UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended SEPTEMBER 30, 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 executive offices) (Zip Code)
(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
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30,
2001 AND 2000 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 3
D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11
CONDITION AND RESULTS OF OPERATIONS.
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
PART 1, 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 a 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)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 52,676 $ 166,041
Restricted cash - current 365,295 382,570
Accounts receivable, net 3,463,527 4,535,696
Inventories 2,376,135 2,926,741
Prepaid expenses and other current assets 1,174,281 974,542
------------ ------------
Total Current Assets 7,431,914 8,985,590
------------ ------------
PROPERTY AND EQUIPMENT, Net 5,163,814 5,913,578
OTHER ASSETS
Patents, net 586,704 671,061
Goodwill 1,149,692 1,720,405
Other intangibles, net 91,348 114,532
Restricted cash-non current 0 443,871
Deferred debt costs 0 785,181
Other noncurrent assets 105,900 90,895
------------ ------------
Total Other Assets 1,933,644 3,825,945
------------ ------------
TOTAL ASSETS $ 14,529,372 $ 18,725,113
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,474,637 $ 7,453,260
Accrued expenses 4,585,254 2,504,542
Other liabilities 1,475,635 2,444,060
Deferred gain on sale-leaseback, current portion 322,107 322,107
Short term revolving credit facilities with related parties 4,459,760 3,600,060
Short term convertible debt 1,000,000 1,000,000
Current portion of long-term debt and short term credit facilities 5,943,312 6,425,682
------------- ---------------
Total Current Liabilities 25,260,705 23,749,711
LONG TERM DEBT 929,510 1,267,071
DEFERRED GAIN ON SALE-LEASEBACK, NONCURRENT PORTION 1,073,636 1,334,040
DEFERRED INCOME TAXES 334,928 259,945
------------- ---------------
Total Liabilities 27,598,779 26,610,767
------------- ---------------
SHAREHOLDERS' EQUITY
Convertible Series A Preferred Stock 10,000 10,000
Convertible Series E Preferred Stock 1 0
Common Stock 45,795 37,492
Additional paid-in capital 76,254,593 69,136,145
Accumulated deficit (88,295,567) (76,079,646)
Treasury stock, at cost (138,160) (138,160)
Accumulated other comprehensive loss (946,069) (851,485)
------------- --------------
TOTAL SHAREHOLDERS' EQUITY (13,069,407) (7,885,654)
------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,529,372 $ 18,725,113
============ =============
The accompanying notes are an integral part of these condensed financial
statements.
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EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Sales $ 15,431,301 $ 20,939,820 $ 4,818,065 $ 6,951,695
Cost of sales 13,531,303 18,778,760 4,170,542 6,185,913
------------ ------------ ------------ ------------
Gross profit 1,899,998 2,161,060 647,523 765,782
OPERATING EXPENSES
Selling, general and administrative expenses 4,447,609 6,351,824 1,511,278 2,064,740
Research and development costs 741,917 1,009,332 366,675 332,908
Gain on sale of fixed assets (249,953) (273,899) (79,883) (86,819)
Insurance proceeds (897,751) 0 0 0
Depreciation and amortization 1,538,127 1,590,951 730,633 522,766
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (3,679,951) (6,517,148) (1,881,180) (2,067,813)
Interest expense, net 8,060,987 7,253,380 2,471,781 3,022,721
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX EXPENSE (11,740,938) (13,770,528) (4,352,961) (5,090,534)
Income tax expense 74,983 84,186 23,965 28,062
------------ ------------ ------------ ------------
NET LOSS $(11,815,921) $(13,854,714) $ (4,376,926) $ (5,118,596)
Accretion, discount and dividends on 420,313 1,319,658 118,313 271,567
preferred stock ------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $(12,236,234) $(15,174,372) $ (4,495,239) $ (5,390,163)
============ ============ ============ ============
Loss per common share-basic and diluted $ (0.30) $ (0.47) $ (0.10) $ (0.16)
============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
-3-
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
---------- ---------
CASHFLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,438,994) $(13,854,714)
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 6,846,671 6,497,993
Depreciation and amortization 1,538,127 1,590,951
Amortization of deferred profit (249,953) (273,899)
Expenses paid with warrants/shares 105,688 259,825
------------ ------------
(3,579,888) 8,074,870
Changes in assets and liabilities 3,153,391 122,150
------------ ------------
Net cash used in operating activities $ 426,497) (5,657,694)
------------ ------------
CASHFLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (549,604) (1,355,543)
Proceeds of sale of fixed assets 44,727
------------ ------------
Net cash used in investing activities (504,877) (1,355,543)
------------ ------------
CASHFLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Preferred Stock 650,000
Proceeds from issuance of common stock, net 3,035,360
Proceeds from short term debt 1,925,332 3,325,000
Repayment of short term debt (1,594,255) (272,673)
Proceeds from long term debt 101,535 1,037,086
Repayment of long term debt (392,843) (474,251)
------------ ------------
Net cash provided from financing activities 689,769 6,932,239
------------ ------------
EFFECT OF EXCHANGE RATE CHANGE ON CASH 128,240 (346,276)
------------ ------------
(DECREASE) IN CASH AND CASH EQUIVALENTS (113,365) (427,274)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 166,041 587,589
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 52,676 $ 160,315
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $ 420,000 $ 1,319,658
Issuance of common stock in exchange for debt costs $ 4,730,000 $ 2,123,438
Issuance of common stock for settlement of liabilities $ 179,050 0
Issuance of warrants to lenders and consultants $ 783,500 $ 3,091,100
Issuance of warrants in connection with raising equity $ 1,027,700 0
The accompanying notes are an integral part of these condensed financial
statements.
-4-
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
September 30, 2001, and the results of operations and cashflows 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 has 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 months and nine months ended September 30,
2001 are not necessarily indicative of the results to be expected for the 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 ended 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 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 close 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
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shareholders. No assurances can be given that the Company will be successful in
raising additional capital and failure to raise such capital, if needed, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
September 30, 2001 December 31, 2000
------------------ -----------------
Raw Materials and Supplies $1,143,050 $1,410,928
Finished Goods 1,233,085 1,515,813
---------- ----------
Total Inventories $2,376,135 $2,926,741
========== ==========
NOTE 4 - NOTES PAYABLE
In 1999, Paul L. Devine, the Company's Chairman and Chief Executive
Officer, agreed to extend to the Company, on a short term basis, a revolving
credit facility in an amount up to $1,000,000. At September 30, 2001, $545,000
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 total of 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 on a number of occasions, currently until January
2002, as a result of which a further 15,400,000 shares are issuable (with a
total value $4,614,500). As of September 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 158%.
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
-6-
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 47%.
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 (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 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
-7-
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.
Interest charged in relation to related party loans (excluding the
non-cash costs detailed above) totaled approximately $140,000 and $382,000 for
the three months and nine months ended September 30, 2001. The interest payable
at September 30, 2001 was approximately $656,000, 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
September 30, 2001 totaled $1,425,268. During the nine months ended September
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
September 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 September 30, 2001 totaled $270,092. The outstanding dividends on the Series
C Stock at September 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 nine months ended
September 30, 2001, holders of 552.5 shares of Series E Stock elected to
exercise their right of conversion, leaving 97.5 shares of Series E Stock
outstanding as at September 30, 2001. The outstanding dividends on the Series E
Stock at September 30, 2001 totaled $19,563.
NOTE 6 - ISSUANCE OF COMMON STOCK
A total of 8,302,574 shares of Common Stock were issued, in
transactions not involving a public offering under the Securities Act of 1933,
as amended, during the nine months ended September 30, 2001. Thus a total of
45,583,525 shares of Common Stock were outstanding at September 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, 6,040,000 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 650,000 shares of Common Stock
to a third party which participated in the negotiation of the restructuring. The
value of these shares ($3,394,000) 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 850,000 shares of Common Stock were issued
upon the conversion of 552.5 shares of Series E Stock (see Note 5 above).
-8-
At September 30, 2001, the Company had 6,240,500 shares issuable in
connection with various financing agreements (see Note 4). The earned value of
these shares ($1,740,000) has been recorded in additional paid in capital.
NOTE 7 - ISSUANCE OF OPTIONS AND WARRANTS
During the nine months ended September 30, 2001, a total of 72,375
options were granted. In addition, a total of 594,250 options expired
unexercised. No options were exercised during this period. As a result, at
September 30, 2001, the Company had 1,510,250 options outstanding and
exercisable to purchase shares of Common Stock at a weighted average price of
$6.50 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 900,000
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 ($439,000) was amortized to
accretion, discount and dividends during the relevant 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 September 30, 2001, the Company had warrants outstanding and
exercisable to purchase 13,864,614 shares of Common Stock at a weighted average
price of $1.06 per share (9,974,114 shares at a weighted average price of $1.35
at December 31, 2000).
At September 30, 2001, the Company had 200,000 warrants issuable in
connection with the conversion of the Series D Stock. The value of these
warrants ($43,000) 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 September 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 September 30,
2001 and 2000 was $4,191,218 and $5,221,764 respectively, and $11,910,505 and
$14,200,991 for the nine months ended September 30, 2001 and 2000 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.
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The following table summarizes the Company's financial information by
industry segment.
Nine months ended Three months ended
Sept 30, 2001 Sept 30, 2000 Sept 30, 2001 Sept 30, 2000
Sales:
Processing technologies and related activities $ 833,819 $ 3,581,938 $ 324,805 $ 1,382,833
Packaging materials 14,597,482 17,357,882 4,493,260 5,568,862
------------ ------------ ------------ ------------
Total sales $ 15,431,301 $ 20,939,820 $ 4,818,065 $ 6,951,695
============ ============ ============ ============
Net (Loss) Income from Operations:
Processing technologies and related activities (3,726,578) (6,459,981) (1,613,429) (2,065,821)
Packaging materials 46,627 (57,167) (267,751) (1,992)
------------ ------------ ------------ ------------
Total net (loss) income from operations $ (3,679,951) $ (6,517,148) $ (1,881,180) $ (2,067,813)
============ ============ ============ ============
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 nine months and three months ended September 30, 2001,
approximately $898,000 and $0 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 nine months ended September 30, 2001,
approximately $758,000 of this provision was utilized.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
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
cashflow 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 income. 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
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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 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, as well as
the impact that adoption of this standard will have on the Company's
consolidated financial statements. The Company had $1,150,000 of goodwill at
September 30, 2001, and recorded $571,000 for goodwill amortization (including a
one-time impairment provision of $310,000 as detailed in Note 14 below) for the
nine months ended September 30, 2001.
In June 2001, the FASB issued SFAS No. 143, Accounting for Retirement
Obligations, which addresses the accounting and reporting 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 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.
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
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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.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Sales. Sales decreased from $20,940,000 in the nine months ended
September 30, 2000 to $15,431,000 in the nine months ended September 30, 2001, a
decrease of $5,509,000 or 26%. Sales of processing technologies and related
activities decreased from $3,582,000 in the nine months ended September 30, 2000
to $834,000 in the nine months ended September 30, 2001, a decrease of
$2,748,000 or 77%. Sales of U.S. packaging materials decreased from $2,530,000
in the nine months ended September 30, 2000 to $1,904,000 in the nine months
ended September 30, 2001, a decrease of $626,000 or 25%. Sales of U.K. packaging
materials increased from $10,548,000 in the nine months ended September 30, 2000
to $10,814,000 in the nine months ended September 30, 2001, an increase of
$266,000 or 2.5%. Sales of Spanish packaging materials fell from $4,280,000 in
the nine months ended September 30, 2000 to $1,879,000 in the nine months ended
September 30, 2001, a decrease of $2,401,000 or 56%.
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 92%
($2,523,000) 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 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 nine months of 2001.
Most of the remaining fall in this segment was due to lower sales from
microbiological testing work. This follows the decision early in 2001 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.
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 first half of 2001, the Company discussed 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 in shipments to large customers
compared to the same period of 2000. The Company continues to be engaged in
discussions with a number of potential customers for new product applications
and markets, especially in relation to the Company's proprietary perforating
capabilities. These include applications in the consumer goods, produce,
horticultural, bakery and pharmaceutical industries, amongst others. Some
initial orders have been received during the first nine months 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.
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Sales of U.K. packaging materials increased by 2.5% in U.S. dollar
terms, but increased 9% in local currency terms. The increase was principally
attributable to an increase in the sales of packaging to the produce industry.
This increase would have been greater but for the decline experienced in
September 2001 as compared to sales in September 2000. Management believes this
was due to a change in world events, and since the end of the 2001 third quarter
demand has picked up slightly. 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 56% decline in sales of Spanish packaging materials was due mainly
to 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 5% in the first nine months
of 2001 as compared with the same period of 2000. It is anticipated that adverse
currency conversion rates in the short term could 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 $2,161,000 in the nine months
ended September 30, 2000 to $1,900,000 in the nine months ended September 30,
2001, a decrease of $261,000. However, this mainly reflected the lower absolute
level of sales, as there was an increase as a percentage of sales, from 10.3% to
12.3%. 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 margin of US processing technologies (as a result of an
improved product mix). These gains were offset by a significant adverse movement
in the gross profit of the Spanish 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 16.3%.
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 2001 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 $6,352,000 in the nine months ended
September 30, 2000 to $4,448,000 in the nine months ended September 30, 2001, a
decrease of $1,904,000 or 30%. 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
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of operations at the end of 2000. The expenses in 2001 included $106,000
(2000:$260,000) non-cash costs for the fair value of warrants. Since September
30, 2001, the Company has continued to look for further ways to reduce selling,
general and administrative expenses.
Research and Development Costs. Research and development costs
decreased from $1,009,000 in the nine months ended September 30, 2000 to
$742,000 in the nine months ended September 30, 2001, a decrease of $267,000 or
26%. 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, $250,000 of this total profit was
recognized in the first nine months 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 $1,591,000 in the nine months ended September 30, 2000 to $1,538,000 in the
nine months ended September 30, 2001, a decrease of $53,000 or 3.3%. This figure
includes a charge of $310,000 to write down to zero the remaining goodwill
arising from the acquisition of CMC. Management felt it prudent to make this
charge as discussions are continuing over the possible sale of CMC, and the
potential sales proceeds are expected to be less that the tangible net asset
value of the business (excluding inter-company balances). Without this one time
charge, the decrease would have been $363,000 or 23%. 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 $6,517,000 in
the nine months ended September 30, 2000 to $3,680,000 in the nine months ended
September 30, 2001, an improvement of $2,837,000 or 44%. This is despite the
$310,000 one time goodwill charge mentioned above, without which the improvement
would have been $3,147,000 or 48%. 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 $2,171,000 or 30%
over the first nine months of 2000. In addition, the Company received insurance
proceeds in relation to Spain, as well as producing an improvement in gross
margin as a percentage of sales, despite the lower sales producing a lower
absolute gross margin. 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 increased from $7,253,000 for the
nine months ended September 30, 2000 to $8,061,000 for the nine months ended
September 30, 2001, an increase of $808,000 or 11%. This increase principally
reflects additional finance charges arising from additional shares of Common
Stock granted upon the restructuring of the facility with
-14-
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, $6,793,000 (84%)represented such non-cash charges.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock decreased from $1,320,000 for the nine
months ended September 30, 2000 to $420,000 in the nine months ended September
30, 2001, a decrease of $900,000 or 68%. 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 nine months of 2000.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Sales. Sales decreased from $6,952,000 in the three months ended
September 30, 2000 to $4,818,000 in the three months ended September 30, 2001, a
decrease of $2,134,000 or 31%. Sales of processing technologies and related
activities in the US decreased from $1,383,000 in the three months ended
September 30, 2000 to $325,000 in the three months ended September 30, 2001, a
decrease of $1,058,000 or 76%. Sales of U.S. packaging materials decreased from
$835,000 in the three months ended September 30, 2000 to $536,000 in the three
months ended September 30, 2001, a decrease of $299,000 or 36%. Sales of U.K.
packaging materials decreased from $3,681,000 in the three months ended
September 30, 2000 to $3,517,000 in the three months ended September 30, 2001, a
decrease of $164,000 or 4.5%. Sales of Spanish packaging materials decreased
from $1,053,000 in the three months ended September 30, 2000 to $440,000 in the
three months ended September 30, 2001, a decrease of $613,000 or 58%.
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 100% ($1,059,000) of the
decline in this business segment. There was no revenue from fresh-cut corn in
the third 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 non corn declines were
offset by an increase in sales of processing technologies.
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 decreased by 4.5% in U.S. dollar
terms, but only declined 1.4% in local currency terms. Although there was on
overall increase in the sales of packaging to the produce industry, the decline
in the period was due to the significant decline in demand during September
2001, as compared with September 2000. Whilst demand has increased somewhat
since the end of the quarter, short term demand remains uncertain. 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 2002 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 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
-15-
2002 and beyond, although there can be no assurance that this development will
result in new business.
The 58% decline in sales of Spanish packaging materials in the 2001
third quarter as compared with the 2000 third quarter was due mainly to the
impact of flood damage that occurred at the Fabbri factory in late October 2000.
Although there was no material currency movement of the dollar against the
Spanish Peseta in the third quarter 2001 as compared with the same period in
2000, it is anticipated that adverse currency conversion rates in the short term
could affect Spanish sales as reported in US dollars as compared to the prior
year periods. 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. With the Spanish plant closed in
August for annual holidays, it is only during the final quarter of 2001 and
beyond that Fabbri can look to start to rebuild its sales and to integrate its
activities more with the U.K. subsidiary. This is intended not only to leverage
the U.K.'s scientific and technical knowledge base, but will also enable the
Company 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 $766,000 in the three months
ended September 30, 2000 to $648,000 in the three months ended September 30,
2001, a decrease of $118,000. However, this was mainly as a result of lower
sales, as the change as a percentage of sales was an increase, from 11% to
13.4%. 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 process technologies (as a result of an improved product mix). These
gains were offset by a significant adverse movement in the gross profit of the
Spanish 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 third quarter of 2000), the Company
would have reported a gross profit of 15.8%. 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 2001 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 $2,065,000 in the three months ended
September 30, 2000 to $1,511,000 in the three months ended September 30, 2001, a
decrease of $554,000 or 27%. 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 $0
(2000:$117,000) non-cash costs for the fair value of warrants.
Research and Development Costs. Research and development costs
increased from $333,000 in the three months ended September 30, 2000, to
$367,000 in the three months ended September 30, 2001, an increase of $34,000 or
10%. This increase reflects a reduction in certain costs following sale of Pure
Produce earlier in 2001, offset by increased spending on packaging and other
developments, incurred both internally and without outside institutions . 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
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financial reporting purposes, $80,000 of this total profit was recognized in the
third quarter of 2001. The remaining balance will be recognized over the eight
year life of the associated leaseback. The tax on this profit can be deferred
for up to 10 years under Spanish tax rules.
Depreciation and Amortization. Depreciation and amortization increased
from $523,000 in the three months ended September 30, 2000 to $731,000 in the
three months ended September 30, 2001, an increase of $208,000 or 40%. However,
the 2001 figure includes a charge of $310,000 to write down to zero the
remaining goodwill arising from the acquisition of CMC, as mentioned above.
Management felt it prudent to make this charge as discussions are continuing
over the possible sale of CMC, and the potential sales proceeds are expected to
be less that the tangible net asset value of the business (excluding
inter-company balances). Without this one time charge, depreciation and
amortization would have fallen by $102,000 or 20%. 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 $2,068,000 in
the three months ended September 30, 2000 to $1,881,000 in the three months
ended September 30, 2001, a decrease of $187,000 or 9%. If the one time
additional goodwill charge is excluded, the reduction would have $497,000 or
24%. 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 $520,000 or 22% over the third quarter of
2000. Further improvements are expected in improving margin and reducing
absolute costs 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 $3,023,000 in the
three months ended September 30, 2000 to $2,472,000 in the three months ended
September 30, 2001, a decrease of $551,000 or 18%. 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 as referenced in Note 4 above. Of the total charges in the current
period, $2,050,000 (83%) represented such non-cash charges.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock decreased from $272,000 in the three
months ended September 30, 2000 to $103,000 in the three months ended September
30, 2001, a decrease of $169,000. The decrease was due to a lower adjustment in
the third quarter of 2001 for the fair value of warrants as compared with the
fair value adjustment for warrants charged during the third 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
nine months ended September 30, 2001, the Company incurred a further net loss of
$11,815,921, a cash loss from operations of $426,000 and had negative working
capital at September 30, 2001 of $17,828,791. Within this negative working
capital is approximately $4,196,000 of short term debt that is currently
repayable during the final 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 until December 2001 and is in discussions to
defer repayment of the balance. Additionally, the Company's $1.0 million
convertible debt is currently due for repayment. 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 nine months of 2001, and
consequently the loans may be
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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 entered into an agreement with an
institutional investor to raise $5 million in new redeemable convertible
preferred stock, which is expected to close 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.
At September 30, 2001, the Company had $53,000 in unrestricted cash and
short term investments, compared with $166,000 at December 31, 2000, a decrease
of $113,000. In addition, the Company had $365,000 of restricted cash - current.
During the nine months ended September 30, 2001, $426,000 was used in operating
activities and a net $505,000 was used in investing activities to purchase fixed
assets. The significant decrease in cash used in operating activities of
$5,232,000 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 nine months ended September 30,
2001 provided net cash of $690,000, compared with net cash provided of
$6,932,000 in 2000. The generation in 2001 was primarily from the proceeds of
new share issuances ($650,000) and short-term debt ($1,925,000) offset by
repayment of short-term and long-term debt ($1,594,000 and $393,000
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 $3,035,000, offset by repayments
of short-term and long-term debt.
As of September 30, 2001, the Company had fully drawn $586,900 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 (4.75% as of September 30, 2001). The Company also has a short-term line of
credit with the Bank of Scotland for up to approximately $2,391,000, subject to
the level of receivables, which bears interest of 1.75% over bank base rate. At
September 30, 2001, approximately $1,442,000 had been drawn under this facility.
In conjunction with this new facility, the Company also has an additional
short-term line of credit with the Bank of Scotland, carrying interest at 1.75%
over bank base rate, under which the Company had drawn approximately $252,000 as
of September 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 nine months 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.
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The Company, through its subsidiary, EPL Flexible Packaging, Inc., has
a short term credit facility of $63,000 with Old Second National Bank of Aurora,
which facility was fully drawn at September 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 (3.00% as at September 30, 2001). The
Company is repaying this over 12 months.
Newcorn had two equipment financing loans with General Electric Capital
Corporation ("GECC") and Santa Barbara Bank & Trust ("SBBT") secured by
specifically identified capital assets. During the 2001 second quarter the
remaining balance owed to GECC was repaid. During the 2001 third quarter, most
of the remaining balance owed to SBBT was repaid, leaving approximately $14,000
outstanding under the SBBT loan as of September 30, 2001.
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 September 30, 2001, $545,000
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 total of 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 on a number of
occasions,currently until January 2002, as a result of which a further
15,400,000 shares are issuable (with a total value $4,614,500). As of September
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 158%.
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
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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 47%.
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 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 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 quarter, the
lender has agreed to 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 September 30, 2001, the Company had warrants outstanding and
exercisable to purchase 13,864,614 shares of Common Stock at a weighted average
price of $1.06 per share. In addition, at September 30, 2001, the Company had
1,510,250 options outstanding and exercisable to purchase shares of Common Stock
at a weighted average price of $6.50 per share. At September 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
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Statements in the foregoing discussion that are not statements of
historical fact and reflect the intent, belief or expectations of the Company
and its management regarding the anticipated impact of events, circumstances and
trends should be considered forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not guarantees of future performance, and actual results may vary
materially from those projected in the forward-looking statements. Meaningful
factors that might affect such results include, but are not limited to: a) the
Company's needs for capital, including capital for acquisitions, which needs
have been and are expected to continue to be substantial, and its potential
inability to obtain additional financing on satisfactory terms, b) the Company's
product development and sales process, which is lengthy and resource intensive,
c) the uncertainty of demand for, or the market acceptance of, the Company's
products and services, d) the Company's limited resources and experience in
marketing and selling its products and services, e) personnel resources and
production requirements and potential difficulties in cross-marketing and
managing multiple product lines, f) the Company's potential inability to
identify and acquire acceptable acquisition targets, to the extent necessary to
fulfill its expansion plans, and its potential inability to successfully
integrate any such acquisitions into its operations, g) potential product
obsolescence and short product life cycles, h) potential competition,
particularly in the market for produce packaging, from companies with greater
financial, management and other resources, i) the unpredictability and
volatility of the market for agricultural products, j) changes in U.S. and
foreign regulation, k) difficulty with research and development and sales and
marketing activities regarding new and existing products, including extension of
necessary time periods or increase in expense for product introduction and
market penetration, l) potential difficulties in obtaining or protecting
intellectual property rights or the infringement of proprietary or other rights
of the Company by third parties, m) raw material availability and pricing 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 nine months ended September 30, 2001,
the revenue generated from these sources amounted to $2,738,000 (17.7%),
$10,813,000 (70.1%) and $1,879,000 (12.2%) 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 6% higher in the first nine 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 nine months of 2001 against the same period in 2000, the U.S. dollar rose
by approximately 5% against the Spanish peseta.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 11.0 - Computation of Loss per share
b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date: November 28, 2001 /s/ Paul L. Devine
-----------------------------------------------
Paul L. Devine
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date: November 28, 2001 /s/ Joseph W. Beach
----------------------------------------------
Joseph W. Beach
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EPL Technologies, Inc.
Exhibit 11.0
Computation of Earnings per Common Share and
Diluted Earnings per Common Share