1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended SEPTEMBER 30, 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.
11,455,545 shares of $0.001 par value
common stock outstanding as of October 31, 1998.
2
EPL TECHNOLOGIES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 14
SIGNATURES. 15
3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,003,647 $ 3,756,956
Accounts receivable, net 5,472,169 5,382,125
Inventories 4,505,636 3,411,213
Prepaid expenses and other current assets 1,456,085 1,060,506
------------ ------------
TOTAL CURRENT ASSETS 17,437,537 13,610,800
------------- -----------
PROPERTY AND EQUIPMENT, NET 10,849,793 8,145,543
OTHER ASSETS
Patent and distribution rights, net 1,007,506 977,903
Goodwill 3,025,060 3,247,229
Other intangibles, net 191,092 218,480
---------- ------------
TOTAL OTHER ASSETS 4,223,658 4,443,612
------------ -----------
TOTAL ASSETS $ 32,510,988 $ 26,199,955
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,729,298 $ 4,738,369
Accrued expenses 1,028,577 1,147,597
Other liabilities 623,955 815,280
Current portion of long-term debt 713,314 396,070
---------- ------------
TOTAL CURRENT LIABILITIES 7,095,144 7,097,316
LONG TERM DEBT 3,937,871 1,791,903
DEFERRED INCOME TAXES 79,352 77,964
----------- --------------
TOTAL LIABILITIES 11,112,367 8,967,183
---------- ------------
Convertible Series D Preferred Stock 12,930,322 10,617,346
SHAREHOLDERS' EQUITY
Convertible Series A Preferred Stock 65,000 2,073,000
Convertible Series C Preferred Stock 0 144
Common Stock 11,454 9,048
Additional paid-in capital 38,265,003 28,697,761
Accumulated deficit (30,411,460) (24,206,954)
Foreign currency translation adjustment 538,302 42,427
------------- -----------
TOTAL SHAREHOLDERS' EQUITY 8,468,299 6,615,426
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,510,988 $ 26,199,955
============ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-1-
4
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Sales $ 24,776,127 $ 14,047,404 $ 8,405,355 $ 5,147,600
Cost of sales 20,667,917 12,604,440 7,228,744 4,572,780
------------ ------------ ------------ ------------
Gross profit 4,108,210 1,442,964 1,176,611 574,820
Selling, general and administrative expenses 5,412,253 4,437,477 1,647,993 1,733,442
Research and development costs 1,115,402 869,067 325,614 284,064
Depreciation and amortization 1,266,416 931,359 461,442 328,894
------------ ------------ ------------ ------------
Net loss from operations (3,685,861) (4,794,939) (1,258,438) (1,771,580)
Interest expense, net (6,869) 84,488 (21,442) 35,947
Minority interest 0 (212,672) 0 (136,062)
------------ ------------ ------------ ------------
Net loss $ (3,678,992) $ (4,666,755) $ (1,236,996) $ (1,671,465)
Deduct:
Accretion, discount and dividends on 2,618,727 411,139 265,073 92,230
------------ ------------ ------------ ------------
preferred stock
Net loss for common shareholders $ (6,297,719) $ (5,077,894) $ (1,502,069) $ (1,763,695)
============ ============ ============ ============
Loss per common share $ (0.61) $ (0.62) $ (0.13) $ (0.20)
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-2-
5
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net loss $(3,678,992) $(4,666,755)
Adjustments to reconcile net loss to net cash
Used in operating activities: 1,179,784 918,481
Gain on foreign currency translation 232,536 27,788
Minority interest 0 (212,672)
Changes in assets and liabilities (1,843,063) 75,886
----------- -----------
Net cash (used) in operating activities (4,109,735) (3,857,272)
----------- -----------
INVESTING ACTIVITIES:
Purchase of fixed assets (3,423,782) (776,919)
Proceeds from sale of fixed assets 15,370 15,658
----------- -----------
Net cash (used) in investing activities (3,408,412) (761,261)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from the exercise of options/warrants 852,018 1,388,454
Proceeds from issuance of common stock, net 6,726,190 1,251,980
Proceeds from issuance of preferred stock, net 0 623,998
Proceeds from long term debt/net borrowings 3,069,534 1,086,495
Repayment of long term debt (882,904) (206,212)
----------- -----------
Net cash provided from financing activities 9,764,838 4,144,715
----------- -----------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 2,246,691 (473,818)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,756,956 1,639,567
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,003,647 $ 1,165,749
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $ 2,528,400 $ 72,222
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
6
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information of EPL Technologies, Inc. and Subsidiaries
(the "Company") included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair statement of results for the
interim period.
The financial information has been prepared in accordance with generally
accepted accounting principles for interim financial information, the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, it does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Moreover, the results
of operations for the nine months and three months ended September 30, 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 should be 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 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 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.
During the third quarter NewcornCo LLC, an entity in which the Company
has a 51% ownership interest ("Newcorn"), relocated its processing facilities to
a new 74,000 sq ft facility located in Camarillo, California. In October 1998,
Newcorn received formal approval from The Sholl Group II, Inc. ("Sholl"),
exclusive licensee of the "Green Giant(R) Fresh" brand from the Pillsbury
Company, of its new facility. Following this approval, shipments of fresh-cut
corn under the "Green Giant(R) Fresh" brand commenced in late October 1998. The
Company has announced that work is continuing on a second new 35,000 sq ft
fresh-cut corn processing facility in the Midwest and that, subject to the
approval of this facility as well, it expects to begin shipping "Green Giant(R)
Fresh" corn products from this facility near the end of 1998. The Company also
announced the relocation of its fresh-cut potato processing activities from a
previously approved, outsourced, co-packer facility in Sacramento, California to
the new produce
- 4 -
7
processing facility in Camarillo, California.
The Company's management believes that cash flows from consolidated
operations and existing resources, together with the remaining proceeds received
from the Company's public offering completed in May 1998, will be sufficient to
meet the Company's operating needs for the next 12 months. Although not
currently expecting to conduct any near term equity financing, the Company may
be required to seek, refinance or structure additional debt or equity financing
to implement its growth strategy. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
September 30, 1998 December 31, 1997
Raw Materials and Supplies $ 2,381,853 $ 2,285,588
Finished Goods 2,123,783 1,125,625
---------- ---------
Total Inventories $ 4,505,636 $ 3,411,213
========== =========
NOTE 4 - 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
(at a rate of $1.50 per share) at the Company's option. The dividends in arrears
at September 30, 1998 total $1,413,097.
During the three months ended September 30, 1998, shareholders
holding 25,000 shares of Series A Stock elected to convert such shares into
16,667 shares of common stock, leaving 65,000 shares of Series A Stock
outstanding at September 30, 1998. Substantially all of the other previously
outstanding shares of Series A Stock were converted in connection with the May
1998 public offering. 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. No warrants were exercised during the three months ended
September 30, 1998, leaving 8,000 of these warrants unexercised at September 30,
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 Series B 10% Convertible Preferred Stock - at an aggregate
consideration of $2,500,000, to two existing institutional investors in the
Company (the "Series B Stock"). During 1997, the holders of all of the shares of
the Series B Stock elected to convert such shares into an aggregate of 265,957
shares of common stock and thus there were no shares of Series B Stock
outstanding at September 30, 1998. The Series B Stock carried a dividend rate of
10% per annum, payable in cash and/or shares of common stock (at a rate of $9.40
per share) at the Company's option. The dividend in arrears on the Series B
Stock at September 30, 1998 totaled $270,092.
During 1997, the Company received gross proceeds of $1.0 million
from an existing institutional shareholder 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"). The Series C Stock carried a dividend rate of 10% per annum, payable in
cash and/or shares (at a rate of $9.00 per share) at the Company's option.
During the three months ended March 31, 1998, the holder of all of the Series C
Stock converted such shares into 72,222 shares of common stock and thus there
were no shares of Series C Stock outstanding at September 30, 1998. Dividends in
-5-
8
arrears on the Series C Stock at September 30, 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 is being 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"). 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 the effect of the 4% per
annum appreciation provision, accrued from the issuance date to the redemption
date or (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
of a share of common stock 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 for each share of
Series D Stock ($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 as set forth in the designations for the Series D
Stock. The extent of the beneficial ownership feature, representing the 6%
discount from the market price at the conversion date, a total of $800,000, was
to be accreted over the earliest period after which all such shares are
convertible, or nine months (the "Conversion Period") and was thus complete as
of September 30, 1998. 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) was accreted over the Conversion Period and is thus
complete. Holders of the Series D Stock have limited voting rights and are not
entitled to any dividends.
NOTE 5 - ISSUANCE OF COMMON STOCK AND EXERCISE OF WARRANTS
The only shares of common stock issued during the three months
ended September 30, 1998 were the 16,667 shares issued upon conversion of 25,000
shares of Series A Stock, as mentioned above.
At a meeting of the Company's shareholders held on September
29, 1998, shareholders approved the Company's 1998 Stock Incentive Plan, as
amended and restated (the "1998 Plan"). Under the 1998 Plan, 850,000 shares of
common stock are reserved for issuance. The minimum exercise price for options
granted to its existing executives and employee directors under the 1998 Plan is
$14.00 per share and all options granted under the 1998 Plan must be granted at
a premium to market price. In addition, options granted under the 1998 Plan
cannot be repriced without shareholder approval.
NOTE 6 - 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 September 30, 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.
-6-
9
NOTE 7 - 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
September 30, 1998 and 1997 was $746,736 and $1,766,511 respectively, and for
the nine months ended September 30, 1998 and 1997 was $3,183,117 and $4,853,839
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 8 - SUBSEQUENT EVENTS
The Company, through its subsidiary EPL Technologies (Europe)
Limited, has agreed in principle to changes in the Company's banking facilities
in the UK. While the term loans of pound sterling710,000 ($1,207,000 at an
exchange rate of pound sterling1:$1.70) will be terminated upon repayment, the
Company and the Bank have agreed that the revolving facility in the amount of
pound sterling400,000 ($680,000 at an exchange rate of pound sterling1:$1.70)
would remain available for future borrowings. In addition, the line of credit
will be increased by pound sterling100,000 to pound sterling250,000 ($425,000 at
an exchange rate of pound sterling1:$1.70). No amounts were outstanding under
the revolving facility or the line of credit, the revolving facility having been
repaid during the three months ended September 30, 1998. The Company expects
during the fourth quarter to formally complete the changes to the credit
facilities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
In October 1998, Newcorn received formal approval from The Sholl
Group II, Inc., exclusive licensee of the "Green Giant (R) Fresh" brand from the
Pillsbury Company, of Newcorn's new produce processing facility, located in
Camarillo, California. Following this approval, shipments of fresh-cut corn
under the "Green Giant(R) Fresh" brand commenced in late October 1998. The
Company also announced that work was continuing on a second new 35,000 sq ft
fresh-cut corn processing facility in the Midwest and that, subject to the
approval of this facility as well, Newcorn expects to begin shipping "Green
Giant(R) Fresh" corn products from this facility by the end of 1998. The Company
further announced the relocation of its fresh-cut potato processing activities
from a previously approved, outsourced, co-packer facility in Sacramento,
California, to the new produce processing facility in Camarillo, California.
- 7 -
10
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.
Management is continually searching for new ways to market its
products and services and expand operations, both internally and, where
appropriate, through strategic and opportunistic acquisitions. There can,
however, be no assurance that any acquisition will in fact be consummated or
that any discussions will result in any transaction being consummated.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Sales. Sales increased from $14,047,000 in the nine months ended
September 30, 1997 to $24,776,000 in the nine months ended September 30, 1998,
an increase of $10,729,000 or 76%. Sales of processing aids and related
activities increased from $2,098,000 in the nine months ended September 30, 1997
to $6,810,000 in the nine months ended September 30, 1998, an increase of
$4,712,000 or 225%. Sales of US packaging materials increased from $2,048,000 in
the nine months ended September 30, 1997 to $2,608,000 in the nine months ended
September 30, 1998, an increase of $560,000 or 27%. Sales of UK and European
packaging materials grew from $9,901,000 in the nine months ended September 30,
1997 to $15,358,000 in the nine months ended September 30, 1998, an increase of
$5,457,000 or 55%.
The increase in sales of processing aids and related activities was
mainly due to the growth in revenues at Newcorn. This is the first year in which
Newcorn had sales of its fresh-cut corn products in the winter months. Increased
sales activities resulted in Newcorn gaining a number of national accounts.
During the third quarter of 1998 Newcorn relocated its West Coast operations
into a new 74,000 sq ft facility in Camarillo, California. In October 1998, the
Company received formal approval from Sholl, the exclusive licensee of the
"Green Giant(R) Fresh" brand name from the Pillsbury Company, to sell fresh-cut
corn processed at this new facility under the "Green Giant(R) Fresh" brand.
Management expects that sales of fresh-cut corn under the "Green Giant(R) Fresh"
brand will drive further sales growth. Prior to the commencement of sales under
this brand in late October 1998, Newcorn sold fresh-cut packaged corn under two
lesser-known regional brands.
The Company expects that the relocation of Newcorn's West Coast
operations will significantly increase processing capacity and enhance operating
efficiencies. In an effort to leverage processing capabilities and operating
efficiencies, the Company has also relocated its fresh-cut potato processing
activities to the Newcorn facility and has received approval from Sholl to sell
fresh-cut potato products processed at this facility under the "Green Giant(R)
Fresh"
-8-
11
brand. The Company also believes that a second new 35,000 sq ft facility located
in the Midwest, which is expected to be operational by the end of 1998, will
further increase processing capacity and enable the Company to extend the
geographic reach of its food products.
In addition, 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.
The growth in the U.S. packaging materials business was principally
attributable to internal growth of the Company's Respire (R) brand of breathable
packaging for fresh produce, together with sales of perforated film. The sales
increase in the U.K. and Europe of packaging materials was principally
attributable to the inclusion of results of operations of the Company's Spanish
subsidiary, Fabbri Artes Graficas Valencia S.A., ("Fabbri"), which was acquired
in December 1997.
Gross Profit. Gross profit increased from $1,443,000 in the nine
months ended September 30, 1997 to $4,108,000 in the nine months ended September
30, 1998, an increase of $2,665,000 or, as a percentage of sales, from 10.3% to
16.6%. This increase was principally due to (i) the inclusion of results of
operations of Fabbri, (ii) higher sales and margins at Newcorn, (iii) higher
margins at the Company's U.K. packaging operation following the completion in
1997 of the reorganization of the Company's Runcorn and Gainsborough facilities
and (iv) higher margins on the sales of U.S. packaging materials. Gross profit
from period to period may continue to be affected by variations in product mix.
Gross profit from period to period may also be impacted by pricing pressures on
Newcorn's corn business primarily attributable to the extent to which bulk corn
is available in regions where Newcorn's fresh-cut corn products are sold, which
is largely a function of the timing of and variations in regional harvest
yields. Management believes changes in prices of raw materials for its products
have not had a material effect on the Company's results of operations to date;
however, as the Company's business becomes more reliant upon sales of its
processing aids and related activities, 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 $4,437,000 in the nine months ended
September 30, 1997 to $5,412,000 in the nine months ended September 30, 1998, an
increase of $975,000 or 22%. This increase was due primarily (i) to incremental
expenses from the inclusion of the results of operations of Fabbri and
California Microbiological Consulting, Inc. ("CMC"), both of which were acquired
after the third quarter of 1997, (ii) the continuing and accelerating
development of the Company's sales and marketing efforts, particularly in the
area of sales of processing aids and related activites for potatoes, corn and
apples, and (iii) other costs, including the hiring of additional personnel.
Research and Development Costs. Research and development costs
increased from $869,000 in the nine months ended September 30, 1997, to
$1,115,000 in the nine months ended September 30, 1998, an increase of $246,000
or 28%. This reflects increased costs of scientific activities related to sales
efforts for large potential customers, principally related to carrots, broccoli,
mushrooms and perforated films. The Company expects that research and
development costs will continue at no less than recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization
increased from $931,000 in the nine months ended September 30, 1997, to
$1,266,000 in the nine months ended September 30, 1998, an increase of $335,000
or 36%. This is a result of the inclusion of nine months of depreciation expense
for Fabbri, as well as from depreciation expense of capital expenditures made at
Newcorn and the Company's UK packaging operations subsequent to the first nine
months of 1997. Amortization expense increased due to the acquisition of CMC and
the admission into Newcorn of Twin Gardens, which occurred subsequent to the
first nine months of 1997, as well as increased amortization of costs of patents
and trademarks as more have been granted during 1998, offset in part by the
completion at December 31, 1997 of the amortization of distribution rights.
Loss from Operations. Loss from operations decreased from $4,795,000
in the nine months ended September 30, 1997 to $3,686,000 in the nine months
ended September 30, 1998, a decrease of $1,109,000 or 23.1%. The decrease was
principally due to the increase in gross profit as a percentage of sales,
together with an increase in total sales. In addition, total operating expenses,
excluding depreciation and amortization, increased at a lower rate than the
growth in sales, as reflected in the decrease of operating expenses as a
percentage of sales, from 38% in 1997 to 26% in 1998. This reflects improved
leveraging of the Company's infrastructure through the
-9-
12
expansion of the Company's business.
Accretion, Discount and Dividends on Preferred Stock. Accretion,
discount and dividends on preferred stock increased from $411,000 in the nine
months ended September 30, 1997 to $2,619,000 in the nine months ended September
30, 1998, an increase of $2,208,000. The increase principally reflects the
amortization of the beneficial conversion features of the Series D Stock,
accretion of the fair value of warrants issued concurrently with the issuance of
the Series D Stock, and a provision representing a 4% per annum appreciation on
the stated value of the Series D Stock while the Series D Stock remains
outstanding. The amortization and accretion charges, which commenced in the
fourth quarter of 1997, were complete as at September 30, 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Sales. Sales increased from $5,148,000 in the three months ended
September 30, 1997 to $8,405,000 in the three months ended September 30, 1998,
an increase of $3,257,000 or 63%. Sales of processing aids and related
activities increased from $1,090,000 in the three months ended September 30,
1997 to $2,981,000 in the three months ended September 30, 1998, an increase of
$1,891,000 or 173%. Sales of UK and European packaging materials grew from
$3,365,000 in the three months ended September 30, 1997 to $4,640,000 in the
three months ended September 30, 1998, an increase of $1,275,000 or 38%. Sales
of US packaging materials increased from $692,000 in the three months ended
September 30, 1997 to $784,000 in the three months ended September 30, 1998, an
increase of $92,000 or 13%.
The increase in sales of processing aids and related activities was
mainly due to the higher sales of fresh-cut corn products from Newcorn. During
the quarter, the Company experienced interruptions in processing and shipment
caused by the relocation of its West Coast operations into a new facility, which
management believes prevented the increase in Newcorn's sales from being even
greater. The relocation has significantly increased processing capacity and a
second new facility, located in the Midwest, which is expected to be operational
by the end of 1998, will further increase processing capacity and extend the
geographic reach of Newcorn's fresh-cut corn products.
Management expects that Newcorn's recent introduction of fresh-cut
corn products bearing the "Green Giant(R) Fresh" brand, which were not available
commercially until late October 1998, will drive further sales growth. Prior to
the commencement of sales under the "Green Giant(R) Fresh" brand in late October
1998, Newcorn sold fresh-cut corn products under two lesser known regional
brands
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.
The sales increase in the U.K. and Europe of packaging materials was
principally attributable to (i) the inclusion of results of operations of
Fabbri, although the impact of Fabbri on the Company's results of operations in
the third quarter ws less significant because Fabbri's operations effectively
cease during August due to typical European vacations, and (ii) growth in sales
of the Company's Respire(R) brand of breathable packaging for fresh produce. The
increase in sales of US packaging materials was mainly due to the growth in
sales of perforated film.
Gross Profit. Gross profit increased by $602,000 to $1,177,000 in
the three months ended September 30, 1998, an increase of 105% over the three
months ended September 30, 1998. Expressed as a percentage of sales, gross
profit increased to 14% from 11.2%. The 105% increase in gross profit for the
third quarter of 1998 significantly exceeded the 63% increase in sales and was
attributable to increased sales volumes which leverage the Company's cost base,
as well as a more profitable sales mix. Gross profit from period to period may
continue to be impacted by variations in product mix. Gross profit from period
to period may also be impacted by pricing pressures on Newcorn's corn business
primarily attributable to the extent to which bulk corn is available in regions
where Newcorn's fresh-cut corn products are sold, which is largely a function of
the timing of and variations in regional harvest yields. 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 fell $85,000 or 4.9% to $1,648,000 in the three months
ended September 30, 1998, despite the addition of expenses from the acquisition
of Fabbri and, to a lesser extent, that of CMC, both made subsequent to the
third quarter of 1997, and
-10-
13
despite the expense of intensifying sales and marketing efforts. Management
credits these results to successful cost containment programs and to the
effective integration of these acquisitions, while still achieving a significant
increase in sales. This is also demonstrated by the fall in overheads (selling,
general and administrative expenses plus research and development costs), as a
percentage of sales, which fell from 39% in 1997 to 23.5% in 1998.
Research and Development Costs. Research and development costs
increased from $284,000 in the three months ended September 30, 1997, to
$326,000 in the three months ended September 30, 1998, an increase of $42,000 or
14.8%. During the quarter the Company launched its Respire(R) brand of flexible
packaging for fresh produce in the UK, which required the provision of
scientific support to its customers. The increased cost also reflects increased
costs of scientific activities related to sales efforts for large potential
customers, principally related to carrots, broccoli, mushrooms and perforated
films. The Company expects that research and development costs will continue at
not less than recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization
increased from $329,000 in the three months ended September 30, 1997, to
$461,000 in the three months ended September 30, 1998, an increase of $132,000
or 40%. This is a result of the inclusion of depreciation expense for Fabbri, as
well as from the previous capital expenditures at Newcorn the Company's UK
packaging operations made subsequent to the third quarter of 1997. Amortization
expense increased due to the acquisition of CMC and the admission into Newcorn
of Twin Gardens, which occurred subsequent to the third quarter of 1997, offset
in part by the completion at December 31, 1997 of amortization of distribution
rights. It also includes increased amortization of patents and trademarks,
reflecting the granting of additional patents since the third quarter of 1997.
The Company now has three US patents and six overseas patents, with numerous
others pending.
Loss from Operations. Loss from operations decreased from $1,772,000
in the three months ended September 30, 1997 to $1,258,000 in the three months
ended September 30, 1998, a decrease of $514,000 or 29%. The decrease was
principally due to the increase in sales and gross profit, together with the
increase in the gross profit percentage. In addition, total operating expenses,
excluding depreciation and amortization, increased at a lower rate than the
growth in sales, as reflected in the decrease of operating expenses as a
percentage of sales, from 39% in 1997 to 23.5% in 1998. A substantial portion of
the loss at the EBITDA level was attributable to the considerable expense of
sales and marketing efforts incurred in developing the Company's potato
business.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock increased from $92,000 in the three
months ended September 30, 1997 to $265,000 in the three months ended September
30, 1998, an increase of $173,000. The increase principally represents the
effect of a provision representing a 4% per annum appreciation on the stated
value of the Series D Stock while the Series D Stock remains outstanding,
together with the final amounts of amortization of the beneficial conversion
features of the Series D Stock, and accretion of the fair value of warrants
issued in connection with the issuance of the Series D Stock. The amortization
and accretion charges, which commenced in the fourth quarter of 1997, are now
complete.
YEAR 2000 COMPLIANCE
The term "year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and the
performance of date-sensitive calculations by computers and other equipment as
the year 2000 is approached and reached
The Company uses a number of computer software programs and
operating systems in its internal operations, including applications used in
manufacturing, product development, financial business systems and various
administrative functions. The Company is currently evaluating the programs and
systems in an effort to identify and assess the anticipated impact of year 2000
issues. The Company has also initiated formal communications with its critical
suppliers, customers and business partners to determine the extent to which the
Company may be vulnerable in the event those parties fail to properly remediate
their own year 2000 issues. The Company currently intends to substantially
complete its identification of year 2000 issues reasonably expected to have a
material impact on the Company's operations by the end of 1998 and to
substantially complete any required remediation prior to June 30, 1999.
Based on its current estimates and information currently available,
the Company does not anticipate that the costs associated with year 2000 issues
will have a material adverse effect on the Company's business, financial
condition or results of operations. There can be no guarantee, however, that
these costs will not be material.
-11-
14
As the Company has not yet completed its assessment of year 2000
issues impacting its business, the Company has not yet fully developed year
2000-specific contingency plans. The Company currently believes that it will be
able to modify, replace or mitigate its affected systems in time to avoid any
material detrimental impact on its operations, and indeed, where appropriate,
has already begun this process. If the Company determines that it may be unable
to remediate and properly test affected systems on a timely basis, the Company
intends to develop appropriate contingency plans at the time such determination
is made. The Company also intends to monitor the progress made by critical
suppliers, customers and business partners in addressing their own year 2000
issues and develop appropriate contingency plans in the event that a significant
exposure is identified.
While the Company is not presently aware of any significant year
2000 issues reasonably expected to affect its business, there can be no
assurance that year 2000 issues affecting the Company or any of its critical
suppliers, customers and business partners will be remediated before the year
2000 arrives, or that contingency plans will sufficiently mitigate the risk
associated with any such year 2000 issues. An interruption of the Company's
ability to conduct business due to a year 2000 issue could have a material
adverse effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $6,004,000 in cash and short
term investments, compared with $3,757,000 at December 31, 1997, an increase of
$2,247,000. During the nine months ended September 30, 1998, $4,110,000 was used
in operating activities. In addition, a net $3,408,000 was used in investing
activities to purchase fixed assets, mainly in support of the corn and potato
businesses, but also in connection with the UK and European packaging
businesses. The increase in cash used in operating activities of $253,000 in the
nine months ended September 30, 1998 compared to the same period in 1997
reflects increased working capital needs as the business has grown, offset by a
lower net loss and higher noncash expenditures.
Total financing activities during the nine months ended September
30, 1998 provided $9,765,000, compared with $4,145,000 provided in the same
period in 1997. In 1998 $6,726,000 was raised in net proceeds from the Company's
public offering completed in May 1998, together with $852,000 raised from the
exercise of previously issued stock options and warrants. New long term debt
totaled $3,070,000, comprised of $1,937,000 from the new Spanish facility
(described below) and the balance from equipment lease financing. An aggregate
of $883,000 of long term debt was repaid, including $680,000 (pound
sterling400,000 at an exchange rate of pound sterling1:$1.70) ) to the Bank of
Scotland (described below).
At September 30, 1998, the Company had warrants outstanding and
exercisable to purchase 284,132 shares of common stock at a weighted average
price of $16.72 per share, which, if exercised, would provide the Company with
gross proceeds of approximately $4,750,000. In addition, at September 30, 1998,
the Company had 1,924, 500 options outstanding and exercisable to purchase
shares of common stock at a weighted average price of $9.31 per share, which, if
exercised, would provide the Company with gross proceeds of up to approximately
$17,917,000. There can be no assurance that any such warrants or options in fact
will be exercised. At September 30, 1998, commitments for capital expenditures
totalled $750,000, primarily relating to Newcorn and the Company's UK packaging
operations.
The Company, through its subsidiary EPL Technologies (Europe)
Limited ("EPL Europe"), has a line of credit in the amount of pound
sterling150,000 ($255,000 at an exchange rate of pound sterling1:$1.70) with the
Bank of Scotland as part of its credit facility for the Company's U.K.
operations (the "U.K. Credit Facility"). There were no amounts outstanding under
this facility at September 30, 1998. The U.K. Credit Facility also contains two
term loans and a revolving facility, under which pound sterling710,000
($1,207,000 at an exchange rate of pound sterling1:$1.70) and pound sterling0
respectively, were outstanding as of September 30, 1998, the revolving facility
of pound sterling400,000 ($680,000 at an exchange rate of pound sterling1:$1.70)
having been repaid during the three months to September 30, 1998. The U.K.
Credit Facility is secured by the assets of the Company's U.K. subsidiaries. The
Company and the Bank of Scotland have agreed in principle the terms of new
credit facilities and the Company has deposited with the Bank of Scotland
sufficient cash to repay the outstanding amounts under the term loans, which
will be terminated upon repayment. The Company and the Bank have agreed that the
revolving facility, in the amount of pound sterling400,000 ($680,000 at an
exchange rate of pound sterling1:$1.70), will remain available for future
borrowings. In addition, the line of credit will be increased by pound
sterling100,000 to pound sterling250,000 ($425,000 at an exchange rate of pound
sterling1:$1.70). The Company expects to formally complete the new credit
facilities during the fourth quarter. The existing UK Credit Facility contains
certain covenants applicable to the results of operation of the businesses of
EPL
-12-
15
Europe and its subsidiaries, which provide for maintenance of minimum
earnings before income taxes and asset levels.
In addition, in July 1998, the Company, through its Spanish
subsidiary Fabbri, finalized with BankInter an unsecured line of credit for
Spanish PTS 275,000,000 ($1,937,000 at an exchange rate of PTS142:$1). This
facility was drawn in full as at September 30, 1998. The facility carries an
interest rate of 0.3% over BankInter base rate (4.25% as at September 30, 1998).
There are no covenants applicable to the facility.
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 remaining proceeds of the Company's recent
public 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, including the pursuit
of acquisitions that either expand or complement its existing lines of business.
-13-
16
FORWARD LOOKING STATEMENTS
Statements in the foregoing discussion that are not statements of
historical fact and reflect the intent, belief or expectations of the Company
and its management regarding the anticipated impact of events, circumstances and
trends should be considered forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not guarantees of future performance, and actual results may vary
materially from those projected in the forward-looking statements. Meaningful
factors that might affect such results include, but are not limited to: a) the
Company's needs for capital, including for acquisitions, which needs have been
and are expected to continue to be substantial, and its potential inability to
obtain additional financing on satisfactory terms, b) the Company's product
development and sales process, which is lengthy and resource intensive, c) the
uncertainty of demand for, or the market acceptance of, the Company's products
and services, d) the Company's limited resources and experience in marketing and
selling its products and services, e) personnel resources and production
requirements and potential difficulties in cross-marketing and managing multiple
product lines, f) the Company's potential inability to identify and acquire
acceptable acquisition targets, to the extent necessary to fulfill its expansion
plans, and its potential inability to successfully integrate any such
acquisitions into its operations, g) potential product obsolescence and short
product life cycles, h) potential competition, particularly in the market for
produce packaging, from companies with greater financial, management and other
resources, i) the unpredictability and volatility of the market for agricultural
products, j) changes in U.S. and foreign regulation, k) difficulty with research
and development and sales and marketing activities regarding new and existing
products, including extension of necessary time periods or increase in expense
for product introduction and market penetration, l) potential difficulties in
obtaining or protecting intellectual property rights or the infringement of
proprietary or other rights of the Company by third parties, m) raw material
availability and pricing, n) loss of services of key employees of the Company
and o) delays in the Company's ability to bring into production Newcorn's new
processing facilities, as well as other information contained in the Company's
other filings with the Securities and Exchange Commission.
-14-
17
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders held on
September 29, 1998, shareholders re-elected Paul L. Devine (10,623,649 votes in
favor, 271,717 votes withheld), Robert D. Mattei (10,624,624 votes in favor,
270,742 votes withheld) and Al S. Clausi (10,619,630 votes in favor, 275,736
votes withheld) as directors of the Company. The shareholders also approved the
1998 Stock Incentive Plan, as amended and restated, with 4,353,192 votes in
favor, 81,710 votes against and 29,643 votes abstaining.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 11.0 - Computation of Loss per share
Exhibit 10.24 - Employment agreement dated as of May
1, 1998 by and between Fabbri Artes Graficas
Valencia SA and Jose Saenz de Santa-Maria.
Exhibit 10.25 - Employment agreement dated as of
July 1, 1998, by and between EPL
Technologies, Inc. and R. Brandon Asbill.
b) Reports on Form 8-K
None
-15-
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date: November 13, 1998 /s/ Paul L. Devine
-----------------------------------------------
Paul L. Devine
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 /s/ Bruce M. Crowell
---------------------------------------------
Bruce M. Crowell
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1998 /s/ Timothy B. Owen
--------------------------------------------
Timothy B. Owen
Treasurer and Assistant Secretary
(Principal Accounting Officer)
-16-