<PAGE> 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 JUNE 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.
11,930,509 shares of $0.001 par value common stock
outstanding as of July 31, 1999.
<PAGE> 2
EPL TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999
AND 1998 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 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 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 18
SIGNATURES. 19
</TABLE>
<PAGE> 3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- -------------
(Unaudited) *
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 780,811 $ 1,831,139
Accounts receivable, net 6,052,736 6,419,712
Inventories 4,391,703 4,275,490
Prepaid expenses and other current assets 1,478,833 1,462,663
------------ ------------
TOTAL CURRENT ASSETS 12,704,083 13,989,004
------------ ------------
PROPERTY AND EQUIPMENT, NET 11,317,554 11,724,648
OTHER ASSETS
Patent and distribution rights, net 851,274 901,285
Goodwill 2,694,129 2,921,061
Other intangibles, net 163,706 181,964
Other noncurrent assets 61,236 53,546
------------ ------------
TOTAL OTHER ASSETS 3,770,345 4,057,856
------------ ------------
TOTAL ASSETS $ 27,791,982 $ 29,771,508
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 9,459,070 $ 6,469,055
Accrued expenses 1,520,787 1,210,129
Other liabilities 1,105,244 705,029
Notes payable 1,125,000 0
Current portion of long-term debt 468,376 474,098
------------ ------------
TOTAL CURRENT LIABILITIES 13,678,477 8,858,311
LONG TERM DEBT 3,338,958 3,683,604
DEFERRED INCOME TAXES 73,578 77,964
------------ ------------
TOTAL LIABILITIES 17,091,013 12,619,879
------------ ------------
Convertible Series D Preferred Stock 11,600,813 12,846,586
SHAREHOLDERS' EQUITY
Convertible Series A Preferred Stock 60,000 60,000
Common Stock 11,905 11,511
Additional paid-in capital 40,089,174 38,442,213
Accumulated deficit (40,718,820) (34,651,720)
Foreign currency translation adjustment (342,103) 443,039
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (899,844) 4,305,043
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,791,982 $ 29,771,508
============ ============
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
-1-
<PAGE> 4
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 16,049,179 $ 16,370,772 $ 8,291,649 $ 9,135,752
Cost of sales 15,627,529 13,439,173 7,913,711 7,363,746
------------ ------------ ------------ ------------
Gross profit 421,650 2,931,599 377,938 1,772,006
Selling, general and administrative expenses 3,856,078 3,764,260 1,933,458 1,881,292
Research and development costs 1,129,942 789,788 547,585 369,337
Depreciation and amortization 1,070,427 804,974 544,935 414,664
------------ ------------ ------------ ------------
Net loss from operations (5,634,797) (2,427,423) (2,648,040) (893,287)
Interest expense, net 172,566 14,573 123,004 (7,223)
Net loss from unconsolidated affiliates 13,904 0 17,717 0
------------ ------------ ------------ ------------
Net loss $ (5,821,267) $ (2,441,996) $ (2,788,761) $ (886,064)
Deduct:
Accretion, discount and dividends on
preferred stock 245,833 2,353,654 122,000 1,002,682
------------ ------------ ------------ ------------
Net loss for common shareholders $ (6,067,100) $ (4,795,650) $ (2,910,761) $ (1,888,746)
============ ============ ============ ============
Loss per common share $ (0.51) $ (0.49) $ (0.24) $ (0.18)
============ ============ ============ ============
Comprehensive loss
Net loss $ (5,821,267) $ (2,441,996) $ (2,788,761) $ (886,064)
Other comprehensive (income)\loss
foreign exchange 785,142 (5,615) 330,166 (98,058)
------------ ------------ ------------ ------------
Total comprehensive loss $ (6,606,409) $ (2,436,381) $ (3,118,927) $ (788,006)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
-2-
<PAGE> 5
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,821,267) $(2,441,996)
Adjustments to reconcile net loss to net cash
Used in operating activities: 1,070,427 799,182
Net loss from unconsolidated affiliates (13,904) 0
Changes in assets and liabilities 4,415,679 (757,034)
----------- -----------
Net cash (used) in operating activities (349,065) (2,399,848)
----------- -----------
INVESTING ACTIVITIES:
Purchase of fixed assets (855,225) (2,008,253)
Proceeds from sale of fixed assets 0 15,370
----------- -----------
Net cash (used) in investing activities (855,225) (1,992,883)
----------- -----------
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
Proceeds from notes payable 1,125,000 0
Proceeds from long term debt 0 290,130
Repayment of long term debt (344,646) (208,503)
----------- -----------
Net cash provided from financing activities 939,104 7,659,835
----------- -----------
EFFECT OF EXCHANGE RATE CHANGE ON CASH (785,142) 5,615
----------- -----------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (1,050,328) 3,272,719
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,831,139 3,756,956
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 780,811 $ 7,029,675
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $ 245,833 $ 2,265,000
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
-3-
<PAGE> 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 six months and three months ended June 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. 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.
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 11 below, should be sufficient to meet the
Company's operating needs for the next 12 months. There can be no assurance,
however, that the Company's borrowing opportunities will result in a debt
financing and, in any event, the Company may be required to seek additional debt
or equity financing to meet its operating needs and to implement its growth
strategy.
- 4 -
<PAGE> 7
NOTE 3 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Raw Materials and Supplies $2,638,754 $ 2,594,370
Finished Goods 1,752,949 1,681,120
---------- ----------
Total Inventories $ 4,391,703 $ 4,275,490
========== =========
</TABLE>
NOTE 4 - INTANGIBLE ASSETS - PATENT AND DISTRIBUTION RIGHTS AND GOODWILL
Patents are amortized over the shorter of their estimated useful
lives or the life of the patent. The net book value of acquired and developed
patents totaled $851,274 as of June 30, 1999. Amortization expense related to
patents totaled $51,156 for the six months ended June 30, 1999. Goodwill related
to the acquisition of certain subsidiaries is being amortized on a straight line
basis over ten years. Amortization expense related to goodwill and other
intangible assets totaled $223,518 for the six months ended June 30, 1999.
NOTE 5 - 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 private 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
facilities are unsecured and amounts outstanding there under 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. As of June 30, 1999, the Company
had drawn $1,125,000 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. The Company will be
able to make draws against the facility when it requires funds for working
capital and other purposes. The interest rate applicable to the facility
balances will be 2.25% over the US Prime Rate with a minimum rate of 9.0%
accruing daily on the outstanding balance on the loan. The Company may repay any
amounts drawn under the facility at any time. There were no amounts drawn under
the facility as of June 30, 1999. In connection with the Spanish sale and
leaseback transaction described in Note 11 below, the Company and the UK Lender
cancelled this facility.
NOTE 6 - CONVERTIBLE PREFERRED STOCK
The Company's 10% Series A Convertible Preferred Stock (the "Series
A Stock"), which has been issued up to its authorized limit of 3,250,000 shares,
was issued at a price of $1.00 per share, with each share of Series A Stock
carrying the option to convert into common shares at a rate of $1.50 per share.
The Series A Stock carries equal voting rights to the common shares, based on
the underlying number of common shares after conversion. The Series A Stock
carries a dividend rate of 10% per annum, payable in cash and/or common shares
($1.50 per share) at the Company's option. The outstanding dividends at June 30,
1999 totaled $1,417,692.
During the three months ended June 30, 1999, no shareholder holding
shares of Series A Stock elected to exercise the right of conversion, leaving
60,000 shares of Series A Stock outstanding at June 30, 1999. 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. 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
- 5 -
<PAGE> 8
- - at an aggregate consideration of $2,500,000, to two existing 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 June 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 June 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"). Such issuance was made under Regulation D under the Securities Act of
1933, as amended, as a transaction not involving a public offering. The Series C
Stock carries the option to convert into such number of shares of common stock
as is determined by dividing $4.50 by the conversion price (as defined in the
documentation for the Series C Stock) in effect at the time of conversion for
each share of Series C Stock and votes as a class, except as otherwise provided
by law, with the Series A Stock, the Series B Stock and the common stock, based
on 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 June 30, 1999. The
outstanding dividends on the Series C Stock at June 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 contains provisions which, in certain circumstances
outside of the Company's control, could provide the holders of Series D Stock
with the ability to redeem their shares. The amount to be paid by the Company in
the event of a redemption would be calculated as the greater of (a) 115% of the
stated value of the Series D stock plus 4% 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. The extent of the beneficial ownership feature,
representing the 6% discount from the market price at the conversion date, a
total of $800,000, will be accreted over the earliest period after which all
such shares are convertible, or nine months (the "Conversion Period") and was
thus largely complete as of June 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) will be 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 June 30, 1999,
no holders of these shares elected to exercise the right of conversion into
shares of common stock, leaving 10,900 shares of Series D Stock outstanding at
June 30, 1999.
- 6 -
<PAGE> 9
NOTE 7 - ISSUANCE OF COMMON STOCK AND EXERCISE OF OPTIONS
A total of 2,500 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 June 30, 1999. These shares were issued upon the
exercise of previously issued stock options and resulted in gross proceeds to
the Company of $8,750.
NOTE 8 - NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the loss
applicable to common shareholders by the weighted average number of common
shares and common shares outstanding during the period. For the periods ended
June 30, 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 9 - INDUSTRY SEGMENT INFORMATION
The Company is a developer and marketer of integrated produce
systems solutions specifically designed to address the needs of the rapidly
growing market for fresh-cut produce. These products fall into two major
classifications: processing technologies and related activities and packaging
materials. Processing technologies are designed to inhibit the enzymatic
degradation that causes fruits and vegetables to begin to deteriorate
immediately after processing and are sold primarily in the United States, 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.
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
<S> <C> <C> <C> <C>
Sales:
Processing technologies and related activities $ 4,731,608 $ 3,828,591 $ 2,922,282 $ 2,848,121
Packaging materials 11,317,571 12,542,181 5,369,367 6,287,631
----------- ----------- ----------- -----------
Total sales $16,049,571 $16,370,772 $ 8,291,649 $ 9,135,752
=========== =========== =========== ===========
Net (Loss) Income from Operations:
Processing technologies and related activities (5,684,839) (2,888,767) (2,606,878) (1,229,510)
Packaging materials 50,142 461,344 (41,162) 336,223
----------- ----------- ----------- -----------
Total net (loss)income from operations $(5,634,797) $(2,427,423) $(2,648,040) $ (893,287)
=========== =========== =========== ===========
</TABLE>
NOTE 10 - 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
- 7 -
<PAGE> 10
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 11 - SUBSEQUENT EVENTS
In July 1999 the Company completed a sale and leaseback of the land
and buildings at its Spanish trading subsidiary, Fabbri Artes Graficas Valencia
S.A. ("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 $5,000,000). Fabbri was purchased in December 1997 for $5,500,000
with part of the proceeds of the Series D Stock. The Company will use the
proceeds to pay down some of its existing debt (estimated at up to $1,500,000,
probably the Short Term Facility) and otherwise for working capital and other
purposes. The Company expects to realize a pretax profit of approximately
$2,600,000 on this transaction, which for financial reporting purposes 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 had with the UK Lender.
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 approved the amendment. This approval will allow
the Company to reclass this stock into stockholders equity.
- 8 -
<PAGE> 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 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. There can, however, be no assurance that
any such discussions will result in any transaction being consummated.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Sales. Sales decreased slightly from $16,371,000 in the six months
ended June 30, 1998 to $16,049,000 in the six months ended June 30, 1999, a
decrease of $322 000 or 2%. Sales of processing technologies and related
activities in the US and Europe increased from $3,829,000 in the six months
ended June 30, 1998 to $4,731,000 in the six months ended June 30, 1999, an
increase of $902,000 or 24%. Sales of US packaging materials decreased from
$1,823,000 in the six months ended June 30, 1998 to $1,247,000 in the six months
ended June 30, 1999, a decrease of $576,000 or 32%. Sales of UK packaging
materials decreased from $6,434,000 in the six months ended June 30, 1998 to
$5,546,000 in the six months ended June 30, 1999, a decrease of $888,000 or 14%.
Sales of European packaging materials rose from $4,285,000 in the six months
ended June 30, 1998 to $4,525,000 in the six months ended June 30, 1999, an
increase of $240,000 or 6%.
The $902,000 increase in sales of processing technologies and
related activities was mainly due to the significant growth in the volume of
fresh-cut corn sold through the Company's majority-owned affiliate, NewCornCo
LLC ("Newcorn"). In an effort to secure a consistently available supply of raw
material, the Company in 1998 entered into supply agreements with a number of
corn growers located in various regions throughout the US and Mexico. Building
on these sources, further development of Newcorn's processing capabilities has
occurred in 1999. Subsequent to the relocation of its West Coast operations into
a newly leased facility in Camarillo, CA ("Camarillo Facility") in the third
quarter of 1998, which management expects will enhance operating efficiencies as
well as significantly increasing Newcorn's processing capacity, Newcorn has also
constructed a new 35,000 square foot
- 9 -
<PAGE> 12
facility located in Darien, Wisconsin (the "Darien Facility") to further
increase processing capacity, which was completed during the second quarter of
1999. Management expects that this new facility will enable Newcorn to extend
the geographic reach of its food products, with shipments from this new facility
targeted principally at the Midwest and East Coast markets of the US.
In October 1998, Newcorn received formal approval from The Sholl
Group II, the exclusive licensee of the "Green Giant(R) Fresh" brand from the
Pillsbury Company, to sell fresh-cut corn processed at the Camarillo Facility
under the "Green Giant(R) Fresh" brand name. Sales under the "Green Giant(R)
Fresh" brand began in late October 1998. Following the approval of the Darien
Facility during the 1999 second quarter, shipments have begun from there, but
shipments from the Darien Facility are not expected to make a meaningful
contribution to group revenue until the second half of 1999 onwards. Management
expects that sales of fresh-cut corn under the "Green Giant(R) Fresh" brand will
supplement sales of fresh-cut corn made under Newcorn's "Somis Creek(R)" and
"Fresh Traditions(TM)" brands. Management believes that the capacity constraints
and disruption caused by the work on the Darien Facility inhibited sales growth
in 1999, but it is unable to quantify the extent to which sales were affected.
The Company also experienced significant 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 is continuing to focus on the sale and development of
its processing technologies, particularly with respect to corn, potatoes and
apples. In addition, the Company has recently obtained (i) US patent protection
for a processing-aid based technology designed to eliminate the use of ice in
shipping boxes of processed broccoli, (ii) an exclusive license for patented
technology developed in collaboration with Penn State University for use on
freshly harvested mushrooms and (iii) US patent protection for a processing-aid
based technology designed to better maintain the quality and thus enhance the
economic value of whole peeled potatoes. Market development work continues to
seek to exploit these new technologies. 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. 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. The Company currently expects to recover much of this
volume shortfall in the third quarter of 1999 and thereafter. 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 its 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.
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 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 over 25% 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. 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.
- 10 -
<PAGE> 13
Sales of European packaging materials increased from $4,285,000 in
the six months ended June 30, 1998 to $4,525,000 in the six months ended June
30, 1999, an increase of $240,000 or 5.6%. The Company, through its subsidiary
in Spain, Fabbri Artes Graficas Valencia, S.A. ("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.. 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 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
Gross Profit. Gross profit decreased from $2,932,000 in the six
months ended June 30, 1998 to $422,000 in the six months ended June 30, 1999, a
decrease of $2,510,000 or, as a percentage of sales, from 17.9% to 2.6%. This
decrease was principally due to the adverse impact of the cost of market
development and sales support within the corn business, as well as in the potato
business. 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. The Company expects the impact of these items to be
significantly reduced going forward now that the Darien Facility has been
completed and associated start costs expensed. Management believes that this
facility will make meaningful contributions to gross profit from the second half
of 1999 onwards. 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, will all significantly increase processing capacity and help enhance
operating efficiencies in the future. In addition, the Company is also reviewing
other options as to how to improve efficiencies and thus profit levels further.
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 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 mainly expensed as incurred, although the benefits of this expense in
terms of incremental sales and gross profit, is not expected to commence until
the second half of 1999 and beyond.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased slightly from $3,764,000 in the six months
ended June 30, 1998 to $3,856,000 in the six months ended June 30, 1999, an
increase of $92,000 or 2.4%. This small increase was due primarily to (i) the
continuing and accelerating 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.
Research and Development Costs. Research and development costs
increased from $790,000 in the six months ended June 30, 1998 to $1,130,000 in
the six months ended June 30, 1999, an increase of $340,000 or 43%. 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, 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
- 11 -
<PAGE> 14
continue at no less than recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization
increased from $805,000 in the six months ended June 30, 1998 to $1,070,000 in
the six months ended June 30, 1999, an increase of $265,000 or 33%. This is
mainly due to the increased depreciation on the increased fixed asset base,
following the capital expenditures in 1998 and the first six months of 1999,
mainly including work on the Camarillo Facility and Darien Facility and in the
UK.
Loss from Operations. Loss from operations increased from $2,427,000
in the six months ended June 30, 1998 to $5,635,000 in the six months ended June
30, 1999, an increase of $3,208,000 or 132%. 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 which 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 Darien Facility which was approved during the
second quarter for shipment of fresh produce under the "Green Giant(R) Fresh".
Within other costs, most of the increase came from increased research and
development costs as outlined above. Administration costs rose marginally, and,
adjusting for the fall in revenue attributable to raw material price decreases,
actually fell as a percentage of sales. This reflects the continuing leveraging
of 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.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock decreased from $2,354,000 for the six
months ended June 30, 1998 to $246,000 in the six months ended June 30, 1999, a
decrease of $2,108,000. 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 on the outstanding stated value of the Series D Stock.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 -
CONFORM
Sales. Sales decreased from $9,136,000 in the three months ended
June 30, 1998 to $8,292,000 in the three months ended June 30, 1999, a decrease
of $844,000 or 9.2%. Sales of processing technologies and related activities in
the US increased from $2,848,000 in the three months ended June 30, 1998 to
$2,922,000 in the three months ended June 30, 1999, an increase of $74,000 or
2.6%. Sales of US packaging materials decreased from $999,000 in the three
months ended June 30, 1998 to $567,000 in the three months ended June 30, 1999,
a decrease of $432,000 or 43%. Sales of UK packaging materials decreased from
$3,255,000 in the three months ended June 30, 1998 to $2,830,000 in the three
months ended June 30, 1999, a decrease of $425,000 or 13%. Sales of European
packaging materials decreased marginally from $2,034,000 in the three months
ended June 30, 1998 to $1,973,000 in the three months ended June 30, 1999, a
decrease of $61,000 or 3.0%.
The increase in sales of processing technologies and related
activities was mainly due to growth in revenue of fresh-cut potato products sold
by its EPL Food Products, Inc. subsidiary under the "Green Giant(R) Fresh" brand
name. Management believes that the capacity constraints and disruption caused by
the work on the Darien Facility inhibited sales growth in Newcorn in the second
quarter of 1999, although the extent to which sales were affected is uncertain.
The Company is continuing to focus on the sale and development of
its processing technologies, particularly with respect to corn, potatoes and
apples. In addition, the Company has recently obtained (i) US patent protection
for a processing-aid based technology designed to eliminate the use of ice in
shipping boxes of processed broccoli, (ii) an exclusive license for patented
technology developed in collaboration with Penn State University for use on
freshly harvested mushrooms and (iii) US patent protection for a processing-aid
based technology designed to better maintain the quality and thus enhance the
economic value of whole peeled potatoes. Market development work continues to
exploit these new technologies. 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
- 12 -
<PAGE> 15
seeing an increasing demand for food safety and hygiene in the produce industry.
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
mainly to timing differences in shipments to large customers compared to the
same period of 1998. The Company currently expects to recover much of this
volume shortfall in the third quarter of 1999 and thereafter. 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 its 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.
The decrease in UK packaging materials was attributable principally
to a reduced level of sales to Pepsico, as well as an 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 on utilizing its proprietary perforating
technology to move into new, higher value-added areas. Raw material prices have
generally fallen by over 25% compared with the same period in 1998, which
accounts for most of the reduction in revenue, as competitive pressures require
that sales prices are 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 increasing
amounts of new business in 1999. 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.
The marginal decrease in sales of European packaging materials
at Fabbri was principally due to timing differences on orders received in 1999
compared with the same period in 1998. 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.
Gross Profit. Gross profit decreased from $1,772,000 in the three
months ended June 30, 1998 to $378,000 in the three months ended June 30, 1998,
a decrease of $1,394,000 or, as a percentage of sales, from 19.4% to 4.6%. This
decrease was principally due to the adverse impact of the cost of market
development and sales support within the corn business, as well as in the potato
business.. The impact of these items should be significantly reduced going
forward now that the Darien Facility has been completed and associated start
costs expensed. Management believes that this facility will make meaningful
contributions to gross profit from the second half of 1999 onwards. 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 late 1998,
together with the recent completion of the Darien Facility, will all
significantly increase processing capacity and help enhance operating
efficiencies in the future. In addition, the Company is also reviewing other
options as to how to improve efficiencies and thus profit levels further.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased marginally from $1,881,000 in the three months
ended June 30, 1998 to $1,933,000 in the three months ended June 30,
- 13 -
<PAGE> 16
1999, an increase of $52,000 or 2.8%. This increase was due primarily to the
continuing and accelerating development of the Company's sales and marketing
efforts, particularly in the area of sales of processing technologies and
related activites for potatoes, corn and apples amongst others, and other costs,
including patent costs.
Research and Development Costs. Research and development costs
increased from $369,000 in the three months ended June 30, 1998, to $548,000 in
the three months ended June 30, 1999, an increase of $179,000 or 48%. 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, 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.
Depreciation and Amortization. Depreciation and amortization
increased from $415,000 in the three months ended June 30, 1998, to $545,000 in
the three months ended June 30, 1999, an increase of $130,000 or 31%. This is
mainly due to the increased depreciation on the increased fixed asset base,
following the capital expenditures in 1998 and 1999 to date, mainly including
work on the Camarillo Facility and Darien Facility and in the UK.
Loss from Operations. Loss from operations increased from $893,000
in the three months ended June 30, 1998 to $2,648,000 in the three months ended
June 30, 1999, an increase of $1,755,000 or 197%. 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, the
latter including the expensing of the start-up costs of the Darien Facility
which was approved during the second quarter for shipment of fresh produce.
Within other costs, most of the increase came from increased research and
development costs as outlined above. Administration costs rose marginally, and,
excluding the fall in revenue attributable to raw material price decreases,
actually fell as a percentage of sales. This reflects the continuing leveraging
of 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.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock decreased from $1,003,000 in the three
months ended June 30, 1998 to $122,000 in the three months ended June 30, 1999,
a decrease of $881,000. 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 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).
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
- 14 -
<PAGE> 17
Company completed development of its remediation plans for such material issues
during the second quarter and expects to perform any required remediation prior
to September 30, 1999. Although the Company is using its best efforts to ensure
that these dates will be achieved in a timely manner, no assurance can be given
that the Company will not experience delays in executing the EPL Y2K Plan.
The Company is in the process of completing its identification,
prioritizing and communicating 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 intends 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 June 30, 1999, the Company
had incurred approximately $50,000 in costs related to its year 2000 project,
$20,000 of which was expensed in 1998 and $30,000 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 has not yet completed its
analysis of the most reasonably likely worst case scenario it is likely to face.
The Company is addressing its most reasonably likely worst case analysis 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 the third quarter of 1999. The Company
expects that its contingency plan may include stockpiling raw materials,
increasing inventory levels, securing alternate sources of supply and other
measures.
- 15 -
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had $780,811 in cash and short term
investments, compared with $1,831,139 at December 31, 1998, a decrease of
$1,050,328. During the six months ended June 30, 1999, $349,065 was used in
operating activities. In addition, $855,225 was used in investing activities to
purchase fixed assets. The decrease in cash used in operating activities of
$2,050,783 in the six months ended June 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 six months ended June
30, 1999 .
Total financing activities during the six months ended June 30, 1999
generated $939,104, compared with $7,659,835 generated in the same period in
1998. The generation in 1999 was primarily from the proceeds of short term debt,
net of repayments of long term debt. In 1998, financing activities were largely
generated from the public offering of common stock that was completed in May
1998.
As of June 30, 1999, the Company had drawn $630,500 under its line
of credit with the Bank of Scotland, entered into by its subsidiary EPL
Technologies (Europe) Limited, for up to $630,500, which bears interest of 2%
over bank base rate (5.0% as of June 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. During the quarter, the Company obtained an increase in
this facility from the Bank of Scotland, to approximately $1,182,200 from up to
approximately $394,100. This facility is currently due to be reduced to
approximately $788,200 at September 30, 1999. At June 30, 1999, approximately
$499,500 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 ($1,786,875 at $1.00:PTS 153.9). This facility was drawn in full
as of June 30, 1999. The facility carries interest of 0.3% over BankInter base
rate (2.85% as of June 30, 1999). There are no covenants applicable to the
facility.
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 June 30, 1999, approximately $463,000 and
$393,000 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 June 30, 1999 $625,000 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 and are due on
the earlier to occur of (a) demand for payment and (b) September 30, 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 $500,000 was outstanding as of June 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 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.
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 $5,000,000). Fabbri was
purchased in December 1997 for $5,500,000 with part of the proceeds of the
Series D Stock. The Company will use the proceeds to pay down some of its
existing debt (estimated at up to $1,500,000, probably the Short Term Facility)
- 16 -
<PAGE> 19
and otherwise for working capital and other purposes. The Company expects to
realize a pretax profit of approximately $2,600,000 on this transaction, which
for financial reporting purposes 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 had with the UK Lender - see Note 11 to the Company's financial
statements.
At June 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, which, if exercised, would provide the Company with
gross proceeds of approximately $4,687,000. In addition, at June 30, 1999, the
Company had 2,115,000 options outstanding and exercisable to purchase shares of
common stock at a weighted average price of $8.56 per share, which, if
exercised, would provide the Company with gross proceeds of up to approximately
$18,096,000. At June 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 11 to the Company's 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. 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, the
Company's business and growth strategies, and the use of the net proceeds to the
Company of the recently completed Offering. Actual results may vary materially
from such expectations. Meaningful factors that might affect such results
include: a) the Company's needs for capital, including for acquisitions, which
needs have been and are expected to continue to be substantial, and its
potential inability to obtain additional financing on satisfactory terms, b) the
Company's product development and sales process, which is lengthy and resource
intensive, c) the uncertainty of demand for, or the market acceptance of, the
Company's products and services, d) the Company's limited resources and
experience in marketing and selling its products and services, e) financial and
personnel resource requirements and potential difficulties in cross-marketing
and managing multiple product lines, f) the Company's potential inability to
identify and acquire acceptable acquisition 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.
- 17 -
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 11.0 - Computation of Loss per share
b) Reports on Form 8-K
None
- 18 -
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date: August 13, 1999 /s/ Paul L. Devine
----------------------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: August 13, 1999 /s/ Timothy B. Owen
---------------------------------------
Timothy B. Owen
Treasurer
(Principal Financial and Accounting Officer)
- 19 -
<PAGE> 22
EPL Technologies, Inc.
Exhibit 11.0
Computation of Earnings per Common Share and
Diluted Earnings per Common Share
<PAGE> 1
EPL Technologies, Inc.
Exhibit 11.0
Computation of Earnings per Common Share and
Diluted Earnings per Common Share
<PAGE> 2
EXHIBIT 11.0
EPL TECHNOLOGIES, INC.
COMPUTATION OF LOSS PER SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Loss $ (5,821) $ (2,442) $ (2,789) $ (886)
Deduct:
Accretion, discount and dividends on
preferred stock 246 2,354 122 1,003
-------- -------- -------- --------
Net loss for common shareholders $ (6,067) $ (4,796) $ (2,911) $ (1,889)
======== ======== ======== ========
Weighted average number
of common shares outstanding 11,829 9,722 11,905 10,366
======== ======== ======== ========
Basic Loss Per Share $ (0.51) $ (0.49) $ (0.24) $ (0.18)
======== ======== ======== ========
Net Loss for diluted loss
per share computation $ (5,821) $ (2,442) $ (2,789) $ (886)
======== ======== ======== ========
Weighted average number
of common shares outstanding 11,829 9,722 11,905 10,366
Common share equivalent applicable to:
Series A convertible preferred stock 40 1,025 40 673
Series B convertible preferred stock 0
Series C convertible preferred stock 26
Series D convertible preferred stock 1,863 1,133 2,071 1,058
Series A warrants 15 24 15 12
Series D warrants 202 202 202 202
Other warrants 62 75 62 75
Stock options 316 1,808 351 1,814
Less common stock acquired with net proceeds (1,453) (1,853) (1,559) (2,128)
Weighted average number of common shares
and common share equivalents used to compute -------- -------- -------- --------
diluted loss per share 12,874 12,162 13,087 12,072
======== ======== ======== ========
Diluted loss per share $ (0.45) $ (0.20) $ (0.21) $ (0.07)
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1999 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1
<SECURITIES> 708,811
<RECEIVABLES> 6,052,738
<ALLOWANCES> 0
<INVENTORY> 4,391,703
<CURRENT-ASSETS> 12,704,083
<PP&E> 14,074,903
<DEPRECIATION> (2,757,349)
<TOTAL-ASSETS> 27,791,982
<CURRENT-LIABILITIES> 13,678,477
<BONDS> 3,338,958
11,600,813
60,000
<COMMON> 11,905
<OTHER-SE> (971,749)
<TOTAL-LIABILITY-AND-EQUITY> 27,791,982
<SALES> 16,049,179
<TOTAL-REVENUES> 16,049,179
<CGS> 15,627,529
<TOTAL-COSTS> 3,856,078
<OTHER-EXPENSES> 2,200,369
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,566
<INCOME-PRETAX> (5,821,267)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,821,267)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,821,267)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.45)
</TABLE>
