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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] Annual Report Pursuant to Section 13 of 15(d) of the
Securities Act of 1934
For the Fiscal Year Ended December 31, 1997
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.
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(Exact name of registrant as specified in its charter)
Colorado 84-0990658
(State of incorporation) (I.R.S. Employer Identification No.)
2 INTERNATIONAL PLAZA, SUITE 245
PHILADELPHIA, PENNSYLVANIA 19113-1507
(address of principal executive offices)
Registrant's telephone number, including area code: (610) 521-4400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value
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. Yes X No__
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendments to this Form 10-K/A. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 31, 1998 was approximately $66,532,000. This excludes
3,706,890 shares of common stock held by directors, officers and stockholders
whose ownership exceeds five percent of the shares outstanding at March 31,
1998.
The number of shares of the Registrant's Common Stock outstanding as of March
31, 1998, was 9,138,105 shares.
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EPL TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K/A
YEAR ENDED DECEMBER 31, 1997
PAGE
1. ITEM 1. BUSINESS 2
2. ITEM 2. PROPERTIES 12
3. ITEM 3. LEGAL PROCEEDINGS 13
4. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
5. ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY 14
HOLDER MATTERS
6. ITEM 6. SELECTED FINANCIAL DATA 16
7. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 17
8. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
9. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 45
10. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 45
11. ITEM 11. EXECUTIVE COMPENSATION 48
12. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 52
13. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 54
14. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 55
15. SIGNATURES 58
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT
EPL Technologies, Inc. (the "Company") is a leading developer, manufacturer
and marketer of proprietary produce processing aids, packaging technologies,
and scientific and technical services, which are designed to maintain the
quality and integrity of fresh-cut produce. The Company designs products which
are components of integrated systems solutions, specifically to address the
needs of a variety of fresh-cut produce categories. The foundation of the
Company's integrated system is its proprietary produce processing aid
technology, which inhibits the natural enzymatic degradation of fruits and
vegetables after they have been processed. Fresh-cut fruits and vegetables that
are treated with the Company's proprietary processing aids better maintain
their natural characteristics, such as color, texture, taste and smell. In
certain fresh-cut produce categories, such as fresh-cut sliced apples,
fresh-cut potatoes and fresh corn, the Company's processing aids allow
increased availability of these fresh-cut produce products in retail and
commercial markets. The Company has concluded that the use of the Company's
processing aids, in accordance with the Company's recommended protocols, is
"generally recognized as safe" ("GRAS") under U.S. Food and Drug Administration
("FDA") regulations. The Company also uses a variety of film technologies to
create packaging specifically designed to complement and enhance the
effectiveness of the Company's processing aids by allowing fruits and
vegetables to "breathe" after they have been cut and packaged. The Company
markets these packaging products to produce growers and processors. The Company
also markets flexible packaging for uses in the snack food, bakery and
confectionery industries, and for other uses. 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 serve to
support the cross-marketing efforts for the Company's other products.
The Company's revenues consist of (i) revenues derived from the sale of
processing aids and flexible packaging, (ii) revenues derived from the sale of
certain fresh-cut fruits and vegetables, (iii) royalties from the sale of
certain fresh-cut fruits and vegetables and (iv) fees received for scientific
and technical services provided by the Company. The Company's revenues from the
sale of produce and royalty revenues are derived from sales of various kinds
and varieties of fresh-cut fruits and vegetables which use the Company's
proprietary technologies and which the Company believes would not be available
commercially without such use. Historically, substantially all of the Company's
revenues have been derived from the sale of flexible packaging to the snack
food, produce, bakery, and confectionery industries and for other uses. The
Company believes that its packaging technologies, coupled with acquisitions of
produce packagers, provide a platform to increase its sales of packaging,
processing aids and scientific and technical services to growers and processors
of fresh produce. Therefore, the Company expects that the proportion of its
revenues derived from the sale of its products and services addressing the
needs of the fresh-cut produce industry will increase over time and constitute
a significant portion of the Company's future revenue growth.
Prior to 1994, the Company had limited revenues and operated exclusively as a
manufacturer and marketer of processing aids. After the advent of new
management and an infusion of capital in December 1992, the Company began to
expand its business to include packaging and scientific and technical services
in an effort to develop integrated systems solutions designed to maintain and
support the quality and integrity of fresh-cut produce. The Company has made
the following acquisitions, seeking to accomplish this objective:
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* In September 1994, the Company acquired Respire Films, Inc.
("Respire"), a U.S.-based business involved in the marketing of
packaging films.
* In September 1995, the Company acquired Bakery Packaging
Services Limited ("BPS"), based near Runcorn, Cheshire, England (the
"Runcorn Facility"). The Runcorn Facility provided the Company with a
U.K. base for packaging, together with access to numerous produce and
other food companies in the U.K. and elsewhere in Europe. The Runcorn
Facility also provided the Company with proprietary perforating
technology to enhance the Company's strategic position, as well as an
incremental source of packaging revenue. The U.K. packaging business
was further enhanced by the acquisition of a food-grade printing
facility and certain other assets located at Gainsborough,
Lincolnshire, England (the "Gainsborough Facility"), from Printpack
Europe (St. Helens) Limited in July 1996. The Company has
consolidated the operations of the Runcorn Facility and the
Gainsborough Facility into those of its subsidiary, EPL Flexible
Packaging Limited ("EPL Flexible").
* In April 1996, the Company, through its Pure Produce, Inc.
subsidiary ("Pure Produce"), acquired the assets of Pure Produce, a
general partnership based in Worcester, Massachusetts, providing the
Company with in-house scientific and technical capabilities,
specifically in the areas of food safety and microbiological testing.
* In July 1996, the Company, through its Crystal Specialty Films,
Inc. subsidiary, acquired the assets of Crystal Plastics, Inc.
("Crystal"), located outside Chicago, to provide a base for the
proprietary gas flame perforation equipment and increase the
Company's packaging presence in the U.S. Crystal uses "K" and
polystyrene resins to manufacture and convert a range of films for
numerous applications, some of which are used to support the
Company's U.S. packaging business as a part of the Company's
integrated systems solutions. Crystal also provides the U.S. base for
facilitating the Company's fulfillment of an exclusive agreement with
E.I. duPont de Nemours & Co. Inc. ("DuPont"), whereby the Company
provides all of DuPont's perforating requirements for DuPont's
Mylar(R) films (the "DuPont Agreement").
* In October 1997, the Company acquired California
Microbiological Consulting, Inc., based in Walnut Creek, California
("CMC"). Together with Pure Produce, CMC specializes in food safety,
forensic testing and microbiological consulting, and provides the
Company with scientific and technical facilities on the East and West
Coasts.
* In December 1997, the Company acquired Fabbri Artes Graficas
Valencia S.A., ("Fabbri") a converter, printer and marketer of
specialty flexible packaging, serving principally the European
produce market, based in Valencia, Spain. The Company believes that
this acquisition complements and enhances the Company's existing
U.K.-based packaging businesses, providing incremental capacity for
more efficient production of the combined product mix, as well as a
strategic foothold on the European continent for the launch of the
Company's related processing aid and scientific and technical
services businesses.
The Company's packaging technologies complement and enhance the effectiveness
of its processing aids, making packaging an integral component of the
integrated system. In marketing its packaging technologies, the Company works
closely with its customers in an effort to determine optimal packaging
characteristics for the customer's products, thereby being in a position to
influence a customer's buying decision with respect to its packaging needs. The
Company's packaging business also provides a revenue stream that helps to fund
market
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development and the Company's lengthy sales process, and the presence of its
packaging infrastructure in regions where produce is grown enhances its sales
prospects to produce growers and processors.
The scientific and technical services the Company provides complement the
processing aids and packaging as a part of its integrated systems solutions.
The Company's scientific and technical expertise provides the Company with an
expanding base of knowledge about food technology, and the Company believes
this expertise helps to establish credibility with customers and support the
commercialization of the Company's products.
The Company markets its processing aids, packaging technologies and scientific
and technical services to processors of packaged, fresh-cut produce as part of
integrated systems solutions for processing fresh-cut produce. To this end, the
Company has been developing relationships with produce processors and other
companies in an effort to penetrate further the fresh-cut produce market.
* In July 1996, the Company formed NewCorn Co LLC ("Newcorn"), a
limited liability company in which the Company has a 51% membership
interest. Newcorn is a joint venture among the Company and Underwood
Ranches and Twin Garden Farms, two major regional growers and
processors of fresh-cut sweet corn. Newcorn processes, packages,
markets and sells fresh-cut corn products using the Company's
processing aids and packaging materials, with the aim of developing
year-round, nationally available branded fresh-cut corn products.
* In September 1997, the Company executed a ten-year exclusive
trademark license agreement (subject to extension) and
strategic alliance with Potandon Produce LLC ("Potandon"), a Green
Giant Fresh(R) brand licensee of the Pillsbury Company. The agreement
is subject to the terms of Potandon's license of the Green Giant
Fresh(R) brand, and contains certain minimum royalty requirements and
other customary provisions. During the first three years of the term
of the agreement, Potandon has the option to require the Company to
negotiate in good faith to form a business entity in which Potandon
and the Company would jointly participate in the fresh-cut potato
products business on terms yet to be established. The Company sells
fresh-cut potato products, such as french fries, to the food service
industry under the Green Giant Fresh(R) brand name, utilizing the
Company's "Potato Fresh(R) System" processing aid technologies and
related protocols in processing potatoes supplied by Potandon. In
order to produce and market its fresh-cut potato products, the
Company uses one co-packer and plans to add several other regional
co-packers, and is building a dedicated sales and marketing
infrastructure to support its efforts.
* In October 1997, the Company entered into a strategic alliance
with Farmington Fresh, a major grower and marketer of Fuji apples.
Under this alliance, the Company has licensed its "Apple Fresh(R)"
processing aids and provides flexible packaging and scientific and
technical services in connection with the production by Farmington
Fresh of certain varieties of fresh-cut sliced apples. The agreement,
which currently extends until December 2002, grants Farmington Fresh
production exclusivity in its local geographic market. In addition to
revenues from sales of the Company's processing aids, packaging and
scientific and technical services, the agreement entitles the Company
to receive a royalty from each package of fresh-cut apple slices
sold.
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The Company was incorporated in 1985 under the laws of the State of Colorado.
The Company's executive offices are located at 2 International Plaza, Suite
245, Philadelphia 19113-1507, and its telephone number is (610) 521-4400.
RECENT DEVELOPMENTS
On March 13, 1998, the Company announced that it had entered into an agreement
with American National Can Co. ("ANC") to create a joint venture company to
market flexible packaging systems for the U.S. fresh produce market. ANC, a
major supplier of packaging materials and containers in the U.S., is a U.S.
subsidiary of Paris, France-based Pechiney (NYSE:PY), an international
packaging group with reported annual revenues of approximately $11.6 billion as
of its fiscal year ended December 31, 1997. It is anticipated that the new
company, ANC-RESPIRE LLC, will develop, manufacture, market, promote and sell
variety-specific, proprietary and other packaging products to the fresh produce
industry under a new brand name - "ANC-RESPIRE." The Company and ANC will have
equal ownership interests in the venture and intend to introduce perforated
film into the fresh produce market as the first of a broad range of products
designed to capitalize on the combined expertise of the Company and ANC. The
joint venture agreement has an initial three-year term (subject to earlier
termination) and can be extended upon the agreement of the Company and ANC.
Although the Company believes that this joint venture will have a favorable
impact on the Company's results of operations, no assurance can be given as
to the timing or extent of any such impact. The Company will account for such
joint venture under the equity method of accounting.
On Friday, March 13, 1998, the Company's shareholders approved a 1-for-2
reverse stock split which became effective for trading on the Nasdaq SmallCap
Market on March 18, 1998. For approximately 30 days after March 18, 1998, the
Company's symbol for its common stock on the NASDAQ Stock Market will be
"EPTGD." At the end of this 30 day period, the Company's NASDAQ Stock Market
symbol will return to "EPTG."
PRODUCTS AND SERVICES
The Company's products and services fall into three major classifications:
processing aids, packaging technologies and scientific and technical services,
which are complementary components of the Company's integrated systems
solutions for fresh-cut produce.
Processing Aids. The Company develops, manufactures and markets proprietary
and patented processing aids, designed to inhibit the enzymatic degradation
that causes fruits and vegetables to begin to deteriorate immediately after
processing, thereby better maintaining their natural characteristics, such as
color, texture, taste and smell. The Company believes its processing aids
provide it with competitive advantages over other existing fresh-cut produce
processing technologies.
According to FDA regulations, a processing aid is a substance used as a
manufacturing aid to enhance the appeal or utility of a food. FDA regulations
do not require packaged produce to identify certain processing aids used in
processing the products. The Company's processing aids are designed to be
applied to produce during post-harvest processing. The Company's processing
aids are then removed from the produce prior to packaging, although
insignificant amounts may remain on the produce. As a result, the Company
believes that produce treated with the Company's processing aids does not,
under FDA regulations, require labeling referring to those processing aids.
Based on advice from FDA counsel and on assessment of relevant scientific
literature by the Company and by third parties, the Company has concluded that
the use of the Company's processing aids in accordance with the Company's
protocols is GRAS under FDA regulations.
The Company formulates processing aids for certain varieties of produce in
accordance with its detailed scientific protocols. The Company believes that
its Apple Fresh(R), Corn Fresh(R) and Potato Fresh(R) processing aids have the
potential to create new markets for fresh-cut apple slices, fresh-cut sweet
corn and fresh-cut potato products because effective, non-sulfite based
processing aids previously have not been commercially available. For example,
Apple Fresh(R), when used in conjunction with the Company's packaging
technology, can be used to inhibit browning and other enzymatic degradation in
certain varieties of fresh apple slices for up to 14 days after processing.
Corn Fresh(R) and Potato Fresh(R) are designed to provide similar pre-packaged
distribution capability for fresh-cut corn on the cob and fresh-cut potato
products. In addition to Apple Fresh(R),
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Potato Fresh(R) and Corn Fresh(R), the Company currently markets its Carrot
Fresh(R) processing aid for carrots. The Company is developing processing aids
for artichokes, broccoli florets, baby leaf lettuce, mushrooms, onions and
parsnips, although there can be no assurance that any such product will become
available. Because several variables influence the efficacy of the Company's
processing aids, the Company must work closely with each customer and potential
customer, using its scientific and technical services for product formulation
and extensive on-site testing, as well as assisting in designing packaging to
optimize the effectiveness of the processing aid for the particular type of
produce.
Packaging. The Company's produce packaging business involves perforating,
converting and printing flexible packaging, using technologies and processes,
some of which are proprietary to the Company. The Company also designs
packaging films the structure of which allows gas and moisture transmission at
different rates, thereby maintaining a balance that enhances the effectiveness
of the Company's processing aids. As with processing aids, in marketing its
packaging technology the Company works closely with each customer and potential
customer, using its scientific and technical services to determine optimal
packaging characteristics, such as the type of film and extent of perforation,
including the size, shape and number of holes of the packaging, based on the
respiration rate of the particular type of produce.
As one of the leading perforators of packaging film, the Company is targeting
specialty and, in some instances, new markets. Although historically films used
in the produce industry have not been perforated, perforating has been shown to
be beneficial to the packaging of certain varieties of fresh-cut produce, which
by their nature continue to consume oxygen and produce carbon dioxide and
moisture after being cut and packaged. Proper perforation of the packaging
materials allows the produce to "breathe," thereby permitting the packaging to
work with the processing aid to inhibit the process of enzymatic degradation.
The Company's microperforation technology is proprietary. The Company's
proprietary production capability allows the Company to produce perforated
films of high quality and great consistency in a cost-effective manner, which
provide control over moisture and oxygen transmission rates, among other
performance characteristics. The Company believes its broad range of
capabilities to produce perforated films provides it with a competitive
advantage. The Company has an exclusive agreement with DuPont, whereby DuPont
purchases its entire requirement for flame perforation services for its
Mylar(R) film from the Company.
Another aspect of the Company's packaging business is the conversion of
packaging film into bags designed for a customer's food packaging needs for
applications such as produce and bakery. The Company also has food-grade
standard printing capabilities in the U.K., utilizing three six-color presses.
The Company's packaging business provides additional market presence in certain
geographic regions that the Company believes can enhance sales prospects for
the Company's processing aids and provide cross-marketing opportunities,
although there can be no assurance that such will be the case. In the U.S., the
Company subcontracts its printing and converting requirements, which the
Company believes are readily available.
In addition to its produce packaging capabilities, the Company provides
packaging to the snack food, bakery and confectionery industries, and for other
uses.
Scientific and Technical Services. The Company provides scientific and
technical services in the areas of post-harvest horticulture, the forensic
analysis of food contaminants and food safety, which are areas of critical
importance for processors of fresh produce. The Company's post-harvest
horticulture services are designed to help processors understand the impact of
harvesting and handling methods on the flavor, texture and nutritional value of
produce. In providing these services, the Company focuses on solving particular
problems unique to certain kinds and varieties of fruits and vegetables in an
effort to maintain the quality and integrity of fresh-cut produce and reduce
post-harvest loss. The Company's forensic testing services involve the analysis
of
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food adulteration by foreign or unlabeled substances or contaminants. The
Company's food safety services, which are intended to reduce or eliminate
pathogens known to cause serious illness in humans, include research,
microbiological testing, production monitoring, and the implementation of Total
Quality Management and Hazard Analysis and Critical Control Point ("HACCP")
programs at its customers' facilities. The FDA recently announced its intention
to introduce a new rule requiring HACCP programs, which programs are designed
to prevent microbial and other safety hazards in food products through
appropriate controls during production and processing, at certain juice
processing plants. The Company believes that HACCP programs ultimately will
become standard in the produce processing industry in response to emerging
concerns about the microbial safety of fresh fruits and vegetables.
The Company's scientific and technical services team consists of five Ph.D.'s,
four senior scientists, and additional support technicians, with expertise in
the areas of microbiology, food science, post-harvest plant physiology and
plant pathology. The Company maintains two laboratories dedicated to
microbiological testing, as well as an applications laboratory used as part of
the Company's sales and marketing program. The Company also maintains a
laboratory at the U.S. Department of Agriculture's ("USDA") Eastern Regional
Research Center through a Cooperative Research and Development Agreement
("CRADA") with the USDA. As part of its sales force, the Company also employs
process engineers and a chemical engineer with expertise in applying the
Company's scientific and technical know-how to a full-scale production facility.
The Company believes its scientific and technical expertise enhances its
credibility in marketing its processing aids and packaging materials to
fresh-cut produce processors. Accordingly, the majority of the Company's
scientific and technical services are provided to support marketing efforts for
the Company's other products, as an integral component of the Company's
integrated systems solutions for fresh-cut produce. The Company also provides
microbiological services on a contract basis for some customers, in what the
Company believes is a growing market for food safety-based testing and
consulting services. In addition to providing incremental revenue, these
consulting relationships may provide cross-marketing opportunities for the
Company's products.
To increase its scientific resources and expertise, the Company has entered
into research alliances with leading institutes of produce and food research,
as well as trade associations. These include a CRADA with the USDA/Agricultural
Research Services in Philadelphia, Pennsylvania; a research grant from the
Washington Apple Commission for a study of enzymatic browning of apples; a
collaborative effort with Rutgers University for residue analysis; a
collaborative agreement with Penn State University for research on the
preservation of mushrooms; and a grant from the Ben Franklin Technology Center,
also for research on the preservation of mushrooms. As an additional technical
resource, the Company maintains a Scientific Advisory Board, consisting of
experts in the field of food science, the members of which are available for
consulting on an as-needed basis.
Company-sponsored research and development expenditures for the years ended
December 31, 1995, 1996 and 1997 were approximately $601,000, $939,000 and
$1,203,000, respectively.
MARKETS
The Company's products are used in the processing of fresh-cut fruits and
vegetables for both the retail and food service markets. By helping to maintain
the quality and integrity of fresh-cut produce, the Company can meet the needs
of its customers who are seeking to offer differentiated, brand-name,
nationally available fresh-cut alternatives to commodity produce lines. In
certain produce categories, such as fresh-cut sweet corn on the cob, the
Company's processing aids have the potential to develop a national market for
its customers, who have previously been limited to regional markets. The
Company's packaging products are used in the fresh-cut produce industry in the
U.S. and by leading companies in the U.K. and Europe in the fresh-cut produce,
bakery, snack food and confectionery industries, and for other uses. The
scientific and technical services offered by the Company provide companies in
the produce industry, especially those involved with
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fresh-cut and minimally processed produce, with analysis, protocols and plans
relating to food safety and quality assurance programs, including
microbiological testing, and provides additional internal technical support in
developing the Company's processing aid and packaging protocols. The Company's
products are increasingly being marketed in concert as integrated systems
solutions comprised of products, processes and scientific and technical
services to maintain the quality and integrity of fresh-cut produce.
The Company's penetration to date of the various markets it is seeking to
develop has been limited. The Company's Respire(R) packaging is used on a
number of produce categories, including apples and potatoes. The Company has
been developing relationships with processors and other companies in connection
with the use of the Company's processing aid technology and related protocols
in various fruit and vegetable categories.
The Company believes that demand for fresh-cut produce is being driven at the
retail level by consumer preferences for healthy foods, convenience and
variety. Similarly, demand for fresh-cut produce by food service providers is
increasingly driven by the need to be able to deliver a product which is
consistent in quality and of high food safety standards while reducing
significant processing and storage costs associated with fresh-cut produce.
Development of new fresh-cut produce applications is further supported by
produce growers and processors who are seeking to increase revenues and margins
by establishing differentiated, brand-name, fresh-cut alternatives to commodity
produce lines.
SALES AND PRODUCT COMMERCIALIZATION PROCESS
In developing its processing aid products, the Company first seeks to identify
the physiological and biochemical issues associated with a particular fresh-cut
fruit or vegetable (e.g., white blush on carrots) and to determine the cause of
any issue so identified. Then the Company seeks to develop an appropriate
solution in a laboratory setting when it perceives that a significant market
opportunity may exist.
The Company has compiled an extensive database of processors, their processing
capabilities and the varieties of fruits and vegetables they process and,
therefore, can approach potential customers from a position of extensive
knowledge and experience with a proposed produce solution. After initial
discussions, the Company initiates a detailed review and testing process to
customize the application of the Company's technologies to the potential
customer's processing system. The testing process involves both application of
the Company's processing aids and, where appropriate, other scientific and
technical support services, such as HACCP and the design of tailored packaging
solutions. Once such development is completed, the product moves through
successive steps of an increasingly sophisticated testing program, during which
the Company identifies and proposes any processing changes that may be needed
and which ultimately leads to a product decision. The Company also works with
the customer to develop specific protocols that should be applied.
With respect to its packaging business, the Company plans to meet the growing
needs of existing customers, develop new products that can be sold to existing
customers, and sell existing and new products to new customers as such
opportunities are identified. The Company believes that the experience it has
accumulated in all aspects of the produce industry, together with its
scientific expertise, is helping to facilitate an integrated systems solution
approach to the packaging needs of the processor.
In the area of scientific and technical services, the Company has an existing
customer base that it has built up over time. Since the acquisition of CMC, the
Company has been actively marketing an increased range of available services,
with a specific emphasis on enhancing cross-marketing opportunities.
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The Company has been developing relationships with produce processors and other
companies in an effort to penetrate the fresh-cut produce market. The Company
believes that its recent packaging acquisitions in regions where produce is
grown will serve as a platform to enhance the Company's ability to cross-market
its other products and services to other produce processors and growers in
those regions. Similarly, with sales of processing aids, the Company has an
opportunity to sell its complementary packaging. The Company also plans to make
proposals for product development or food safety programs to other existing
customers of its processing aids and packaging.
Due to the extended nature of the development, testing and sales process for
processing aids, the Company has experienced no significant backlog of orders
to date for these products and, based on the relatively small incremental cost
and time frame required to increase product output, the Company does not
believe that any backlog measurement is material. Similarly, the Company has
not experienced a significant backlog of orders for its packaging materials.
SOURCES OF SUPPLY
The Company purchases its U.S. processing aid ingredient requirements from a
number of suppliers, some of which use sources outside the U.S. Requirements
for certain raw materials used in the Company's processing aids are obtained
pursuant to a contract with Jungbunzlauer, Inc., a U.S. subsidiary of a
Swiss-based company which is a former Company shareholder. These raw materials
transactions are undertaken on a commercial, arm's-length basis. The mixing of
the Company's processing aids is currently conducted under a subcontract with a
third party. The Company believes that the mixing of its processing aids could
be performed in-house or by numerous other parties on an out-sourcing basis
without incurring substantial additional expense.
Potatoes used in processing are provided under a long-term supply agreement
with Potandon. This long-term agreement represents a source of supply that
might be difficult for the Company to replace without incurring potentially
substantial additional expense. Corn is supplied under a number of fixed-price
supply agreements, principally with the parties to the Newcorn strategic
alliance.
The Company's U.S. packaging business utilizes a number of subcontractors for
film manufacturing, conversion and printing. The U.K. packaging business
sources its film and other requirements from a number of suppliers, most of
which are based in the U.K. and Europe. The U.K. packaging business performs
its own conversion and printing. The Company believes that it is not dependent
on a single or a few suppliers or subcontractors for its packaging businesses.
INDUSTRY AND GEOGRAPHIC AREAS
Of the Company's two primary product lines, processing aids are sold primarily
in the U.S. with smaller amounts also sold in Canada, while packaging materials
are marketed in North America, the U.K. and, to a lesser extent, Continental
Europe. Since the acquisition of BPS in late 1995 there has been an increase in
marketing activity, both in the Company's processing aid and applications
technology in Europe. In addition, proprietary perforating technologies
developed by BPS have been introduced into the U.S. market. See Note 17 to the
Company's Consolidated Financial Statements.
CUSTOMER CONCENTRATION
During the year ended December 31, 1997, two packaging customers, Walkers Snack
Foods Ltd, a division of Frito-Lay Europe, a subsidiary of Pepsico, Inc.
("Pepsico"), and Geest Bananas Ltd. ("Geest"), a leading
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marketer of fresh produce, accounted for approximately 32% and 6% respectively
of the Company's sales. During the same period, on a proforma basis reflecting
the Fabbri acquisition, these two customers accounted for an aggregate of
approximately 22% of the Company's sales. During 1996, Pepsico accounted for
13% of the Company's sales. During 1995, no customer accounted for more than
10% of the Company's sales.
SEASONALITY
Although, historically, the management of the Company has not discerned a
seasonal pattern in the Company's business on a consolidated basis, certain
aspects of the Company's business are seasonal. For example, Fabbri, one of the
Company's subsidiaries, historically has reported relatively higher sales and
income in the Company's first and fourth fiscal quarters because of the timing
of citrus and other crop harvests. The Company's results of operations may
become subject to greater seasonality as its various businesses develop at
different rates.
COMPETITION
Although many other companies provide packaging or microbiological testing and,
to a lesser extent, processing aids for fresh produce, the Company is unaware
of any competitor which provides each of these as components of integrated
systems solutions for processing fresh-cut produce. The Company's direct,
indirect and potential competitors include producers of sulfites and "sulfite
substitutes," as well as other providers of alternative preservation and
packaging technologies, including those employing temperature, gas and humidity
control. The Company believes its products may provide technological advantages
over competing technologies and processes, particularly in terms of their
safety and effectiveness. Despite the potential advantages of the Company's
products and technologies, however, many competitors and potential competitors,
particularly in the market for produce packaging, are larger, have greater
financial, marketing, sales, distribution and technological resources, and
enjoy greater name recognition than the Company. Certain of these companies may
also enjoy long-standing relationships with processors of fresh produce.
Accordingly, there can be no assurance that the Company will be able to compete
effectively against such competitors.
The Company believes the primary competitive factors in the market for
fresh-cut produce technologies include safety and consistency,
cost-effectiveness and ease of use, availability of technical service and
support and product innovation.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
The Company currently has two U.S. patents, four U.S. patents pending and
numerous others licensed to the Company or under review for application. The
U.S. patents for the Company's "Potato Fresh(R)" and "Carrot Fresh(R)" products
were granted on June 26, 1990 and September 13, 1994, respectively. Patents are
pending for the Company's processing aids for broccoli and apples. Patents that
had been granted, or applications that were pending as of June 8, 1995 run for
the longer of 17 years from the date of formal grant or 20 years from the date
of filing. For all subsequent filings, U.S. patents (once granted) run for 20
years from the date of formal application. The Company also has various
registered U.S. trademarks, including Respire(R), and its processing aid names,
such as Potato Fresh(R), and five trademark applications. The Company will also
seek licenses for other trademarks which it believes will add value to a
proposed product, as evidenced by its license of the "Green Giant Fresh(R)"
brand for fresh-cut potato products (Green Giant Fresh(R) is a registered
trademark of the Pillsbury Company). Furthermore, the Company has two patents
and 23 patent applications pending outside the U.S. for its main technology,
with others under review. To help protect the Company's technology and
proprietary information, the Company has confidentiality agreements with its
customers, as well as internal non-disclosure agreements and safeguards,
although there can be no assurance that these safeguards will be adequate to
fully protect the Company. The importance the Company attaches to its patent
position is reflected in the significant efforts made on research and
development (see the Company's Consolidated Financial Statements and the notes
thereto). In addition to its patent protection, the Company believes it has a
competitive advantage through its proprietary knowledge of the applications for
its technology.
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<PAGE> 12
REGULATORY REQUIREMENTS
Based on advice from FDA counsel and on assessment of relevant scientific
literature by the Company and by third parties, the Company has concluded that
the use of the Company's processing aids in accordance with the Company's
recommended protocols is GRAS under FDA regulations. There is, however, a risk
that new scientific information about an ingredient could change its GRAS
status, that the FDA could revise its regulations governing the GRAS status of
the ingredients, or that the FDA might take the position that an ingredient is
not GRAS under the current regulations. Any such change could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company employs a firm of Washington-based FDA lawyers to
advise the Company on the effect of FDA regulations on the Company's
operations, together with any planned or potential changes in government
attitude and legislation. The Company also consults with advisors outside the
U.S. concerning foreign regulatory issues. Compliance with existing FDA
regulations has not been a material burden on the Company's operations to date,
although there can be no assurance that the regulatory requirements will not
change and increase the burden to the Company.
The Company's packaging operations are subject to federal, state and local
U.S., U.K. and other European environmental laws and regulations that impose
limitations on the generation, storage, transport, disposal and emission of
various substances into the environment, including laws that restrict the
discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. The Company is
subject to U.S. and foreign laws and regulations regarding the use, storage,
transport and disposal of inks used with its packaging products. There can be
no assurance that there will not be an accidental contamination, disposal or
injury from the use, storage, transport or disposal of inks used in the
Company's packaging business. Additionally, the Company's use of plastic film
in its packaging operations may subject it, in certain jurisdictions, to laws
and regulations designed to reduce solid wastes by requiring, among other
things, plastics to be degradable in landfills, minimum levels of recycled
content, various recycling requirements, disposal fees and limits on the use of
plastic products. In addition, various consumer and special interest groups
have lobbied from time to time for the implementation of additional
environmental protection measures. The Company may be required to make capital
expenditures in response to changing compliance standards and environmental
regulations. Furthermore, unknown contamination of sites currently or formerly
owned or operated by the Company (including contamination caused by prior
owners and operators of such sites) and off-site disposal of hazardous
substances and wastes may give rise to additional compliance costs. There can
be no assurance that the Company will not incur liabilities for environmental
matters in the future, including those resulting from changes in environmental
regulations, that may have a material adverse effect on the Company's business,
financial condition and results of operations.
Specifically, during its due diligence investigation in connection with the
Fabbri Acquisition, the Company was informed that from time to time in the past
Fabbri disposed of certain hazardous waste (such as used oil cans, empty dye
cans and electrolytic salts residue) using some waste mangement companies that
were not authorized handlers of hazardous waste under applicable Spanish
legislation. Some drums of such hazardous waste also were not labeled as
required and stored longer than permitted under Spanish legislation. Under
Spanish law, a producer of hazardous wastes remains responsible for damages to
third parties or the environment if these wastes are collected by a
non-authorized hauler. As part of the documentation of the Fabbri Acquisition,
the Company obtained from the prior owner of Fabbri, Sidlaw Group plc, a U.K.
public-company ("Sidlaw"), an indemnification for any fines or penalties levied
against the Company from the collection of waste by unauthorized haulers,
subject to a limit of approximately $4,500,000. The Company is not aware that
these past actions resulted in any environmental damages, and therefore does
not believe that these represent possible material losses. To the extent that
the Company incurs liabilities in respect of the foregoing that are not covered
by the indemnity from Sidlaw, or Sidlaw fails to fulfill its indemnity
obligations,
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<PAGE> 13
there could be a material adverse effect on the Company's business, financial
condition and results of operations. Nevertheless, the Company is not aware
that any claims have been made or are pending, and is not aware of any past or
current environmental conditions that it believes will result in any material
adverse effect on the Company's business, financial condition and results of
operations.
EMPLOYMENT
As of December 31, 1997, the Company had 191 employees providing services in
the U.S. and Europe, of which 19 were engaged in sales and marketing, 127 in
production, 16 in technical services and research and 29 in management and
administration. Some of the managerial employees are employed pursuant to
employment agreements, and the Company maintains key man insurance on Mr.
Devine in the amount of $1,000,000. See "Item 11. Executive Compensation". The
Company expects to recruit additional personnel as and when required.
FORWARD LOOKING STATEMENTS
The above discussions include certain forward looking statements of
management's expectations of product developments and potential results of
operations. For a discussion of factors that may materially affect realization
of these expectations, see Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward Looking Statements.
ITEM 2. PROPERTIES
The Company believes that its current facilities are adequate for its present
needs and that it would not have any difficulty in obtaining additional or
alternate space at prevailing rates if necessary. The Company's current
facilities are as follows:
<TABLE>
<CAPTION>
SQUARE OWNED/LEASED
LOCATION FEET (EXPIRATION) CHARACTER OF USE
- ---------------------------- ------- ---------------- -------------------------------
<S> <C> <C> <C>
Philadelphia, PA 6,600 Leased (1/2002) Principal administrative office
Fresno, CA 2,600 Leased (1/1999) Applications laboratory
Oswego, IL 16,400 Leased (6/1999) Packaging operations
Gainsborough, England 19,500 Leased (10/2004) Printing facility
Runcorn, England 17,500 Owned Perforating and converting
facilities
Runcorn, England 5,100 Leased (9/2007) Perforating and converting
facilities
Runcorn, England 8,500 Leased (12/2000) Perforating and converting
facilities
Runcorn, England 4,000 Month-to-month Vacated 1/1998
Runcorn, England 5,500 Month-to-month Vacated 1/1998
Somis, CA(a) 74,200 Leased (8/2002) Fresh-cut corn processing
facility
Worcester, MA 1,200 Leased (12/1998) Food safety and microbiological
testing laboratory and office
space
Valencia, Spain 142,100 Owned Packaging operations
</TABLE>
(a) Property is leased by Newcorn and the lease is guaranteed by the
Company. Newcorn will occupy approximately 25% of the facility. The
Company intends to sublease the remaining space.
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<PAGE> 14
The Company also occupies additional space under agreements with third
parties, primarily in connection with research and development arrangements and
processing activities.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject. None of the Company's officers or
directors are involved in any legal proceedings relating to the Company. To the
best of the Company's knowledge, there are no proceedings being contemplated by
governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET INFORMATION
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq SmallCap Market under
the symbol "EPTG" in July 1996. For approximately 30 days after March 18, 1998,
the Company's Common Stock is included in the Nasdaq Small Cap Market under the
symbol "EPTGD" to indicate the 1-for-2 reverse stock split that was approved by
the Company's shareholders in a special meeting held on March 13, 1998. From
September 1995 to July 1996, the Common Stock traded on the National Association
of Securities Dealers "bulletin board." Prior to September 1995, the Common
Stock traded on the National Association of Securities Dealers "pink sheets." An
application has been made to include the Common Stock on the Nasdaq National
Market under the symbol "EPTG." The following table sets forth the high and low
reported closing bid prices for the Company's Common Stock during the periods
indicated (reflecting actual prices before the reverse stock split and assuming
a post-split price that is twice the pre-split price):
<TABLE>
<CAPTION>
HIGH LOW
-------------- -------------
PRE- POST- PRE- POST-
SPLIT SPLIT SPLIT SPLIT
-------------- -------------
<S> <C> <C> <C> <C>
1996
First quarter $5.88 $11.75 $3.25 $ 6.50
Second quarter 8.75 17.50 4.88 9.75
Third quarter 7.38 14.75 5.25 10.50
Fourth quarter 6.88 13.75 4.06 8.13
1997
First quarter 6.63 13.25 4.88 9.75
Second quarter 6.56 13.13 4.06 8.13
Third quarter 8.50 17.00 5.88 11.75
Fourth quarter 9.25 18.50 5.25 10.50
</TABLE>
As of December 31, 1997 there were 18,095,965 (9,047,982 shares on a post-split
basis) shares of the Company's Common Stock issued and outstanding, held by 301
shareholders of record. During the twelve months ended December 31, 1997, the
Company did not declare any cash dividends on its Common Stock. Other than in
connection with the payment of accumulated dividends, which have not been
declared or paid, on its Series A 10% Cumulative Convertible Preferred Stock,
Series B Convertible Preferred Stock and Series C Convertible Preferred Stock
(collectively with the Series D Convertible Preferred Stock, the "Preferred
Stock"), the Company intends to retain earnings, if any, which may be generated
from operations to finance the expansion and development of its business. No
cash dividends have been declared or paid to date on the Common Stock. The
Company does not expect to declare or pay cash dividends to the holders of the
Common Stock in the foreseeable future and no such dividends may be declared or
paid until all accumulated dividends on the Series A, Series B and Series C
Preferred Stock have been paid. See Note 9 to the Company's Consolidated
Financial Statements.
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<PAGE> 16
RECENT SALES OF UNREGISTERED SECURITIES
In November 1997, the Company issued 12,500 shares of Board Designated
Preferred Stock - designated Series D Convertible Preferred Stock - at an
aggregate consideration, before associated costs and expenses of approximately
$583,000, of $12,500,000, to three new institutional investors (the "Series D
Stock"). Such issuance was made under Regulation D under the 1933 Act in a
transaction not involving a public offering. The Series D Stock arrangement
contains provisions in which certain circumstances, which are outside of the
Company's control, could provide the Series D Stockholders with the ability to
redeem their shares. The amount to be paid by the Company in the event of a
redemption would be calculated as the greater of (a) 115% of the stated value
of the Series D Stock plus 4% appreciation accrued from the issuance date to
the redemption date 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 on the redemption date.
At the option of each holder, each share of Series D Stock is convertible,
subject to certain limitations, into such number of shares of Common Stock as
is determined by dividing the sum of (i) the stated value and (ii) a premium
equal to 4% of the stated value per annum accruing from the date of issuance,
by the Conversion Price then in effect, being generally 94% of the lowest
five-day average closing bid price per share of Common Stock during a specified
period of time, subject to certain limitations and exceptions. Holders of the
Series D Stock are not entitled to any dividends and have limited voting
rights. In connection with the issuance of the Series D Stock, the Company
issued warrants to purchase 201,614 shares of Common Stock, exercisable
at $20.16 at any time until November 6, 2002.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected condensed consolidated statement of
operations and balance sheet data for the Company. The selected condensed
consolidated financial data for the years ended December 31, 1995, 1996 and
1997 and as of December 31, 1996 and 1997 are derived from the audited
Consolidated Financial Statements of the Company, which are included elsewhere
in this report, and are qualified by reference to such Consolidated Financial
Statements and the related Notes thereto. The selected condensed consolidated
financial data for the years ended December 31, 1993 and 1994 and as of
December 31, 1993, 1994 and 1995 are derived from audited consolidated
financial statements of the Company not included herein. The selected
consolidated financial data set forth below is qualified in its entirety by,
and should be read in conjunction with the Consolidated Financial Statements,
the related Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
----------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales $ 178 $ 578 $ 3,240 $ 11,314 $ 19,953
Cost of Sales 47 387 2,469 9,136 18,090
Gross Profit 131 191 771 2,178 1,863
Total operating expenses 2,768 3,472 3,813 6,362 9,185
Loss from operations (2,637) (3,281) (3,042) (4,184) (7,322)
Net loss (2,666) (3,373) (3,320) (4,296) (7,187)
Net loss for common
shareholders (2,666) (3,697) (3,634) (5,295) (8,355)
Net loss per common share $ (0.88) $ (1.02) $ (0.78) $ (0.71) $ (1.00)
Weighted average number
of common shares 3,035,620 3,629,362 4,655,529 7,436,759 8,372,537
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) $ (623) $ (378) $ 1,167 $ 2,269 $ 6,513
Total assets 2,630 3,189 10,041 15,215 26,200
Long-term debt 76 1,812 844 1,554 1,792
Total liabilities 984 2,771 3,665 6,797 8,967
Series D Convertible
Preferred Stock 0 0 0 0 10,617
Accumulated deficit (4,670) (8,043) (11,363) (16,283) (24,207)
Total shareholders' equity $ 1,646 $ 418 $ 6,376 $ 8,418 $ 6,615
</TABLE>
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a leading developer and marketer of integrated produce systems
solutions specifically designed to address the needs of the rapidly growing
market for fresh-cut produce. In this regard, the Company develops,
manufactures and markets proprietary produce processing aids, packaging
technologies, and scientific and technical services, which are
specifically designed to maintain the quality and integrity of fresh-cut
produce. The foundation of the Company's integrated systems solutions is its
proprietary produce processing aid technology, which inhibits the natural
enzymatic degradation of fruits and vegetables after they have been processed.
Fresh-cut fruits and vegetables that are treated with the Company's proprietary
processing aids better maintain their natural characteristics such as color,
texture, taste and smell. The use of the Company's processing aids allows for
increased availability of certain fresh-cut produce products, such as sliced
apples, potatoes and corn. The Company has concluded that the use of the
Company's processing aids, in accordance with the Company's recommended
protocols, is "generally recognized as safe" ("GRAS") under FDA regulations.
The Company also uses a variety of film technologies to create packaging
specifically designed to complement and enhance the effectiveness of the
Company's processing aids by allowing fruits and vegetables to "breathe" after
they have been cut and packaged. The Company markets these packaging products
to produce growers and processors. In addition, the Company's scientific and
technical services, which include food safety and microbiological testing,
provide fresh produce processors with expertise in food safety, post-harvest
horticulture and processing techniques, and support the cross-marketing efforts
for the Company's other products. The Company believes its processing aids are
safe and environmentally "friendly" and, together with its packaging and
scientific and technical services, add significant value to the businesses of
its customers. In addition to its integrated systems solutions for fresh-cut
produce, the Company also markets flexible packaging for uses in the snack
food, bakery and confectionery industries and for other uses.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Sales increased from $11,314,000 in 1996 to $19,953,000 in 1997, an
increase of $8,639,000 or 76%. Sales of processing aids in the US and Europe
increased from $1,327,000 in 1996 to $3,035,000 in 1997, an increase of
$1,708,000 or 129%. Sales of US packaging materials increased from $1,717,000
in 1996 to $2,716,000 in 1997, an increase of $999,000 or 58%. Sales of UK and
European packaging materials grew from $8,270,000 in 1996 to $14,202,000 in
1997, an increase of $5,932,000 or 72%.
The increase in processing aid sales was mainly due to the inclusion of a full
year of revenue from the sale of fresh-cut corn through the Company's
majority-owned affiliate, Newcorn, which commenced sales in the third quarter
of 1996, as well as internal growth. The Company is continuing to focus on the
sale and development of its processing aid technologies, particularly with
respect to corn, potatoes and apples. Product testing continues, and in some
cases has been expanded or accelerated, and significant costs have been
incurred to date which have yet to yield material revenues. Some of the
initial results of this work are evidenced by the agreements with Potandon and
Farmington Fresh. The Company believes that both of these agreements have the
potential to result in increased sales in the future, although there can be no
assurance that this will be the case.
The growth in the U.S. packaging materials business was principally
attributable to the inclusion of a full year of the results of operations of
Crystal, which was acquired in the third quarter of 1996 and, to a lesser
extent, growth in the Company's Respire business. The sales increase in the
U.K. and Europe of packaging materials was principally attributable to internal
growth in the core packaging business, the inclusion of a full
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<PAGE> 19
year of the results of operations attributable to EPL Flexible's Gainsborough
Facility and, to a lesser extent, sales attributable to Fabbri, which was
acquired in December 1997.
In 1997, two packaging customers, Pepsico and Geest (a leading marketer of fresh
produce), accounted for approximately 32% and 6%, respectively, of the Company's
sales.
Gross Profit. Gross profit decreased from $2,178,000 in 1996 to $1,863,000 in
1997, a decrease of $315,000 or, as a percentage of sales, from 19.2% to 9.3%.
This reduction was principally due to: (i) increased fixed costs related to
newly-acquired packaging operations at EPL Flexible's Gainsborough Facility,
(ii) costs incurred in the relocation of film printing activities, from the
Runcorn Facility to the Gainsborough Facility, (iii) initial operating
inefficiencies associated with the reorganization at the Runcorn Facility and
the Gainsborough Facility and (iv) proportionately greater sales of packaging
products, which yield lower margins than the Company's perforated products. The
reorganization of the Company's Runcorn and Gainsborough facilities, which
resulted in significant operating inefficiencies during 1997, especially in the
second half of 1997, has been completed. Operating results from period to
period may continue to be impacted by variations in product mix. Management
believes changes in prices of raw material for its products have not had a
material effect on the Company's results of operations; however, as the
Company's business becomes more reliant upon sales of its processing aids,
results of operations may be more susceptible to the effects of changing prices
due to the pricing of certain kinds of produce, as well as ingredients used in
the Company's processing aids.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $4,413,000 in 1996 to $6,693,000 in
1997, an increase of $2,280,000 or 52%. This increase was due primarily to (i)
incremental expenses from the inclusion of a full year of expenses from the
Gainsborough Facility, and the operation of Newcorn and Crystal, as well as
incremental expenses from the acquisition of Fabbri, and (ii) the continuing
and accelerating development of the Company's sales and marketing efforts,
including projects supporting prospective large customers, particularly in the
processing aid area for potatoes and corn, and (iii) other costs, including
increased costs of patent preparation and filing, as well as the appointment of
additional personnel.
The Company's sales and marketing efforts with respect to processing aids are
primarily focused on fresh-cut potatoes, corn and apples and, to a lesser
extent, other produce categories. These expenses in 1997 also include certain
one-time costs, such as (i) bonuses paid to certain executive officers in
connection with the consummation of certain transactions, including the Series
D Stock placement and the Fabbri Acquisition, and (ii) costs associated with a
line of credit obtained from Trilon Dominion Partners (the Company's largest
shareholder) in the third quarter of 1997, which was repaid and canceled in the
fourth quarter of 1997. Excluding one-time costs, the Company expects that
sales and marketing expenses will continue at recent levels and may increase.
Research and Development Costs. Research and development costs increased from
$939,000 in 1996 to $1,203,000 in 1997, an increase of $264,000 or 28%. This
reflects increased costs of the scientific activities related to sales efforts
for prospective large customers, principally related to broccoli, mushrooms and
perforated films. The Company expects that research and development costs will
continue at recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization increased from
$1,010,000 in 1996 to $1,290,000 in 1997, an increase of $280,000 or 28%. This
is a result of a full year of expenses for the Gainsborough Facility, Crystal
and Newcorn since their acquisitions made in the second half of 1996, plus
capital expenditures during 1997.
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<PAGE> 20
Loss from Operations. Loss from operations increased from $4,184,000 to
$7,322,000, an increase of $3,138,000 or 75%. The increase was principally due
to the increase in total operating expenses. However, total operating
expenses, excluding depreciation and amortization, rose at a lower rate than
the growth in sales revenue, as reflected in the absolute increase in total
operating expenses but a decrease as a percentage of sales, from 47.3% in 1996
to 39.6% in 1997. This reflects the leveraging of the Company's infrastructure
through the expansion of the Company's business.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Sales increased from $3,240,000 in 1995 to $11,314,000 in 1996, an
increase of $8,075,000 or 249%. Sales of processing aids increased from
$473,000 in 1995 to $1,327,000 in 1996, an increase of $854,000 or 181%. Sales
for the U.S. packaging materials business increased from $868,000 in 1995 to
$1,717,000 in 1996, an increase of $849,000 or 98%. Sales from the U.K. and
European packaging materials businesses grew from $1,899,000 in 1995 to
$8,270,000 in 1996, an increase of $6,372,000 or 336%.
The increase in processing aid sales was mainly from the inclusion of revenue
from the sale of fresh-cut corn through the Company's majority-owned
subsidiary, Newcorn, which commenced sales in the third quarter of 1996. The
growth in the U.S. packaging materials business mainly reflected the
contribution of the Crystal business acquired in July 1996. The sales increase
from U.K. and European packaging materials reflected a full period contribution
from the Runcorn Facility, acquired in September 1995, together with an initial
contribution from the Gainsborough Facility, which includes sales to its main
customer Pepsico.
In 1996, one customer, Pepsico, accounted for 13.0% of consolidated sales and
in 1995, no customer accounted for more than 10.0% of consolidated sales.
Gross Profit. Gross profit increased from $771,000 in 1995 to $2,178,000 in
1996, an increase of $1,407,000 or 183%, but decreased as a percentage of sales
from 23.8% in 1995 to 19.2% in 1996. This reduction was due principally to the
increase in sales of packaging materials as a percentage of total sales.
Packaging sales generate a lower average margin than processing aids.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $2,638,000 in 1995 to $4,413,000 in
1996, an increase of $1,775,000 or 67%. A significant part of the increase was
due to the inclusion of expenses from the Runcorn Facility operations, as well
as incremental expenses from the inclusion of the Gainsborough Facility,
Crystal and Newcorn in consolidated results. The remainder of the increase was
due to the continuing development of the sales and marketing effort as well as
projects to support prospective large customers. This effort was focused on a
number of produce categories, including potatoes and apples, where market test
activity continued. Furthermore, additional investor relations costs were
incurred, including SEC-related and other legal work.
Research and Development Costs. Research and development costs increased from
$601,000 in 1995 to $939,000 in 1996, an increase of $338,000 or 56%. This
reflects the costs of third-party collaborative projects commenced during 1995,
as well as the costs associated with additional staff to support the Company's
scientific and technical objectives relating to sales efforts for prospective
large customers.
Depreciation and Amortization. Depreciation and amortization increased from
$574,000 in 1995 to $1,010,000 in 1996, an increase of $435,000 or 76%. The
most significant portion of this increase was due to a full year of
depreciation of fixed assets and amortization of goodwill arising from the
acquisition of the Runcorn Facility in September 1995, with the remainder due
to capital expenditures and the assets acquired in
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<PAGE> 21
the Gainsborough Facility, Crystal and Newcorn acquisitions during 1996.
Loss from Operations. Loss from operations increased from $3,042,000 in 1995
to $4,184,000 in 1996, an increase of $1,142,000 or 38%. The increase was due
to an increase in total operating expenses. However, total operating expenses,
excluding depreciation and amortization, decreased as a percentage of sales
from 100.0% in 1995 to 47.3% in 1996, reflecting the leveraging of the
Company's infrastructure through the expansion of its business.
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
manufacturing, product development, financial business systems and various
administrative functions. To the extent that these software applications contain
source code that is unable to appropriately interpret the upcoming calendar year
"2000," some level of modification or even possibly replacement of such source
code or applications will be necessary. The Company is currently in the process
of completing its identification of software applications that are not "Year
2000" compliant and expects to make appropriate responses to address any issue
identified by the end of 1998. Given the information known at this time about
the Company's systems, coupled with the Company's ongoing, normal
course-of-business efforts to upgrade or replace business critical systems as
necessary, it is currently not anticipated that these "Year 2000" costs will
have any material adverse effect on the Company's business, financial condition
or results of operations. However, the Company is still in the preliminary
stages of analyzing its software applications and, to the extent they are not
fully "Year 2000" compliant, there can be no assurance that the costs necessary
to update software, or potential systems interruptions, would not have a
material adverse effect on the Company's business, financial condition or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $3,757,000 in cash and short term
investments, compared with $1,640,000 at December 31, 1996, an increase of
$2,117,000. During the year ended December 31, 1997, $5,921,000 was used in
operating activities. In addition, $8,334,000 was used in investing
activities, of which $1,004,000 was used to purchase fixed assets and
$7,330,000 was used in the purchase of businesses, notably the Fabbri
Acquisition and the acquisition of assets from Twin Garden Farms. The increase
in cash used in operating activities of $2,081,000 in 1997 compared to 1996
reflects the increased loss in 1997, net of increased depreciation and
amortization, offset by lower amounts used in accounts receivable and increases
in amounts in accounts payable.
Total financing activities during 1997 provided $16,581,000, compared with
$6,439,000 in 1996. Of this, gross proceeds of $12,500,000 were raised in the
Series D Stock placement. The balance came principally from the issuance of
Series C Preferred Stock and common stock in the second quarter of 1997, and
the exercise of previously issued stock options and warrants.
At December 31, 1997, the Company had warrants outstanding and exercisable to
purchase 341,198 shares of common stock at a weighted average price of $14.26
per share, which, if exercised, would provide the Company with gross proceeds
of approximately $4,866,000. In addition, at December 31, 1997, the Company
had 1,758,125 options outstanding and exercisable to purchase shares of common
stock at a weighted average price of $9.92 per share, which, if exercised,
would provide the Company with gross proceeds of up to approximately
$15,689,000. At December 31, 1997, there were no material commitments
-20-
<PAGE> 22
for capital expenditures.
The Company, through its subsidiary EPL Technologies (Europe) Limited ("EPL
Europe"), has a line of credit in the amount of Pounds Sterling 150,000
($248,000 at an exchange rate of Pounds Sterling 1:$1.65) with the Bank of
Scotland as part of its credit facility for its U.K. operations (the "U.K.
Credit Facility"), under which Pounds Sterling 16,000 ($26,000 at an exchange
rate of Pounds Sterling 1:$1.65) was outstanding as of December 31, 1997. The
U.K. Credit Facility also contains a term loan and a revolving facility, under
which Pounds Sterling 710,000 ($1,168,000) at an exchange rate of Pounds
Sterling 1:$1.65) and Pounds Sterling 400,000 ($658,000 at an exchange rate of
Pounds Sterling 1:$1.65), respectively, were outstanding as of December 31,
1997. The Company plans to repay the outstanding amounts under the term loans
and the revolving facility with the net proceeds of the proposed public offering
described below, if such offering is completed. While the term loan would be
terminated upon repayment, the Company currently anticipates that the revolving
facility, in the amount of Pounds Sterling 400,000 ($658,000 at an exchange rate
of Pounds Sterling 1:$1.65), would remain available for future borrowings. The
U.K. Credit Facility is secured by the assets of the Company's U.K.
subsidiaries. The debt agreements with the Bank of Scotland contain certain
covenants applicable to the results of operation of the businesses of EPL Europe
and its subsidiaries, which provide for maintenance of minimum earnings before
income taxes and cash flows to interest expense ratios. Pursuant to the U.K.
Credit Facility, EPL Europe is restricted in its ability to make certain
payments to the Company. During the final quarter of 1997, EPL Europe informed
the Bank of Scotland that it expected to be unable to meet certain covenants for
fiscal 1997. Subsequent to December 31, 1997, EPL Europe and its subsidiaries
and the Bank of Scotland amended certain provisions of the facility agreements
in relation to these covenants.
The Company is currently expecting to make capital expenditures of
approximately $3,600,000 during 1998. Of this amount, approximately $1,900,000
will be used to refurbish and expand certain Newcorn facilities, with the
remainder to be used primarily to expand capacity in EPL's flexible packaging
business and in the fresh-cut potato business.
On February 17, 1998, the Company filed a registration statement for a proposed
public offering of its Common Stock (the "Offering). The Offering consists of
3,500,000 shares of Common Stock, of which 809,097 shares of Common Stock would
be sold by the Company (and an additional 525,000 shares of Common Stock if the
underwriters' over-allotment option is exercised) and 2,690,903 shares of
Common Stock (including 1,288,666 shares issuable upon conversion of Series A
Preferred Stock) would be sold by Trilon. The registration statement relating
to the Offering (SEC File No 333-46397) has not yet become effective. The
securities to be registered under the registration statement may not be sold
nor may offers to buy be accepted prior to the time the registration statement
becomes effective. There can be no assurance that the Offering will be
completed or that the currently proposed terms will not be modified. The
Company expects to use approximately $1,853,000 of the estimated net proceeds
of the proposed Offering to repay outstanding borrowings under the U.K. Credit
Facility, and the remainder to make additional capital expenditures in its
corn, potato and packaging businesses and for working capital and general
corporate purposes, including the possibility that the Company may use a
portion of the net proceeds of the Offering for the acquisition of businesses,
products and technologies that are complementary to those of the Company (for
which additional equity or debt financing may be required), although no such
acquisitions are currently being negotiated and no portion of the net proceeds
has been allocated for any specific acquisition Furthermore, there can be no
assurance that suitable acquisition candidates will be identified or that any
acquisition will be consummated.
Historically, the Company's revenues have not been sufficient to fund the
development of the Company's business, and thus it has had to finance its
operating losses externally principally through equity financing. The
Company's management believes that cash flows from consolidated operations and
existing resources, together with the net proceeds of its proposed Offering, if
such Offering is completed, will be sufficient to meet the Company's operating
needs for the next twelve months. The Company may, however, be required to
seek additional debt or equity financing to implement its growth strategy.
FORWARD LOOKING STATEMENTS
The discussions above include certain forward looking statements regarding the
Company's expectations of gross margin, expenses, market penetration, success
in obtaining large new customers, possible acquisitions, access to capital,
new product introduction, trends affecting the Company's financial condition or
results of operations, the Company's financing plans, the Company's business
and growth strategies, and the use of the net proceeds to the Company of the
proposed 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
-21-
<PAGE> 23
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
fulfil its expansion plans, and its potential inability to successfully
integrate any such acquistions into its operations, g) potential product
obsolesence and short product life cycles, h) potential competition,
particularly in the market for produce packaging, from companies with greater
financial, management and other resources, i) the unpredictability and
volatility of the market for agricultural products, j) changes in U.S. and
foreign regulation, k) difficulty with research and development activities
regarding new products, including extension of necessary time periods or
increase in expense for product introduction, l) potential difficulties in
obtaining or protecting intellectual property rights or the infringement of
proprietary or other rights of the Company by third parties, m) raw material
availability and pricing and n) loss of services of key employees of the
Company.
-22-
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT 24
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 25
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED 26
DECEMBER 31, 1996, 1995 AND 1994
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS 27
ENDED DECEMBER 31, 1996, 1995 AND 1994
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 28
DECEMBER 31, 1996, 1995 AND 1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29
-23-
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EPL Technologies, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of EPL
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of EPL Technologies, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 18, the accompanying financial statements give effect to a
one-for-two reverse stock split effective March 13, 1998.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 27, 1998 (March 13, 1998 as to Note 18)
- 24 -
<PAGE> 26
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,756,956 $ 1,639,567
Accounts receivable, net 5,382,125 2,911,660
Due from related parties 34,101
Inventories 3,411,213 1,938,819
Prepaid expenses and other current assets 1,060,506 623,792
------------- -------------
Total current assets 13,610,800 7,147,939
------------- -------------
PROPERTY AND EQUIPMENT, Net 8,145,543 4,005,711
------------- -------------
INTANGIBLE ASSETS, Net:
Patent and distribution rights, net of accumulated amortization of $2,772,371
and $2,459,757 at December 31, 1997 and 1996 977,903 1,303,121
Goodwill, net of accumulated amortization of $633,827 and $311,960 at
December 31, 1997 and 1996 3,247,229 2,503,655
Other intangibles, net of accumulated amortization of $117,989 and $82,161 at
December 31, 1997 and 1996 218,480 254,996
------------- -------------
Total other assets 4,443,612 4,061,772
------------- -------------
TOTAL ASSETS $ 26,199,955 15,215,422
============= =============
CURRENT LIABILITIES:
Accounts payable $ 4,738,369 $ 3,005,577
Accrued expenses 1,147,597 1,213,964
Other liabilities 815,280 396,418
Current portion of long-term debt 396,070 262,779
------------- -------------
Total current liabilities 7,097,316 4,878,738
LONG-TERM DEBT 1,791,903 1,554,161
DEFERRED INCOME TAXES 77,964 161,926
MINORITY INTEREST 202,120
------------- -------------
Total liabilities 8,967,183 6,796,945
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 13)
CONVERTIBLE SERIES D PREFERRED STOCK, $.01 par value -
authorized, issued and outstanding 12,500 and 0 shares in 1997 and 1996 10,617,346
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred Stock, $1.00 par value - authorized, 3,250,000 shares;
issued and outstanding 2,073,000 and 2,490,000 shares in 1997 and 1996, respectively 2,073,000 2,490,000
Convertible Series B Preferred Stock $0.01 par value authorized, 531,915 shares;
issued and outstanding 0 and 531,915 shares in 1997 and 1996, respectively 5,319
Convertible Series C Preferred Stock, $.001 par value -
authorized, issued and outstanding, 144,444 and 0 shares in 1997 and 1996, respectively 144
Common Stock, $0.001 par value - authorized, 50,000,000 shares;
issued and outstanding, 9,047,982 and 7,765,600 shares in 1997 and 1996, respectively 9,048 7,765
Additional paid-in capital 28,697,761 21,947,444
Accumulated deficit (24,206,954) (16,283,464)
Foreign currency translation adjustment 42,427 251,413
------------- -------------
Total stockholders' equity 6,615,426 8,418,477
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,199,955 15,215,422
============= =============
</TABLE>
See notes to consolidated financial statements.
- 25 -
<PAGE> 27
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SALES $19,953,480 $11,314,141 $ 3,239,566
COST OF SALES 18,090,546 9,136,286 2,468,843
------------ ------------ ------------
GROSS PROFIT 1,862,934 2,177,855 770,723
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,692,727 4,413,365 2,638,116
RESEARCH AND DEVELOPMENT COSTS 1,202,645 938,719 600,529
DEPRECIATION AND AMORTIZATION 1,289,758 1,009,746 574,293
------------ ------------ ------------
LOSS FROM OPERATIONS (7,322,196) (4,183,975) (3,042,215)
INTEREST EXPENSE, NET 122,025 20,223 267,176
MINORITY INTEREST (202,120) (9,711)
------------ ------------ ------------
LOSS BEFORE INCOME TAX EXPENSE (7,242,101) (4,194,487) (3,309,391)
INCOME TAX (BENEFIT) EXPENSE (55,043) 101,432 10,543
------------ ------------ ------------
NET LOSS (7,187,058) (4,295,919) (3,319,934)
ACCRETION, DISCOUNT AND DIVIDENDS
ON PREFERRED STOCK 1,167,486 998,924 313,854
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(8,354,544) $(5,294,843) $(3,633,788)
============ ============ ============
LOSS PER COMMON SHARE $ (1.00) $ (0.71) $ (0.78)
============= ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,372,537 7,436,759 4,655,529
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
- 26 -
<PAGE> 28
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
--------------------- ----------------------- --------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 3,828,206 $3,828 3,250,000 $3,250,000
Shares issued in private placement (net of issuance cost) 1,375,000 1,375
Conversion of note payable to common shares
(net of write-off of deferred finance costs) 1,012,500 1,012
Shares issued to pay expenses and fees 115,236 115
Conversion of preferred shares to common shares 240,000 240 (360,000) (360,000)
Exercise of warrants 33,334 34
Net loss
Foreign currency translation adjustment
--------- --------- --------- ----------
BALANCE, DECEMBER 31, 1995 6,604,276 6,604 2,890,000 2,890,000
Preferred shares issued for cash 531,915 $5,319
Discount on Series B preferred stock
Exercise of options 192,000 192
Shares issued to pay expenses and fees 2,992 3
Conversion of preferred shares to common shares 266,667 267 (400,000) (400,000)
Exercise of warrants (net of costs) 699,665 699
Net loss
Foreign currency translation adjustment
--------- --------- --------- --------- -------- -------
BALANCE, DECEMBER 31, 1996 7,765,600 7,765 2,490,000 2,490,000 531,915 5,319
Shares issued in private placement (net of issuance costs) 168,750 169
Preferred shares issued for cash:
Series C preferred stock
Series D preferred stock
Accretion of Series C warrant value
Accretion of Series D warrants, discount,
increase in stated value and issuance costs
Discount on Series C preferred stock
Exercise of options (net of costs) 410,250 410
Conversion of preferred shares to common shares 543,957 544 (417,000) (417,000) (531,915) (5,319)
Exercise of warrants (net of costs) 119,425 120
Shares issued for acquisitions 40,000 40
Net loss
Foreign currency translation adjustment
--------- --------- --------- ---------- -------- -------
BALANCE, DECEMBER 31, 1997 9,047,982 $9,048 2,073,000 $2,073,000
========= ========= ========= ========== ======== =======
</TABLE>
<TABLE>
<CAPTION>
SERIES C
PREFERRED STOCK ADDITIONAL CURRENCY
--------------------- PAID-IN ACCUMULATED TRANSLATION
NUMBER AMOUNT CAPITAL DEFICIT ADJUSTMENT
---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 5,210,046 (8,042,611) (3,124)
Shares issued in private placement (net of issuance cost) 4,878,625
Conversion of note payable to common shares
(net of write-off of deferred finance costs) 3,910,643
Shares issued to pay expenses and fees 424,889
Conversion of preferred shares to common shares 359,760
Exercise of warrants 66,633
Net loss (3,319,934)
Foreign currency translation adjustment (5,692)
----------- ------------ ----------
BALANCE, DECEMBER 31, 1995 14,850,596 (11,362,545) (8,816)
Preferred shares issued for cash 2,494,681
Discount on Series B preferred stock 625,000 (625,000)
Exercise of options 255,328
Shares issued to pay expenses and fees 23,929
Conversion of preferred shares to common shares 399,733
Exercise of warrants (net of costs) 3,298,177
Net loss (4,295,919)
Foreign currency translation adjustment 260,229
----------- ------------ ----------
BALANCE, DECEMBER 31, 1996 21,947,444 (16,283,464) 251,413
Shares issued in private placement (net of issuance costs) 1,246,672
Preferred shares issued for cash:
Series C preferred stock 144,444 144 622,549
Series D preferred stock 1,943,569
Accretion of Series C warrant value 19,833 (19,833)
Accretion of Series D warrants, discount,
increase in stated value and issuance costs (644,377)
Discount on Series C preferred stock 72,222 (72,222)
Exercise of options (net of costs) 1,489,557
Conversion of preferred shares to common shares 421,775
Exercise of warrants (net of costs) 369,180
Shares issued for acquisitions 564,960
Net loss (7,187,058)
Foreign currency translation adjustment (208,986)
-------- -------- ----------- ------------ ---------
BALANCE, DECEMBER 31, 1997 $144,444 $144 $28,697,761 $(24,206,954) 42,427
======== ======== =========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, JANUARY 1, 1995 418,139
Shares issued in private placement (net of issuance cost) 4,880,000
Conversion of note payable to common shares
(net of write-off of deferred finance costs) 3,911,655
Shares issued to pay expenses and fees 425,004
Conversion of preferred shares to common shares
Exercise of warrants 66,667
Net loss (3,319,934)
Foreign currency translation adjustment (5,692)
------------
BALANCE, DECEMBER 31, 1995 6,375,839
Preferred shares issued for cash 2,500,000
Discount on Series B preferred stock
Exercise of options 255,520
Shares issued to pay expenses and fees 23,932
Conversion of preferred shares to common shares
Exercise of warrants (net of costs) 3,298,876
Net loss (4,295,919)
Foreign currency translation adjustment 260,229
------------
BALANCE, DECEMBER 31, 1996 8,418,477
Shares issued in private placement (net of issuance costs) 1,246,841
Preferred shares issued for cash:
Series C preferred stock 622,693
Series D preferred stock 1,943,569
Accretion of Series C warrant value
Accretion of Series D warrants, discount,
increase in stated value and issuance costs (644,377)
Discount on Series C preferred stock
Exercise of options (net of costs) 1,489,967
Conversion of preferred shares to common shares
Exercise of warrants (net of costs) 369,300
Shares issued for acquisitions 565,000
Net loss (7,187,058)
Foreign currency translation adjustment (208,986)
-----------
BALANCE, DECEMBER 31, 1997 6,615,426
===========
</TABLE>
- 27 -
<PAGE> 29
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(7,187,058) $(4,295,919) $(3,319,934)
Adjustments to reconcile net loss to net cash
used in operating activities:
Expenses paid with common stock 23,932 425,004
Depreciation and amortization 1,289,758 1,009,746 574,293
Minority interest and gain on sale of fixed assets (189,954) (10,376)
Changes in assets and liabilities, net of effects from acquisitions
of businesses, which provided (used) cash:
Accounts receivable 218,752 (1,381,262) 536,394
Due from related parties 34,101 40,676 1,429
Inventories 36,617 (1,136,800) 247,262
Prepaid expenses and other current assets (274,905) (168,520) (8,549)
Accounts payable 529,792 1,192,893 (185,067)
Accrued expenses (405,749) 669,632 (207,513)
Other liabilities 27,900 216,022 43,237
----------- ----------- -----------
Net cash used in operating activities (5,920,746) (3,839,976) (1,893,444)
----------- ----------- -----------
INVESTING ACTIVITIES:
Fixed assets acquired (1,036,638) (1,997,071) (442,438)
Proceeds from sale of fixed assets 36,822 23,033
Acquisition of businesses, net of cash acquired (7,330,279) (767,869) (3,172,528)
Cost of patent acquired (4,157) (8,000)
----------- ----------- -----------
Net cash used in investing activities (8,334,252) (2,741,907) (3,622,966)
----------- ----------- -----------
FINANCING ACTIVITIES:
Repayment to stockholders (74,912)
Proceeds from long-term debt 1,800,410 1,511,127
Payment of long-term debt (1,429,377) (1,126,377) (145,719)
Proceeds from notes payable - stockholder 2,250,000
Proceeds from sale of common stock/warrants/options 3,671,110 3,554,396 4,946,667
Proceeds from sale of preferred stock 12,539,230 2,500,000
----------- ----------- -----------
Net cash provided by financing activities 16,581,373 6,439,146 6,976,036
----------- ----------- -----------
EFFECT OF EXCHANGE RATE ON CASH (208,986) 260,229 (5,692)
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,117,389 117,492 1,453,934
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,639,567 1,522,075 68,141
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,756,956 $ 1,639,567 $ 1,522,075
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 195,857 $ 107,027 $ 26,683
Income taxes paid $ 23,951 $ 55,635
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Accretion of warrants, discount, increased value and issuance costs
related to preferred stock $ 736,432 $ 625,000
Issuance of common stock for:
Conversion of note payable to common shares $ 4,050,000
Acquisition of subsidiary $ 565,000
Exchange for services and other fees $ $ 23,392 $ 114,840
Payment of interest $ 310,164
Conversion of preferred shares to common shares $ 422,319 $ 400,000 $ 360,000
</TABLE>
See notes to consolidated financial statements.
- 28 -
<PAGE> 30
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - EPL Technologies, Inc. (the "Company") is engaged in
the development, manufacture and marketing of proprietary food
processing aids, packaging technologies and related scientific
services that facilitate the maintenance of the quality and integrity
of fresh produce.
B. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of EPL Technologies, Inc. and its majority and
wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
C. CASH AND CASH EQUIVALENTS - The Company considers all short-term
investments with a maturity of three months or less to be cash
equivalents.
D. ACCOUNTS RECEIVABLE - Accounts receivable are shown net of allowance
for doubtful accounts of $419,212 and $153,037 as of December 31, 1997
and 1996, respectively.
E. INVENTORIES - Inventories are stated at the lower of cost or net
realizable value. Cost is determined by the first-in, first-out
(FIFO) method (Note 3). F. PROPERTY AND EQUIPMENT - Property and
equipment are stated at cost. Depreciation and amortization is
calculated by the straight-line method, based upon the estimated
useful lives of the assets which are as follows:
<TABLE>
<CAPTION>
<S> <C>
Production and laboratory equipment 5-10 years
Machinery and office equipment 3-11 years
Leasehold improvements The term of the lease or the estimated
life of the asset, whichever is shorter.
Motor Vehicles 3-6 years
Buildings 20-40 years
</TABLE>
G. OTHER ASSETS -
GOODWILL (NOTE 6) - Goodwill related to the acquisition of certain
subsidiaries is being amortized on a straight-line basis over 10
years.
DISTRIBUTION RIGHTS (NOTE 5) - Are being amortized on a straight-line
basis over the ten-year life of the distribution rights
agreement.
PATENTS (NOTE 5) - Are being amortized on a straight-line basis over
the life of the patent. Initially, costs related to new patents
are expensed as incurred. However, once a patent has been
confirmed to patent pending status, then the direct incremental
cost is capitalized and amortized over the estimated useful life
of the patent.
- 29 -
<PAGE> 31
OTHER INTANGIBLES (NOTE 6) - Other intangibles which consist of
trademarks, formulations and non-compete agreements are being
amortized on a straight-line basis over 5 to 10 years.
Total amortization expense related to intangible assets was $670,309,
$624,844 and $452,364 for the years ended December 31, 1997, 1996 and
1995, respectively.
H. INCOME TAXES - The Company has adopted the provisions of Financial
Accounting Standards Board Statement No. 109, Accounting for Income
Taxes (SFAS No. 109). SFAS No. 109 requires that deferred income taxes
reflect the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial report amounts
using the enacted marginal rate in effect for the year in which the
differences are expected to reverse.
I. REVENUE RECOGNITION - Revenues are recognized either at the time of
shipment to customers or, for inventory held at customers' facilities,
at the time the product is utilized in the customers' processing
operations.
J. FOREIGN CURRENCY TRANSLATION ADJUSTMENT - The financial statements
of the Company's foreign subsidiaries have been translated into U.S.
dollars in accordance with SFAS No. 52. All balance sheet accounts
have been translated using the current exchange rate at the balance
sheet date. Income statement amounts have been translated using the
average rate for the year. The profit or loss resulting from the
change in exchange rates has been reported separately as a component of
stockholders' equity.
K. RECLASSIFICATIONS - Certain reclassifications have been made to the
1996 and 1995 consolidated financial statements in order to conform
with the 1997 presentation.
L. USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
M. LONG LIVED ASSETS - The Company evaluates the carrying value of its
long lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Measurement of the amount of impairment, if any, is based
upon the difference between the carrying value and estimated fair
value.
N. STOCK-BASED COMPENSATION - During the year ended December 31, 1996, the
Company adopted Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation. The Company will continue
to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees. See Note 11
for pro forma disclosures of net income and earnings per share as if the
fair value-based method prescribed by SFAS No. 123 had been applied in
measuring compensation expense.
O. NEW ACCOUNTING PRONOUNCEMENTS - As discussed in Note 12, during the
year ended December 31, 1997, the Company adopted SFAS No. 128,
Earnings Per Share.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement, which establishes standards for reporting and
disclosing comprehensive income, is effective for interim and annual
periods beginning after December 15, 1997, although earlier adoption is
- 30 -
<PAGE> 32
permitted. Reclassification of financial information for earlier
periods presented for comparative periods is required under SFAS No.
130. As this statement only requires additional disclosures in the
Company's consolidated financial statements, its adoption will not have
any impact on the Company's consolidated financial position or results
of operations. The Company will adopt SFAS No. 130 effective January 1,
1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This statement which
establishes standards for the reporting of information about operating
segments and requires the reporting of selected information about
operating segments in interim financial statements, is effective for
fiscal years beginning after December 15, 1997, although earlier
application is permitted. Reclassification of segment information for
earlier periods presented for comparative periods is required under SFAS
No. 131. The Company does not expect adoption of this statement to
result in changes to its presentation of financial information. The
Company will adopt SFAS No. 131 effective January 1, 1998.
2. OPERATIONS
The Company's continued ability to operate is dependent upon its ability to
maintain adequate financing and to achieve levels of revenue necessary to
support the Company's cost structure. Historically, the Company's revenues
have not been sufficient to fund the development of the Company's business,
and thus it has had to finance its operating losses externally, principally
through equity financing.
The Company has undergone a number of operational improvements as well as
made significant investments in development and marketing activities related
to its various processing aids businesses in 1997, which the Company's
management believes will improve cash flows from operations. Management
believes that such cash flows, together with existing resources will be
sufficient to meet the Company's operating needs for the next twelve months.
The Company may, however, be required to seek additional debt or equity
financing to implement its growth strategy.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
<S> <C> <C>
Raw materials and supplies $2,285,588 $ 938,050
Finished Goods 1,125,625 1,000,769
---------- ----------
Total Inventories $3,411,213 $1,938,819
========== ==========
</TABLE>
- 31 -
<PAGE> 33
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Production and laboratory equipment $ 5,352,748 $3,489,187
Buildings 3,491,214 814,154
Machinery and office equipment 306,843 243,213
Leasehold improvements 20,077 26,099
Motor vehicles 43,776 88,251
--------------- ---------------
Total property and equipment 9,214,658 4,660,904
Accumulated depreciation and amortization (1,069,115) (655,193)
--------------- ---------------
Property and equipment (net) $ 8,145,543 $4,005,711
=============== ===============
</TABLE>
Depreciation expense was $619,449, $384,902, and $121,929 for the years
ended December 31, 1997, 1996 and 1995, respectively.
5. PATENT AND DISTRIBUTION RIGHTS
In connection with the acquisition of Agra Research, Inc. on December 31,
1992, the purchase cost was allocated primarily to patents acquired. The
patent was formally approved in June 1990, and, therefore, the patent value
is being amortized over the remaining fourteen and one half years of its
life commencing January 1, 1993. Patents, net, totaled $977,903 and
$1,073,522 as of December 31, 1997 and 1996, respectively. The Company owns
the exclusive right to establish the worldwide sales, marketing and
distribution network for the food processing products of Agra Research, Inc.
for a period of ten years. The Company issued 1,530,656 restricted shares
of common stock for these product rights at a value of $1.50 per share for a
total of $2,295,984. The asset is being amortized on a straight-line basis
over the ten-year life of the distribution rights agreement. Distribution
rights, net, totaled $229,599 as of December 31, 1996. As of December 31,
1997, distribution rights have been fully amortized.
6. ACQUISITIONS
In December 1997, the Company acquired all of the issued and outstanding
share of capital of Fabbri Artes Graficas Valencia S.A. ("Fabbri"), a
Spanish company, through a newly formed, wholly owned subsidiary of the
Company, EPL Technologies SL. Fabbri is based in Valencia, Spain and is a
converter, printer and marketer of specialty flexible packaging, serving
principally the southern European citrus fruit market. The business was
acquired for cash of US $5,500,000 (825 million pesetas @ $1.00 = 150
pesetas). The Company has accounted for the Fabbri acquisition under the
purchase method of accounting. The cost of the acquisition has been
allocated on the basis of the estimated fair market value of the assets
acquired and the liabilities assumed. This allocation resulted in net
write-up of the property, plant and equipment acquired of approximately
$1,658,000 over the book value of such assets. The Fabbri acquisition was
financed with a portion of the proceeds from a private placement of 12,500
shares of its Series D Preferred Stock, par value $0.01 per share (the
"Series D Stock"), raising gross proceeds of $12,500,000 before deducting
associated costs of approximately $583,000 (see Note 9).
- 32 -
<PAGE> 34
The results of Fabbri have been included with those of the Company since the
date of acquisition. The following summarized unaudited consolidated pro
forma information for the years ended December 31, 1997 and 1996 has been
presented as if the Fabbri acquisition had occurred on January 1, 1996.
This unaudited pro forma information is based on the historical results of
operations adjusted for acquisition costs and, in the opinion of management,
is not necessarily indicative of what the results would have been had the
Company operated Fabbri since January 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996
<S> <C> <C>
Sales $ 26,781,000 $19,435,000
Net loss (10,841,000) (5,238,000)
Loss per common share (1.29) (0.70)
</TABLE>
In October, 1997 the Company acquired 100% of California Microbiological
Consulting, Inc. ("CMC"), based in Walnut Creek, California. CMC was
acquired in a primarily stock transaction valued at approximately $650,000
(including acquisition costs). The cost of acquisition has been allocated
on the basis of the estimated fair market value of the assets acquired and
the liabilities assumed. This allocation resulted in goodwill of
approximately $509,000 which is being amortized over 10 years. CMC
specializes in food safety, forensic testing and microbiological consulting.
In July 1996, the Company formed NewCorn Co., LLC, a jointly owned limited
liability company in which the Company owns a 51% equity interest. As of
December 31, 1996 the remaining 49% interest was owned by Underwood Ranches,
the trade name of Agricultural Innovation and Trade, Inc. In December 1997,
NewCorn Co. acquired certain assets of Twin Garden Sales Inc. in exchange
for $600,000 in cash and 15% membership interest in NewCorn Co. The cost of
the acquisition has been allocated on the basis of the estimated fair market
value of the assets acquired. This allocation resulted in goodwill of
approximately $498,000, which is being amortized over 10 years. The Company
continues to own 51% of the joint venture while Underwood Ranches' interest
was reduced to 34%. Since the equity of the minority partners has been
reduced to zero, the Company is recording 100% of NewCorn Co.'s losses until
such time as NewCorn achieves a profitable level. NewCorn Co. utilizes the
Company's proprietary processing aid and packaging technologies and
Underwood's and Twin Garden's existing corn processing and distribution
capabilities.
On April 19, 1996, the Company acquired substantially all of the tangible
and intangible assets of Pure Produce, a Massachusetts general partnership,
through a wholly owned subsidiary, Pure Produce, Inc., a Massachusetts
corporation. The total cost of the acquisition was approximately $150,000.
Pure Produce is in the business of providing companies in the food industry,
especially those involved with fresh and minimally processed produce, with
analysis, protocols and plans relating to food and quality assurance
programs including microbial testing.
In July 1996, the Company acquired, through a wholly owned U.K. subsidiary
(EPL Flexible Packaging Limited ("EPL Flexible")), some of the fixed assets
located at Gainsborough, Lincolnshire, UK, of a division of Printpack Europe
(St. Helens) Limited ("Printpack St. Helens"). EPL Flexible also assumed a
real estate lease and offered employment to some of the employees of
Printpack St. Helens. The total net consideration paid was $1,286,500.
This company specializes in the printing of flexible packaging films serving
primarily the snack food industry.
- 33 -
<PAGE> 35
In July 1996, the Company formed a wholly owned U.S. subsidiary, Crystal
Specialty Films, Inc., to acquire the assets and assume some of the
liabilities of Crystal Plastics, Inc., based in Illinois. Crystal uses "K"
resin and polystyrene resins to manufacture a range of proprietary films for
a variety of applications. After an initial payment of approximately
$400,000, an additional amount of $267,000 is payable in quarterly
installments over two years, with a final payment based on the performance
of the business over the next two years. Crystal serves as the site for
proprietary gas-flame perforation equipment which the Company has had
custom-built in the U.K. and which is planned to be the basis for
penetration of the U.S. film perforation market.
Except as noted above, the pro forma effects of these acquisitions were not
significant in 1997 and 1996.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997 and
1996 consists of deferred foreign income tax (benefit) expense of $(55,043)
and $101,432, respectively. There was no federal or state benefit provided
for domestic losses as a 100% valuation allowance was recorded based on
management's assessment that realization was not likely. In addition, there
was no foreign benefit provided for certain foreign losses as a 100%
valuation allowance was recorded based on management's assessment that
realization was not likely. The tax rate on other foreign income was less
than the U.S. rate.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and is a summary of the significant components of the
Company's deferred federal tax assets and liabilities:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred Tax Asset:
Other assets $ 59,983 31,340
Foreign assets 160,706
Operating loss carryforwards 6,628,944 4,552,532
------------- -------------
Gross deferred tax asset 6,849,633 4,583,872
Valuation allowance (6,830,508) (4,570,246)
------------- -------------
Deferred tax asset 19,125 13,626
------------- -------------
Deferred Tax Liability:
Fixed assets 19,125 13,626
Foreign liability 77,964 161,926
------------- -------------
Deferred tax liability 97,089 175,552
------------- -------------
Net deferred tax liability $ 77,964 161,926
============= =============
</TABLE>
For income tax reporting purposes, the Company has net operating loss
carryforwards of $19,496,893 which will expire between 2003 and 2012.
- 34 -
<PAGE> 36
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996
<S> <C> <C>
Bank term loan and lines of credit $1,852,578 $1,387,125
Notes payable 100,125 233,625
Capital leases 235,270 196,190
----------------- -------------
2,187,973 1,816,940
Less current portion 396,070 262,779
----------------- -------------
Long-term debt $1,791,903 $1,554,161
================= =============
</TABLE>
In 1996, the Company refinanced its existing debt by EPL Technologies
(Europe) Limited entering into a bank term loan agreement. The bank term
loan matures in 2003 and carries an interest rate ranging from 2% to 2-1/4%
over the Bank of Scotland Base Rate, which base rate at December 31, 1997
was 7.25%. At December 31, 1997 and 1996, $1,168,234 and $1,387,125 were
outstanding under this term loan agreement, respectively. In 1996, EPL
Europe also entered into a short-term line of credit with Bank of Scotland
for up to approximately $514,000 which bears interest of 2% over bank base
rate. At December 31, 1997, $26,183 has been drawn on this line of credit.
In 1997, EPL Europe entered into another line of credit with Bank of
Scotland for up to approximately $658,000, which bears interest of 2% over
bank base rate. At December 31, 1997, the entire balance has been drawn on
this line. The term loan and the lines of credit are collateralized by the
assets of EPL Europe 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
earnings before income taxes and cash flows to interest expense ratios.
During the final quarter of 1997, EPL Europe informed the Bank of Scotland
that it expected to be unable to meet certain covenants for fiscal 1997.
Subsequent to December 31, 1997, EPL Europe and its subsidiaries, and the
Bank of Scotland amended certain provisions of the facility agreements in
relation to these covenants. Subsequent to December 31, 1997, the Company
also reduced the availability under its short-term line of credit to
approximately $248,000.
In conjunction with the acquisition of some of the assets of Crystal
Plastics, Inc., (Note 6), the Company entered into a $267,000 note payable
with the prior owner. The note was payable in 8 quarterly principal
installments of $33,375 through 1998. Subsequent to December 31, 1997, this
note payable was repaid in full.
Other debt relates to capital leases that bear interest rates from 5.9%
through 13.0%, with varying monthly principal and interest payments.
- 35 -
<PAGE> 37
At December 31, 1997, aggregate annual maturities of long-term debt
(including current portion) were as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1998 $ 396,070
1999 272,558
2000 265,879
2001 469,158
2002 466,197
Thereafter 318,111
----------
$2,187,973
==========
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock, (the "Series A Stock") which has been issued
up to its authorized limit of 3,250,000, was issued at a price of $1.00 per
share with each share of Series A Stock carrying the option to convert into
common shares at a rate of $1.50 per share. The Series A Stock carries
equal voting rights to the common shares, based on the underlying number of
common shares after conversion. The Series A Stock carries a dividend rate
of 10% per annum, payable in cash and/or common shares ($1.50 per share) at
the Company's option (dividends in arrears at December 31, 1997 and 1996
totaled $1,334,159 and $1,100,716, respectively.) During 1997, shareholders
holding 417,000 shares of Series A Stock elected to exercise their right of
conversion, leaving 2,073,000 shares of Series A Stock outstanding at
December 31, 1997. In addition, 20% of the common stock conversion option
carries detachable warrants at a price of $2.00 per warrant. During
1997,1996 and 1995, 54,200, 12,333 and 33,334 warrants were exercised,
respectively, leaving 65,065 unexercised at December 31, 1997.
At the Annual Meeting of the Company held on July 22, 1996, the stockholders
of the Company authorized the issuance of up 2,000,000 shares of 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 as Series B
Convertible Preferred Stock at an aggregate consideration of $2,500,000 to
two existing institutional 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. The Series B
Stock contains the option to convert into such number of shares of Common
Stock as is determined by dividing $4.70 by the Conversion Price (as defined
in the documentation for the Series B Stock) in effect at the time of
conversion for each share of Series B Stock and votes as a class, except as
otherwise provided by law, with the Series A stock, the Series C stock (as
defined below) 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 $9.40
conversion price and the prevailing market price of the Common Stock at the
date of issuance, a total of $625,000, was immediately accreted upon
issuance. The Series B Stock carries a dividend rate of 10% per annum,
payable in cash and/or shares at the Company's option. The outstanding
dividends on the Series B Stock at December 31, 1997 and 1996 totaled
$270,092 and $110,445, respectively. During 1997, the shareholders of the
Series B Preferred Stock elected to fully exercise their right of conversion
into common stock and thus there were no Shares of Series B Stock
outstanding at December 31, 1997.
During 1997, the Company received gross proceeds of $1.0 million, before
deducting associated costs of approximately $42,000, from an existing
institutional stockholder in connection with a private offering of common
and Board Designated Preferred Stock. This resulted in the issuance of
43,750
- 36 -
<PAGE> 38
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 carries a dividend rate of 10% per annum, payable in cash
and/or shares at the Company's option. Dividends in arrears on the Series C
Stock at December 31, 1997 totaled $37,842. 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 stockholders
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 12,500 shares of Board
Designated Preferred Stock - designated Series D Convertible Preferred Stock
- at an aggregate consideration, before associated costs and expenses, of
$12,500,000, to three new institutional investors (the "Series D Stock").
Such issuance was made under Regulation D under the Securities Act of 1933,
as amended, in a transaction not involving a public offering. The Series D
Stock certificate of designation contains provisions which, in certain
circumstances outside of the Company's control, could provide the Series D
Stockholders with the ability to redeem their shares. The amount to be paid
by the Company in the event of a redemption would be calculated as the
greater of (a) 115% of the stated value of the Series D stock plus 4%
appreciation accrued from the issuance date to the redemption date 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 on
the redemption date.
The Series D Stock carries the option to convert into shares of common stock
at a variable rate, based on the stated value ($1,000) divided by 94% of the
prevailing market price at the time of conversion, as calculated based on
the lowest five-day average closing bid price per share of Common Stock
during a specified period of time, and subject to certain limitations. The
extent of the beneficial ownership feature, representing the 6% discount
from the market price at the conversion date, a total of $800,000, will be
accreted over the earliest period after which all such shares are
convertible, or nine months (the "Conversion Period"). In addition, the
Series D Stock agreement contains a provision whereby the stated value of
the Series D Stock is to increase by 4% per annum, accruing from the date of
issuance until conversion. In connection with the issuance of the Series D
Stock, the Company issued 201,614 warrants to purchase the Company's common
stock at an exercise price of 130% of the closing price on the issuance date
(i.e., $20.16 per share). The fair value of these warrants ($1,200,000)
will be accreted over the Conversion Period of the Series D Stock. Holders
of the Series D Stock have limited voting rights and are not entitled to any
dividends.
10. COMMON STOCK
During 1997 the Company issued a total of 1,282,382 shares of Common Stock.
A total of 119,425 shares were issued from the exercise of warrants,
resulting in net proceeds to the Company of $369,300. A total of 410,250
shares were issued from the exercise of options, resulting in net proceeds
to the Company of $1,489,967. 278,000 and 265,957 shares of Common Stock
were issued upon conversion
- 37 -
<PAGE> 39
of 417,000 shares of Series A Preferred Stock and all 531,915 Shares of
Series B Preferred Stock, respectively. A total of 168,750 shares were
issued in connection with two private placements, which resulted in net
proceeds to the Company of $1,246,841. A further 40,000 shares were issued
in connection with the CMC acquisition.
During 1996 the Company issued a total of 1,161,324 shares of Common Stock.
A total of 699,665 shares were issued from the exercise of warrants,
resulting in net proceeds to the Company of $3,298,876. A total of 192,000
shares were issued from the exercise of options, resulting in net proceeds
to the Company of $255,520. A total of 266,667 shares were issued on
conversion of Series A Preferred Stock. A further 2,992 shares were issued
in a non-public transaction as payment for professional services resulting
in expense of $23,932.
During 1995, the Company issued a total of 2,776,070 shares of Common Stock.
In September 1995, the Company completed a private placement transaction of
1,375,000 restricted shares of its Common Stock (the "Offering"), par value
$0.001 per share, at a price of $4.00 per share, to raise gross proceeds of
$5,500,000. Proceeds were used for the acquisition of Bakery Packaging
Services Limited and for working capital. Expenses associated with the
Offering were $620,000, which were charged against additional paid-in
capital. Furthermore, the Company issued 1,012,500 shares of Common Stock
in the conversion of a note payable. A total of 23,250 shares were issued
as a commitment fee for a line of credit from a corporate stockholder,
resulting in the capitalization of deferred finance costs totaling $77,459.
Additionally, 81,306 shares of Common Stock were issued to this stockholder
in settlement of accrued interest of $310,164. A further 10,680 shares were
issued as compensation to employees and as payment for professional services
pursuant to the Company's Option Plan, resulting in expense of $37,381. In
1995, a total of 240,000 shares were issued on conversion of Series A stock.
At December 31, 1997 the Company had warrants outstanding to purchase
341,198 shares of Common Stock at between $2.00 and $20.16 per share, which,
if exercised, would provide the Company with gross proceeds of approximately
$4,866,000. In addition, the Company had options outstanding to purchase
1,758,125 shares of Common Stock at an average price of $8.92 per share (See
Note 11), which, if exercised, would provide the Company with gross proceeds
of approximately $15,689,000.
11. STOCK OPTION PLANS
The 1994 Stock Incentive Plan (the "1994 Plan") originally provided for up
to 750,000 shares of unissued Common Stock to be made available for the
granting of options. This was approved by stockholders on July 21, 1994.
On July 22, 1996, stockholders approved an increase in the number of shares
available for the granting of options under the 1994 Plan to 1,500,000. On
July 21, 1997, the stockholders approved another amendment to the 1994 Plan,
which increased the number of shares of common stock reserved for issuance
under the Plan to 2,250,000. On December 31, 1997 and 1996, 512,125 and
332,750 shares, respectively, were available for grant.
Information regarding these plans is as follows:
- 38 -
<PAGE> 40
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
UNDER OPTION PRICE
<S> <C> <C>
Outstanding and Exercisable at December 31, 1994 515,000 $ 1.20
Activity for the Year Ended December 31, 1995
Granted 437,250 $ 3.68
Expired (15,000) $ 9.24
-----------
Outstanding and Exercisable at December 31, 1995 937,250 $ 2.24
Activity for the Year Ended December 31, 1996
Granted 902,500 $ 8.94
Exercised (192,000) $ 1.34
-----------
Outstanding and Exercisable at December 31, 1996 1,647,750 $ 6.02
Activity for the Year Ended December 31, 1997
Granted 520,625 $ 13.56
Exercised (410,250) $ 3.68
-----------
Outstanding and Exercisable at December 31, 1997 1,758,125 $ 8.92
=========== ==========
</TABLE>
These options expire between March 10, 1998 and December 11, 2002. No
options issued during 1997 were issued outside of the 1994 Plan.
The following table summarizes information about the Company's stock options
outstanding of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE
EXERCISE OF REMAINING EXERCISE
PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE PRICE
<C> <C> <C> <C>
$1.00-$4.00 431,250 2.1 years $ 3.30
$8.00 354,500 3.2 years $ 8.00
$8.125 - $12.00 413,250 4.0 years $ 8.64
$12.50 - $15.25 559,125 4.6 years $14.06
-----------------
1,758,125
=================
</TABLE>
- 39 -
<PAGE> 41
The estimated fair value of options granted during 1997, 1996 and 1995
ranged between $2.48 - $3.21, $5.86 - $12.62 and $3.46 - $3.96 per share,
respectively. The Company applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized for its fixed stock
option plans and its stock purchase plan. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement No. 123, the Company's net loss and loss per share for the years
ended December 31, 1997, 1996 and 1995 would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net loss available for common shareholders:
As reported $ 8,354,544 $ 5,294,843 $3,633,788
Pro forma $11,550,509 $11,666,398 $5,224,529
Net loss per common share:
As reported $ 1.00 $ 0.71 $ 0.78
Pro forma $ 1.38 $ 1.57 $ 1.12
</TABLE>
The fair value of options granted under the Company's stock option plans
during 1997, 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option-pricing mode with the following assumptions used: no
dividend yield, expected volatility ranging from 45% to 224%, risk free
interest rate ranging from 5.6% - 7.0%, and expected lives of 5 years. Pro
forma compensation cost of options granted under the 1994 Plan is measured
based on the discount from market value. The pro forma effect on net income
for 1997, 1996 and 1995 is not representative of the pro forma effect on net
income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995. SFAS No. 123
does not apply to awards prior to 1995, and additional awards in future
years are anticipated.
12. NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the loss applicable to
common stockholders by the weighted average number of common shares
outstanding during the period.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
was adopted by the Company effective for the year ended December 31, 1997,
as required by the statement. For the years ended December 31, 1997, 1996
and 1995, the potential common shares have an antidilutive effect on the net
loss per common share for common stockholders. Accordingly, diluted net
loss per common share for common shareholders has not been presented.
- 40 -
<PAGE> 42
The following table summarizes those securities that could potentially
dilute loss (earnings) per common share for common shareholders in the
future that were not included in determining net loss per common
stockholders as the effect as antidilutive.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996 1995
(Amounts in Thousands)
<S> <C> <C> <C>
Potential Common Shares resulting from:
Stock options 1,758 1,648 937
Convertible preferred stock 2,724 1,926 1,927
Warrants 341 197 896
-------- -------- --------
4,823 3,771 3,760
======== ======== ========
</TABLE>
13. COMMITMENTS
The Company has entered into various operating leases for facilities,
vehicles and equipment. At December 31, 1997, future minimum lease payments
were as follows:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31,
1998 $ 709,281
1999 614,965
2000 536,985
2001 537,677
2002 360,224
------------
Future Minimum Lease Payments $ 2,759,132
============
</TABLE>
Rental expense for operating leases amounted to $430,039, $224,461 and
$162,559 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company has entered into agreements for services with certain executive
officers. In addition to a base salary, certain other benefits are
provided. At December 31, 1997, minimum annual payments to executive
officers under these agreements totaled approximately $681,000.
In connection with the Fabbri Acquisition, the Company was informed that
from time to time in the past, Fabbri disposed of certain hazardous waste
using some waste management Companies that were not authorized handlers of
hazardous waste under applicable Spanish legislation. The Company obtained
from the prior owner of Fabbri an indemnification for any fines or penalties
levied against the Company from such actions. Management believes that this
matter will not have a material adverse effect on the Company's financial
position and results of operations.
14. RELATED PARTY TRANSACTIONS
In October 1997, the Company entered into a line of credit with a
stockholder for up to $2.1 million for working capital purposes. The
Company paid a transaction fee of $100,000 in connection with obtaining this
line of credit. Interest on this line was at prime rate plus 4%. This line
of credit was repaid in full and cancelled in November, 1997.
- 41 -
<PAGE> 43
The Company purchased certain raw materials from Jungbunzlauer Inc., a
subsidiary of a former stockholder, in the amount of $29,572 and $35,280 for
the years ended December 31, 1997 and 1996, respectively. At December 31,
1997, the Company had a payable to Jungbunzlauer, Inc. in the amount of
$10,080.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, due
from related parties and accounts payable approximate fair value because of
the short maturities of these items.
Interest rates that are currently available to the Company for issuance of
long-term debt (including current maturities) with similar terms and
remaining maturities are used to estimate fair value for long-term debt.
The estimated fair value of the long-term debt approximate its carrying
value.
The fair values are based on pertinent information available to the
management as of respective year ends. Although management is not aware of
any factors that could significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these consolidated financial statements since that date, and current
estimates of fair value may differ from amounts presented herein.
16. CUSTOMER CONCENTRATION
One customer, within the European packaging materials operations, accounted
for approximately 32% and 13% of total consolidated revenues in 1997 and
1996, respectively. In 1995, no customers accounted for 10% or more of
total consolidated revenues.
17. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION
The Company develops, manufactures, and markets proprietary technologies
designed to maintain the integrity of fresh produce. These products fall
into two major classifications; processing aids and packaging materials.
Processing aids are sold primarily in the United States with smaller amounts
also sold in Canada. Packaging materials are marketed in North America and
Europe. Sales in the United Kingdom comprised 93.3%, 94.2% and 90.3% of the
European operations in 1997, 1996 and 1995, respectively.
- 42 -
<PAGE> 44
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SALES
Domestic Operations:
Processing aids $ 3,034,795 $ 1,326,669 $ 472,747
Packaging materials 2,715,938 1,716,984 868,229
----------- ----------- -----------
Total Domestic 5,750,733 3,043,653 1,340,976
European Operations - packaging materials 14,202,747 8,270,488 1,898,590
----------- ----------- -----------
Total $19,953,480 $11,314,141 $ 3,239,566
=========== =========== ===========
NET (LOSS) INCOME FROM OPERATIONS
Domestic Operations:
Processing aids $(4,742,326 ) $(2,700,793) $(2,661,480)
Packaging materials (2,023,855 ) (1,552,376) (385,653)
----------- ----------- -----------
Total Domestic (6,766,181 ) (4,253,169) (3,047,133)
European Operations - packaging materials (556,015 ) 69,194 4,918
----------- ----------- -----------
Total $(7,322,196 ) $(4,183,975) $(3,042,215)
=========== =========== ===========
TOTAL ASSETS
Domestic Operations:
Processing aids $ 5,872,115 $ 2,876,117 $ 3,061,720
Packaging materials 2,977,607 2,149,822 657,357
----------- ----------- -----------
Total Domestic 8,849,722 5,025,939 3,719,077
European Operations - packaging materials 17,350,233 10,189,483 6,322,120
----------- ----------- -----------
Total $26,199,955 $15,215,422 $10,041,197
=========== =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE
Domestic Operations:
Processing aids $ 543,960 $ 434,313 $ 432,135
Packaging materials 129,801 117,543 43,172
----------- ----------- -----------
Total Domestic 673,761 551,856 475,307
European Operations - packaging materials 615,997 457,890 98,986
----------- ----------- -----------
Total $ 1,289,758 $ 1,009,746 $ 574,293
=========== =========== ===========
CAPITAL EXPENDITURES
Domestic Operations:
Processing aids $ 419,608 $ 92,858 $ 127,471
Packaging materials 66,555 4,994 75,989
----------- ----------- -----------
Total Domestic 486,163 97,852 203,460
European Operations - packaging materials 550,475 1,899,219 238,978
----------- ----------- -----------
Total $ 1,036,638 $ 1,997,071 $ 442,438
=========== =========== ===========
</TABLE>
- 43 -
<PAGE> 45
18. SUBSEQUENT EVENTS
On February 17, 1998, the Company filed a Registration Statement on Form S-1
for the purpose of offering a total of up to 3,500,000 shares of common
stock. Of the 3,500,000 shares offered, 2,690,903 are being offered by an
existing shareholder of the Company, and the remaining 809,097 are being
offered by the Company. Additionally, the Company has granted the
underwriters an over-allotment option to purchase 525,000 shares of common
stock.
On March 12, 1998, the Company entered into an agreement with American
National Can Company to create a joint venture company, in which the Company
will own 50%, to market flexible packaging systems for fresh produce for the
U.S. market. The Company will account for such joint venture under the
equity method of accounting.
On March 13, 1998, the Company declared a one-for-two reverse stock split
which became effective on March 13, 1998. Per share information and share
amounts in these financial statements have been adjusted to reflect this
stock split.
- 44 -
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to each
of the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY AND AFFILIATES
---- --- -----------------------------------------
<S> <C> <C>
Paul L. Devine 43 Chairman of the Board of Directors, President, Chief Executive Officer
Bruce M. Crowell 43 Vice President and Chief Financial Officer
Timothy B. Owen 39 Secretary and Treasurer
Derrick W. Lyon 54 Chief Executive Officer of EPL Technologies (Europe) Limited
Dr. William R. Romig 51 Senior Vice President-Science and Technology
Antony E. Kendall 54 Chief Executive Officer of EPL Flexible Packaging Ltd.
Virginia N. Finnerty 37 Chief Operating Officer of IPS Produce, Inc.
Jose Saenz de Santa Maria 42 Managing Director of Fabbri Artes Graficas Valencia SA
Robert D. Mattei(1)(2) 58 Director
Ronald W. Cantwell 53 Director
A. S. Clausi (1)(2)(3) 75 Director
</TABLE>
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Appointed March 25, 1998
-45-
<PAGE> 47
Paul L. Devine. Mr. Devine was appointed Chairman and Chief Executive Officer
of the Company in March 1992. From 1989 to 1992, Mr. Devine was involved as a
business consultant in the identification and targeting of acquisitions for
various public companies. During this time, he also served as a director and
chief executive officer of various companies, including three U.K.
subsidiaries of Abbey Home Healthcare, Inc., a U.S. public health care group.
Prior to this, he was the Chief Executive of Leisure Time International, plc
from 1986 to 1989. He is a graduate of London University and holds Bachelors
and Masters degrees in curriculum research. Throughout his business career, he
has been intimately involved in the design and implementation of new product
strategies, both in financial services and health/hygiene services.
Bruce M. Crowell. Mr. Crowell joined the Company as Vice President and Chief
Financial Officer in February 1998. From 1994 until 1998, Mr. Crowell served
as Vice President and Chief Financial Officer, Secretary and Treasurer of
Datron Inc. From 1988 until 1994, Mr. Crowell worked for Miltrope Group Inc.
as Vice President, Chief Financial Officer and Treasurer. Mr. Crowell holds a
BBA in Accounting from Florida Atlantic University.
Timothy B. Owen. Mr. Owen was appointed Secretary and Treasurer in October
1996, having served as European Financial Controller of the Company since
1995. From 1992 until 1995, Mr. Owen performed financial and accounting
services for the Company as an independent consultant. From 1990 to 1993, Mr.
Owen served as chief financial officer and secretary of various companies,
including three U.K. subsidiaries of Abbey Home Healthcare, Inc. Prior to
this, from 1986 to 1990, he was a financial controller for The Foseco Group
Plc, holding both corporate and operational positions. Mr. Owen qualified as a
chartered accountant with Touche Ross & Co. (now Deloitte & Touche) in 1985.
He is a graduate of Brunel University, and holds an Honors degree in
economics.
Derrick W. Lyon. Mr. Lyon was appointed Chief Executive Officer of EPL
Technologies (Europe) Limited in August 1996. Mr. Lyon previously served as
Chief Operating Officer of Bakery Packaging Services Limited ("BPS") (now EPL
Flexible Packaging Ltd.) following its acquisition by the Company in September
1995 until December 1996. From 1981 to 1995, Mr. Lyon was Managing Director
and a founding shareholder of BPS. Prior to this, Mr. Lyon held senior
management positions within Bernard Wardle & Co., Smurfit Limited, and W.R.
Grace, where he had over 25 years experience in the printing and packaging
industries. He holds a degree in mechanical engineering from City University,
London, and Bachelors and Masters degrees in economics from St. John's
College, Cambridge.
Dr. William R. Romig. Dr. Romig was appointed Vice President of Research and
Development of the Company in September of 1994, and, as of January 1, 1998,
serves as Senior Vice President of Science and Technology. From 1988 until
1994, Dr. Romig was first Senior Director of Vegetable Genetics and then
Senior Director of Business Development and Director of Product Development
for FreshWorld, a joint venture between DNA Plant Technology Corporation, a
public company, and DuPont. Prior to 1988, he worked for General Foods
Corporation (Kraft) eventually attaining the highest technical position of
Principal Scientist. Dr. Romig received his B.S. in Plant Pathology from
Cornell University and his Ph.D. from the University of Delaware. He has held
positions of Adjunct Professor at several universities and has lectured and
published in the area of fresh-cut fruits and vegetables. Dr. Romig is also
Chairman of the Company's Scientific Advisory Board.
Antony E. Kendall. Mr. Kendall joined the Company in August 1996 as chief
executive of BPS (now EPL Flexible Packaging Ltd. From 1970 to 1996, Mr.
Kendall worked for the UCB group of companies in various senior management
positions. Most recently he was Managing Director of UCB Flexible Ltd.,
responsible for marketing its specialty packaging products in the U.K. and for
Pepsico European contracts. He holds a B.S.
-46-
<PAGE> 48
degree in Mechanical Engineering from the University of London.
Virginia N. Finnerty. Ms. Finnerty has served as Chief Operating Officer of
IPS Produce, Inc., the subsidiary through which the Company conducts its
activities related to fresh-cut potatoes, since June 1997. From June 1994 to
June 1997, Ms. Finnerty served as the Company's Director of Business
Development. From December 1993 to June 1994, Ms. Finnerty worked in sales and
marketing development for the Greater Philadelphia Chamber of Commerce. From
1990 to 1993, Ms. Finnerty served as a sales and marketing manager for
Osterman Foods. Ms. Finnerty holds a BFA and an Education Certification from
Temple University and an MBA in marketing from St. Joseph's University.
Jose Saenz de Santa Maria. Mr. Saenz has served as Managing Director of
Fabbri since its acquisition by the Company in December 1997. Mr. Saenz joined
the Company in July 1997 as an independent consultant, and was responsible for
conducting the Company's on-site due diligence with respect to the Fabbri
Acquisition. From January 1994 to July 1997 Mr. Saenz served as Managing
Director of AMCOR Flexibles Espano. Prior to this, Mr. Saenz served as a
senior executive of Ramondine, Inc., a specialty packaging company, from
August 1987 to December 1993. He is a law graduate of the University of Madrid
and holds Masters degrees in Commercial Management and Marketing from CESEM
Business School (Madrid).
Robert D. Mattei. Mr. Mattei is an investor and entrepreneur. Mr. Mattei has
been self-employed in various aspects of the food service industry for more
than 20 years. As a restaurateur, Mr. Mattei has developed, operated and sold
many successful operations. Mr. Mattei currently owns three restaurants, and
acts as an industry consultant primarily involved in the development of
restaurant concepts. Mr. Mattei has been a member of the Board of Directors of
the Company since February 1988 and was Secretary of the Company from February
1988 to March 1993.
Ronald W. Cantwell. Mr. Cantwell currently serves as President of Trilon and
has done so since its inception in June 1995. Mr. Cantwell also serves as
President of VC Holdings, Inc., the sole manager of Trilon. Prior to this, Mr.
Cantwell served as President of The Catalyst Group, Inc., where he executed a
variety of merchant banking activities and developed and directed the
strategic plan for a diverse mix of utility assets. In addition, he was
involved in advising numerous mergers, acquisitions and restructuring matters
for The Edper Group, the principal investor in The Catalyst Group. Prior to
joining The Catalyst Group, Mr. Cantwell spent nineteen years in the practice
of public accounting, most recently with Ernst & Young, where he was a tax
partner and headed the Dallas-based Mergers and Acquisitions practice. Mr.
Cantwell has been a director since May 1997.
A.S. Clausi. Mr. Clausi was elected to the Board of Directors in March 1998.
For more than five years, Mr. Clausi has served as a consultant and adviser to
the food industry. He was Senior Vice President and Chief Research Officer of
General Foods Corporation worldwide, prior to his retirement. Mr. Clausi is a
past President of the Institute of Food Technologists (IFT), past Chairman of
the IFT Foundation and past Chairman of the Food Safety Council. He has a
chemistry degree from Booklyn College and has done graduate work at Stevens
Institute of Technology. Mr. Clausi is the holder of 13 patents, has authored
chapters in food technology texts and has delivered numerous papers on various
aspects of the management of food science and technology. Mr. Clausi is
currently a director of Opta Food Ingredients, Inc. and also serves as a member
of the Technical Advisory Board of Goodman Fielder, Ltd. He served on the
Technical Advisory Board of Martek Biosciences, Inc. from 1990 to 1997. Mr.
Clausi serves as a director and a member of Technical Advisory Boards of a
number of private companies as well.
-47-
<PAGE> 49
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by
the Company for the year ended December 31, 1997 for services rendered in all
capacities to the Chief Executive Officer and each of the other four most
highly compensated executive officers (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ---------------------- ------------------
ALL
RESTRICTED OTHER
OTHER STOCK OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- -------------------------- ---- ------- ------- ------------ ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine 1997 275,000 225,000 0 100,000 0 0
Chairman, President 1996 225,000 210,978 0 0 250,000 0 0
and Chief Executive 1995 56,250 100,000 120,000 0 100,000 0 0
Officer
Derrick W. Lyon 1997 0 0 148,500(1) 0 0 0 0
CEO--EPL 1996 0 0 184,000(1) 0 50,000 0 0
Technologies 1995 0 0 36,000(1) 0 50,000 0 0
(Europe) Ltd
Antony E. Kendall 1997 125,470 8,200 13,089(2) 0 25,000 0 0
Chief Executive 1996 47,839 0 2,470(2) 0 50,000 0 0
EPL Flexible 1995 0 0 0 0 0 0 0
Packaging Ltd
Timothy B. Owen 1997 105,000 40,000 0 0 50,000 0 0
Treasurer and 1996 90,000 0 0 0 57,500 0 0
Secretary 1995 60,000 0 30,000 0 62,500 0 0
William R. Romig 1997 105,750 14,075 1,634 0 75,000 0 0
Vice President, 1996 94,089 5,000 0 0 87,500 0 0
Research & 1995 85,000 0 0 0 17,500 0 0
Development
</TABLE>
(1) includes payments made to DWL Associates Limited, an entity
controlled by Mr. Lyon, for the provision of consulting and advisory
services. Amounts assume an exchange rate in 1995/6 of Pounds
Sterling 1:$1.60 and Pounds Sterling1:$1.65 in 1997.
(2) assumes an exchange rate of Pounds Sterling 1:$1.65.
COMPENSATION OF DIRECTORS
With the exception of Mr. Devine in his capacity as an officer of the Company,
no cash compensation was paid to any director of the Company during the year
ended December 31, 1997. In May 1997, in accordance with the terms of the
Company's 1994 Stock Incentive Plan, Robert D. Mattei and former director Dr.
Rainer G. Bichlbauer were each granted an option to acquire 7,500 shares of
Common Stock at an exercise price of $10.50 per share, for their services as
members of the audit and compensation committees. Also pursuant to the 1994
Stock Incentive Plan, Mr. William Hopke, also a former director, served for
part of fiscal 1996 and was granted an option to acquire 5,000 shares of
Common Stock at an exercise price of $10.50 per share for his services as a
member of such committees. These options are exercisable for five-year terms
and have exercise prices equal to the fair market value of such shares on the
date of grant.
-48-
<PAGE> 50
EMPLOYMENT AND CONSULTING CONTRACTS
Mr. Devine and the Company are parties to an employment agreement dated as of
January 1, 1997 which provides that Mr. Devine is to serve as the Company's
Chairman of the Board, President and Chief Executive Officer. The agreement
provides for a rolling three year term. The Agreement provides for a base
salary to be fixed by the Board which, as of January 1, 1997, was $275,000 per
year. Pursuant to the agreement the Company will maintain life insurance on
Mr. Devine's life with a face amount equal to at least $1,000,000, for which
Mr. Devine may designate a beneficiary. Under the agreement Mr. Devine also
will be entitled to receive a retirement benefit if he remains continuously
employed (as defined) by the Company until age fifty. Generally, if Mr. Devine
retires at age 65, the retirement benefit to be received annually will be
equal to 50% of his average annual base salary and bonus during the final
three years of his employment (less benefits from any other defined benefit
pension plan of the Company). The percentage of Mr. Devine's average annual
base salary and bonus will be reduced or increased by 6% for each year by
which Mr. Devine elects to have such retirement benefit commence earlier or
later than his 65th birthday. The agreement also provides that Mr. Devine is
entitled to participate in all benefit plans and arrangements of the Company
and may also receive bonuses, if any, as determined by the Board of Directors.
The agreement also provides certain disability and death benefits to Mr.
Devine, as well as severance payments approximately equal to Mr. Devine's
average salary and bonus for the previous three years, to continue for three
years if Mr. Devine is terminated under certain conditions. Additionally, Mr.
Devine is entitled to receive a payment of slightly less than three times his
"base amount" (as defined in the Internal Revenue Code of 1986) in the event
of a "change of control" of the Company (as defined in the agreement). This
agreement also contains certain customary provisions regarding confidentiality
and non-competition.
The Company entered into a Consulting Agreement with DWL Associates Ltd., an
entity controlled by Mr. Lyon, for the provision of consulting and advisory
services. The agreement, which was signed as part of the acquisition by the
Company of BPS in September 1995, had an original term of two years, expiring
September 14, 1997. Under its terms, however, the agreement continues in
effect until terminated by either party serving six months notice. Annual
fees of Pounds Sterling 90,000 ($149,000 at an exchange rate of Pounds
Sterling 1: $1.65) are payable under this agreement, plus the reimbursement of
directly incurred expenses.
The Company, through Bakery Packaging Services Limited (now known as EPL
Flexible Packaging Limited ("EPL Flexible")), entered into an employment
agreement with Mr. Kendall commencing on August 1, 1996, which provides that
Mr. Kendall is to serve as Chief Executive of EPL Flexible. The agreement
originally provided for an annual salary of Pounds Sterling 70,000 ($115,000
at an exchange rate of Pounds Sterling 1:$1.65), which salary is reviewable on
January 1 annually and has been increased to Pounds Sterling 83,000 ($137,000
at an exchange rate of Pounds Sterling 1:$1.65) as of July 1, 1997, together
with customary benefits, such as vacation, the provision of an automobile,
healthcare coverage and contributions into a defined contribution pension
scheme. A bonus is also payable upon the achievement of certain performance
targets, as agreed on an annual basis. After the first twelve months, the
contract may be terminated by either side upon six months' notice. The
agreement also contains certain customary provisions regarding confidentiality
and non-competition.
The Company entered into an employment agreement with Dr. Romig effective
September 1, 1994, which provides for a twelve month term, with annual renewal
terms. Effective January 1, 1998, the Company entered into a new agreement
with Dr. Romig, which runs for an initial term of two years, with annual
renewal terms thereafter. Either party may terminate the contract upon six
months' notice. The initial annual salary is $120,000, with a bonus of up to
25% of the salary based upon the achievement of agreed-upon objectives. In
addition to the customary provisions on vacation and healthcare coverage, the
agreement also provides that, in the event of a termination of employment by
either party due to a change in control (as
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<PAGE> 51
defined in the agreement), Dr. Romig would receive a total payment equal to
twice his annual salary plus a bonus equal to his average bonus earned over
the previous twelve months. The agreement also contains certain customary
provisions regarding confidentiality and non-competition.
The Company entered into an employment agreement with Mr. Crowell effective
February 18, 1998, under which Mr. Crowell will serve as Vice President and
Chief Financial Officer. The contract has an initial term of two years with
annual renewal terms thereafter. Either party may terminate the agreement
upon four weeks notice. If the Company terminates Mr. Crowell's employment
without cause, or the initial or any renewal term expires without being
renewed, Mr. Crowell will receive an amount paid in monthly installments,
equal to his annual base salary (and bonus, if any) earned in the previous
twelve months. The initial annual salary is $180,000, with a bonus of up to
35% of the salary based upon the achievement of agreed-upon objectives. In
addition to customary provisions on vacation and healthcare coverage, the
agreement also provides for relocation expenses. The agreement further
provides that, in the event of a termination of employment by either party due
to a change in control (as defined in the agreement), Mr. Crowell would
receive a total payment equal to twice his annual salary plus a bonus equal to
his average bonus earned over the previous twelve months. The agreement also
contains certain customary provisions regarding confidentiality and
non-competition. Mr. Crowell was also awarded options to purchase 100,000
shares of Common Stock, which vested on the date of the agreement.
1994 STOCK INCENTIVE PLAN
The Company's 1994 Stock Incentive Plan was adopted by the shareholder on July
21, 1994, and modified by the shareholders to increase the shares issuable
thereunder and to make certain other changes on July 22, 1996, and again on
July 21, 1997. The Plan is intended as an additional incentive to certain
employees, certain consultants or advisors and non-employee members of the
Board of Directors to enter into or remain in the employ of the Company or to
serve on the Board of Directors by providing them with an additional
opportunity to increase their proprietary interest in the Company and to align
their interests with those of the Company's shareholders generally through the
receipt of options to purchase Common Stock and has been structured to comply
with the applicable provisions of Section 16(b) of the Securities Exchange Act
of 1934, as amended, and Rule 16b-3 thereunder. The Plan provides for the grant
of incentive stock options within the meaning of the Internal Revenue Code of
1986, as amended, and non-qualified stock options and the award of shares of
Common Stock. The particular terms of each option grant or stock award are set
forth in a separate agreement between the Company and the optionee or award
recipient. The Plan is administered by the 1994 Stock Incentive Plan
Administration Committee appointed by the Board of Directors, which is
currently comprised of Robert D. Mattei and A.S. Clausi. The committee has the
discretion to determine the number of shares subject to each award, and other
applicable terms and conditions, including a grant's vesting schedule. The term
of an option may not be more than five years from the grant date. Options
granted under the Plan generally terminate three months after an optionee ceases
to be employed by the Company (twelve months in the case of death or
disability). The Plan provides that no option may be granted under it after May
4, 1999.
The following table sets forth certain information concerning grants of stock
options made during the year ended December 31, 1997 to Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
% OF POTENTIAL REALIZABLE VALUE AT
SHARES TOTAL OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION OPTION TERM(5 YEARS)(1)
NAME GRANTED FISCAL YEAR PRICE DATE 0% 5% 10%
- -------------------- ---------- -------------- -------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine 100,000 19.2% $14.00 11/14/2002 0 $386,794 $854,714
Derrick W. Lyon 0 0 0 N/A N/A N/A N/A
Antony E. Kendall 25,000 4.8 14.00 11/14/2002 0 96,699 213,679
Timothy B. Owen 50,000 9.6 14.00 11/14/2002 0 193,397 427,357
William R. Romig 75,000 14.4 14.00 11/14/2002 0 290,096 641,036
</TABLE>
(1) The dollar amounts under these columns are the result of
calculations at 0%, 5% and 10% rates set by the Securities and
Exchange Commission and therefore are not intended to forecast
possible future appreciation of the price of the Common Stock.
-50-
<PAGE> 52
The following table sets forth certain information concerning exercises
of stock options during the year ended December 31, 1997 and the value of
unexercised stock options at December 31, 1997 for Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---------------------------- ---------------------------
SHARES
ACQUIRED VALUE UNEXER- UNEXER-
NAME ON EXERCISE REALIZED EXERCISABLE CISABLE EXERCISABLE CISABLE
- ---- ----------- -------------- ------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Paul L. Devine 200,000(1) $2,212,500(1) 400,000 0 $1,462,500 0
Derrick W. Lyon 0 0 100,000 0 618,750 0
Antony E. Kendall 0 0 75,000 0 109,375 0
Timothy B. Owen 5,000(1) 60,625(1) 170,000 0 669,375 0
William R. Romig 0 0 180,000 0 468,751 0
</TABLE>
(1) None of the shares underlying the exercised options had been
sold as at December 31, 1997.
(2) At December 31, 1997, the split-adjusted closing price of a
share of Common Stock on the Nasdaq Small Cap Market was $12.25.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee during fiscal 1997 were
Mr. Mattei, who served for the entire year, and Mr. Cantwell, who was elected
to the committee in May 1997. Neither Mr. Mattei nor Mr. Cantwell were
officers of the Company during such period. Except as disclosed under
"Certain Transactions," neither of the members of the Compensation Committee
nor any of their affiliates entered into any transactions with the Company
during 1997.
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<PAGE> 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 31,
1997, regarding the beneficial ownership of (i) each director, (ii) each of
the executive officers named in the summary compensation table, (iii) all
executive officers and directors of the Company as a group and (iv) each
person known to the Company to be a beneficial owner of more than 5% of the
Company's outstanding Common Stock and/or Series A Preferred Stock (on an
as-converted basis) and/or Series C Preferred Stock (on an as-converted
basis). Subsequent to the year end, all of the Series C Preferred Stock was
converted into shares of Common Stock. The Series D Preferred Stock is not a
class of voting securities. Except as set forth below, the shareholders named
below have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED (1) COMMON
- ------------------------ -------------- -------
<S> <C> <C>
Trilon Dominion Partners, L.L.C. 2,690,903(2) 26.03%
Lancer Partners, L.P. 1,788,505(3) 19.77%
Norwich Union Investment
Management Limited 481,250(4) 5.30%
Willbro Nominees Ltd. 146,965(5) 1.61%
Paul L. Devine 770,416(6) 8.12%
Robert D. Mattei 214,482(7) 2.36%
Ronald W. Cantwell 2,690,903(8) 26.03%
Derrick W. Lyon 100,000(9) 1.09%
Dr. William Romig 180,000(9) 1.95%
Timothy B. Owen 187,500(10) 2.03%
Antony E. Kendall 75,000(9) *
Directors and executive officers
as a group (10 persons) 4,432,052(11) 38.54%
Total number of shares outstanding - 9,047,983 100.00%
common
Preferred (as converted)-Series A 1,382,000
-Series C 72,222
</TABLE>
* Less than one percent.
(1) Unissued shares of Common Stock of each owner subject to currently
exercisable options or other rights to acquire securities exercisable
within 60 days of the date hereof are included in the totals listed and
are deemed to be outstanding for the purpose of computing the percentage
of Common Stock owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of the class
owned by any other person. The effect of this calculation is to increase
the stated total ownership percentage currently controlled. Information
in the table is based solely upon information contained in filings with
the Securities and Exchange Commission, pursuant to sections 13(d) and
13(g) of the Securities Exchange Act of 1934, as amended, and the records
of the Company.
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<PAGE> 54
(2) Includes 1,288,666 shares of Common Stock that may be acquired by
converting 1,933,000 shares of Series A Preferred Stock into shares of
Common Stock. Trilon Dominion Partners, L.L.C. beneficially owns 93.2% of
the Company's outstanding Series A Preferred Stock. The address for
Trilon Dominion Partners, L.L.C. is 245 Park Avenue, Suite 2820, New
York, NY 10017.
(3) Includes shares of Common Stock held by funds other than Lancer
Partners, L.P., but which are commonly managed in a group that includes
Lancer Partners, L.P. The address for Lancer Partners, L.P. is 375 Park
Avenue, Suite 2006, New York, NY 10017.
(4) Includes 31,250 shares of Common Stock issuable upon exercise of
warrants. The address for Norwich Union Investment Management Limited is
Sentinel House, 37 Surrey Street, Norwich NR1 3UZ U.K.
(5) Includes 72,222 shares of Common Stock issuable upon conversion of
Series C Preferred Stock and 30,993 shares of Common Stock issuable upon
exercise of warrants. Willbro Nominees beneficially owns 100% of the
Series C Preferred Stock. The address for Willbro Nominees is 6
Broadgate, London, U.K.
(6) Includes 440,000 shares of Common Stock that may be acquired by (i)
converting 50,000 shares of A Preferred Stock into 33,333 shares of
Common Stock, (ii) exercising options to acquire 400,000 shares of Common
Stock and (iii) exercising warrants to acquire 6,666 shares of Common
Stock. Mr. Devine beneficially owns 2.4% of the Series A Preferred Stock.
The address for Mr. Devine is c/o the Company, 2 International Plaza,
Suite 245, Philadelphia, PA 19113-1507.
(7) Includes 47,500 shares of Common Stock that may be acquired by
exercising options to acquire 47,500 shares of Common Stock and 10,000
shares of Common Stock owned by Mr. Mattei's wife, as to which he
disclaims beneficial ownership.
(8) Mr. Cantwell may be considered to be an indirect beneficial owner of
such shares of Common Stock by virtue of his ownership of all of the
voting stock of VC Holdings, the sole manager of Trilon Dominion
Partners, L.L.C. ("Trilon") and owner of 100% of the voting interest in
Trilon. The only other member of Trilon is Dominion Capital, Inc., a
Virginia corporation ("Dominion Capital"), which holds a non-voting
membership interest in Trilon. Dominion Capital is a wholly owned
subsidiary of Dominion Resources, Inc., a Virginia corporation ("Dominion
Resources"). Both Dominion Capital and Dominion Resources may be
considered to be indirect beneficial owners of such shares of Common
Stock of the Company. However, both entities disclaim any indirect
beneficial ownership of such shares.
(9) Amount shown represents shares of Common Stock issuable upon exercise of
options.
(10) Includes 170,000 shares of Common Stock that may be acquired by
exercising options.
(11) Includes 2,513,666 shares of Common Stock that may be acquired by (i)
converting 1,983,000 shares of A Preferred Stock into 1,322,000 shares of
Common Stock, (ii) exercising options to acquire 1,185,000 shares of
Common Stock and (iii) exercising warrants to acquire 6,666 shares of
Common Stock.
.
-53-
<PAGE> 55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had a revolving line of credit under an agreement originally
obtained from Dominion Capital, Inc. ("Dominion"), a related party of Trilon,
which was to have expired on March 21, 1998, bearing interest at prime plus
2.5%. In July 1995, Dominion transferred its interest in this line of credit
to Trilon. On October 2, 1995, Trilon agreed to convert the outstanding
principal amount of $4,050,000 under the line of credit into 1,012,500 shares
of Common Stock and Warrants to purchase 50,000 shares of Common Stock for
$8.00 per share. The Company also issued 81,306 shares of Common Stock in
settlements of accrued interest under this facility of $310,164, and 23,250
shares of Common Stock in settlement of commitment fees.
Effective October 21, 1997, the Company completed a revolving line of credit
agreement with Trilon (the "Trilon Line"). In connection with obtaining the
Trilon Line, Company paid Trilon a total transaction fee of $100,000. Under
the Trilon Line, Trilon made available to the Company $2.1 million for working
capital purposes. Any amounts drawn were secured by, among other things, a
blanket lien on the assets of the Company's wholly-owned U.S. subsidiaries and
on the assets of the Company itself. Interest was at the "prime rate" (as
published in the Wall Street Journal) plus 3% or 4% and payable quarterly in
arrears. Part of the proceeds of the Series D Placement was used to repay the
Trilon Line on November 12, 1997, whereupon the Company instructed Trilon to
cancel the Trilon Line and to file appropriate releases of all collateral
securing the Trilon Line. The Trilon Line therefore is no longer available for
drawings.
Trilon's investment in the Company constitutes a substantial portion of
Trilon's overall investment portfolio and as such, Mr. Cantwell, by virtue of
his share ownership in VC Holdings, may be deemed to have a significant
economic interest in the proposed Offering. The Company and Trilon have agreed
that the expenses of the Offering will be apportioned to and paid by Trilon in
the same proportion as the gross proceeds of the Offering received by Trilon
bears to the aggregate gross proceeds of the Offering. The Company and Trilon
also have agreed to indemnify each other from certain liabilities in connection
with the Offering, including liabilities under the Securities Act.
-54-
<PAGE> 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
See index to Financial Statements at page 23.
REPORTS ON FORM 8-K
On October 3, 1997 the Company filed a report on Form 8-K under Item 5
thereof, in connection with the execution by Integrated Produce Systems, Inc.
(IPS), a subsidiary of the Company, of a licensing agreement by IPS with
Farmington Fresh.
On October 24, 1997, the Company filed a report on Form 8-K under Item 5
thereof, in relation to a revolving line of credit agreement with Trilon
Dominion Partners LLC, the Company's largest shareholder.
On December 24, 1997, the Company filed a report on Form 8-K, under Item 2
thereof, in connection with the acquisition of the issued and outstanding
share capital of Fabbri Artes Graficas Valencia SA, a Spanish company, through
a newly-formed, wholly-owned subsidiary of the Company, EPL Technologies SRL.
EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K/A. Where so indicated, exhibits which were previously filed are
incorporated by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Amendment and Restated Articles of Incorporation of the Company,m as
amended. (Incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
on file with the Securities and Exchange Commission (the "SEC").)
3.2 Amended and Restated Bylaws of the Company, as amended.
(Incorporated by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997 on file
with the SEC.)
3.3 Plan of Reverse Stock Split (Incorporated by reference to the
Company's definitive proxy statement for a special meeting of
stockholders dated February 27, 1998, on file with the SEC)
4.1* Specimen Common Stock Certificate.
10.1 Stock Purchase and Supply Agreement dated May 19, 1994 between
Jungbunzlauer Holding AG and Extended Product Life, Inc.(Incorporated
by reference to Exhibit 10.10 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 on file with the SEC).
10.2 1994 Stock Incentive Plan, as amended (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-8 (File
No 333-42047) on file with the SEC).
10.3 Agreement for the sale and purchase of the entire issued share capital of
Bakery Packaging Services Limited, dated September 15, 1995.
(Incorporated by reference to Exhibit 2.1 to the Company's Report on
Form 8-K dated October 3, 1995 on file with the SEC.)
10.4 Disclosure letter in relation to the agreement for the sale of the
entire issued share capital of Bakery Packaging Services Limited, dated
September 15, 1995. (Incorporated by reference to Exhibit 2.2
to the Company's Report on Form 8-K dated October 3, 1995 on file with
the SEC.)
</TABLE>
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<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.5 Agreement between EPL Technologies (Europe) Limited and DWL
Associates for the services of D.W. Lyon as Chief Operating Officer of
Bakery Packaging Services Limited. (Incorporated by reference to
Exhibit 2.3 to the Company's Report on Form 8-K dated October 3, 1995
on file with the SEC.)
10.6 Employment agreement between EPL Technlologies, Inc. and P.L.
Devine, Director, President and Chief Executive Officer, dated as of
January 1, 1997. (Incorporated by reference to Exhibit 10.15 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997 on file with the SEC.)
10.7 Office Lease Agreement dated September 11, 1996 between EPL
Technologies, Inc. And K/B Fund II for Headquarters office.
(Incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 on file
with the SEC.)
10.8 License agreement dated as of April 29, 1997 by and between
Integrated Produce Systems, Inc. and Farmington Fresh. (Incorporated
by reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-3 (File No. 333-42185) on file with the SEC.)
10.9 Amendment to License Agreement, dated December 1, 1997, between
Integrated Produce Systems, Inc. and Farmington Fresh. (Incorporated
by reference to Exhibit 10.2 to the Company's Registration Statement on
Form S-3 (File No. 333-42185) on file with the SEC.)
10.11 Operating Agreement of NewCornCo, LLC, dated July 19, 1996, as
amended, between the Company and Agricultural Innovation & Trade, Inc.
(Incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-3 (File No. 333-42185) on file with
the SEC.)
10.12 Fresh-Cut Corn Processing Agreement, dated July 22, 1996, between
NewCornCo, LLC, and Agricultural Innovation & Trade, Inc.
(Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-3 (File No. 333-42185) on file with
the SEC.)
10.13 Assignment of Membership Interest, dated December 6, 1997, between
Agricultural Innovation & Trade, Inc. Aand Twin Garden Sales, Inc.
(Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-3 (File No. 333-42185) on file with
the SEC.)
10.14 Requirements Agreement, dated as of January 1, 1998, between
NewCornCo, LLC, and Twin Garden Farms. (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on Form S-3 (File
No. 333-42185) on file with the SEC.)
10.15 Employment Agreement, dated January 1, 1998, between the Company
and William R. Romig. (Incorporated by reference to Exhibit 10.17 to
the Company's Registration Statement on Form S-3 (File No. 333-42185)
on file with the SEC.)
10.16 Agreement for the Sale and Purchase of the entire issued share
capital of Fabbri Artes Graficas Valencia S.A., dated December 11,
1997. (Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on December 24, 1997.)
10.17 Securities Purchase Agreement dated as of November 6, 1997 between
the Company and each of the purchasers of the Company's Series D
Preferred Stock. (Incorporated by reference to Exhibit 4.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.)
10.18 Registration Rights Agreement dated as of November 6, 1997 between
the Company and each of the purchasers of the Company's Series D
Preferred Stock. (Incorporated by reference to Exhibit 4.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.)
10.19 Trademark License Agreement between IPS Produce, Inc. and Potandon
Produce LLC (confidential treatment has been granted for certain
portions of this document). (Incorporated by reference to Exhibit
10.12 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.)
10.20 Employment Agreement dated as of February 18, 1998, by and between
EPL Technologies, Inc. and Bruce M. Crowell. (Incorporated by
reference to Exhibit 10.22 to the Company's Registration Statement on
Form S-1 (File No. 333-46397) on file with the SEC.)
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.21 Employment Agreement dated as of October 1, 1997, by and between
EPL Technologies, Inc. and Jose Saenz de Santa Maria. (Incorporated by
reference to Exhibit 10.23 to the Company's Registration Statement on
Form S-1 (File No. 333-46397) on file with the SEC.)
10.22 Agreement dated February 1, 1998 by and between the Company and
American National Can Company (Incorporated by reference to Exhibit
99.2 to the Company's Current Report on Form 8-K filed on March 30,
1998.)
10.23 Operating Agreement of ANC-RESPIRE LLC. (Incorporated by reference to
Exhibit 99.3 to the Company's Current Report on Form 8-K filed on March
30, 1998.)
11.0* Computation of Earnings per Common Share and Fully Diluted Earnings
per Common Share.
21 Subsidiaries of the Company (Incorporated by reference to Exhibit
21 to the Company's Registration Statement on Form S-1 (File No
333-46397) on file with the SEC).
23.1 Consent of Deloitte & Touche LLP.
27.1* Financial Data Schedules (for SEC use only)
</TABLE>
- -------------------
* Previously filed.
-57-
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date: April 21, 1998 /s/ Paul L. Devine
---------------------------
Paul L. Devine
Chairman, President and
Chief Executive Officer
-58-
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
EPL Technologies, Inc. on Forms S-3 (Nos. 333-42185 and 333-09719) and on Forms
S-8 (Nos. 333-4306, 333-9795 and 333-42047) of our report dated February 27,
1998 (March 13, 1998 as to Note 18) appearing in the Annual Report on Form
10-K/A of EPL Technologies, Inc. for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
- ------------------------------
DELOITTE & TOUCHE LLP
Philadelphia, PA
April 20, 1998
