1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended MARCH 31, 1998
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: 0-28444
EPL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0990658
(State of incorporation) (I.R.S. Employer Identification Number)
2 INTERNATIONAL PLAZA, SUITE 245
PHILADELPHIA, PA 19113-1507
(Address of principal executive offices) (Zip Code)
(610) 521-4400
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
9,149,439 shares of $0.001 par value common stock
outstanding as of April 30, 1998.
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EPL TECHNOLOGIES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 3
D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 12
SIGNATURES. 13
3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED) *
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,415,823 $ 3,756,956
Accounts receivable, net 4,690,090 5,382,125
Inventories 4,033,692 3,411,213
Prepaid expenses and other current assets 1,383,260 1,060,506
------------ ------------
TOTAL CURRENT ASSETS 12,522,865 13,610,800
------------ ------------
PROPERTY AND EQUIPMENT, Net 8,334,712 8,145,543
------------ ------------
OTHER ASSETS
Patent, net 952,897 977,903
Goodwill 3,226,321 3,247,229
Other intangibles, net 209,350 218,480
------------ ------------
TOTAL OTHER ASSETS 4,388,568 4,443,612
------------ ------------
TOTAL ASSETS $ 25,246,145 $ 26,199,955
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,916,475 $ 4,738,369
Accrued expenses 1,185,732 1,147,597
Other liabilities 582,471 815,280
Current portion of long-term debt 301,614 396,070
------------ ------------
TOTAL CURRENT LIABILITIES 7,986,292 7,097,316
LONG TERM DEBT 1,812,731 1,791,903
DEFERRED INCOME TAXES 79,191 77,964
------------ ------------
TOTAL LIABILITIES 9,878,214 8,967,183
------------ ------------
CONVERTIBLE SERIES D PREFERRED STOCK 11,708,922 10,617,346
SHAREHOLDERS' EQUITY
Convertible Series A Preferred Stock 2,073,000 2,073,000
Convertible Series C Preferred Stock -- 144
Common Stock 9,138 9,048
Additional paid-in capital 28,676,773 28,697,761
Accumulated deficit (27,049,886) (24,206,954)
Foreign currency translation adjustment (50,016) 42,427
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,659,009 6,615,426
------------ ------------
TOTAL LIABILITY AND SHAREHOLDERS' EQUITY $ 25,246,145 $ 26,199,955
============ ============
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
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EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
------------------
1998 1997
----------- -----------
Sales $ 7,235,020 $ 3,788,724
Cost of sales 6,075,427 3,388,130
----------- -----------
Gross profit 1,159,593 400,594
Selling, general and administrative expenses 1,882,968 1,204,416
Research and development costs 420,451 319,164
Depreciation and amortization 390,310 284,235
----------- -----------
Loss from operations (1,534,136) (1,407,221)
Interest expense (net) 21,796 21,440
Minority interest -- (37,589)
----------- -----------
Net loss $(1,555,932) $(1,391,072)
Accretion, discount and dividends on preferred stock 1,350,972 124,350
----------- -----------
Net loss applicable to common shareholders $(2,906,904) $(1,515,422)
=========== ===========
Basic loss per common share $ (0.32) $ (0.19)
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
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EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
1998 1997
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,555,932) ($1,391,072)
Adjustments to reconcile net loss to net cash
used in operating activities 386,205 275,080
(Loss)/gain on foreign currency translation (96,582) 8,461
Minority interest -- (37,589)
Changes in assets and liabilities 487,279 678,914
----------- -----------
Net cash used in operating activities (779,030) (466,206)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (521,543) (478,795)
Proceeds from sale of fixed assets 2,405 6,703
----------- -----------
Net cash used in investing activities (519,138) (472,092)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of options/warrants 30,663 26,250
Committed proceeds from expected stock issuance -- 1,000,000
Proceeds from long term debt 38,384 --
Repayment of long term debt (112,012) (101,084)
----------- -----------
Net cash (used)/provided in financing activities (42,965) 925,166
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,341,133) (13,132)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,756,956 1,639,567
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,415,823 $ 1,626,435
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $ 1,287,000 --
The accompanying notes are an integral part of these condensed financial
statements.
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EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information of EPL Technologies, Inc. and Subsidiaries
(the "Company") included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair statement of results for the
interim period.
The financial information has been prepared in accordance with generally
accepted accounting principles for interim financial information, the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly it does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Moreover, the results
of operations for the three months ended March 31, 1998 are not necessarily
indicative of the results to be expected for the full year. At this stage of the
Company's development, month to month and quarter to quarter anomalies in
operating results are expected. This information must also be read in connection
with the Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997.
NOTE 2 - OPERATIONS
EPL Technologies, Inc. develops, manufactures and markets complementary
proprietary technologies designed to maintain the quality and integrity of
fresh-cut produce. The Company's primary products are processing aids and
packaging materials, together with a range of scientific and technical services
that the Company believes support and complement its product offerings. The
Company's continued ability to operate is dependent upon its ability to maintain
adequate financing and to achieve levels of revenues necessary to support its
cost structure, of which there can be no assurance. The process by which the
Company develops and sells its integrated systems solutions for certain kinds
and varieties of fresh-cut produce is both expensive and time-consuming. After
preliminary discussions with a potential customer, the Company performs a
comprehensive review of the potential customer's methods and facilities and
initiates a series of tests in an effort to tailor the application of the
Company's proprietary and other technologies to the kind or variety of produce
to be processed. The Company also works closely with the potential customer to
develop a detailed protocol to be followed in processing such produce. Once the
development of this integrated systems solution is substantially complete, the
Company conducts increasingly sophisticated tests in an effort to refine the
prescribed solution before the potential customer makes any purchase decision.
Although the Company believes it has improved its sales efforts significantly,
the Company's product development and sales process continues to be lengthy and
resource-intensive and could limit the Company's growth. Additionally, limited
awareness of the Company and its products in the marketplace and the highly
fragmented nature of the fresh-cut produce industry may extend the Company's
product development and sales process. The Company does not believe that this
process is likely to shorten significantly. Management believes that success in
this sales process with large processors is the primary basis for developing
sustainable growth in revenues, which will enable the Company to achieve
profitable operations in this area of the business, although there can be no
assurance such will be the case. The nature of the packaging materials business
is such that the sales process is shorter than that for processing aids, but
there is still an approval process to be completed with new customers prior to
sale.
On March 13, 1998, the Company announced it had entered into an
agreement with American National Can Company ("ANC") to create a joint venture
company to market flexible packaging systems for the U.S. fresh produce market.
ANC, a major supplier of packaging materials and containers in the U.S., is a
U.S. subsidiary of Paris, France-based Pechiney (NYSE:PY), an international
packaging group with reported annual revenues of approximately $11.6 billion as
of its fiscal year ended December 31, 1997. It is anticipated that the new
company, ANC-RESPIRE LLC ("ANC-Respire"), will develop, manufacture, market,
promote and sell variety-specific, proprietary and other packaging products to
the fresh produce industry under a new brand name - ANC-RESPIRE. EPL and ANC
will have equal ownership interests in the venture and intend to introduce
perforated film into the fresh produce market as the first of a broad range of
products designed to capitalize on the combined expertise of EPL and ANC. The
joint venture agreement has an initial three-year term (subject to earlier
termination) and can be extended upon the agreement of EPL and ANC.
The Company's management believes that cash flows from consolidated
operations and existing resources, together with the net proceeds of the
offering described in Note 9 below, will be sufficient to meet the Company's
operating needs for the next 12 months. The Company may, however, be required
to seek additional debt or equity financing to implement its growth strategy.
See also Note 6 and "Management's Discussion and Analysis of Financial
Condition and Results of Operation" below.
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NOTE 3 - INVENTORIES
Inventories consisted of the following:
March 31, 1998 December 31, 1997
-------------- -----------------
Raw Materials and Supplies $2,433,758 $2,285,588
Finished Goods 1,599,934 1,125,625
---------- ----------
Total Inventories $4,033,692 $3,411,213
========== ==========
NOTE 4 - INTANGIBLE ASSETS - PATENTS AND GOODWILL
Patents are amortized over the shorter of their estimated useful
lives or the life of the patent. The net book value of acquired and developed
patents totaled $952,897 as of March 31, 1998. Amortization expense related to
patents totaled $25,006 for the three months ended March 31, 1998. Goodwill
related to the acquisition of certain subsidiaries is being amortized on a
straight line basis over ten years. Amortization expense related to goodwill and
other intangible assets totaled $110,543 for the three months ended March 31,
1998.
NOTE 5 - CONVERTIBLE PREFERRED STOCK
The Company's 10% Series A Convertible Preferred Stock (the "Series
A Stock"), which has been issued up to its authorized limit of 3,250,000, was
issued at a price of $1.00 per share, with each share of Series A Stock carrying
the option to convert into common shares at a rate of $1.50 per share. The
Series A Stock carries equal voting rights to the common shares, based on the
underlying number of common shares after conversion. The Series A Stock carries
a dividend rate of 10% per annum, payable in cash and/or common shares ($1.50
per share) at the Company's option (dividends in arrears at March 31, 1998
totaled $1,386,734).
During the three months ended March 31, 1998, no shareholder holding
shares of Series A Stock elected to exercise their right of conversion, leaving
2,073,000 shares of Series A Stock outstanding at March 31, 1998. In addition,
20% of the common stock into which the Series A Stock may be converted carries
detachable warrants at an exercise price of $2.00 per warrant. During the three
months ended March 31, 1998, 15,067 of these warrants were exercised and 28,666
of these warrants expired, leaving 21,332 of these warrants unexercised at March
31, 1998.
At the Annual Meeting of the Company's shareholders held on July 22,
1996, the shareholders of the Company authorized the issuance of up to 2,000,000
shares of preferred stock (the "Board Designated Preferred Stock") with such
designations and preferences as the Company's Board of Directors may determine
from time to time. On July 23, 1996, the Company issued 531,915 of these shares
- - - designated 10% Series B Convertible Preferred Stock - at an aggregate
consideration of $2,500,000 to two existing investors in the Company (the
"Series B Stock"). During 1997, the shareholders of the Series B Stock elected
to fully exercise their right of conversion into common stock and thus there
were no shares of Series B Stock outstanding at March 31, 1998. The Series B
Stock carried a dividend of 10% per annum, payable in cash and/or shares ($9.40
per share) at the Company's option. The outstanding dividends on the Series B
Stock at March 31, 1998 totaled $270,092.
During 1997, the Company received gross proceeds of $1.0 million,
from an existing institutional stockholder in connection with a private offering
of common and Board Designated Preferred Stock. This resulted in the issuance of
43,750 shares of common stock, together with 144,444 shares of Board Designated
Preferred Stock -- designated Series C Convertible Preferred Stock (the "Series
C Stock"). Such issuance was made under Regulation D under the Securities Act of
1933, as amended, as a transaction not involving a public offering. The Series C
Stock carries the option to convert into such number of shares of common stock
as is determined by dividing $4.50 by the conversion price (as defined in the
documentation for the Series C Stock) in effect at the time of conversion for
each share of Series C Stock and votes as a class, except as otherwise provided
by law, with the Series A Stock, the Series B Stock and the common stock, based
on
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the underlying number of shares of common stock after conversion. The extent of
the beneficial conversion feature, representing the difference between the $9.00
conversion price and the prevailing market price of the common stock at the date
of issuance, a total of $72,222, was accreted immediately upon issuance. The
Series C Stock carried a dividend rate of 10% per annum, payable in cash and/or
shares at the Company's option. During the three months ended March 31, 1998,
the stockholder elected to fully exercise their right of conversion into 72,222
shares of common stock and thus there were no shares of Series C Stock
outstanding at March 31, 1998. Dividends in arrears on the Series C Stock at
March 31, 1998 totaled $49,239. In connection with the issuance of the Series C
Stock, the Company issued warrants to purchase 30,993 shares of the Company's
common stock at an exercise price of $10.00 per share. The value of these
warrants will be accreted over the estimated lives of these warrants (5 years).
At the Annual Meeting of the Company held on July 21, 1997, the
shareholders of the Company approved an increase in the number of shares of
Board Designated Preferred Stock reserved for issuance from 2,000,000 to
4,000,000. During 1997, the Company issued a further 12,500 shares of Board
Designated Preferred Stock - designated Series D Convertible Preferred Stock -
at an aggregate consideration, before associated costs and expenses, of
$12,500,000, to three new institutional investors (the "Series D Stock"). Such
issuance was made under Regulation D under the Securities Act of 1933, as
amended, in a transaction not involving a public offering. The Series D Stock
certificate of designation contains provisions which, in certain circumstances
outside of the Company's control, could provide the holders of Series D Stock
with the ability to redeem their shares. The amount to be paid by the Company in
the event of a redemption would be calculated as the greater of (a) 115% of the
stated value of the Series D stock plus 4% appreciation accrued from the
issuance date to the redemption date of (b) the "parity value" of the shares to
be redeemed, which is calculated as the number of shares issuable upon
conversion multiplied by the closing price on the redemption date.
The Series D Stock carries the option to convert into shares of
common stock at a variable rate, based on the stated value ($1,000) divided by
94% of the prevailing market price at the time of conversion, as calculated
based on the lowest five-day average closing bid price per share of Common Stock
during a specified period of time, and subject to certain limitations. The
extent of the beneficial ownership feature, representing the 6% discount from
the market price at the conversion date, a total of $800,000, will be accreted
over the earliest period after which all such shares are convertible, or nine
months (the "Conversion Period"). In addition the Series D Stock agreement
contains a provision whereby the stated value of the Series D Stock is to
increase by 4% per annum, accruing from the date of issuance until conversion.
In connection with the issuance of the Series D Stock, the Company issued
201,614 warrants to purchase the Company's common stock at an exercise price of
130% of the closing price on the issuance date (i.e. $20.16 per share). The fair
value of these warrants ($1,200,000) will be accreted over the Conversion Period
of the Series D Stock. Holders of the Series D Stock have limited voting rights
and are not entitled to any dividends.
NOTE 6 - ISSUANCE OF COMMON STOCK AND EXERCISE OF WARRANTS
As indicated above, a total of 89,789 shares of common stock were
issued during the three months ended March 31, 1998: 72,222 upon the conversion
in full of the Series C stock, 2,500 on the exercise of previously issued stock
options and 15,067 on the exercise of previously issued warrants. The exercise
of options and warrants resulted in net proceeds of $30,663. On March 13, 1998,
the Company's shareholders approved a 1-for-2 reverse stock split, which became
effective for trading purposes on the Nasdaq SmallCap Market on March 18, 1998.
NOTE 7 - 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.
In February 1997, the FASB issued SFAS No. 128, "Earnings per
Share", which was adopted by the Company effective for the year ended December
31, 1997, as required by the statement. For the periods ended March 31, 1998 and
1997, the potential common shares have an antidilutive effect on the net loss
per common share for common shareholders. Accordingly, diluted net loss per
common share for common shareholders has not been presented. All loss per common
share and share figures have been adjusted to reflect the 1-for-2 reverse stock
split approved by shareholders on March 13, 1998.
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NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which was adopted by the Company effective January 1, 1998, as required
by the statement. The total comprehensive loss for the three months ended March
31, 1998 and 1997 was $1,648,375 and $1,514,887, respectively. The adjustment to
arrive at the total comprehensive loss for each period consists of foreign
currency translation.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which was adopted by the
Company effective for the year beginning January 1, 1998, as required by the
statement. This statement does not require adoption in interim financial
statements in the initial year of adoption.
NOTE 9 - SUBSEQUENT EVENTS
On April 21, 1998, the Company announced that NewCorn Co LLC, an
entity in which the Company has a 51% ownership interest ("NewCorn"), has
entered into a trademark sublicense agreement with The Sholl Group II, Inc.
("Sholl"), the exclusive licensee of the Pillsbury Company's Green Giant
Fresh(R) brand name. The agreement grants NewCorn the right to use the Green
Giant Fresh(R) brand name on the Company's fresh-cut corn products on an
exclusive basis in North America. Under this agreement, Freshcorn LLC, a newly
formed joint venture company owned equally by NewCorn and Sholl ("Freshcorn"),
will provide marketing support for the Company's fresh-cut corn products. The
Company believes that the Green Giant Fresh(R) brand will enhance consumer
awareness and acceptance of the Company's fresh-cut corn products and facilitate
the development of a market for branded fresh-cut corn available nationally on a
year-round basis.
NewCorn's license expires on December 31, 2020, subject to automatic
renewal or earlier termination in certain events, including termination of
Sholl's license from the Pillsbury Company. NewCorn will pay a royalty to Sholl
based on the number of cases of licensed corn products sold by NewCorn.
Additionally, NewCorn will pay to Freshcorn a fee based on the profitability of
NewCorn's sales of fresh-cut corn product (the "Fee"), against which the royalty
payments to Sholl will be credited. As members of Freshcorn, NewCorn and Sholl
have agreed that, generally, 25% of the Fee in each year will be used to
reimburse expenses incurred by NewCorn for the advertising, marketing and
promotion of the Company's fresh-cut corn products.
On May 12, 1998, the shares of common stock of the Company were
accepted for quotation on the Nasdaq Stock Market's National Market under the
symbol "EPTG," subject to completion of the public offering described below.
Prior to the offering, the shares of common stock of the Company was included on
the Nasdaq Stock Market's SmallCap Market under the symbol EPTG.
On May 15, 1998 the Company completed a public offering of
2,400,000 shares of its common stock (the "Offering"), of which 809,097 shares
were sold by the Company and 1,590,903 shares were sold by Trilon Dominion
Partners LLC ("Trilon"). In connection with the Offering, Trilon converted
1,933,000 shares of the Company's Series A Stock into 1,288,667 shares of
Common Stock, leaving 140,000 shares of Series A Stock issued and outstanding -
see Note 5 "Convertible Preferred Stock." The offering price was $10.00 per
share of common stock - see "Liquidity and Capital Resources." The Company has
granted the Underwriters an option, exercisable until June 10, 1998, to
purchase up to 360,000 additional shares of common stock at the public offering
price of $10.00 per share (less underwriting discounts and commissions) solely
to cover over-allotments.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company is a leading developer and marketer of integrated
produce systems solutions specifically designed to address the needs of the
rapidly growing market for fresh-cut produce. In this regard, the Company
develops, manufactures and markets proprietary produce processing aids,
packaging technologies, and scientific and technical services, which are
specifically designed to maintain the quality and integrity of fresh-cut
produce. The foundation of the Company's integrated systems solutions is its
proprietary produce processing aid technology, which inhibits the natural
enzymatic degradation of fruits and vegetables after they have been processed.
Fresh-cut fruits and vegetables that are treated with the Company's proprietary
processing aids better maintain their natural characteristics such as color,
texture, taste and smell. The use of the Company's processing aids 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 complement and enhance the effectiveness of the
Company's processing aids by allowing fruits and vegetables to "breathe" after
they have been cut and packaged. The Company markets these packaging products to
produce growers and processors. In addition, the Company's scientific and
technical services, which include food safety and microbiological testing,
provide fresh produce processors with expertise in food safety, post-harvest
horticulture and processing techniques, and support the cross-marketing efforts
for the Company's other products. The Company believes its processing aids are
safe and environmentally "friendly" and, together with its packaging and
scientific and technical services, add significant value to the businesses of
its customers. In addition to its integrated systems solutions for fresh-cut
produce, the Company also markets flexible packaging for uses in the snack food,
bakery and confectionery industries and for other uses.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Sales. Sales increased from $3,788,724 in the three months ended
March 31, 1997 to $7,235,020 in the three months ended March 31, 1998, an
increase of $3,446,296 or 91%. Sales of processing aids in the US and Europe
increased from $120,896 in the three months ended March 31, 1997 to $980,470 in
the three months ended March 31, 1998, an increase of $859,574 or 711%. Sales of
US packaging materials increased from $751,360 in the three months ended March
31, 1997 to $824,227 in the three months ended March 31, 1998, an increase of
$72,867 or 10%. Sales of UK and European packaging materials grew from
$2,916,468 in 1997 to $5,430,323 in 1998, an increase of $2,513,855 or 86%.
The increase in processing aid sales was mainly due to growth in
revenues at the Company's Newcorn joint venture. This is the first year in which
Newcorn had sales of its fresh-cut corn products in the winter season. The
Company is continuing to focus on the sale and development of its processing aid
technologies, particularly with respect to corn, potatoes and apples. Product
testing continues, and in some cases has been expanded or accelerated, and
significant costs have been incurred to date which have yet to yield material
revenues. Some of the initial results of this work are evidenced by agreements
with Potandon Produce LLC and Farmington Fresh as well as the recently announced
agreement between Newcorn and Sholl for the license of the Green Giant Fresh(R)
brand on the Company's fresh-cut corn products. The Company believes that these
agreements have the potential to result in increased sales in the future,
although there can be no assurance that this will be the case.
The growth in the U.S. packaging materials business was principally
attributable to internal growth of the Company's Respire(R) brand products. The
sales increase in the U.K. and Europe of packaging materials was principally
attributable to the inclusion of results of operations of Fabbri Artes Graficas
Valencia S.A., ("Fabbri"), which was acquired in December 1997, as well as
internal growth in the Company's EPL Flexible packaging business.
Gross Profit. Gross profit increased from $400,594 in the three
months ended March 31, 1997 to $1,159,593 in the three months ended March 31,
1998, an increase of $758,999 or, as a percentage of sales, from 10.6% to 16.0%.
This increase was principally due to higher gross margins at the Company's U.K.
packaging operation following the completion in 1997 of the reorganization of
its Runcorn and Gainsborough facilities, the inclusion of results of operations
of Fabbri, which was acquired in December 1997, and increased margins on the
sales of U.S. packaging materials. Operating results from
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11
period to period may continue to be impacted by variations in product mix.
Management believes changes in prices of raw materials for its products have not
had a material effect on the Company's results of operations; however, as the
Company's business becomes more reliant upon sales of its processing aids,
results of operations may be more susceptible to the effects of changing prices
due to the pricing of certain kinds of produce, as well as ingredients used in
the Company's processing aids.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1,204,416 in the three months ended
March 31, 1997 to $1,882,968 in the three months ended March 31, 1998, an
increase of $678,552 or 56%. This increase was due primarily to incremental
expenses from the inclusion of Fabbri and California Microbiological Consulting,
Inc. ("CMC"), both of which were acquired after the first quarter of 1997, the
continuing and accelerating development of the Company's sales and marketing
efforts, including projects supporting prospective large customers, particularly
in the processing aid area for potatoes and corn, and other costs including the
appointment of additional personnel.
Research and Development Costs. Research and development costs
increased from $319,164 in the three months ended March 31, 1997 to $420,451 in
the three months ended March 31, 1998, an increase of $101,287 or 32%. This
reflects increased costs of the scientific activities related to sales efforts
for prospective large customers, principally related to carrots, broccoli,
mushrooms and perforated films. The Company expects that research and
development costs will continue at recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization
increased from $284,235 in the three months ended March 31, 1997 to $390,310 in
the three months ended March 31, 1998, an increase of $106,075 or 37%. This is a
result of a full quarter of depreciation expense for Fabbri, as well as from the
previous capital expenditures at Newcorn and EPL Flexible since the first
quarter of 1997. Amortization expense increased due to the acquisitions of CMC
and Twin Gardens, which occurred subsequent to the first quarter of 1997, offset
in part by distribution rights being fully amortized at December 31, 1997.
Loss from Operations. Loss from operations increased from $1,407,221
in the three months ended March 31, 1997 to $1,534,136 in the three months ended
March 31, 1998, an increase of $126,915 or 9%. The increase was principally due
to the increase in total operating expenses. However, total operating expenses,
excluding depreciation and amortization, rose at a lower rate than the growth in
sales revenue, as reflected in the absolute increase in total operating expenses
but a decrease as a percentage of sales, from 40.3% in 1997 to 31.8% in 1998.
This reflects the leveraging of the Company's infrastructure through the
expansion of the Company's business.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock increased from $124,350 for the three
months ended March 31, 1997 to $1,350,972 in the three months ended March 31,
1998, an increase of $1,226,622. The increase represents principally the
amortization of the beneficial conversion feature of the Series D Stock,
accretion of the fair value of warrants issued in connection with the issuance
of the Series D Stock, and a 4% per annum appreciation provision on the stated
value of the Series D Stock. This amortization and accretion, which commenced in
the fourth quarter of 1997, will be largely complete by the end of the second
quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $2,415,823 in cash and short term
investments, compared with $3,756,956 at December 31, 1997, a decrease of
$1,341,133. During the three months ended March 31, 1998, $779,030 was used in
operating activities. In addition, $519,138 was used in investing activities, of
which $521,543 was used to purchase fixed assets. The increase in cash used in
operating activities of $312,824 in the three months ended March 31, 1998
compared to the same period in 1997 reflects less favorable improvements in
working capital for the three months ended March 31, 1998, additional amounts
assigned to minority interest, and foreign currency translation losses offset by
higher non-cash expenditures.
Total financing activities during the three months ended March 31,
1998 used $42,965, compared with $925,166 provided for in the same period in
1997. This was primarily from the repayment of long term debt, offset by
additional borrowings and the net proceeds from the exercise of previously
issued stock options and warrants. The difference from the same period in 1997
reflects the $1 million in committed proceeds from a stock issuance received in
1997.
At March 31, 1998, the Company had warrants outstanding and
exercisable to purchase 297,465 shares of common stock at a weighted average
price of $16.06 per share, which, if exercised, would provide the Company with
gross proceeds of approximately $4,778,734. In addition, at March 31, 1998, the
Company had 1,886,875 options outstanding and
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exercisable to purchase shares of common stock at a weighted average price of
$9.14 per share, which, if exercised, would provide the Company with gross
proceeds of up to approximately $17,240,000. At March 31, 1998, there were no
material commitments for capital expenditures.
The Company, through its subsidiary EPL Technologies (Europe)
Limited ("EPL Europe"), has a line of credit in the amount of pound sterling
150,000 ($250,695 at an exchange rate of pound sterling 1:$1.67) with the Bank
of Scotland as part of its credit facility for its U.K. operations (the "U.K.
Credit Facility"), under which pound sterling 26,191 ($43,733 at an exchange
rate of pound sterling 1:$1.67) was outstanding as of March 31, 1998. The
Company plans to repay the outstanding amounts under the term loans and the
revolving facility with the net proceeds of the public offering described below.
While the term loan will be terminated upon repayment, the Company currently
anticipates that the revolving facility, in the amount of pound sterling 400,000
($668,520 at an exchange rate of pound sterling 1:$1.67), would remain available
for future borrowings. The U.K. Credit Facility also contains a term loan and a
revolving facility, under which pound sterling 710,000 ($1,186,623) at an
exchange rate of pound sterling 1:$1.67) and pound sterling 400,000 ($668,520 at
an exchange rate of pound sterling 1:$1.67), respectively, were outstanding as
of March 31, 1998. The U.K. Credit Facility is secured by the assets of the
Company's U.K. subsidiaries. The debt agreements with the Bank of Scotland
contain certain covenants applicable to the results of operation of the
businesses of EPL Europe and its subsidiaries, which provide for maintenance of
minimum earnings before income taxes and cash flows to interest expense ratios.
During the final quarter of 1997, EPL Europe informed the Bank of Scotland that
it expected it would be unable to meet certain covenants for fiscal 1997.
Subsequent to December 31, 1997, EPL Europe and its subsidiaries and the Bank of
Scotland amended certain provisions of the facility agreements in relation to
these covenants.
On May 15, 1998 the Company completed a public offering of
2,400,000 shares of its common stock (the "Offering"), of which 809,097 shares
were sold by the Company and 1,590,903 shares were sold by Trilon Dominion
Partners LLC ("Trilon"). In connection with the Offering, Trilon converted
1,933,000 shares of the Company's Series A Stock into 1,288,667 shares of
Common Stock, leaving 140,000 shares of Series A Stock issued and outstanding -
see Note 5 "Convertible Preferred Stock." The offering price was $10.00 per
share of common stock. The Company has granted the Underwriters an option,
exercisable until June 10, 1998, to purchase up to 360,000 additional shares
of common stock at the public offering price of $10.00 per share (less
underwriting discounts and commissions) solely to cover over-allotments. The
Offering price was $10.00 per share. The lead manager for the offering is
Prudential Securities Incorporated and the co-manager is Pennsylvania Merchant
Group. The Company expects to use approximately $1,853,000 of the estimated
net proceeds of the proposed Offering to repay outstanding borrowings under
the U.K. Credit Facility, and the remainder to make additional capital
expenditures in its corn, potato and packaging businesses and for working
capital and general corporate purposes, including the possibility that the
Company may use a portion of the net proceeds of the Offering for the
acquisition of businesses, products and technologies that are complementary to
those of the Company (for which additional equity or debt financing may be
required), although no such acquisitions are currently being negotiated and no
portion of the net proceeds has been allocated for any specific acquisition.
Furthermore, there can be no assurance that suitable acquisition candidates
will be identified or that any acquisition will be consummated.
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
Company's management believes that cash flows from consolidated operations and
existing resources, together with the net proceeds of the Offering, will be
sufficient to meet the Company's operating needs for the next twelve months. The
Company may, however, be required to seek additional debt or equity financing to
implement its growth strategy.
FORWARD LOOKING STATEMENTS
The discussions above include certain forward looking statements
regarding the Company's expectations of gross margin, expenses, market
penetration, success in obtaining large new customers, possible acquisitions,
access to capital, new product introduction, trends affecting the Company's
financial condition or results of operations, the Company's financing plans, the
Company's business and growth strategies, and the use of the net proceeds to the
Company of the recently completed Offering. Actual results may vary materially
from such expectations. Meaningful factors that might affect such results
include: a) the Company's needs for capital, including for acquisitions, which
needs have been and 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) financial and
personnel resource requirements and potential difficulties in cross-marketing
and managing multiple product lines, f) the Company's potential inability to
identify and acquire acceptable acquisition
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targets, to the extent necessary to fulfill its expansion plans, and its
potential inability to successfully integrate any such acquisitions into its
operations, g) potential product obsolescence and short product life cycles, h)
potential competition, particularly in the market for produce packaging, from
companies with greater financial, management and other resources, i) the
unpredictability and volatility of the market for agricultural products, j)
changes in U.S. and foreign regulation, k) difficulty with research and
development activities regarding new products, including extension of necessary
time periods or increase in expense for product introduction, l) potential
difficulties in obtaining or protecting intellectual property rights or the
infringement of proprietary or other rights of the Company by third parties, m)
raw material availability and pricing and n) loss of services of key employees
of the Company.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 13, 1998, the Company's shareholders approved a 1-for-2
reverse stock split, which became effective for trading on the Nasdaq SmallCap
Market on March 18, 1998. On the basis of shares of common stock issued,
10,879,661 voted in favor, 561,102 voted against and 15,725 abstained. On an
as-converted basis (assuming conversion of the Series A Stock and Series C Stock
entitled to vote), 13,589,328 voted in favor, 561,102 voted against and 15,725
abstained.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 11.0 Computation of Loss per share
b) Reports on Form 8-K
On March 30, 1998 the Company filed a report on Form 8-K,
under item 5 thereof, in connection with the execution of an
agreement to form a joint venture company with American
National Can Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date: May 15, 1998 /s/ Paul L. Devine
------------------------------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: May 15, 1998 /s/ Bruce M. Crowell
------------------------------------------
Bruce M. Crowell
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 1998 /s/ Timothy B. Owen
------------------------------------------
Timothy B. Owen
Secretary and Treasurer
(Principal Accounting Officer)
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