anticipated to have a material adverse
effect on the Company's consolidated financial statements, except as follows:
The Company's subsidiary, California Microbiological Consulting, Inc.,
(CMC) is currently facing legal action in connection with the results of
various tests it carried out for a food manufacturer. The Company currently
believes that its professional liability insurance coverage, which provides
cover of up to $1 million, should be sufficient to cover any costs incurred,
although there can be no assurance that such will in fact be the case. In the
event that any liability exceeds this figure, the only additional risk for the
Company would be the net assets of CMC. Excluding inter-company balances, these
amounted to approximately $130,000 at September 30, 2001. The Company is also
currently in discussions over the potential sale of CMC. As the potential sales
proceeds are currently estimated to be less that the tangible net asset value
of CMC, the Company has deemed it prudent to write down to zero the remaining
goodwill ($310,000) arising from the acquisition of CMC. This provision is
reflected in the depreciation and amortization expense in the third quarter of
2001.
Subsequent to the end of the 2001 third quarter, and following the
cessation of operations of its potato business, the Company has received
notification from Potandon of legal action over the non-payment of royalties
arising under the agreement between the Company and Potandon. The Company
believes it has provided for the amount of minimum royalties payable for the
period ending September 30, 2001. However, the Company may be subject to other
liabilities as a result of this legal action, which cannot be ascertained at
this time.
-10-
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, snack
food, consumer goods, healthcare, confectionery and industrial markets.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Sales. Sales decreased from $13,988,000 in the six months ended June
30, 2000 to $10,613,000 in the six months ended June 30, 2001, a decrease of
$3,375,000 or 24%. Sales of processing technologies and related activities
decreased from $2,199,000 in the six months ended June 30, 2000 to $509,000 in
the six months ended June 30, 2001, a decrease of $1,690,000 or 77%. Sales of
U.S. packaging materials decreased from $1,695,000 in the six months ended June
30, 2000 to $1,368,000 in the six months ended June 30, 2001, a decrease of
$327,000 or 19%. Sales of U.K. packaging materials increased from $6,868,000 in
the six months ended June 30, 2000 to $7,297,000 in the six months ended June
30, 2001, an increase of $429,000 or 6%. Sales of Spanish packaging materials
fell from $3,226,000 in the six months ended June 30, 2000 to $1,439,000 in the
six months ended June 30, 2001, a decrease of $1,787,000 or 55%.
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, and accounted for
approximately 85% ($1,464,000) 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 six months 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 few months of 2001, and therefore the full
benefit of this action will not be seen until the second half of 2001 and
beyond.
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 reviewing its options in relation to this activity, given the
Company's stated objective of achieving group operational profitability. To date
it has suspended operations in this area pending a final decision.
These decreases were offset by an increase in revenue from
processing technologies. 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
breached certain of its obligations under the license with them (a claim the
Company believes is without merit). During the second quarter of 2001, the
Company terminated the license agreement with Penn State.
The decrease in U.S. packaging material sales was principally
attributable to the adverse timing differences
- 11 -
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 half 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 6% in U.S. dollar
terms, but increased 16% 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 55% decline in sales of Spanish 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 7% in the first
half 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 and, with a
delay in the receipt of insurance proceeds, and with limited availability of
capital, this restriction on sales revenue has continued into 2001. The
insurance proceeds of the business interruption claim were received in June
2001, although those from the business damage claim remain to be settled. During
the second half of 2001, Fabbri will look to start to rebuild its sales and 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 decreased from $1,395,000 in the six
months ended June 30, 2000 to $1,252,000 in the six months ended June 30, 2001,
a decrease of $133,000. However, this mainly reflected the lower absolute level
of sales, as there was an increase as a percentage of sales, from 10% to 11.8%.
This increase reflected the considerably reduced losses in the corn operations,
following the cessation of operations at the end of 2000. In addition, there was
an improvement in the results of the potato operations, as well as increase in
the US packaging margin (mainly as a result of an improved product mix). These
gains were offset by a significant adverse movement in the gross profit of the
European packaging operations. This was due to the lower sales volumes, which
impacted margins disproportionately given the level of fixed costs, as well as
the additional impact of the floods which limited revenue generation, but where
costs continue to be incurred. Although many of these costs have been recovered
under insurance proceeds, these proceeds are recognized separately in the
Company's income statement. If the Spanish operations had only achieved a nil
gross profit (and it was profitable in the same period in 2000), the Company
would have reported a gross profit of 16.7%. There was also a slight fall in the
UK packaging margin. Although there has been an improving product mix, the
margin fall reflected the need to outsource certain activities pending the
installation of a new 10 color press. Once installed, the Company expects that
this will result in improved economies of operation and thus an increase in
margins, although there can be no assurance that such improvements will be
forthcoming.
In addition, the Company continues to accelerate the development of
certain applications for its proprietary
- 12 -
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 decreased from $4,287,000 in the six months ended June
30, 2000 to $2,936,000 in the six months ended June 30, 2001, a decrease of
$1,351,000 or 32%. This decrease was due primarily to (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 expenses in 2001 included $106,000
(2000:$143,000) non-cash costs for the fair value of warrants.
Research and Development Costs. Research and development costs
decreased from $676,000 in the six months ended June 30, 2000 to $375,000 in the
six months ended June 30, 2001, a decrease of $301,000 or 45%. The 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, 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.
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, $170,000 of this total profit was
recognized in the first half 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.
Insurance Proceeds. Insurance proceeds represent monies received
during the 2001 first half 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.
Depreciation and Amortization. Depreciation and amortization
decreased from $1,068,000 in the six months ended June 30, 2000 to $807,000 in
the six months ended June 30, 2001, a decrease of $261,000 or 24%. This
reduction was mainly as a result of the asset write down in 2000 relating to the
remaining fixed assets in the Company's corn operations.
Loss from Operations. Loss from operations decreased from $4,449,000
in the six months ended June 30, 2000 to $1,799,000 in the six months ended June
30, 2001, an improvement of $2,650,000 or 60%. 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
$1,652,000 or 33% over the first six months of 2000. In addition, the Company
received insurance proceeds in relation to Spain, as well as producing 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
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. 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.
- 13 -
Interest Expense. Interest charges increased from $4,231,000 in the
first half of 2000 to $5,589,000 in the first half of 2001, an increase of
$1,358,000 or 32%. 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 period, $4,743,000 (85%) represented such non-cash
charges.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock decreased from $1,048,000 for the six
months ended June 30, 2000 to $302,000 in the six months ended June 30, 2001, a
decrease of $746,000 or 71%. The decrease was due to a lower adjustment in 2001
for the fair value of warrants as compared with the fair value adjustment for
warrants charged during the first half of 2000.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Sales. Sales decreased from $7,936,000 in the three months ended
June 30, 2000 to $5,354,000 in the three months ended June 30, 2001, a decrease
of $2,582,000 or 33%. Sales of processing technologies and related activities in
the US decreased from $1,608,000 in the three months ended June 30, 2000 to
$257,000 in the three months ended June 30, 2001, a decrease of $1,351,000 or
86%. Sales of U.S. packaging materials decreased from $754,000 in the three
months ended June 30, 2000 to $590,000 in the three months ended June 30, 2001,
a decrease of $164,000 or 22%. Sales of U.K. packaging materials increased from
$4,033,000 in the three months ended June 30, 2000 to $4,060,000 in the three
months ended June 30, 2001, an increase of $27,000 or 0.7%. Sales of Spanish
packaging materials decreased from $1,541,000 in the three months ended June 30,
2000 to $447,000 in the three months ended June 30, 2001, a decrease of
$1,094,000 or 71%.
As discussed in the year to date results above, 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, and accounted for approximately 86%
($1,191,000) of the decline in this business segment. There was no revenue from
fresh-cut corn in the second quarter of 2001. Most of the remaining fall in this
segment was due to lower sales from microbiological testing work from the
Company's Pure Produce subsidiary following the sale earlier this year of
certain of its assets, as well as 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. To date it has suspended operations in this area pending a final
decision.
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.
Sales of U.K. packaging materials only increased by 1% in U.S.
dollar terms, but increased 8% 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
- 14 -
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 71% decline in sales of Spanish 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 8% in the 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 and, with a
delay in the receipt of insurance proceeds, and with limited availability of
capital, this restriction on sales revenue has continued into 2001. The
insurance proceeds of the business interruption claim were received late in the
second quarter of 2001, although those from the business damage claim remain to
be settled. During the second half of 2001, Fabbri will look to start to rebuild
its sales and 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 decreased from $863,000 in the three
months ended June 30, 2000 to $597,000 in the three months ended June 30, 2001,
a decrease of $266,000. However, this was mainly as a result of lower sales, as
the change as a percentage of sales was a small increase, from 10.9% to 11.1%.
Within these figures were considerably reduced losses in the corn operations
(following the cessation of operations at the end of 2000), an improvement in
the results of the potato operations and an increase in the margin in US
packaging (as a result of an improved product mix). These gains were offset by a
significant adverse movement in the gross profit of the European packaging
operations. This was due to the lower sales volumes, which impacted margins
disproportionately given the level of fixed costs, as well as the additional
impact of the floods which limited revenue generation, but where costs continue
to be incurred. Although many of these costs have been recovered under insurance
proceeds, these proceeds are recognized separately in the Company's income
statement. If the Spanish operations had only achieved a nil gross profit (and
it was profitable in the second quarter of 2000), the Company would have
reported a gross profit of 17.3%. There was also a slight fall in the UK
packaging margin. Although there has been an improving product mix, the margin
fall reflected the need to outsource certain activities pending the installation
of a new 10 color press. Once installed, the Company expects that this will
result in improved economies of operation and thus an increase in margins,
although there can be no assurance that such improvements will be forthcoming.
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 decreased from $2,117,000 in the three months ended June
30, 2000 to $1,413,000 in the three months ended June 30, 2001, a decrease of
$704,000 or 33%. This decrease was due primarily to (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 expenses in 2001 included $19,500 (2000:$97,700)
non-cash costs for the fair value of warrants.
Research and Development Costs. Research and development costs
decreased from $353,000 in the three months ended June 30, 2000, to $180,000 in
the three months ended June 30, 2001, a decrease of $173,000 or 49%. The
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, 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.
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
- 15 -
(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 second 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.
Insurance Proceeds. Insurance proceeds represent monies received
during the 2001 second 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.
Depreciation and Amortization. Depreciation and amortization
decreased from $546,000 in the three months ended June 30, 2000 to $414,000 in
the three months ended June 30, 2001, a decrease of $131,000 or 24%. This
reduction was mainly as a result of the asset write down in 2000 relating to the
remaining fixed assets in the Company's corn operations.
Loss from Operations. Loss from operations decreased from $2,059,000
in the three months ended June 30, 2000 to $613,000 in the three months ended
June 30, 2001, a decrease of $1,446,000 or 70%. 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
$877,000 or 36% over the second quarter of 2000. In addition, the Company
received insurance proceeds in relation to Spain, as well as producing an
improved 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
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. 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 decreased from $2,887,000 in the
three months ended June 30, 2000 to $2,814,000 in the three months ended June
30, 2001, a decrease of $73,000 or 2.5%. This decrease principally reflects
slightly lower 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 period,
$2,257,000 (80%) represented such non-cash charges.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock increased from $508,000 in the three
months ended June 30, 2000 to $277,000 in the three months ended June 30, 2001,
a decrease of $331,000. The decrease was due to a lower adjustment in the second
quarter of 2001 for the fair value of warrants as compared with the fair value
adjustment for warrants charged during the second quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
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 six
months ended June 30, 2001, the Company incurred a further net loss of
$7,438,994, a cash loss from operations of $1,131,000 and had negative working
capital at June 30, 2001 of $16,116,251. Within this negative working capital is
approximately
- 16 -
$4,415,000 of short term debt that is currently repayable during the third
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 during the third quarter of 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 half 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) further exploitation of the Company's
processing, and (iii) further exploitation of the Company's perforating
technologies, as evidenced by the new orders gained in produce packaging in the
U.K. during 2000 on, 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 third 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 June 30, 2001, the Company had $201,000 in unrestricted cash and
short term investments, compared with $166,000 at December 31, 2000, an increase
of $35,000. In addition, the Company had $553,000 of restricted cash - current.
During the six months ended June 30, 2001, $1,131,000 was used in operating
activities and a net $153,000 was used in investing activities to purchase fixed
assets. The significant decrease in cash used in operating activities of
$3,612,000 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 six months ended June 30, 2001
provided net cash of $1,377,000, compared with net cash provided of $6,069,000
in 2000. The generation in 2001 was primarily from the proceeds of new share
issuances ($650,000) and short-term debt ($1,368,000) offset by repayment of
short-term and long-term debt ($297,000 and $345,000 respectively). 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, together with proceeds from the issuance of common
stock of $2,205,000, offset by repayments of short-term and long-term debt.
As of June 30, 2001, the Company had fully drawn $562,500 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
(5.25% as of June 30, 2001). The Company also has a short-term line of credit
with the Bank of Scotland for up to approximately $2,109,000, subject to the
level of receivables, which bears interest of 1.75% over bank base rate. Shortly
after the end of the quarter, this limit was increased to approximately
$2,391,000. At June 30, 2001, approximately $2,071,000 had been drawn under this
facility. In conjunction with this new facility, the Company also
- 17 -
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 $234,000 as of June 30, 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 half 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 June 30, 2001. 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 (5.75% as at June 30, 2001). The
Company is discussing with the bank converting this into a short term loan,
repayable over 12 months.
Newcorn has two equipment financing loans with General Electric
Capital Corporation ("GECC") and Santa Barbara Bank & Trust ("SBBT") secured by
specifically identified capital assets. During the quarter the remaining balance
owed to GECC was repaid. At June 30, 2001, approximately $186,000 was
outstanding under the SBBT loan.
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 June 30, 2001, approximately $524,000 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 June 30, 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, first to May 2001, as a result of which a total of
1,650,000 shares were issued (with a total value of $825,000), and then to July
2001. Under this second extension, a further 2,550,000 shares are issuable, with
a value of $1,310,500. In addition, interest continues to be accrued and will be
paid upon repayment of the debt balance. Repayment has been subsequently
deferred again until January 2002, as a result of which a further 15,400,000
shares are issuable, with a total value of $4,614,500. As of June 30, 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 166%.
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 "Notes"). The Notes, 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 the
Notes 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. During the second
quarter and subsequently, agreement has been reached to further extend the
repayment date on this balance for a period up to 90 days, and in certain
circumstances for up to 18 months on some balances. Interest will continue to
accrue at a rate of 10% per annum. In consideration for this second 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
- 18 -
be paid in shares of common stock. This additional charge has been expensed into
interest expense during the second quarter of 2001 The fair value attributable
to the additional warrants will be amortized into interest expense over the
extension period. In addition, the life of the original warrants has been
extended by 15 months to June 2006 and the exercise price of the warrants
reduced from $1.00 to $0.50. The fair value of this one time change ($131,000)
has been charged into interest expense in the second quarter of 2001.
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. During the second quarter, the lender agreed to defer repayment
for a period of 60 days. In consideration for this extension, the Company has
agreed to issue the lender 100,000 shares of Common Stock, plus a warrant for
the purchase of the 100,000 shares of Common Stock, exercisable at $0.50 per
share. The fair value of the shares ($58,000) and the warrants ($50,000) will be
expensed into interest expense over the period of the extension. Subsequent
to the end of the third quarter of 2001, the lender has served a demand for
repayment, which the Company has yet to meet. The effective interest rate of
this facility, assuming the loan is not converted and after including the value
of the warrants issued, is approximately 57%.
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. During June 2001, in line with other loan agreements, it was agreed to
issue the lender with 65,000 shares of common stock, (with a value of $28,600),
which will be expensed into interest expense over the period of the loan.
Subsequent to the end of the 2001 third quarter, this director has agreed to
defer repayment until April 2002. No further consideration has been granted in
return for the extension.
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 issued
400,000 shares of Common Stock. The market value of the warrants ($325,000) was
amortized into interest expense over the life of the debt.
In May 2001, the Company obtained a further loan from a director of
the Company in the amount of $50,000. 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 agreed to issue 50,000 shares of Common
Stock. The value of these shares ($22,000) is being amortized into interest
expense over the life of the debt. Subsequent to the end of the 2001 third
quarter, this director has agreed to defer repayment until April 2002. No
further consideration has been granted in return for the extension.
In June 2001, the Company obtained a loan from an institutional
investor in the amount of $500,000. This loan, which is unsecured, is for a
period of three months and carries interest at the rate of 10% per annum. In
connection with this loan, the Company agreed to issue 325,000 shares of Common
Stock. The value of these shares ($162,175) is being amortized into interest
expense over the life of the debt. Subsequent to the end of the 2001 third
quarter, the lender has agreed to defer repayment until December 31, 2001. In
connection with this, the Company has agreed to issue 300,000 restricted shares
of common stock plus warrants to purchase 600,000 of common stock at an exercise
price of $0.30 per share. The value of the shares and the fair value of the
warrants will be charged into interest expense during the final quarter of 2001.
At June 30, 2001, the Company had warrants outstanding and
exercisable to purchase 13,264,614 shares of Common Stock at a weighted average
price of $1.08 per share. In addition, at June 30, 2001, the Company had
1,728,000 options outstanding and exercisable to purchase shares of Common Stock
at a weighted average price of $7.17 per share. At June 30, 2001, the Company,
through its UK operations, had capital commitments totaling approximately
$2,900,000. Lease finance has been arranged for this, subject to the payment of
a deposit of approximately $400,000.
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,
- 19 -
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 and n)
loss of services of key employees of the Company, 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 six months ended June 30, 2001, the
revenue generated from these sources amounted to $1,852,000 (17.5%), $7,297,000
(68.9%) and $1,440,000 (13.6%) 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 8% higher in the first six months 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 Comparing the first six
months of 2001 against the same period in 2000, the U.S. dollar rose by
approximately 7% against the Spanish peseta.
- 20 -
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 June
28, 2001, shareholders re-elected Paul L. Devine, W. Ward Carey, Al S. Clausi
and Richard M. Harris. The shareholders also approved the proposed amendments to
the Company's 1998 Stock Incentive Plan (to increase the number of shares
reserved for issuance from 850,000 to 1,500,000) and the Company's Articles of
Incorporation (to increase the authorized number of shares of common stock from
50,000,000 to 100,000,000).
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
- 21 -
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 28, 2001 /s/ Paul L. Devine
---------------------------- ---------------------------------------
Paul L. Devine
Chairman, President and Chief Executive
Officer
Date: November 28, 2001 /s/ Joseph W. Beach
---------------------------- ----------------------------------------
Joseph W. Beach
Senior Vice President and Chief
Financial Officer
EPL Technologies, Inc.
Exhibit 11.0 Computation of Earnings per Common Share and Diluted Earnings
per Common Share
- 22 -