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, 1999
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.
17,365,004 shares of $0.001 par value common stock
outstanding as of October 31, 1999.
2
EPL TECHNOLOGIES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 3
D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9
CONDITION AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 19
SIGNATURES. 20
3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited) *
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,326,418 $ 1,831,139
Accounts receivable, net 5,190,503 6,419,712
Inventories 5,059,586 4,275,490
Prepaid expenses and other current assets 1,499,491 1,462,663
------------ ------------
TOTAL CURRENT ASSETS 13,075,998 13,989,004
------------ ------------
PROPERTY AND EQUIPMENT, NET 8,791,664 11,724,648
OTHER ASSETS
Patent and distribution rights, net 826,329 901,285
Goodwill 2,608,878 2,921,061
Other intangibles, net 154,577 181,964
Other noncurrent assets 61,935 53,546
------------ ------------
TOTAL OTHER ASSETS 3,651,719 4,057,856
------------ ------------
TOTAL ASSETS $ 25,519,381 $ 29,771,508
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,416,715 $ 6,469,055
Accrued expenses 1,840,905 1,210,129
Other liabilities 2,633,989 705,029
Notes payable 526,900 0
Current portion of long-term debt 281,203 474,098
------------ ------------
TOTAL CURRENT LIABILITIES 13,699,712 8,858,311
Deferred profit on sale of property 2,209,392 0
LONG TERM DEBT 1,482,782 3,683,604
DEFERRED INCOME TAXES 238,159 77,964
------------ ------------
TOTAL LIABILITIES 17,630,045 12,619,879
------------ ------------
Convertible Series D Preferred Stock 0 12,846,586
SHAREHOLDERS' EQUITY
Convertible Series A Preferred Stock 60,000 60,000
Convertible Series D Preferred Stock 6,044,873 0
Common Stock 16,775 11,511
Additional paid-in capital 45,632,711 38,442,213
Accumulated deficit (43,246,368) (34,651,720)
Foreign currency translation adjustment (618,655) 443,039
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 7,889,336 4,305,043
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,519,381 $ 29,771,508
============ ============
* 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 AND COMPREHENSIVE LOSS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Sales $ 22,697,053 $ 24,776,127 $ 6,647,874 $ 8,405,355
Cost of sales 22,125,642 20,667,917 6,498,113 7,228,744
------------ ------------ ------------ ------------
Gross profit 571,411 4,108,210 149,761 1,176,611
Selling, general and administrative expenses 5,766,072 5,412,253 1,909,994 1,647,993
Research and development costs 1,541,469 1,115,402 411,527 325,614
Depreciation and amortization 1,599,968 1,266,416 529,541 461,442
------------ ------------ ------------ ------------
Net loss from operations (8,336,098) (3,685,861) (2,701,301) (1,258,438)
Interest expense, net 368,204 (6,869) 195,638 (21,442)
Gain on sale of fixed assets (541,822) 0 (541,822) 0
Net loss (income) from unconsolidated affiliates 12,510 0 (1,394) 0
------------ ------------ ------------ ------------
Loss before income tax (benefit) expense $ (8,174,990) $ (3,678,992) $ (2,353,723) $ (1,236,996)
Income tax (benefit) expense 66,551 0 66,551 0
------------ ------------ ------------ ------------
Net Loss $ (8,241,541) $ (3,678,992) $ (2,420,274) $ (1,236,996)
Deduct:
Accretion, discount and dividends on
preferred stock 353,107 2,618,727 107,274 265,073
------------ ------------ ------------ ------------
Net loss for common shareholders $ (8,594,648) $ (6,297,719) $ (2,527,548) $ (1,502,069)
============ ============ ============ ============
Loss per common share $ (0.70) $ (0.61) $ (0.19) $ (0.13)
============ ============ ============ ============
Comprehensive loss
Net loss $ (8,241,541) $ (3,678,992) $ (2,420,274) $ (1,236,996)
Other comprehensive (income)\loss
foreign exchange 1,061,694 (495,875) 276,552 (490,260)
------------ ------------ ------------ ------------
Total comprehensive loss $ (9,303,235) $ (3,183,117) $ (2,696,826) $ (746,736)
============ ============ ============ ============
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)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net loss $(8,241,541) $(3,678,992)
Adjustments to reconcile net loss to net cash
Used in operating activities: 1,599,968 1,179,784
Net loss from unconsolidated affiliates (12,510) 0
Changes in assets and liabilities 4,884,071 (1,843,063)
----------- -----------
Net cash (used) in operating activities (1,770,012) (4,342,271)
----------- -----------
INVESTING ACTIVITIES:
Purchase of fixed assets (1,110,948) (3,423,782)
Proceeds from sale of fixed assets 5,146,000 15,370
----------- -----------
Net cash provided from (used in) investing activities 4,035,052 (3,408,412)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from the exercise of options/warrants 158,750 852,018
Proceeds from issuance of preferred and common stock, net 0 6,726,190
Net proceeds from notes payable 526,900 0
Proceeds from long term debt 0 3,069,534
Net repayment of long term debt (2,393,717) (882,904)
----------- -----------
Net cash (used in) provided from financing activities (1,708,067) 9,764,838
----------- -----------
EFFECT OF EXCHANGE RATE CHANGE ON CASH (1,061,694) 232,536
----------- -----------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (504,721) 2,246,691
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,831,139 3,756,956
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,326,418 $ 6,003,647
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $ 353,107 $ 2,618,727
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 nine months and three months ended September 30, 1999 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 for the fiscal year
ended December 31, 1998.
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 technologies 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. At levels of operations as
experienced by some parts of its business in the third quarter, there is
increased pressure on the Company's liquidity. The pressure is especially
significant in the Company's corn business and efforts are being made to
restructure and recapitalize the business to ensure it has adequate resources to
exploit the considerable opportunities available. Discussions are also taking
place with vendors to agree to revised payment terms to help address the
liquidity pressure. However, there can be no guarantee that efforts to
restructure the corn business or changes in vendor payment terms will ultimately
be successful or that any such restructuring or changes in payment terms will
address all of the liquidity pressure.
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 technologies, but there is still an approval
process to be completed with new customers prior to sale. In addition, the
Company has consumed considerable levels of capital in capital expenditure in
increasing its production capacity for its product offerings. The Company
expects that these levels should reduce in the future, although this is subject
to the level of demand for its products.
The Company's management believes that cash flows from consolidated
operations, existing resources,
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borrowing and other funding opportunities and financing received to date in
1999, including the net proceeds received from the sale and leaseback of
property described below, should be sufficient to meet the Company's operating
needs for the next twelve months. In this regard, the Company is currently
exploring a number of options to raise additional capital. However, no
assurances can be given that the Company will be successful in raising
additional capital and failure to raise such capital could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In July 1999 the Company completed a sale and leaseback of the land and
building at its Spanish trading subsidiary, Fabbri Artes Graficas Valencia S.A.
("Fabbri"), with an unrelated third party. The Company raised gross proceeds,
before costs and taxes, of PTS800,000,000 (approximately $5,100,000). Fabbri
was purchased in December 1997 for $5,500,000 with part of the proceeds arising
from the Company's issuance of the Series D Preferred Stock. The Company used a
portion of the proceeds to pay down some of its then outstanding debt and
otherwise for working capital and other purposes. Such proceeds have now been
fully allocated. The Company expects to realize a total pretax profit of
approximately $2,750,000 on this transaction. For financial reporting purposes,
$542,000 of this total has been recognized in the current period. The remaining
balance will be recognized over the eight year life of the associated
leaseback. The tax on this profit can be deferred for up to 10 years under
Spanish tax rules. In connection with this transaction, the Company has
terminated the credit facility of $3,000,000 that it had had with a UK lender
(see Note 4 below).
NOTE 3 - INVENTORIES
Inventories consisted of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw Materials and Supplies $2,736,853 $2,594,370
Finished Goods 2,322,733 1,681,120
---------- ----------
Total Inventories $5,059,586 $4,275,490
========== ==========
NOTE 4 - NOTES PAYABLE
In March 1999, the Company obtained short-term revolving credit
facilities in an aggregate amount of $1,000,000 from the Company's Chairman and
Chief Executive Officer ($500,000) and other accredited investors ($500,000). In
June 1999, the former amount was increased to $1,000,000, making a total of
$1,500,000 (the "Short Term Facility"). The Company's obligations under the
Short Term Facility are unsecured and amounts outstanding thereunder bear
interest at a rate of nine percent (9%) per annum and are due on the earlier to
occur of (a) demand for payment and (b) September 30, 1999. The Company's
Chairman has agreed to defer repayment of the remaining balance owed to him
until the earlier of (i) such time as the Company and he agree a repayment date,
or (ii) December 31, 1999. A demand for repayment has been received from the
other investors (other than the Company's Chairman) and discussions are
continuing as to repayment terms for the amount owed to them. As of September
30, 1999, the Company had drawn a total of $526,900 under these facilities.
On March 30, 1999 the Company entered into a $3.0 million credit
facility with a UK asset management and investment advisory firm ( the "UK
Lender"), for a term of 18 months until September 30, 2000 for working capital
and other purposes, at an interest rate of 2.25% over the US Prime Rate with a
minimum rate of 9.0% accruing daily on the outstanding balance on the loan.
There were no amounts drawn under the facility as of September 30, 1999. In
connection with the Spanish sale and leaseback transaction described in Note 10
below, the Company and the UK Lender canceled this facility.
NOTE 5 - CONVERTIBLE PREFERRED STOCK
The Company's 10% Series A Convertible Preferred Stock (the "Series
A Stock"), which has been issued up to its authorized limit of 3,250,000 shares,
was issued at a price of $1.00 per share, with each share of Series A Stock
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carrying the option to convert into common shares at a rate of $1.50
per share. 60,000 shares of Series A Stock were outstanding as of September 30,
1999. The Series A Stock carries equal voting rights to the common shares,
based on the underlying number of common shares after conversion. The Series A
Stock carries a dividend rate of 10% per annum, payable in cash and/or common
shares ($1.50 per share) at the Company's option. The outstanding dividends at
September 30, 1999 totaled $1,419,192. In addition, 20% of the common stock
into which the Series A Stock may be converted carried detachable warrants at
an exercise price of $2.00 per warrant. All of these warrants have now been
exercised or have expired.
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 - for an aggregate
consideration of $2,500,000, to two existing investors in the Company (the
"Series B Stock"). Such issuance was made under Regulation D under the
Securities Act of 1933, as amended, as a transaction not involving a public
offering. 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, 1999. 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 outstanding dividends on the Series B Stock at September
30, 1998 totaled $270,092.
During 1997, the Company received gross proceeds of $1.0 million
from a then 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"). 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 carried 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 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 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, 1999. The outstanding dividends on the Series C Stock at September
30, 1999 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, as a transaction not involving a public offering. The Series D Stock
certificate of designation, as originally drafted, contained 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% 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 certificate of designation also contained
provision requiring shareholder approval for the issuance of shares of common
stock upon conversion if such shares of common stock exceeded certain defined
levels. At the Company's annual meeting of shareholders held on August 12, 1999,
shareholders approved the issuance of certain shares of common stock upon
conversion of the Company's Series D Stock and also approved the amendment to
the preferences and rights of the Company's Series D Stock. The holders of the
Series D Stock had previously
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approved the amendment. This approval has allowed the Company to reclass this
stock into shareholders equity.
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. 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 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.
Holders of the Series D Stock have limited voting rights and are not entitled to
any dividends. During the three months ended September 30, 1999, holders of
5,165 of these shares elected to exercise the right of conversion into 4,844,613
shares of common stock, leaving 5,735 shares of Series D Stock outstanding at
September 30, 1999.
NOTE 6 - ISSUANCE OF COMMON STOCK AND EXERCISE OF OPTIONS
A total of 4,869,613 shares of common stock were issued, in
transactions not involving a public offering under the Securities Act of 1933,
as amended, during the three months ended September 30, 1999. 25,000 shares were
issued upon the exercise of previously issued stock options and resulted in
gross proceeds to the Company of $87,500, and 4,844,613 shares were issued upon
conversion of various shares of the Series D Stock (See Note 5 above).
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. For the periods ended
September 30, 1999 and 1998, 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.
NOTE 8 - INDUSTRY SEGMENT INFORMATION
The Company develops, manufactures and markets proprietary
technologies designed to maintain the quality and integrity of fresh-cut
produce. These products fall into two major classifications: processing
technologies and related activities and packaging materials. Processing
technologies are designed to inhibit the enzymatic degradation that causes
fruits and vegetables to begin to deteriorate immediately after processing and
are sold primarily in the United States, with smaller amounts also sold in
Canada. This category also includes activities of the Company's fresh-cut corn
and potato products, as well as provision of scientific and technical services
in the United States. The Company's produce packaging business involves
perforating, converting and printing of flexible packaging, including
technologies and processes that are proprietary to the Company, which are
marketed in North and South America, the United Kingdom and Continental Europe.
The following table summarizes the Company's financial information
by industry segment:
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Nine months ended Three months ended
September 30 September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Sales:
Processing technologies and related activities $ 6,735,750 $ 6,810,080 $ 2,004,142 $ 2,981,489
Packaging materials 15,961,303 17,966,047 4,643,732 5,423,865
------------ ------------ ------------ ------------
Total sales $ 22,697,053 $ 24,776,127 $ 6,647,874 $ 8,405,354
============ ============ ============ ============
Net (Loss) Income from Operations:
Processing technologies and related activities (8,240,994) (4,254,451) (2,556,055) (1,365,684)
Packaging materials (95,104) 568,590 (145,246) 107,246
------------ ------------ ------------ ------------
Total net (loss)income from operations $ (8,336,098) $ (3,685,861) $ (2,701,301) $ (1,258,438)
============ ============ ============ ============
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-up Activities. This SOP provides guidance on the financial reporting of
start-up costs and organizational costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. This SOP is
effective for fiscal years beginning after December 15, 1998 and, as such, the
Company has adopted it as of January 1, 1999. Adoption of this SOP did not have
a material impact on the Company's consolidated financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts collectively referred to as
derivatives, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the consolidated balance
sheet and measure those statements at fair value. This statement is effective
for fiscal years beginning after June 15, 2000 although early adoption is
encouraged. The Company has not yet determined the impact SFAS No.133 will have
on its consolidated financial position or results of operations.
NOTE 10 - SUBSEQUENT EVENTS
On October 8, 1999, the Company announced that it had signed a
strategic five year manufacturing and co-pack agreement with Reser's Fine Foods,
Inc. ("Reser's"). Under the agreement, Reser's will process and supply EPL's
wholly-owned subsidiary, EPL Food Products, Inc. ("EPL Food"), with all of EPL
Food's fresh-cut potato product requirements. In addition, Reser's will process
and supply EPL Food with a new range of blanched (partially cooked) potato
products to be sold by EPL Food under the Fresh Alternatives TM brand. The Fresh
Alternatives TM brand has been made available to EPL Food by the Sholl Group II,
Inc., the exclusive licensee of The Pillsbury Company's Green Giant (R) Fresh
brand name. In addition, the Company and Reser's signed a related five-year
non-exclusive license agreement for the Company's proprietary processing
technology for potatoes.
On November 2, 1999 Robert D. Mattei resigned from the board of
directors of the Company to concentrate more fully on his other business
interests. Until such time as a new member is appointed, the board will remain
at three. The Company has approached various potential new members, none of
which have yet agreed to serve. Upon any such new appointment, the Company
will make appropriate disclosure.
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11
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 technologies,
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 technologies 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 technologies, 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 technologies 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 technologies 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. The Company is continuing to seek to shift, where
possible, from low margin packaging products to higher margin packaging
products.
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. In addition, the
Company continues to be in discussions with a number of companies in connection
with a number of produce categories regarding strategic alliances, joint
ventures, licenses and other contracts. Although the Company consummated a
copack and licensing agreement with Reser's in October 1999 as detailed in Note
10 to the Company's condensed, consolidated financial statements, there can be
no assurance that any such discussions will result in any further transactions
being consummated.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Sales. Sales decreased from $24,776,000 in the nine months ended
September 30, 1998 to $22,697,000 in the nine months ended September 30, 1999, a
decrease of $2,079,000 or 8.4%. Sales of processing technologies and related
activities in the US and Europe decreased marginally from $6,810,000 in the nine
months ended September 30, 1998 to $6,736,000 in the nine months ended September
30, 1999, a decrease of $74,000 or 1.1%. Sales of US packaging materials
decreased from $2,608,000 in the nine months ended September 30, 1998 to
$1,852,000 in the nine months ended September 30, 1999, a decrease of $756,000
or 29%. Sales of UK packaging materials decreased from $9,522,000 in the nine
months ended September 30, 1998 to $8,316,000 in the nine months ended September
30, 1999, a decrease of $1,206,000 or 13%. Sales of European packaging materials
decreased marginally from $5,837,000 in the nine months ended September 30, 1998
to $5,793,000 in the nine months ended September 30, 1999, a decrease of $44,000
or 1%.
The small decrease in sales of processing technologies and related
activities was mainly due to the lower sales revenue from fresh-cut corn sold
through the Company's majority-owned affiliate, NewCornCo LLC ("Newcorn").
During the second quarter of 1999 the Company completed the work on its facility
in Darien, Wisconsin (the "Darien Facility"). However, this was just prior to
the short period of the year when local corn is generally available. The Company
decided not to incur significant ongoing costs to compete against low value corn
at uneconomic prices and thus limited its sales activities, principally during
the third quarter. In the early part of the year
- 9 -
12
Newcorn had at times been unable to process and sell on a profitable basis bulk
corn which it had committed to purchase. This impacted gross profit, since when
the Company has limited its corn commitments under contract. The Company has now
set up a sales effort to focus on food service, as well as to develop and extend
its traditional retail market. In addition, the Company is assessing the best
way to grow the business profitably on a national basis.
Offsetting this decrease in revenue, the Company experienced
significant growth in the volume of fresh-cut potato products sold by its EPL
Food Products, Inc. ("EPL Food") subsidiary under the "Green Giant(R) Fresh"
brand name. The Company has continued to expand both the geographical coverage
of its sales effort and the product range, and now offers a number of different
fresh-cut potato products in addition to its original "Fresh Fries". However,
as the Company continued to seek to expand its product range and geographic
coverage, the Company sought to find a strategic partner to help in this
process. As mentioned above in Note 10 to the condensed, consolidated financial
statements, in October 1999 the Company announced that it had signed a
strategic five year manufacturing and co-pack agreement with Reser's Fine
Foods, Inc. ("Reser's"). Under the agreement, Reser's will process and supply
EPL Food with all of EPL Food's fresh-cut potato product requirements. In
addition, Reser's will process and supply EPL Food with a new range of blanched
(partially cooked) potato products to be sold by EPL Food under the Fresh
Alternatives TM brand. The Fresh Alternatives TM brand has been made available
to EPL Food by the Sholl Group II, Inc., the exclusive licensee of The
Pillsbury Company's Green Giant (R) Fresh brand name. The Company has already
commenced sales of these blanched potato products, although such sales are not
expected to contribute materially to sales revenues of EPL Food before 2000. In
addition, the Company and Reser's agreed to enter into a related five-year
non-exclusive license agreement for the Company's proprietary processing
technology for potatoes. The Company currently believes these arrangements will
have a material positive impact on the sales revenue of EPL Food in 2000 and
beyond, although there can be no assurance such will be the case.
The Company is continuing to focus on the sale and development of
its processing technologies, particularly with respect to corn, potatoes and
apples. Furthermore, development work continues to seek to exploit the new
technologies for use on freshly harvested mushrooms and whole peeled potatoes.
In addition, product testing continues on a number of other vegetables, and in
some cases has been expanded or accelerated, and significant costs have been
incurred to date which are yet to yield material revenues. The Company also
continues to grow its capability in scientific and technical services, and is
seeing an increasing demand for food safety and hygiene advice in the produce
industry. From a low base, revenue from this area has risen by 27% over the same
period in 1998. The Company believes it is well-positioned to add further value
to the operations of fresh-cut processors. Furthermore, the Company is receiving
an increasing number of inquiries for its processing technologies from potential
UK and European customers.
The reduction in U.S. packaging material sales was principally
attributable to timing differences in shipments to large customers compared to
the same period of 1998 and the Company currently expects to recover some of
this volume going forward. Additionally, certain sales, which were previously
reported by the Company, are now accounted for in the Company's unconsolidated
joint venture with American National Can Company, ANC-Respire, LLC and,
therefore, are no longer reported as sales in the Company's statement of
operations. The Company is currently engaged in discussions with a number of
potential customers for new product applications and markets, especially in
relation to the Company's proprietary perforating capabilities, leveraging the
knowledge base of the U.K. operations. These include applications in the
produce, horticultural, bakery and pharmaceutical industries, amongst others.
Although not expected to make a material contribution to U.S. packaging sales
revenue in 1999, should such orders be forthcoming, the Company expects that
such new business would make a material contribution to sales revenue in 2000
onwards. There can be no assurance, however, that the Company will in fact
obtain these orders.
The decrease in U.K. packaging material sales was principally
attributable to a reduced level of sales to Pepsico, historically the Company's
largest single customer, as well as the adverse impact of pricing pressures in
the UK, together with a reduction in sales of film to the bakery industry. The
impact, however, was offset by increased sales in other areas, as the Company
continued the execution of its strategic objective to reduce its dependence on
Pepsico and the bakery industry, both of which are lower margin areas of
activity, and focus more effort on utilizing its proprietary perforating
technology to move into new, higher value-added areas. Raw material prices have
generally fallen by over 20% compared with the same period in 1998, which
accounts for most of the reduction in revenue, as sales prices were adjusted
downwards to reflect the lower raw material prices. The Company believes that
its efforts to change product mix represents a more stable foundation for
sustainable and more profitable growth, although there can be no assurance that
the Company will be successful in these efforts. During 1998 the Company's
Respire(R) brand of
- 10 -
13
breathable packaging for fresh produce was launched in the UK and has
been successful in gaining new business in 1999. The Company has recently
gained new business from the suppliers to the main supermarkets in the UK, and
these are beginning to come through in increased shipments. Although this new
business is not expected to have a material impact on sales revenue for 1999 as
a whole, the year 2000 is expected to see a full year benefit of the increased
new business and is expected to generate a material increase in revenue during
2000 and beyond, although there can be no assurance of success. In addition,
the Company's proprietary micro-perforating technology has enabled the Company
to win new business in the area of cooked meat pastry products, although the
volume of this business has not been significant to date. New business
continues to be gained in the area of "breathable" packaging and the Company
has recently increased its production capacity in this area to handle the
forecast volume increase. Other applications are currently under development,
which, if successful, could have a material impact on sales revenues in 2000,
although there can be no assurance of success.
Sales of European packaging materials decreased marginally,
principally as a result of timing differences in shipments. The 1999 citrus
harvest was delayed slightly, resulting in some shipments of packaging materials
being delayed to the fourth quarter. The Company, through Fabbri, is targeting
further expansion not only in Spain but in other European countries and this is
beginning to show results. In addition, Fabbri is reducing its dependency on the
citrus crop by increasing its sales of packaging materials used in fresh produce
and other areas. Fabbri is also seeking to expand its limited revenue derived
from South American countries through existing and new contacts. Furthermore,
Fabbri is working increasingly closely with the UK business not only to leverage
the scientific and technical knowledge base, but to be able to offer customers a
pan-European service offering. This is reflected in the launch of the Company's
Respire(R) brand of "breathable" packaging for fresh produce into Europe, from
which Fabbri has already begun to gain new business.
Gross Profit. Gross profit decreased from $4,108,000 in the nine months
ended September 30, 1998 to $571,000 in the nine months ended September 30,
1999, a decrease of $3,537,000 or, as a percentage of sales, from 16.6% to
2.5%. This decrease was principally due to the adverse impact of the cost of
market development and sales support within the corn and potato businesses. In
addition, Newcorn, at times, was unable to process and sell on a profitable
basis bulk corn which it had committed to purchase, which adversely impacted
gross profit. Market development and sales support costs are expected to
continue to be incurred in the future, although their adverse impact on gross
profit is expected to diminish as sales volumes and operating efficiencies
improve. The Company also expects that the relocation of Newcorn's West Coast
operations in late 1998, together with the recent completion of the Darien
Facility, which have significantly increased processing capacity, will help
enhance operating efficiencies in the future as sales volumes increase. In
addition, the Company is also reviewing other options to improve production
efficiencies and thus reduce the cost base of the businesses further. The
various agreements with Reser's, as described in Note 10 to the Company's
condensed, consolidated financial statements, in relation to the Company's Green
Giant potato business, is expected to make a material improvement to the
profitability of this business from 2000 onwards as the business benefits from
the economies of scale of Reser's existing production volumes. Work is
continuing to identify ways to improve the profitability of the Company's corn
business, although any precise course of actions remains uncertain.
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. Newcorn enters into fixed price contracts for the
supply of a portion of its bulk corn requirements, the aim of which is to
ensure, where possible, adequate supplies of bulk corn of consistent quality at
a known, fixed price. If market prices for bulk corn are constant or rise,
Newcorn will benefit from such arrangement. However, if market prices fall,
Newcorn may not be able to fully pass on all of its costs if it is unable to
renegotiate contract prices. Management believes that 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 technologies.
In addition, the Company continues to accelerate the development of
certain applications for its proprietary micro-perforating technology. These
costs are primarily expensed as incurred, although the benefits of this expense
in terms of incremental sales and gross profit, are not expected to commence
no earlier than the final quarter of 1999 and beyond.
- 11 -
14
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $5,412,000 in the nine months ended
September 30, 1998 to $5,766,000 in the nine months ended September 30, 1999, an
increase of $354,000 or 7%. This increase was due primarily to (i) the
continuing development of the Company's sales and marketing efforts,
particularly in the area of sales of processing technologies and related
activities for potatoes, corn and apples, together with packaging development,
and (ii) other costs, including the hiring of additional personnel. The
Company's sales and marketing efforts with respect to processing technologies
and related activities are primarily focused on fresh-cut potatoes, corn and
apples and, to a lesser extent, other produce categories, together with
packaging applications. The Company is evaluating ways of reducing its overhead
base. In the Company's potato business, the agreement with Reser's should help
facilitate revenue growth with lower incremental overhead costs. The Company has
reviewed the overhead base in its corn business and reduced the number of
personnel. Other personnel are not being replaced automatically, and
responsibilities reviewed to determine whether workloads can be reallocated.
Research and Development Costs. Research and development costs
increased from $1,115,000 in the nine months ended September 30, 1998 to
$1,541,000 in the nine months ended September 30, 1999, an increase of $426,000
or 38.0%. This reflects the increasing costs of internal scientific activities
related to sales efforts for large potential customers, principally related to
mushrooms and potatoes, together with perforated films, as well as external
costs from the collaborative work undertaken with outside institutions. The
Company continues to expense all development costs, whether product, market or
sales related, as they are incurred, and thus costs are incurred prior to the
benefits, if any, that may be expected to be realized from such expense. The
Company expects that research and development costs will continue at no less
than recent levels and may increase, depending on available resources.
Depreciation and Amortization. Depreciation and amortization
increased from $1,266,000 in the nine months ended September 30, 1998 to
$1,600,000 in the nine months ended September 30, 1999, an increase of $334,000
or 26%. This is mainly due to the depreciation on the increased fixed asset
base, following the capital expenditures in 1998 and the first nine months of
1999, mainly including work on the corn processing facilities at Camarillo, CA
and the Darien Facility, together with capital expenditures in the UK.
Loss from Operations. Loss from operations increased from $3,686,000
in the nine months ended September 30, 1998 to $8,336,000 in the nine months
ended September 30, 1999, an increase of $4,650,000 or 126%. The increase was
primarily due to an increase in costs in 1999 as compared with 1998 (reflected
in the fall in gross profit). Many of such costs were one time costs as detailed
above, especially the development costs of potatoes and corn, the latter
including the expensing of the start-up costs of the new Darien Facility which
was approved during the second quarter for shipment of fresh produce under the
"Green Giant(R) Fresh" brand name. The Company continues to look for ways to
leverage the Company's infrastructure through the expansion of the Company's
business, and management believes this leverage should increase further as sales
continue to develop. Management believes that considerable commercial progress
continues to be made and that the foundation for future sustainable growth has
been considerably strengthened. However, because all development costs are
expensed as they are incurred, together with the fact that such expense is
necessarily incurred before the benefits of increased sales and improved margins
can be seen, the Company's financial results do not yet reflect this activity.
Gain on sale of fixed assets. As noted in note 2 to the Company's
condensed, consolidated financial statements, the Company completed a sale and
leaseback of the land and building at its Spanish trading subsidiary, "Fabbri",
with an unrelated third party. The Company raised gross proceeds, before costs
and taxes, of PTS800,000,000 (approximately $5,100,000). The Company expects to
realize a pretax profit of approximately $2,750,000 on this transaction. For
financial reporting purposes, $542,000 has been recognized in the current
period. The remaining balance will be recognized over the eight year life of the
associated leaseback. The tax on this profit can be deferred for up to 10 years
under Spanish tax rules.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock decreased from $2,619,000 for the nine
months ended September 30, 1998 to $353,000 in the nine months ended September
30, 1999, a decrease of $2,266,000. The decrease was due to completion during
1998 of the amortization of the beneficial conversion feature 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 1999 charge primarily represents a 4% per
annum appreciation provision
- 12 -
15
on the outstanding stated value of the Series D Stock.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Sales. Sales decreased from $8,405,000 in the three months ended
September 30, 1998 to $6,648,000 in the three months ended September 30, 1999, a
decrease of $1,757,000 or 21%. Sales of processing technologies and related
activities in the US decreased from $2,981,000 in the three months ended
September 30, 1998 to $2,004,000 in the three months ended September 30, 1999, a
decrease of $977,000 or 33%. Sales of US packaging materials decreased from
$784,000 in the three months ended September 30, 1998 to $605,000 in the three
months ended September 30, 1999, a decrease of $179,000 or 23%. Sales of UK
packaging materials decreased from $3,088,000 in the three months ended
September 30, 1998 to $2,770,000 in the three months ended September 30, 1999, a
decrease of $318,000 or 10%. Sales of European packaging materials decreased
from $1,551,000 in the three months ended September 30, 1998 to $1,268,000 in
the three months ended September 30, 1999, a decrease of $283,000 or 18%.
The decrease in sales of processing technologies and related
activities was mainly due to the decline in revenue of fresh-cut corn products.
During the second quarter of 1999 the Company completed the work on its facility
in Darien, Wisconsin (the "Darien Facility"). However, this was just prior to
the short period of the year when local corn is generally available. As
mentioned above, the Company decided not to incur significant ongoing costs to
compete against low value corn at uneconomic prices in the third quarter and
thus limited its sales activities. In the early part of the year Newcorn had at
times been unable to process and sell on a profitable basis bulk corn which it
had committed to purchase. This impacted gross profit, since when the Company
has limited its commitments under contract. The level of activity did not pick
up until after the end of the period. The Company has now set up a sales effort
to focus on food service, as well as to develop and extend its traditional
retail market. In addition, the Company is assessing the best way to grow the
business profitably on a national basis.
Offsetting this decrease in revenue, the Company experienced
growth in the volume of fresh-cut potato products sold by its EPL
Food Products, Inc. subsidiary under the "Green Giant(R) Fresh" brand name. The
Company has continued to expand both the geographical coverage of its sales
effort and the product range, and now offers a number of different fresh-cut
potato products in addition to its original "Fresh Fries". However, as the
Company continued to seek to expand its product range and geographic coverage,
the Company sought to find a strategic partner to help in this process. The
Company believes that the copack agreement with Reser's will help the future
growth of the business.
The Company is continuing to focus on the sale and development of
its processing technologies, particularly with respect to corn, potatoes and
apples. Furthermore, market development work continues to seek to exploit the
new technologies for use on freshly harvested mushrooms and whole peeled
potatoes. In addition, product testing continues on a number of other
vegetables, 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
Company also continues to grow its capability in scientific and technical
services, and is seeing an increasing demand for food safety and hygiene advice
in the produce industry. From a low base, revenue from this area has risen by
36% over the same quarter in 1998. The Company believes it is well-positioned to
add further value to the operations of fresh-cut processors. Furthermore, the
Company is receiving an increasing number of inquiries for its processing
technologies from potential UK and European customers.
The reduction in U.S. packaging material sales was attributable to
timing differences in shipments to large customers compared to the same period
of 1998, some of which the Company currently expects to recover going forward.
Additionally, certain sales, which were previously reported by the Company, are
now accounted for in the Company's unconsolidated joint venture with American
National Can Company, ANC-Respire, LLC and, therefore, are no longer reported as
sales in the Company's statement of operations. The Company is currently engaged
in discussions with a number of potential customers for new product applications
and markets, especially in relation to the Company's proprietary perforating
capabilities, leveraging the knowledge base of the U.K. operations. These
include applications in the produce, horticultural, bakery and pharmaceutical
industries, amongst others. Although not expected to make a material
contribution to U.S. packaging sales revenue in 1999, should such orders be
forthcoming, the Company expects that such new business would make a material
contribution to sales revenue in 2000 onwards.
The decrease in U.K. packaging material sales was principally
attributable to a reduced level of sales to Pepsico, as well as the adverse
impact of pricing pressures in the UK, together with a reduction in sales of
film to the bakery industry. The impact, however, was offset by increased sales
in other areas, as the Company continued the execution of its strategic
objective to reduce its dependence on Pepsico and the bakery industry, both of
which are
- 13 -
16
lower margin areas of activity, and focus more on utilizing its proprietary
perforating technology to move into new, higher value-added areas. Raw material
prices have generally fallen by an average of 15-20% compared with the same
period in 1998, which accounts for most of the reduction in revenue, as sales
prices were adjusted downwards to reflect the lower raw material prices. The
Company believes that its efforts to change product mix is providing a more
stable foundation for sustainable and more profitable growth, although there can
be no assurance that the Company will be successful in this effort. During 1998
the Company's Respire(R) brand of breathable packaging for fresh produce was
launched in the UK and has been successful in gaining new business in 1999. The
Company has gained new business from the suppliers to the main supermarkets in
the UK, and these are beginning to come through in increased shipments. This
will further benefit the fourth quarter of 1999 and 2000 is expected to see a
full year benefit of the increased new business, although there can be no
assurance of success. In addition, the Company's proprietary micro-perforating
technology has enabled the Company to win new business in the area of cooked
meat pastry products, although the volume of this business has not been
significant to date. New business continues to be gained in the area of
"breathable" packaging and the Company has recently increased its production
capacity in this area to handle the forecast volume increase. Other applications
are currently under development, which, if successful, could have a material
impact on sales revenues in 2000, although there can be no assurance of success.
The decrease in sales of European packaging materials at Fabbri
was principally due to timing of completion of the 1999 citrus crop. This was
delayed slightly, and thus the Company expects some of the lost volume to be
recovered in the fourth quarter. There was also some impact from falling raw
material prices, which was much less than the UK due to different product mixes.
The Company is unable, however, to quantify the impact of these pricing changes.
Fabbri is targeting further expansion not only in Spain but in other European
countries and this is beginning to show results. In addition, Fabbri is reducing
its dependency on the citrus crop by increasing its sale of packaging materials
used in fresh produce and other areas. Furthermore, Fabbri is seeking to expand
its limited revenue derived from South American countries through existing and
new contacts. Fabbri is also working increasingly closely with the UK business
not only to leverage the scientific and technical knowledge basis, but to be
able to offer customers a pan-European service offering. This is reflected in
the launch of the Company's Respire(R) brand of breathable packaging for fresh
produce into Europe. Fabbri has now received its first orders for this produce
packaging, although such sales are not yet material.
Gross Profit. Gross profit decreased from $1,177,000 in the three
months ended September 30, 1998 to $150,000 in the three months ended September
30, 1998, a decrease of $1,027,000 or, as a percentage of sales, from 14% to
2.3%. This decrease was principally due to the adverse impact of the cost of
market development and sales support within the corn and potato businesses.
Market development and sales support costs are expected to continue to be
incurred in the future, although their adverse impact on gross profit is
expected to diminish as sales volumes and operating efficiencies improve. The
Company also expects that the relocation of Newcorn's West Coast operations in
late 1998, together with the completion of the Darien Facility, will all
significantly increase processing capacity and help enhance operating
efficiencies in the future as sales volume increase. In addition, the Company is
also reviewing other options as to how to improve efficiencies and thus profit
levels further. The various agreements with Reser's in relation to its Green
Giant potato business is expected to make a material improvement to the
profitability of this business from 2000 onwards as the business benefits from
the economies of scale of Reser's existing production volumes. Work is
continuing to identify ways to improve the profitability of the Company's corn
business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1,648,000 in the three months ended
September 30, 1998 to $1,910,000 in the three months ended September 30, 1999,
an increase of $262,000 or 16%. This increase was due primarily to the
continuing development of the Company's sales and marketing efforts,
particularly in the area of sales of processing technologies and related
activities for potatoes, corn and apples amongst others, and other costs,
including patent costs. The Company is evaluating ways of reducing its overhead
base. In the Company's potato business, the agreement with Reser's should help
facilitate revenue growth with lower incremental overhead costs. The Company has
reviewed the overhead base in its corn business and reduced the number of
personnel. Other personnel are not being replaced automatically, and
responsibilities reviewed to determine whether workloads can be reallocated.
Research and Development Costs. Research and development costs
increased from $326,000 in the three months ended September 30, 1998, to
$412,000 in the three months ended September 30, 1999, an increase of $86,000 or
26%. This reflects the increasing costs of internal scientific activities
related to sales efforts for large potential
- 14 -
17
customers, principally related to mushrooms and potatoes, together with
perforated films, as well as external costs from the collaborative work
undertaken with outside institutions. The Company continues to expense all
development costs, whether product, market or sales related, in the year
incurred, and thus costs are incurred prior to the benefits, if any, that may be
expected to be realized from such expense. The Company expects that research and
development costs will continue at no less than recent levels and may increase,
depending on available resources.
Depreciation and Amortization. Depreciation and amortization
increased from $461,000 in the three months ended September 30, 1998, to
$530,000 in the three months ended September 30, 1999, an increase of $69,000 or
15%. This is mainly due to the depreciation on the increased fixed asset base,
following the capital expenditures in 1998 and 1999 to date, mainly including
work improvements to the corn processing facilities at Camarillo, CA and the
Darien Facility, together with capital expenditures in the UK.
Loss from Operations. Loss from operations increased from $1,258,000
in the three months ended September 30, 1998 to $2,701,000 in the three months
ended September 30, 1999, an increase of $1,443,000 or 115%. The increase was
primarily due to an increase in costs in 1999 as compared with the same period
in 1998 (and reflected in the fall in gross profit), many of which were one time
costs as detailed above, especially the development costs of potatoes and corn.
Within other costs, most of the increase came from increased research and
development costs and associated selling costs as outlined above. The Company
continues to look for ways to leverage the Company's infrastructure through the
expansion of the Company's business, and management believes this leverage
should increase further as sales continue to develop. Management believes that
considerable commercial progress continues to be made and that the foundation
for future sustainable growth has been considerably strengthened. However,
because all development costs are expensed as they are incurred, together with
the fact that such expense is necessarily incurred before the benefits of
increased sales and improved margins can be seen, the Company's financial
results do not yet reflect this activity.
Gain on sale of fixed assets. As noted in note 2 to the Company's
condensed, consolidated financial statements, the Company completed a sale and
leaseback of the land and building at its Spanish trading subsidiary, "Fabbri",
with an unrelated third party. The Company raised gross proceeds, before costs
and taxes, of PTS800,000,000 (approximately $5,100,000). The Company expects to
realize a total pretax profit of approximately $2,750,000 on this transaction.
For financial reporting purposes, $542,000 of this total profit has been
recognized in the current period. The remaining balance will be recognized over
the eight year life of the associated leaseback. The tax on this profit can be
deferred for up to 10 years under Spanish tax rules.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock decreased from $265,000 in the three
months ended September 30, 1998 to $107,000 in the three months ended September
30, 1999, a decrease of $158,000. The decrease was due to completion during 1998
of the amortization of the beneficial conversion feature of the Series D Stock
and accretion of the fair value of warrants issued in connection with the
issuance of the Series D Stock, together with a reduction in the amount of
Series D Stock outstanding. The 1999 charge primarily represents a 4% per annum
appreciation provision on the outstanding stated value of the Series D Stock.
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 has adopted a written plan (the "EPL Y2K Plan") which
outlines the actions the Company plans to take to identify and address year 2000
issues. The EPL Y2K Plan requires each of the Company's business units to
prepare a compliance plan (a "Unit Plan") which (i) summarizes efforts taken to
identify, prioritize and address year 2000 issues facing such business unit,
(ii) estimates the extent to which these year 2000 issues have been addressed,
and (iii) flags foreseeable problems. The EPL Y2K Plan calls for each Unit Plan
to identify, prioritize and address both "internal" year 2000 issues (those
arising from such unit's computer hardware and software, embedded chips and unit
practices with respect to date entry) and "external" year 2000 issues (those
arising by virtue of material relationships with customers and suppliers which
have year 2000 issues).
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The Company has received and reviewed Unit Plans from each of its
business units and has completed its identification of year 2000 issues
reasonably expected to have a material impact on the Company's operations. The
Company completed development of its remediation plans for such material issues
during the second quarter of 1999 and performed any required remediation during
the third quarter of 1999. Although the Company believes its best efforts were
used to ensure that any remediation was accomplished effectively, no assurance
can be given that the Company will not experience interruptions in its
operations for Y2K-related reasons.
The Company has completed its identification and prioritization of,
and communication with, critical suppliers, distributors and customers to
determine the extent to which the Company may be vulnerable to external year
2000 issues. Detailed evaluations of the most critical third parties have been
initiated through questionnaires, interviews and other means. The Company
believes that each business unit has successfully identified critical third
parties with year 2000 issues. The Company will continue to monitor the progress
made by those parties and formulate appropriate contingency plans to address any
year 2000 issues of critical third parties which remain unresolved.
The Company requires each business unit to monitor and report on a
monthly basis the progress made on identifying and addressing such unit's year
2000 issues. Unit plans include any incremental out-of-pocket expenses incurred
by such unit to assess exposure, prepare and implement a remediation plan, test
internal systems, upgrade or replace non-compliant computer hardware and
software and embedded technology and contact critical suppliers and customers.
The Company does not require such units to monitor the cost of using internal
resources (such as salary and related benefit costs) in implementing the EPL Y2K
Plan.
The total estimated cost of the Company's year 2000 project,
excluding the cost of using internal resources, is estimated at approximately
$100,000 and is currently being funded through operating cash flows. Of this
total estimated cost, the Company estimates that approximately $30,000 will be
attributable to the purchase of new hardware and software and will be
capitalized in accordance with the Company's current policies, with the
remaining $70,000 to be expensed as incurred. As of September 30, 1999, the
Company had incurred approximately $80,000 in costs related to its year 2000
project, $20,000 of which was expensed in 1998 and $60,000 expensed in 1999. The
remaining costs are expected to be incurred over the balance of 1999. This total
estimated cost is based on numerous assumptions, including the continued
availability of current employees responsible for implementing the Company's
year 2000 plan, the Company's ability to identify and remediate its year 2000
issues in a timely manner and the severity of any year 2000 issues identified.
There can be no assurance, however, that actual costs will not differ materially
from this estimate. Factors that may cause actual costs to vary materially from
those currently anticipated include, but are not limited to, the availability
and cost of personnel capable of implementing the Company's year 2000 plan, the
ability to locate and repair or replace all non-compliant hardware, software and
embedded technology in a timely manner, the ability of critical suppliers and
customers to address their own year 2000 issues adequately.
In addition, year 2000 issues may lead to third party claims, the
impact of which cannot yet be estimated. The Company has product and general
liability insurance policies which provide coverage in the event of certain
product failures. The Company has not purchased insurance specifically designed
to cover year 2000 issues because, in management's view, the cost is
prohibitive. No assurance can be given that the aggregate cost of defending or
resolving such claims, if any, would not have a material adverse effect on the
Company.
The Company believes that the EPL Y2K Plan will allow the Company to
anticipate and resolve any year 2000 issues in a timely manner. In the event,
however, that the Company does not properly identify and resolve year 2000
issues in a timely manner, there can be no assurance that year 2000 issues will
not materially and adversely effect the Company. In addition, disruptions in the
economy generally resulting from year 2000 issues could also materially and
adversely effect the Company. The Company currently believes that the most
reasonably likely worst case scenario is either (I) the failure of a supplier to
resolve in a timely manner its year 2000 issues, which could result in the
temporary slowdown or interruption in the Company's ability to manufacture
products and/or to provide services and increased expenses of automated
functions which must be performed manually, or (ii) the failure of a customer to
resolve in a timely manner its year 2000 issues, which could result in lost
revenues if such customer is unable to continue to purchase products and/or
services from the Company. The amount of potential liability, lost revenue and
incremental expense that would be reasonably likely to result from the failure
by the Company and critical third parties to resolve year 2000 issues in a
timely manner cannot be reasonably estimated at this time.
The Company is using its best efforts to ensure that the impact of
year 2000 issues on its critical systems will not affect its ability to provide
products and services to its customers. The Company is addressing its most
reasonably likely worst case scenario by having the Units develop contingency
plans for matters that might arise despite best efforts. The Company expects
that its contingency plans will be substantially in place by the end of November
1999. The Company contingency plans include stockpiling raw materials,
increasing inventory levels,
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securing alternate sources of supply, scheduling non mission-critical activities
during the first week of 2000, making contingency arrangements for funds
transfer, establishing back-up means of communication and other measures.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had $1,326,400 in cash and short
term investments, compared with $1,831,100 at December 31, 1998, a decrease of
$504,700. During the nine months ended September 30, 1999, $1,770,000 was used
in operating activities. In addition, $4,035,000 was provided from investing
activities, $5,146,000 from proceeds from the sale of fixed assets (representing
the Spanish property referred to above and below), net of purchase of fixed
assets of $1,111,000. The decrease in cash used in operating activities of
$2,572,000 in the nine months ended September 30, 1999 compared to the same
period in 1998 reflects the increased net loss, offset by increased non cash
adjustments and more favorable improvements in working capital for the nine
months ended September 30, 1999.
Total financing activities during the nine months ended September
30, 1999 used $1,708,000, compared with $9,764,800 generated in the same period
in 1998. The finance funds used in 1999 were primarily from the repayment of
long term debt, offset by proceeds of short term debt. In 1998, financing
activities were largely generated from the public offering of common stock that
was completed in May 1998.
As of September 30, 1999, the Company had drawn $658,800 under its
line of credit with the Bank of Scotland, entered into by its subsidiary EPL
Technologies (Europe) Limited, for up to $658,800, which bears interest of 2%
over bank base rate (5.25% as of September 30, 1999). The Company also has a
short-term line of credit with the Bank of Scotland which also bears interest of
2% over bank base rate. Subsequent to the end of the quarter, the Company
obtained an increase in this facility from the Bank of Scotland, to
approximately $1,647,000 from up to approximately $1,235,200. At September 30,
1999, approximately $817,800 had been drawn under this facility. The lines of
credit are collateralized by the assets of EPL Technologies (Europe) Limited and
its subsidiaries. The debt agreements with the Bank of Scotland contain certain
covenants applicable to the results of operations of these businesses which
provide for maintenance of minimum asset levels and minimum earnings before
interest and tax to external interest ratios.
In addition, in July 1998 the Company, through its Spanish
subsidiary Fabbri, finalized with BankInter an unsecured line of credit for
PTS275,000,000 ($1,761,600 at $1.00:PTS 156.2). The facility carries interest of
0.3% over BankInter base rate (2.85% as of September 30, 1999). There are no
covenants applicable to the facility. During the period, this facility was
repaid out of part of the proceeds of the sale and leaseback of the Spanish
property referred to below. A new unsecured facility was then granted from
BankInter in the amount of PTS100,000,000 ($640,200 at $1.00:PTS 156.2). This
facility carries interest of 1.0% over BankInter base rate. This facility was
fully drawn at September 30, 1999.
At the end of the third quarter of 1998, Newcorn entered into two
equipment financing loans with General Electric Capital Corporation ("GECC") and
Santa Barbara Bank & Trust ("SBBT") secured by specifically identified capital
assets. The GECC loan is for approximately $549,000 for a term of 48 months
bearing interest at 10.25% per annum. The SBBT loan is for approximately
$466,000 for a term of 48 months payable in equal monthly installments bearing
interest at 10.5% per annum. At September 30, 1999, approximately $432,000 and
$367,000 were outstanding under the GECC and SBBT loans, respectively.
In March 1999, Paul L. Devine, the Company's Chairman and Chief
Executive Officer, agreed to extend to the Company on a short term basis a
revolving credit facility in an amount of up to $500,000, which was increased to
$1,000,000 in June 1999. At September 30, 1999 $126,900 was outstanding. The
Company's obligations under this facility are unsecured, and amounts outstanding
thereunder bear interest at a rate of nine percent (9%) per annum. The Company's
Chairman has agreed to defer repayment of the remaining balance owed to him
until the earlier of (i) such time as the Company and he agree a repayment date,
or (ii) December 31, 1999. The Company has agreed to pay all reasonable
out-of-pocket expenses incurred by Mr. Devine in connection with advancing funds
to the Company under this facility.
Also in March 1999, private investors agreed to extend to the
Company on a short term basis a revolving credit facility in an amount of up to
$500,000, of which $400,000 was outstanding as of September 30, 1999. The
Company's obligations under this facility are unsecured, and amounts outstanding
thereunder bear interest at a rate of 9% per annum and are due on the earlier to
occur of (a) demand for payment and (b) September 30, 1999. The Company has
agreed not to permit any encumbrance on the assets of its Spanish subsidiary
Fabbri without the prior written consent of the lenders under such facility for
so long as any amounts remain outstanding thereunder. The
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20
Company has agreed to pay all reasonable out-of-pocket expenses incurred by such
lenders in connection with advancing funds to the Company under such facility.
The Company has received a demand for repayment and is currently in discussions
with the investors over the terms of repayment. Although the Company believes
it will reach an agreement with such investors that the Company will be able to
meet, failure to to so could have a material adverse effect on the Company.
In July 1999 the Company completed a sale and leaseback of the land
and buildings at its Spanish trading subsidiary, Fabbri, in an arms length
transaction with an unrelated third party. The Company raised gross proceeds,
before costs and taxes, of PTS800,000,000 (approximately $5,100,000). Fabbri was
purchased in December 1997 for $5,500,000 with part of the proceeds of the
Series D Stock. As mentioned above, the Company used a portion of the proceeds
to pay down some of its then outstanding debt and otherwise for working capital
and other purposes. The Company expects to realize a pretax profit of
approximately $2,750,000 on this transaction. For financial reporting purposes,
$542,000 has been recognized in the current period. The remaining balance will
be recognized substantially over the eight year life of the associated
leaseback. The tax on this profit can be deferred for up to 10 years under
Spanish tax rules. In connection with this transaction, the Company has
terminated the credit facility of $3,000,000 that it had with the UK Lender -
see Note 4 to the Company's condensed, consolidated financial statements.
At September 30 1999, the Company had warrants outstanding and
exercisable to purchase 263,857 shares of common stock at a weighted average
price of $17.76 per share. In addition, at September 30, 1999, the Company had
2,000,875 options outstanding and exercisable to purchase shares of common stock
at a weighted average price of $8.89 per share. At September 30, 1999, there
were no material commitments for capital expenditures.
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, as well as debt
financing. The Company's management believes that cash flows from consolidated
operations, existing resources, borrowing opportunities and financing received
to date in 1999, including the net proceeds received from the sale and leaseback
of property described in Note 2 to the Company's condensed, consolidated
financial statements, should 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 in the event the Company's actual operating needs
exceed those currently anticipated by management, or the Company's actual cash
flows are less than those currently anticipated by management, or to implement
the Company's growth strategy. In this regard, the Company is currently
exploring a number of options to raise additional capital. No assurances can be
given that the Company will be successful in raising additional capital and
failure to raise such capital, if needed, could have a material adverse effect
on the Company's business, financial condition and results of operations.
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 and
the Company's business and growth strategies, including raising additional
debt or equity financing. 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, particularly in the near term, are expected to continue to be substantial,
and its potential inability to obtain additional financing on satisfactory
terms or in satisfactory amounts, 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 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, n) loss of
services of key employees of the Company, o) changes in the Company's product
mix and strategic focus and p) delays in the Company's ability to relocate its
Newcorn processing facilities, as well as other information contained in the
Company's filings with the Securities and Exchange Commission.
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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 August
12, 1999, shareholders re-elected Paul L. Devine (8,822,822 votes in favor,
262,770 votes withheld), Robert D. Mattei (8,884,822 votes in favor, 200,770
votes withheld) W Ward Carey (8,885,372 votes in favor, 200,220 votes withheld)
and Al S. Clausi (8,877,284 votes in favor, 208,308 votes withheld) as directors
of the Company. The shareholders also approved the issuance of certain shares of
Common Stock upon conversion of any of the Company's Series D Stock, with
4,401,077 votes in favor, 123,995 votes against and 156,750 votes abstaining and
also approved the amendment to the preferences and rights of the Company's
Series D Stock, with 4,380,818 votes in favor, 146,244 votes against and 155,010
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
b) Reports on Form 8-K
On August 4, 1999, the Company issued an 8-K reporting the sale
and leaseback of its Spanish property as mentioned in Note 2 to
the Company's condensed, consolidated financial statements.
On September 15, 1999, the Company issued an 8-K in connection
with the transfer of the listing of the Company's Common Stock
to the Nasdaq SmallCap market.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date: November 12, 1999 /s/ Paul L. Devine
--------------------------------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: November 12, 1999 /s/ Timothy B. Owen
--------------------------------------------
Timothy B. Owen
Treasurer
(Principal Financial and Accounting Officer)
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