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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 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____ to ____
Commission File Number : 0-28444
EPL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0990658
(State of incorporation) (I.R.S. Employer Identification Number)
2 INTERNATIONAL PLAZA, SUITE 245
PHILADELPHIA, PA
19113-1507
(address of principal executive offices)
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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
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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 or any
amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of February 28, 1997 was approximately $52,138,707. This excludes
6,066,435 shares of common stock held by directors, officers and stockholders
whose ownership exceeds five percent of the shares outstanding at February 28,
1997.
The number of shares outstanding of the Registrant's Common Stock, as of
February 28, 1997 was: 15,546,200 Shares
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EPL TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K/A
YEAR ENDED DECEMBER 31, 1996
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1. PART I
PAGE
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1. ITEM 1. BUSINESS 2
2. ITEM 2. PROPERTIES 7
3. ITEM 3. LEGAL PROCEEDINGS 7
4. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
5. ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS 8
6. ITEM 6. SELECTED FINANCIAL DATA 10
7. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
8. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
9. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 35
10. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 35
11. ITEM 11. EXECUTIVE COMPENSATION 37
12. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 40
13. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 43
14. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 44
15. SIGNATURES
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT
EPL Technologies, Inc. and its subsidiaries (the "Company") are
principally engaged in the development, manufacture and marketing of
proprietary processing aids, packaging technologies and related
scientific services that facilitate the maintenance of the quality and
integrity of fresh produce.
The Company targets its current and expected future operations to develop
an international sales, marketing, distribution and scientific services
network for fresh produce processing and packaging technologies.
Toward that goal the Company began in 1994 to seek strategic acquisitions,
which would add incremental resources and capabilities towards a systems
approach in the fresh produce industry that would complement its
internally developed proprietary processing aid technology base. On
September 30, 1994, the Company acquired Respire Films, Inc. ("Respire")
a U.S.-based business involved in the marketing of packaging films that
are contract-manufactured under the Respire name. The Company believes
that this acquisition provided synergy to the Company's processing aid
business in the fresh cut produce market and since its acquisition has
represented a growing source of revenues.
On September 19, 1995, the Company acquired Bakery Packaging Services
Limited ("BPS"), based in northwest England. BPS has developed a
proprietary perforating technology for packaging materials which are
used by leading companies in the fresh-cut produce and institutional
bakery industries. BPS also produces, in substantially smaller volumes,
wax-coated packaging used principally in the confectionery industry. The
Company believes that the acquisition of BPS provides an additional
proprietary technology to enhance the company's strategic position,
together with providing an incremental source of packaging revenue and an
opportunity for additional cross-marketing activities between the US and
UK markets. The latter has been demonstrated by the installation in the
U.S. of the Company's proprietary gas flame equipment (see below) and the
servicing of US customers.
On April 19, 1996, the Company acquired the tangible and intangible
assets of Pure Produce, a Massachusetts general partnership, through a
wholly-owned subsidiary, Pure Produce, Inc., a Massachusetts corporation.
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. The Company believes
that this acquisition extends the range of technical support services it
can offer as part of its systems approach, as well as raising the overall
scientific content of the Company in its relationship with the fresh-cut
produce and food services industry.
In July 1996, the Company acquired, through a wholly owned UK subsidiary
(EPL Flexible Packaging Limited ("EPL Flexible")), some of the fixed
assets located at Gainsborough, Lincolnshire, England, of a division of
Printpack Europe (St. Helens) Limited. This company specializes in the
printing of flexible packaging films serving primarily the snack food
industry. The Company believes that this acquisition broadens the range
of printed packaging materials it can offer its customers, as well as
increasing productive capacity. Since this acquisition, the printing
press previously located at BPS has been relocated to EPL Flexible. The
Company believes that this will lead to economies of scale by
concentrating printing at one location, as well as freeing up productive
space at BPS's Runcorn, England location to accomodate higher margin
perforation activities.
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In addition, also in July 1996, the Company formed Newcorn Co. L.L.C., a
jointly owned limited liability company in which the Company owns a 51%
membership interest. The other member of Newcorn Co. is Underwood Ranches,
the trade name of Agricultural Innovation and Trade, Inc. Newcorn Co.
utilizes the Company's proprietary processing aid and packaging
technologies and Underwood's existing corn processing and distribution
capabilities with the aim of developing a year-round, national,
value-added market for fresh corn products.
Also in July 1996, the Company acquired through a wholly-owned US
subsidiary, Crystal Specialty Films, Inc., the assets and assumed 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. Crystal serves as the
site for the proprietary gas flame perforation equipment which the
Company had custom-built in the UK, shipped and installed at Crystal and
which is planned to be the basis for penetration of the US film
perforation market. This is based on the initial contract the Company has
with E.I. duPont de Nemours and Company ("DuPont") for the perforation of
DuPont's Mylar Film (the "DuPont Agreement"). DuPont is shipping film to
the Crystal location, where it is being perforated according to required
specifications and then shipped either back to DuPont or to DuPont
customers.
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, Pennsylvania 19113-1507, and its telephone
number is (610) 521-4400.
PRODUCTS
The Company's products fall into two major classifications: processing
aids and related technical support services and packaging materials. The
Company's food processing aid products, using ingredients that are
included in the Food and Drug Administration (FDA) list as generally
recognized as safe ("GRAS") help to maintain the quality and integrity of
fresh-cut fruits and vegetables. See "Business - Regulatory Requirements."
Products have been developed for apples, artichokes, broccoli florets,
carrots, baby leaf lettuce, mushrooms, onions, parsnips, potatoes and
sweet corn. These are currently being marketed to processors of fresh cut
fruits and vegetables. The Company has also developed products for use on
organically grown carrots and baby leaf lettuce. Work is continuing on
products for application on other vegetables, such as celery, radicchio,
peppers and spinach. All fruits or vegetables processed with the
Company's developed applications technology, using strict protocols
included in such technology, are dipped into a water bath containing the
specified concentration of the Company's products for the specified time,
after which the produce undergoes a thorough washing intended to ensure
that there is little residue of the EPL product. The Company's
complementary packaging technologies incorporate technologies that help
to control temperature, gas and humidity. The Company believes that a
proper packaging process can be designed to enhance the effectiveness of
processing aids as part of an integrated processing system (which
includes technical services support), and is continuing to commit
resources to further develop this system.
INDUSTRY AND GEOGRAPHIC AREA SEGMENTS
Of the Company's two primary product lines, processing aids are sold
primarily in the United States with smaller amounts also sold in Canada,
while packaging materials are marketed in North America, the United
Kingdom 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 US market. See Note 17 to
Consolidated Financial Statements.
CUSTOMER CONCENTRATION
During 1996, Walkers Snack Foods Ltd., a division of Frito-Lay Europe, a
subsidiary of Pepsico, Inc. ("Pepsico") accounted for 13% of annual
revenues. During 1995, no customer accounted for more than 10% of annual
revenues. During 1994, two customers, Taylor Packaging and Dixie Produce,
accounted for 18% and 17% of annual revenues, respectively.
MARKETS
Fresh fruits and vegetables begin to deteriorate after harvest. In
response, processing aids have long been used to increase shelf life and,
consequently, the economic value of fresh produce. Bisulfates, previously
the most common of such aids, have been the subject of some debate in
recent years. The Company's processing aid product-line was originally
developed in response to the market need to eliminate the use of
bisulfates in the pursuit of extending freshness for vegetables. Use of
the Company's products enabled food processors to address product quality
concerns, without requiring the use of any governmentally mandated labels.
Markets for the Company's food processing products
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include the processing of fresh vegetables for both the retail and food
service markets. By improving the maintenance of produce integrity (and
thus increasing the economic value) of fresh produce, the Company's
products have the potential to open up a national market for processors
previously limited to regional activities. Respire's packaging products
are used exclusively in the fresh-cut produce industry in the U.S. BPS's
products are used by leading companies in the U.K. and Europe, mainly
involved in the fresh cut produce and institutional bakery industries.
Pure Produce provides 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, and provides additional internal technical
support in developing the Company's processing aid and packaging
protocols. EPL Flexible specializes in the printing of flexible packaging
films serving primarily the snack food industry. Crystal manufactures a
range of proprietary films for various applications. The Company's
products are increasingly being marketed in concert as part of a
co-ordinated line of products, processes and technical support services
as a system for maintaining fresh produce integrity. To date, the
Company's penetration of the various markets it is seeking to develop is
insignificant.
SOURCES OF SUPPLY
The Company purchases its U.S. raw material requirements from a number of
suppliers, some of which use sources outside the U.S. BPS and EPL
Flexible purchase their requirements from a number of suppliers, most of
which are based in the U.K. and Europe. The Company currently obtains all
of its requirements for certain raw materials pursuant to a long-term
contract with Jungbunzlauer, Inc., a U.S. subsidiary of a Swiss-based
company, and is also one of the Company's stockholders. See "Certain
Relationships and Related Transactions." These raw materials transactions
are undertaken on an ongoing commercial arms-length basis.
COMPETITION
Since the FDA originally banned the use of sulfites on freshly processed
fruits and vegetables (a ban that was subsequently overturned), other
"sulfite substitutes" have appeared in the marketplace. The Company faces
competition from these products as well as alternative preservation and
packaging technologies in the marketplace such as packaging, temperature,
gas and humidity control. The Company believes that these complementary
technologies operate synergistically with the Company's products and
services and that the Company's products combined with, for example,
appropriate modified atmosphere packaging, are capable of maintaining the
integrity of fresh cut produce by a time period in excess of that which
either technology can achieve alone. The Company faces competition in
each of its markets from numerous enterprises, many of which are larger
and currently have greater resources than the Company. The Company
believes that to succeed, its proprietary technologies must add value to
the business of its customers. In this respect, the Company believes that
its integrated systems approach to the sales and marketing of its related
technologies provide it with a competitive advantage.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
The Company currently has two U.S. patents, two U.S. patents pending, and
numerous others under review for application. The U.S. patent for the
Company's "Carrot Fresh"(TM) product was granted on September 13, 1994,
and its "Broccoli Fresh"(TM) product was granted patent pending status in
the U.S. on January 17, 1995. 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. Furthermore, it has one non-U.S.
patent, patents pending in
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26 countries 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 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.
SALES AND PRODUCT COMMERCIALIZATION PROCESS
The Company markets its products to processors of fresh vegetables and
fruits for both the retail and food service markets. Upon an
expression of interest from a potential customer, the Company through its
technical service representatives, initiates a detailed review and
testing process to customize the application of the Company's
technologies relating to that particular product to the potential
customer's production system. This testing process involves both
reproducing the Company's processing aids and designing tailored
packaging materials. The development of new product formulations can be a
time-consuming and expensive process. To increase the resources and
expertise available to the Company for development, it has entered into a
number of collaborative ventures with well-known scientific and
commercial institutions. These include the Washington Apple Commission
for several varieties of apples, Rutgers University for residue analysis
Penn State University for mushrooms and the Ben Franklin Foundation. The
Company also has a CRADA (Cooperative Research and Development Agreement)
with the USDA/ARS (United States Department of Agriculture/Agricultural
Research Services) in Philadelphia, Pennsylvania. Once the development
is completed, then the product moves through successive steps of an
increasingly sophisticated testing program, leading to a product
decision. Testing is a complex undertaking within which the Company has
had to build documentation in order to perform successfully and with
consistency. The problems uncovered in the testing process have been
documented in detailed Company protocols to better control the process
outcome and begin to shorten the marketing/sales time frames, with a
resulting positive effect on the sales cycle. However, if the Company is
unable to control the testing process satisfactorily, such lack of
control of the time and resources so required could have an adverse
effect on the Company's revenues. Due to the extended nature of this
development, testing and sales process for processing aids, the Company
has experienced no significant backlog of orders to date in this area
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. The Company has also not experienced
a significant backlog of orders for its packaging materials. The
Company's market development activities continue to increase. The main
areas of activity include potatoes and apples, where the Company is in
volume market test in retail, food and food service outlets.
REGULATORY REQUIREMENTS
All of the ingredients used in the production of the Company's processing
aid products are detailed on the FDA GRAS (generally recognized as safe)
list. In addition, the Company employs a firm of Washington-based FDA
consultants to advise the Company on existing product development,
together with any planned/potential changes in government attitude and
legislation. 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.
FUTURE
The FDA ban introduced in March 1990 on the use of sulfites on freshly
processed potatoes was subsequently struck down by federal courts for
technical flaws, but the Company believes there is a possibility that this
ban may be reintroduced within the next few years. In addition, the recent
changes in labeling requirements on processed food products, introduced by
the FDA, have increased consumer
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awareness of substances that could be harmful to health. Furthermore,
government promotion of fresh fruits and vegetables by the five-a-day
program has made consumers more conscious of the need to include such
foods as part of a balanced diet. As this awareness continues to grow,
management believes interest in the Company's products will increasingly
benefit. Management is continually searching for new ways to market its
products and expand operations, both internally and, where appropriate,
through strategic acquisitions. In this regard, among other initatives
the Company has recently signed a letter of intent containing its
conditional offer to acquire a specialty packaging business (see note 18
to the Company's Consolidated Financial Statements). The Company also
plans, at some point in the future, to invite other fresh corn processors
with specific regional processing and distribution strengths
complementary to California based Underwood Ranches, to work with or
join Newcorn Co. LLC.
EMPLOYMENT
As of December 31, 1996, the Company had 111 employees providing services
in North America and Europe, of which 21 were engaged in sales and
marketing, 61 in production, 11 in applications and research and 18 in
management and administration. The Company expects to recruit additional
personnel as and when required.
PARENTS AND SUBSIDIARIES
1. Parents - The Company disclaims that it is controlled by any one or
more persons or a group of persons and therefore disclaims that any
person or group is its "parent" within the meaning of that term
under the Securities Exchange Act of 1934, as amended. However, by
virtue of the powers vested by law in the Company's Board of
Directors, it is possible that some or all of the Company's
directors might be deemed to be parents of the Company as that term
is so defined, to the extent that they act in concert.
2. Subsidiaries - At December 31, 1996, the Company had six wholly
owned US subsidiaries. Integrated Produce Systems, Inc., a
Pennsylvania corporation, is the vehicle through which the US
processing aid business is conducted; Respire Films, Inc., also a
Pennsylvania corporation, provides packaging related technology to
the fresh cut produce industry; IPS Produce, Inc., a Pennsylvania
corporation, is involved in the market testing of produce; Crystal
Specialty Films, Inc., ("Crystal") an Illinois corporation, is
involved in the manufacture of films; Pure Produce, Inc., a
Massachusetts corporation, provides companies in the food industry
with analysis, protocols, plans and microbial analysis; and Agra
Research, Inc., an Indiana corporation, which is currently inactive.
The Company also owns a 51% membership equity interest in Newcorn
Co. LLC, a Delaware limited liability company, which is involved in
the processing and distribution of fresh corn products. The Company
also had five subsidiaries in the U.K all of which are English
companies. These are Integrated Produce Systems Limited (formerly
known as Extended Product Life Limited), which is the vehicle
through which the Company conducts its activities in the U.K. and
Europe in relation to processing aids; a U.K. holding company, EPL
Technologies (Europe) Limited, which in turn owns 100% of BPS and
EPL Flexible Packaging Limited. In addition, BPS has a dormant
subsidiary, BPS Produce Packaging Limited.
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FORWARD LOOKING STATEMENTS
The above discussions include certain forward looking statements of
management's expectations of product development 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's principal administrative office comprises 6,600 square
feet of space located just outside Philadelphia, Pennsylvania. The
space is rented pursuant to a lease expiring in January 2002. In
addition, the Company formulates its products at a facility located
in Auburn, Alabama, occupying 4,250 square feet. The Company has not
formally renewed this lease, which expired on September 30, 1994 and
thus currently operates on a month-to-month basis pending its
evaluation of the most cost-effective location from which to
operate. In 1994 the Company entered into a lease for an
applications laboratory in Fresno, California, occupying 2,700
square feet, expiring in February 1999. Crystal occupies 16,000
square feet in Oswego, Illinois, pursuant to a lease expiring in
June 1998. For its European packaging and materials business, BPS
owns three adjoining industrial buildings in the U.K. covering a
total of 17,478 square feet. In addition, it rents a building of
5,085 square feet under a lease expiring September 2007. It also
rents an additional building of 5,000 square feet on a
month-to-month basis. EPL Flexible occupies 19,500 square feet of an
industrial property in the U.K., pursuant to a lease expiring in
October 2004. The Company believes that its current facilities are
adequate for its present needs and that it would not have any
difficulty obtaining additional or alternate space at prevailing
rates if required.
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. There were no
proceedings terminated during the fourth quarter of the fiscal year
ended December 31, 1996. 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 known
as 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,
1996.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET INFORMATION
The Company's common stock currently trades on the Nasdaq Small Cap
Market tier of the Nasdaq Stock Market under the symbol "EPTG",
having been traded on the National Association of Securities Dealers
"bulletin board" prior to July 1996. The quotations below reflect
inter-dealer prices, without retail markup, markdowns or commission
and may not necessarily represent actual transactions. The high and
low bid prices for the Company's $0.001 par value Common Stock for
the quarterly periods during the years ended December 31, 1996 and
1995 are as follows:
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1996 1995
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QUARTER ENDED HIGH LOW HIGH LOW
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March 31, 5.88 3.06 1.00 0.63
June 30, 9.00 4.75 1.50 0.50
September 30, 7.63 5.00 3.13 1.25
December 31, 7.13 4.00 3.88 2.38
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As of December 31, 1996, there were 15,531,200 shares of the
Company's $0.001 par value Common Stock issued and outstanding, held
by 331 shareholders of record. During the twelve months ended
December 31, 1996, the Company did not declare any cash dividends on
its Common Stock. It is unlikely that dividends will be paid by the
Company on its Common Stock in the foreseeable future, as the
Company intends to reinvest its results of operations for further
growth.
PREFERRED STOCK
In January 1994 the Company completed a private placement under
Section 4(2) of the Securities Act of 1933, as amended, (the "1933
Act") of 3,250,000 shares of Series A Preferred Stock (the Series A
Stock") at a price of $1.00 per share. The Series A Stock carry a
dividend of 10% per annum payable in cash and/or shares of Common
Stock at the Company's option. This dividend is cumulative, and is
to be paid in priority to any dividends to holders of Common Stock.
If paid in shares, the deemed value will be $0.75 per share of
Common Stock. The aggregate dividend due on the Series A Stock at
December 31, 1996 was $1,100,716. Each $1 share of Series A Stock
carries an option to convert into shares of Common Stock at a rate
of $0.75 per common share. The Series A Stock carry equal voting
rights to the shares of Common Stock, based on the underlying
number of common shares after conversion. In addition, 20% of the
Common Stock option conversion carries detachable warrants at a
price of $1.00 per warrant, i.e., every 100 shares of Series A
Stock has 20 warrants exercisable at $1.00 each. These can be
exercised any time up to 5:00 p.m., December 31, 1998.
At the Annual Meeting of the Company held on July 22, 1996, the
shareholders of the Company approved the issuance of up 2,000,000
shares of preferred stock, to bear such designations and preferences
as the Board may determine ("Board Designated Preferred Stock"). On
July 23, 1996, the Company issued 531,915 shares of 10% cumulative
convertible Series B Preferred Stock ("Series B Preferred Stock") to
certain accredited investors who were existing shareholders of the
Company, in a transaction exempt from registration pursuant to
Section 4(2) of the 1933 Act. These shares carry the option to
convert into
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shares of Common Stock at the rate of $4.70 per share and carry
equal voting rights to the shares of Common Stock, based on the
underlying number of shares of Common Stock after conversion. The
Series B Preferred Stock carries a dividend rate of 10% per annum,
payable in cash and/or shares at the Company's option. The
aggregate dividend due on the Series B Preferred Stock at
December 31, 1996 was $110,445.
During 1996, a total of 1,399,331 shares of Common Stock were issued
pursuant to the exercise of outstanding warrants, resulting in net
proceeds to the Company of $3,298,876 in a transaction exempt from
registration pursuant to Section 4(2) of the 1933 Act. During 1996,
the Company issued 5,983 shares of Common Stock pursuant to the
Company's option plan as payment for professional services
resulting in expense of $23,932.
During 1996, the Company filed a resale registration statement on
Form S-3, which was declared effective on November 12, 1996. The
Company registered a total of 12,784,011 shares, comprising
8,740,429 outstanding shares of Common Stock, 293,334 shares of
Common Stock issuable by the Company pursuant to the terms of
certain outstanding warrants, 45,000 share of Common Stock issuable
by the Company pursuant to the terms of certain outstanding options,
3,173,333 shares of Common Stock issuable by the Company upon
conversion of outstanding shares of the Company's Series A Preferred
Stock and 531,915 shares of Common Stock issuable by the Company
upon conversion of outstanding shares of the Company's Series B 10%
Preferred Stock.
In September 1995, the Company sold 2,750,000 shares of Common Stock
to a limited number of "accredited investors", (within the meaning
of Rule 501 under the 1933 Act) for an aggregate consideration of
$5,500,000, in a transaction exempt from registration pursuant to
Section 4(2) of the 1933 Act (the "1995 Placement"). The Company
issued warrants to purchase 55,000 shares of Common Stock for $2.00
per share to Hermitage Capital Corp., as placement agent for the
1995 Placement. Additionally, on October 2, 1995, $4,050,000 in
outstanding borrowings under a line of credit with Trilon Dominion
Partners, L.L.C. was converted into 2,025,000 shares of Common Stock
and warrants to purchase 100,000 shares of Common Stock for $2.00
per share. The Company also issued to Trilon 162,612 shares of
Common Stock in settlement of accrued interest of $310,164, and
46,500 shares of Common Stock in settlement of commitment fees.
Additionally, in 1995 21,361 shares of Common Stock 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.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended December
31, 1996, 1995, 1994, 1993 the eight months ended December 31, 1992 and
the fiscal year ended April 30, 1992 are derived from the Company's
audited consolidated financial statements. The selected financial
information presented below should be read in conjunction with the
consolidated financial statements, related notes and other financial
information included in this report.
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FISCAL FISCAL FISCAL FISCAL EIGHT FISCAL
YEAR YEAR YEAR YEAR MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 4/30/92
(As Restated)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Sales $ 11,314,141 $ 3,239,566 $ 578,463 $ 177,552 $ 141,597 $ 165,491
Gross profit 2,177,885 770,723 190,916 131,470 65,477 81,037
Expenses:
Selling, general, administrative 6,352,119 3,812,938 3,471,952 2,768,685 496,149 310,802
research and development,
depreciation and amoritization
interest expense (income) and 121,655 277,719 91,554 28,725 (14,680) (27,348)
income taxes ------------ ------------ ---------- ----------- --------- ---------
Net loss (4,295,919) (3,319,934) (3,372,590) (2,665,940) (415,992) (202,417)
Accretion, discount and
dividends on preferred stock 998,924 313,854 324,185 199,198
------------ ------------ ----------- ----------- ----------- -----------
Net loss for common stockholders $ (5,294,843) $ (3,633,788) $(3,696,775) $(2,865,138) $ (415,992) $ (202,417)
============ ============ =========== =========== =========== ===========
Weighted average number of
common shares 14,873,518 9,311,059 7,258,725 6,071,241 5,908,616 5,865,241
Net loss per common share $ (0.36) $ (0.39) $ (0.51) $ (0.47) $ (0.07) $ (0.03)
============ ============ =========== =========== =========== ===========
BALANCE SHEET
Working capital (deficiency) $ 2,069,594 $ 1,166,921 $ (378,207) $ (622,924) $ (149,627) $ (267,774)
Total assets 15,215,422 10,041,197 3,188,745 2,629,846 3,193,949 1,905,211
Long-term debt 1,554,161 844,333 1,812,181 75,880 238,331
Total liabilities 6,796,945 3,665,358 2,770,606 983,722 1,011,226 321,599
Total shareholders' equity 8,418,477 6,375,839 418,139 1,646,124 2,182,723 1,583,652
</TABLE>
Note: See Item 1. - "Business - General Development" for description of
acquisitions of businesses which affect the comparability between years.
-10-
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
EPL Technologies, Inc. develops, manufactures and markets complementary
proprietary technologies designed to maintain the quality and integrity
of fresh produce. The Company's primary products are processing aids and
packaging materials, together with related technical support services
which are designed and marketed to processors of fresh vegetables and
fruits to be integrated into a customer's fresh produce production
system. The Company believes its products are safe, environmentally
friendly and add significant value to the business of its customers.
The Company's goal is to become a world class provider of products and
scientific services designed to maintain the integrity of fresh produce.
As consumer awareness of the potential health hazards of sulfite-based
preservatives, which the Company's products do not contain, continues to
grow, management believes interest in the Company's products will
increase. Management is continually searching for new ways to market its
products and expand operations, both internally and, where appropriate,
through strategic and opportunistic acquisitions. In this regard, the
Company has recently signed a letter of intent containing its conditional
offer to acquire a European based specialty packaging business (see note
18 to the Company's Consolidated Financial Statements). In negotiations
and diligence in connection with the potential UK acquisition announced
last fall, the Company has recently terminated these discussions and
does not expect them to resume in the near future. However, the Company
continues to be interested in this or similar opportunities and thus
may revisit this potential acquisition in the future in the right
circumstances. There can however, be no assurance that this or any other
acquisition will in fact occur.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales for the twelve months ended December 31, 1996 were $11,314,141, an
increase of $8,074,575 (249%) over the 1995 total revenue of $3,239,566.
The 1996 total comprised $1,326,669 of processing aids and related
activities (an increase of 181% over 1995), $1,716,984 of U.S. packaging
materials (an increase of 98% over 1995) and $8,270,488 of UK and European
packaging materials (an increase of 336% over 1995).
Within the U.S. processing aid business management continues to work
with and target medium to large food processors as the customer base to
provide the Company a balance of satisfactory sales growth. This activity
has continued in 1996 and as detailed below, costs have been incurred
which are yet to show in significant revenue increases. The current
market development activity includes work on potatoes and apples, where
the Company is in volume market test in retail, food and food service
outlets. Additional activities were added during the year to extend the
range of services offered. This included Pure Produce Inc., which signed
a contract with the U.S. Apple Institute for work on residual analysis in
the final quarter of 1996. The main increase in revenue came from the
inclusion of revenue from the Company's corn activities through the
majority owned Newcorn Co. LLC, which transaction was completed on July
22, 1996.
The growth in the U.S. packaging materials business reflects mainly the
contribution of the Crystal business acquired in July 1996, although
management believes that the activity during 1996 in Respire will also
provide an improved growth base for 1997. In both businesses, the Company
continues to target and to expand product development activities and to
seek to exploit the synergies that exist with the processing aid business.
The successful completion of the DuPont Agreement in late 1996 did not
generate significant revenue in the U.S. in the period. The new gas-flame
film perforation machine was successfully installed at the Crystal factory
and, while initial revenue contribution was at a low level, it is
expected to contribute to the 1997 totals.
Revenue from the UK and European packaging materials businesses grew from
$1,898,590 to $8,270,488. This reflected a full period contribution from
BPS, acquired in September 1995, together with an initial contribution
from EPL Flexible. BPS continues to develop, and the Company is beginning
to exploit the synergies between the two businesses. At the end of 1996
the Company relocated all of the film printing activities that were
located at BPS to the EPL Flexible site, which is expected to yield
economies of scale from having all of the printing activities in one
location. It will
-11-
<PAGE> 13
also facilitate an increase in higher margin film perforation capacity at
BPS and a plant reorganization to achieve this is expected to be
undertaken during the first half of 1997. Having acquired the assets at
EPL Flexible in July 1996, business has been increasing during the period,
principally from its main customer, Walkers Snack Foods Ltd., a division
of Frito-Lay Europe, a subsidiary of Pepsico, Inc. ("Pepsico"), and new
customers are actively being sought to help maximize the available
capacity and further diversify the customer base. There can be no
assurance, however, that the Company will be successful in doing so.
In 1996, one customer, Pepsico, accounted for 13% of annual revenues for
the group and in 1995 no customers accounted for more than 10% or more of
annual revenues. Gross margin for the year was 19.2% as compared to 23.8%
for the same period last year. This reduction is due principally to the
inclusion in consolidation of sales of UK and European packaging
materials, which generate a lower average margin than processing aids. In
addition, it reflects the relationship between the volume of product sold
and dollar volumes, which can be substantially affected from quarter to
quarter by varying product mix, varying processor efficiency levels and by
promotional pricing of products used for tests and evaluation. As the
proportion of revenue generated from processing aids or perforated film
increases, management believes that this gross margin will increase,
although, there can be no assurance that such in fact will be the case.
Selling, general and administrative expenses rose to $4,413,365 from
$2,638,116, an increase of $1,775,249. A significant part of this was due
to the inclusion on consolidation of expenses from the BPS operations, as
well as some incremental expenses from the inclusion of EPL Flexible,
Crystal and Newcorn Co. The remainder was due to the continuing
development of the sales and marketing effort as well as projects to
support prospective large customers. As discussed above, this effort is
focused on a number of vegetable categories, including potatoes and
apples, where market test activity is continuing. The Company expects
that this level of additional expenditure will continue, at least in the
short-term. Furthermore, as interest in the Company has grown and the
shareholders base has expanded significantly, additional costs have been
incurred in investor relations, including SEC and other legal work,
notably in connection to registrations of the Company's securities under
federal and state securities laws. Research and development costs
increased from $600,529 to $938,719, an increase of $338,190. This
reflects the costs of some of the third-party collaborative projects
commenced during 1995, as well as additional staff to support the
Company's scientific and technical objectives in relation to the ongoing
sales effort for prospective large customers. Again, the Company
expects that these higher expenses will continue in the short-term,
although it believes the results of these expenditures will be seen in
incremental revenues in 1997 and beyond. Depreciation and amortization
expense increased by $435,453 from $574,293 in 1995 to $1,009,746 in
1996. The most significant proportion of this increase was due to a full
years depreciation of fixed assets and amortization of goodwill arising
from the acquisition of BPS in September 1995, with the remainder due to
increased depreciation as a result of capital expenditure and the assets
acquired in the EPL Flexible, Crystal and Newcorn Co. acquisitions during
1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales for the twelve months ended December 31, 1995 was $3,239,566, an
increase of 460% on total revenue of $578,463 achieved in 1994. The
1995 total comprised $472,747 of processing aids (an increase of 36.7%
over 1994), $868,229 of US packaging materials (an increase of 273% over
1994) and $1,898,590 of UK and European packaging materials (representing
the sales of BPS since its acquisition by the Company on September 19,
1995).
This reflects the lack of occasional sales to very small processors,
offset by new customers. In 1995, no such customer accounted for 10% or
more of annual revenues while two customers represented 35% of the
Company's annual revenues in 1994. Management continues to target medium
to large volume food processors as the customer base to best provide the
Company a balance of
-12-
<PAGE> 14
satisfactory sales growth within a reasonable time frame and to limit the
Company's customer concentration.
The US packaging materials business results in 1995 reflect the inclusion
of a full year's sales of Respire, representing sales to 66 customers
during this period. This total compares with the 1994 total sales (pre and
post acquisition) of $494,289, an increase of 76%. The Company continues
to target new areas for growth and to exploit the synergies that exist
with the processing aid business.
The UK and European packaging materials business of BPS was acquired on
September 19, 1995. On a comparable basis, the total revenues for the year
grew by some 20%.
Selling, general and administrative expenses rose from $2,571,865 in 1994
to $2,638,116 in 1995, an increase of only 2.5%, despite the 460% increase
in revenues. This is evidence of the infrastructure being able to support
increases in sales revenue without corresponding increases in costs.
Research and development costs increased from $522,495 in 1994 to $600,529
in 1995, an increase of 14.9%. This reflects the costs of some of the
collaborative projects commenced in 1995. Depreciation and amortization
rose from $377,592 in 1994 to $574,293 in 1995, an increase of 52%. Of
this increase of $196,701, $87,597 represents increased amortization of
goodwill on acquisition, consisting of BPS in September 1995 and a full
year of Respire. The remainder represents increased depreciation as a
result of 1994 and 1995 capital expenditures.
-13-
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents of
$1,639,567, compared to $1,522,075 as of December 31, 1995, an increase of
$117,492. For 1996, $3,839,976 of net cash was used in operations,
compared to $1,893,444 for 1995. The increase in the net cash used in
operations in 1996 was due primarily to the net loss and the increase in
accounts receivable and inventory.
Net cash used in investing activities totaled $2,741,907 in 1996, compared
to $3,622,966 in 1995. This amount in 1996 included the acquisitions of
assets for Pure Produce, Crystal and EPL Flexible, as well as the
investment in Newcorn Co. The 1995 amount reflected the acquisition of
BPS.
Financing activities for 1996 provided net cash of $6,439,146 compared to
$6,976,036 in 1995. In 1996, the Company raised $3,554,396 through the
exercise of warrants and options. A further $2,500,000 was raised from
the issuance of Series B Preferred Stock.
Also in 1996, a net $359,625 was raised from the refinancing of the BPS
debt. Two seven year loan facilities, totaling $1,387,125 were obtained
and the proceeds used to repay the existing BPS mortgage and pension fund
loan. In addition, EPL Technologies (Europe) Ltd. obtained a line of
credit of $513,750 in 1996.
At December 31, 1996, the Company had 393,532 warrants outstanding to
purchase common stock at between $1 and $2.00 per share, which if
exercised would provide the Company with gross proceeds of approximately
$598,000.
In addition, at December 31, 1996 the Company had 3,295,000 options
outstanding to purchase Common Stock at an weighted average price of
$3.01 per share, which if exercised would provide the Company with gross
proceeds of approximately $9,900,000.
Subsequent to the year end, in March 1997, the Company received
$1,000,000 through a private placement of common stock and Board
Designated Preferred Stock. Further subscriptions are expected shortly
for this limited private placement from other existing offeree
shareholders.
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 its cost structure. The Company's management believes that
cash flows from operations, together with its current resources
(including cash received in the recent private placement) and with the
availability of financing from other sources, will allow the Company to
maintain adequate financing for the next year.
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. 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 impact 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.
-14-
<PAGE> 16
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 and new product introduction. Consequently, actual results may
vary materially from such expectations. Meaningful factors that might
affect such results include: a) the length and effectiveness of the sales
process for processing aids and packaging, b) raw material availability
and pricing, c) changes in regulatory environment and d) difficulty with
research and development activities regarding new products, including
extension of necessary time periods or increase in expense for product
introduction.
-15-
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 17
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 18
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 19
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994 20
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22
</TABLE>
-16-
<PAGE> 18
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, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 19, the December 31, 1996 consolidated financial statements
have been restated to reflect the accretion of the Series B Preferred Stock
discount.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 28, 1997, except for Notes 9 and 19, as to
which the date is January 26, 1998
-17-
<PAGE> 19
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
(As restated,
See Note 19)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,639,567 $ 1,522,075
Accounts receivable, net 2,911,660 1,333,353
Due from related parties 34,101 74,777
Inventories 1,938,819 561,255
Prepaid expenses and other current assets 623,792 442,814
------------ ------------
Total current assets 7,147,939 3,934,274
------------ ------------
PROPERTY AND EQUIPMENT, Net 4,005,711 1,786,534
------------ ------------
OTHER ASSETS:
Patent and distribution rights, net of accumulated
amortization of $2,459,757 and $2,130,381 at
December 31, 1996 and 1995, respectively 1,303,121 1,632,497
Goodwill 2,503,655 2,396,380
Other intangibles, less accumulated amortization
of $82,161 and $45,645 at
December 31, 1996 and 1995, respectively 254,996 291,512
------------ ------------
Total other assets 4,061,772 4,320,389
------------ ------------
TOTAL ASSETS $ 15,215,422 $ 10,041,197
============ ============
CURRENT LIABILITIES:
Accounts payable $ 3,005,577 $ 1,701,578
Accrued expenses 1,213,964 539,313
Other liabilities 396,418 288,651
Current portion of long-term debt 262,779 237,811
------------ ------------
Total current liabilities 4,878,738 2,767,353
LONG-TERM DEBT 1,554,161 844,333
DEFERRED INCOME TAXES 161,926 53,672
MINORITY INTEREST 202,120
------------ ------------
Total liabilities 6,796,945 3,665,358
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred Stock, $1.00 par value -
authorized, 3,250,000 shares; issued and outstanding
2,490,000 and 2,890,000 shares in 1996 and 1995, respectively 2,490,000 2,890,000
Convertible Series B Preferred Stock $0.01 par value
authorized, issued and outstanding $531,915 and $0 1996
and 1995, respectively 5,319
Common Stock, $0.001 par value - authorized,
50,000,000 shares; issued and outstanding, 15,531,200
and 13,208,552 shares in 1996 and 1995, respectively 15,531 13,208
Additional paid-in capital 21,939,678 14,843,992
Accumulated deficit (16,283,464) (11,362,545)
Foreign currency translation adjustment 251,413 (8,816)
------------ ------------
Total stockholders' equity 8,418,477 6,375,839
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,215,422 $ 10,041,197
============ ============
</TABLE>
See notes to consolidated financial statements.
-18-
<PAGE> 20
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
(As restated,
See Note 19)
<S> <C> <C> <C>
SALES $ 11,314,141 $ 3,239,566 $ 578,463
COST OF SALES 9,136,286 2,468,843 387,547
------------ ----------- -----------
GROSS PROFIT 2,177,855 770,723 190,916
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,413,365 2,638,116 2,571,865
RESEARCH AND DEVELOPMENT COSTS 938,719 600,529 522,495
DEPRECIATION AND AMORTIZATION 1,009,746 574,293 377,592
------------ ----------- -----------
LOSS FROM OPERATIONS (4,183,975) (3,042,215) (3,281,036)
INTEREST EXPENSE, NET 20,223 267,176 91,554
MINORITY INTEREST (9,711)
------------ ----------- -----------
LOSS BEFORE INCOME TAX EXPENSE (4,194,487) (3,309,391) (3,372,590)
INCOME TAX EXPENSE 101,432 10,543
------------ ----------- -----------
NET LOSS (4,295,919) (3,319,934) (3,372,590)
Accretion, discount and dividends on Preferred Stock 998,924 313,854 324,185
------------ ----------- -----------
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS $ (5,294,843) $(3,633,788) $(3,696,775)
============ =========== ===========
LOSS PER COMMON SHARE $ (0.36) $ (0.39) $ (0.51)
============ =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,873,518 9,311,059 7,258,725
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
-19-
<PAGE> 21
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED SHARES PREFERRED SHARES
COMMON SHARES -------------------------- ---------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 6,160,991 $ 6,161 3,000,000 $ 3,000,000
Shares issued to employees 25,000 25
Shares issued for professional services 31,289 31
Shares issued as commitment fee 75,000 75
Common shares issued for cash 1,224,133 1,224
Shares issued for acquisition of subsidiary 140,000 140
Preferred shares issued for cash 250,000 250,000
Net loss
Foreign currency translation adjustment
---------- -------- --------- ------------- --------- -------
BALANCE, DECEMBER 31, 1994 7,656,413 7,656 3,250,000 3,250,000
Shares issued in private placement (net of
issuance cost) 2,750,000 2,750
Conversion of note payable to common shares
(net of write-off of deferred finance costs) 2,025,000 2,025
Shares issued to pay expenses and fees 230,472 230
Conversion of preferred shares to common shares 480,000 480 (360,000) (360,000)
Exercise of warrants 66,667 67
Net loss
Foreign currency translation adjustment
---------- -------- --------- ------------- --------- -------
BALANCE, DECEMBER 31, 1995 13,208,552 13,208 2,890,000 2,890,000
Preferred shares issued for cash 531,915 $5,319
Discount on Series B Preferred Stock
Exercise of options 384,000 384
Shares issued to pay expenses and fees 5,983 6
Conversion of preferred shares to common shares 533,334 534 (400,000) (400,000)
Exercise of warrants (net of costs) 1,399,331 1,399
Net loss
Foreign currency translation adjustment
---------- -------- --------- ------------- --------- -------
BALANCE, DECEMBER 31, 1996 (as restated, see Note 19) 15,531,200 $ 15,531 2,490,000 $ 2,490,000 531,915 $5,319
========== ======== ========= ============= ========= =======
</TABLE>
<TABLE>
<CAPTION>
FOREIGN
CURRENCY TOTAL
ADDITIONAL ACCUMULATED TRANSLATION STOCKHOLDERS'
PAID-IN CAPITAL DEFICIT ADJUSTMENT EQUITY
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 3,310,476 $ (4,670,021) $ (492) $ 1,646,124
Shares issued to employees 32,475 32,500
Shares issued for professional services 46,907 46,938
Shares issued as commitment fee 104,925 105,000
Common shares issued for cash 1,431,575 1,432,799
Shares issued for acquisition of subsidiary 279,860 280,000
Preferred shares issued for cash 250,000
Net loss (3,372,590) (3,372,590)
Foreign currency translation adjustment (2,632) (2,632)
------------- ------------- --------- -----------
BALANCE, DECEMBER 31, 1994 5,206,218 (8,042,611) (3,124) 418,139
Shares issued in private placement (net of
issuance cost) 4,877,250 4,880,000
Conversion of note payable to common shares
(net of write-off of deferred finance costs) 3,909,630 3,911,655
Shares issued to pay expenses and fees 424,774 425,004
Conversion of preferred shares to common shares 359,520
Exercise of warrants 66,600 66,667
Net loss (3,319,934) (3,319,934)
Foreign currency translation adjustment (5,692) (5,692)
------------- ------------- --------- -----------
BALANCE, DECEMBER 31, 1995 14,843,992 (11,362,545) (8,816) 6,375,839
Preferred shares issued for cash 2,494,681 2,500,000
Discount on Series B Preferred Stock 625,000 (625,000)
Exercise of options 255,136 255,520
Shares issued to pay expenses and fees 23,926 23,932
Conversion of preferred shares to common shares 399,466
Exercise of warrants (net of costs) 3,297,477 3,298,876
Net loss (4,295,919) (4,295,919)
Foreign currency translation adjustment 260,247 260,247
------------- ------------- --------- -----------
BALANCE, DECEMBER 31, 1996 (as restated,
see Note 19) $ 21,939,678 $(16,283,464) $ 251,413 $ 8,418,477
============= ============= ========= ===========
</TABLE>
See notes to consolidated financial statements.
-20-
<PAGE> 22
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,295,919) $(3,319,934) $(3,372,590)
Adjustments to reconcile net loss to net cash
used in operating activities:
Expenses paid with common stock 23,932 425,004 184,438
Depreciation and amortization 1,009,746 574,293 377,592
Minority interest and gain on sale of fixed assets (10,375)
Changes in assets and liabilities, net of effects from acquisitions of
businesses, which provided (used) cash:
Accounts receivable (1,381,262) 536,394 (174,860)
Due from related parties 40,676 1,429 (76,206)
Inventories (1,136,800) 247,262 (76,391)
Prepaid expenses and other current assets (168,520) (8,549) (50,900)
Accounts payable 1,192,893 (185,067) 264,093
Accrued expenses 669,632 (207,513) (187,775)
Other liabilities 216,021 43,237 41,444
----------- ----------- -----------
Net cash used in operating activities (3,839,976) (1,893,444) (3,071,155)
----------- ----------- -----------
INVESTING ACTIVITIES:
Fixed assets acquired (1,997,071) (442,438) (168,343)
Proceeds from sale of fixed assets 23,033
Acquisition of businesses, net of cash acquired (767,869) (3,172,528) (57,156)
Cost of patent acquired (8,000) (44,914)
----------- ----------- -----------
Net cash used in investing activities (2,741,907) (3,622,966) (270,413)
----------- ----------- -----------
FINANCING ACTIVITIES:
Deferred financing cost (90,778)
Repayment to stockholders (74,912) (41,863)
Proceeds from long-term debt 1,511,127
Payment of long-term debt (1,126,377) (145,719) (89,015)
Proceeds from notes payable - stockholder 2,250,000 1,800,000
Proceeds from sale of common stock/warrants/options 3,554,396 4,946,667 1,432,799
Proceeds from sale of preferred stock 2,500,000 250,000
----------- ----------- -----------
Net cash provided by financing activities 6,439,146 6,976,036 3,261,143
----------- ----------- -----------
EFFECT OF EXCHANGE RATE ON CASH 260,229 (5,692) (2,632)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 117,492 1,453,934 (83,057)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,522,075 68,141 151,198
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,639,567 $ 1,522,075 $ 68,141
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid $ 107,027 $ 26,683 $ 60,290
Income taxes paid $ 55,635
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock for:
Conversion of note payable to common shares $ 4,050,000
Acquisition of subsidiary $ 280,000
Exchange for services and other fees $ 23,932 $ 114,840 $ 184,438
Payment of interest $ 310,164
Conversion of preferred shares to common shares $ 400,000 $ 360,000
</TABLE>
See notes to consolidated financial statements.
-21-
<PAGE> 23
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 processing aids and packaging
technologies and related scienctific 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 $153,037 and $143,210 as of
December 31, 1996 and 1995, 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 on the
straight-line method, based upon the estimated useful lives
of the assets which are as follows:
<TABLE>
<S> <C>
Production and laboratory equipment 5-10 years
Machinery and office equipment 3-7 years
Leasehold improvements The term of the lease or
the estimated life of the asset,
whichever is shorter.
Motor Vehicles 3-4 years
Buildings 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.
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.
-22-
<PAGE> 24
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 basis 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 subsidiary 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
1995 consolidated financial statements in order to conform with the
1996 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 fair value.
N. STOCK-BASED COMPENSATION - During the year ended December 31, 1996, the
Company adopted Statement of Financial Accounting Standard (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 123 had been applied in
measuring compensation expense.
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. The nature of the processing aid
business is such that fresh cut produce processors and other third-party
users supplying retail markets require extensive on site, and, in certain
cases, independent testing prior to utilizing the Company's product in their
production. This results in an extended sales process. Management believes
that this process is the basis for developing sustainable growth in revenues
which will enable the Company to achieve profitable operations.
-23-
<PAGE> 25
The Company's management believe that cash flows from operations,
together with its current resources (including cash received in the
recent private placement, see Note 18) and with the availability of
financing from other sources, will allow the Company to maintain
adequate financing for the next year.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
<S> <C> <C>
Raw materials and supplies $ 938,050 $361,252
Finished goods 1,000,769 200,003
---------- --------
Total inventories $1,938,819 $561,255
========== ========
</TABLE>
-24-
<PAGE> 26
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
<S> <C> <C>
Production and laboratory equipment $ 3,489,187 $ 868,128
Machinery and office equipment 243,213 233,315
Leasehold improvements 26,099 24,099
Motor vehicles 88,251 143,645
Buildings 814,154 731,247
----------- -----------
Total property and equipment 4,660,904 2,000,434
Accumulated depreciation and amortization (655,193) (213,900)
----------- -----------
Property and equipment (net) $ 4,005,711 $ 1,786,534
=========== ===========
</TABLE>
Depreciation expense was $384,902, $121,929, and $33,945 for the years ended
December 31, 1996, 1995 and 1994, respectively.
5. PATENTS AND DISTRIBUTION RIGHTS
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 3,061,312
restricted shares of common stock for these product rights at a value of
$0.75 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 and $459,197 as of
December 31, 1996 and 1995, respectively.
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 $1,073,522 and
$1,173,299 as of December 31, 1996 and 1995, respectively.
6. ACQUISITIONS
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 UK 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.
-25-
<PAGE> 27
In July 1996, the Company formed a wholly-owned US 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 UK and which is planned to be the basis for penetration
of the US film perforation market.
In addition, also in July 1996, the Company formed Newcorn Co. LLC, a
jointly-owned limited liability company in which the Company owns 51% equity
interest. The Company's partner is Underwood Ranches ("Underwood"), the
trade name of Agricultural Innovation and Trade, Inc. The new company will
utilize the Company's proprietary processing aid and packaging technologies
and Underwood's existing corn processing and distribution capabilities to
develop a year-round, national, value-added market for fresh corn products.
The pro forma effects on the above acquisitions were not significant in
1996.
On September 19, 1995 the Company acquired all of the issued and
outstanding share capital of Bakery Packaging Services Limited ("BPS"),
an English company, through a wholly owned subsidiary of the
Company, EPL Technologies (Europe) Limited, also an English Company. BPS is
based in the northwest of England and is in the business of the manufacture
and sale of packaging materials, principlly perforated packaging materials,
used by leading companies in the fresh cut produce and institutional bakery
industries, which the Company intends that BPS continue. BPS also produces
wax-coated packaging used principally in the confectionery industry, which
also is intended to continue. The total purchase price (including
acquisition costs) was approximately $3,251,000. The acquisition has been
accounted for 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 goodwill of approximately $2,456,000 which is being amortized
over 10 years.
The results of BPS have been included with those of the Company since
the date of the acquisition. Pro Forma unaudited consolidated operating
results of the Company and BPS for the year ended December 31, 1995,
assuming the acquisition had been made as of January 1, 1995, are
summarized below:
<TABLE>
<S> <C>
Sales $ 8,149,255
Net loss (3,281,953)
Loss per common share (0.35)
</TABLE>
-26-
<PAGE> 28
7. INCOME TAXES
The provision for income taxes for the year ended December 31, 1996 and 1995
consists of deferred foreign income tax of $101,432 and $10,543,
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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Deferred Tax Asset
Other assets $ 31,340 $ 49,414 $ 11,488
Operating loss carryforwards 4,552,532 3,396,572 2,292,211
----------- ----------- -----------
Gross deferred tax asset 4,583,872 3,445,986 2,303,699
Valuation allowance (4,570,246) (3,338,968) (2,195,845)
----------- ----------- -----------
Deferred tax asset 13,626 107,018 107,854
----------- ----------- -----------
Deferred Tax Liability
Fixed assets 13,626 160,690 107,854
Foreign liability 161,926
----------- ----------- -----------
Deferred tax liability 175,552 160,690 107,854
----------- ----------- -----------
NET DEFERRED TAX LIABILITY $ 161,926 $ 53,672 $
=========== =========== ===========
</TABLE>
For income tax reporting purposes, the Company has net operating loss
carryforwards as follows:
<TABLE>
<CAPTION>
NET
OPERATING LOSS
CARRYFORWARDS EXPIRATION
U.S. DATE
<S> <C> <C>
Net Operating Loss 4/30/88 $ 75,031 2003
Net Operating Loss 4/30/89 269,949 2004
Net Operating Loss 4/30/90 203,605 2005
Net Operating Loss 4/30/91 42,024 2006
Net Operating Loss 12/31/92 262,926 2007
Net Operating Loss 12/31/93 2,301,851 2008
Net Operating Loss 12/31/94 3,159,453 2009
Net Operating Loss 12/31/95 3,182,663 2010
Net Operating Loss 12/31/96 3,892,298 2011
-----------
$13,389,800
===========
</TABLE>
-27-
<PAGE> 29
A change in fiscal year caused the $262,926 of U.S. loss for the period
ended December 31, 1992 to be utilized ratably over a six-year period. The
Company's ability to utilize the U.S. net operating loss carryover amounts
disclosed above may be significantly limited under U.S. Internal Revenue
Code ("IRC") Section 382 as a result of various changes affecting the
Company's capital structure during 1996 and prior years.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
<S> <C> <C>
Mortgage loan $ 465,600
Directors' pension fund loan 465,600
Bank term loan $1,387,125
Notes payable 233,625
Capital leases 196,190 150,944
---------- ----------
1,816,940 1,082,144
Less current portion 262,779 237,811
---------- ----------
Long-term debt $1,554,161 $ 844,333
========== ==========
</TABLE>
In 1996, the Company refinanced the mortgage loan and Directors' pension
fund loan by EPL Technologies (Europe) Limited ("EPL Europe") entering
into a bank term loan agreement. The bank term loan matures over the next
seven years 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, 1996 was
6%. EPL Europe also entered into a line of credit with the Bank of Scotland
for approximately $514,000 which bears interest of 2-1/2% over bank base
rate. Both the term loan and the line of credit are collaterallized by the
assets of BPS.
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 is payable in 8 quarterly principal
installments of $33,375 through June 1998 with additional consideration
based on the performance of the business over the next two years and bears
an interest rate of 8%.
Other debt relates to capital leases that bear interest rates from 5.9%
through 13.0%, with varying monthly principal and interest payments.
At December 31, 1996, aggregate annual maturities of long-term debt were as
follows:
YEAR ENDING DECEMBER 31,
<TABLE>
<S> <C>
1997 $ 262,779
1998 325,926
1999 200,735
2000 205,500
2001 222,625
Thereafter 599,375
----------
$1,816,940
==========
</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 $0.75 per share. The Series A Stock carries equal
voting rights to the common shares, based on the underlying number of common
shares after
-28-
<PAGE> 30
conversion. The Series A Stock carries a dividend rate of 10% per annum,
payable in cash and/or common shares ($0.75 per share) at the Company's
option (dividends in arrears at December 31, 1996 and 1995 totaled
$1,100,716 and $837,237, respectively.) During 1996, shareholders holding
400,000 shares of Series A Stock elected to exercise their right of
conversion, leaving 2,490,000 shares of Stock outstanding at December 31,
1996. In addition, 20% of the common stock conversion option carries
detachable warrants at a price of $1.00 per warrant. During 1996 and 1995,
24,667 and 66,667 warrants were exercised, respectively, leaving 238,532
unexercised at December 31, 1996.
At the Annual Meeting of the Company held on July 22, 1996, the
shareholders of the Company authorized the issuance of up 2,000,000 shares
of Board Designated Preferred Stock. On July 23, 1996, the Company issued
531,915 of these shares, designated as Series B Preferred Stock (the
"Series B Stock"). The Series B Stock contains the option to convert into
shares of Common Stock at the rate of $4.70 per share and carries equal
voting rights to the shares of Common Stock, based on the underlying
number of shares of Common Stock after conversion. The Series B Stock
carries a dividend rate of 10% per annum, payable in cash and/or shares at
the Company's option. Gross proceeds to the Company were $2,500,000. The
outstanding dividends on the Series B Stock at December 31, 1996 totaled
$110,445. The Series B Stock, when issued, was convertible into shares of
common stock at a fixed conversion price of $4.70 per share. The extent of
the beneficial conversion feature, representing the difference between the
$4.70 conversion price and the prevailing market price of the Common Stock
at the date of issuance, a total of $625,000, was accreted immediately
from accumulated deficit to additional paid-in-capital.
10. COMMON STOCK
During 1996 the Company issued a total of 2,322,648 shares of Common Stock.
A total of 1,399,331 shares were issued from the exercise of warrants,
resulting in net proceeds to the Company of $3,298,876. A total of 384,000
shares were issued from the exercise of options, resulting in net proceeds
to the Company of $255,520. A total of 533,334 shares were issued on
conversion of the Series A Preferred Stock. A further 5,983 shares were
issued pursuant to the Company's option plan, as payment for professional
services resulting in expense of $23,932.
During 1995, the Company issued a total of 5,552,139 shares of common stock.
In September 1995, the Company completed a private placement transaction of
2,750,000 restricted shares of its common stock (the "Offering"), par value
$0.001 per share, at a price of $2.00 per share, to raise gross proceeds of
$5,500,000. Proceeds were used for the acquisition of BPS (see Note 6) and
for working capital. Expenses associated with the Offering were $620,000,
which were charged against additional paid-in capital. A further 21,361
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 connection with the
-29-
<PAGE> 31
Offering, warrants for a total of 55,000 shares of Common Stock, exercisable
at $2.00 per share up to October 1998, were issued in October 1995.
At December 31, 1996, the Company had 393,532 warrants outstanding to
purchase shares of Common Stock at between $1.00 and $2.00 per share, which
if exercised would provide the Company with gross proceeds of approximately
$548,000. In addition, the company had 3,295,000 options outstanding to
purchase shares of Common Stock at an weighted average price of $3.01 per
share, which if exercised would provide the Company with gross proceeds of
approximately $9,900,000.
11. STOCK OPTION PLANS
The 1994 Stock Incentive Plan (the "1994 Plan") originally provided for up
to 1,500,000 shares of unissued Common Stock to be made available for the
granting of options. This was approved by shareholders on July 21, 1994. On
July 22, 1996, shareholders approved an increase in the number of shares
available for the granting of options under the 1994 Plan to 3,000,000. On
December 31, 1996 and 1995, 665,500 and 625,500 shares, respectively, were
available for grant.
Information regarding these plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
UNDER OPTION PRICE
<S> <C> <C>
Outstanding and Exercisable at December 31, 1993 1,070,000 $0.69
Activity for the Year Ended December 31, 1994
Expired/Canceled (40,000) $3.25
---------
Outstanding and Exercisable at December 31, 1994 1,030,000 $0.60
Activity for the Year Ended December 31, 1995
Granted 874,500 $1.84
Expired (30,000) $4.62
---------
Outstanding and Exercisable at December 31, 1995 1,874,500 $1.12
Activity for the Year Ended December 31, 1996
Granted 1,805,000 $4.47
Exercised (384,000) $0.67
---------
Outstanding and Exercisable at December 31, 1996 3,295,500 $3.01
========= =====
</TABLE>
The options expire between March 10, 1998 and December 4, 2001. Of the above
options, 345,000 options issued during 1996 were issued outside of the 1994
Plan.
The estimated fair value of options granted during 1996 and 1995 ranged
between $2.93 - $6.31 and $1.73 - $1.98 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.
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 123, the Company's net loss
and loss per share for the years ended December 31, 1996 and 1995 would
have been increased to the pro forma amounts indicated below:
-30-
<PAGE> 32
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net loss available for common shareholders
As reported $ 5,294,843 $ 3,633,788
Pro forma $ 11,666,398 $ 5,224,529
Net loss per common share
As reported $ 0.36 $ 0.39
Pro forma $ 0.78 $ 0.56
</TABLE>
The fair value of options granted under the company's stock option plans
during 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used: no
dividend yield, expected volatility ranging from 88% - 224%, risk free
interest rate ranging from 5.6% - 6.91%, 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 1995 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
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 shareholders by the weighted average number of common shares and
common share equivalents outstanding during the period. Outstanding options,
convertible preferred stock and stock warrants were determined to be
antidilutive for the years ended December 31, 1996, 1995 and 1994, as
applicable, and were therefore excluded from the per share calculations.
13. COMMITMENTS
The Company has entered into various leases for facilities, vehicles and
equipment. At December 31, 1996, future minimum lease payments were as
follows:
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
<S> <C> <C>
1997 $ 39,020 $ 425,559
1998 40,689 399,877
1999 7,789 312,539
2000 264,972
2001 264,440
-------- -------
Future Minimum Lease Payments $ 87,498 $1,667,387
======== ==========
</TABLE>
Rental expense for operating leases amounted to $224,461, $162,559 and
$119,022 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company has entered into agreements for services with certain executive
officers, which currently will expire, if not renewed, in 1997. In addition
to a base salary, certain other benefits are provided.
-31-
<PAGE> 33
14. RELATED PARTY TRANSACTIONS
The Company purchased certain raw materials from Jungbunzlauer Inc., a
subsidiary of a shareholder, in the amount of $35,280 and $35,760 for the
years ended December 31, 1996 and 1995, respectively.
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 approximates 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 financial statements since that date, and current
estimates of fair value may differ from amounts presented herein.
16. CUSTOMER CONCENTRATION
In 1996, one customer accounted for 13% of annual revenues and in 1995, no
customers accounted for 10% or more of annual revenues. Two customers
represented 35% of revenues for the year ended December 31, 1994.
-32-
<PAGE> 34
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, while packaging materials are marketed in North
America, United Kingdom and, to a lesser extent, Continental Europe.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
SALES
Domestic Operations:
Processing aids $ 1,326,669 $ 472,747 $ 345,795
Packaging materials 1,716,984 868,229 232,668
Total Domestic 3,043,653 1,340,976 578,463
United Kingdom Operations - packaging materials 8,270,488 1,898,590
------------ ----------- -----------
Total $11,314,141 $ 3,239,566 $ 578,463
============ =========== ===========
NET (LOSS) INCOME FROM OPERATIONS
Domestic Operations:
Processing aids $ (2,700,793 $(2,661,480 $(3,289,917)
Packaging materials (1,552,376) (385,663) 8,881
------------ ----------- -----------
Total Domestic (4,253,169) (3,047,133) (3,281,036)
United Kingdom Operations - packaging materials 69,194 4,918
------------ ----------- -----------
Total $ (4,183,975) $(3,042,215) $(3,281,036)
============ =========== ===========
TOTAL ASSETS
Domestic Operations:
Processing aids $2,876,117 $3,061,720 $2,673,450
Packaging materials 2,149,822 657,357 515,295
------------ ----------- -----------
Total Domestic 5,025,939 3,719,077 3,188,745
United Kingdom Operations - packaging materials 10,189,483 6,322,120
------------ ----------- -----------
Total $ 15,215,422 $10,041,197 $ 3,188,745
============ =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE
Domestic Operations:
Processing aids $ 434,313 $ 432,135 $ 368,131
Packaging materials 117,543 43,172 9,461
------------ ----------- -----------
Total Domestic 551,856 475,307 377,592
United Kingdom Operations - packaging materials 459,890 98,986
------------ ----------- -----------
Total $ 1,009,746 $ 574,293 $ 377,592
============ =========== ===========
CAPITAL EXPENDITURES
Domestic Operations:
Processing aids $ 92,858 $ 127,471 $ 168,343
Packaging materials 4,994 75,989
------------ ----------- -----------
Total Domestic 94,852 203,460 168,343
United Kingdom Operations - packaging materials 1,899,219 238,978
------------ ----------- -----------
Total $ 1,997,071 $ 442,438 $ 168,343
============ =========== ===========
</TABLE>
18. SUBSEQUENT EVENTS
Subsequent to the year end, in March 1997, the Company executed a letter of
intent containing its conditional offer to acquire a specialty packaging
business, based in Europe with sales revenue of approximately $7,500,000
and net assets of approximately $6,300,000. The Company believes that this
would
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<PAGE> 35
complement its existing European operations and advance its strategic plan
of products and services it should be offering. The expected purchase price
will be based on the net asset value of the business at the date of
acquisition, as adjusted by an agreed reduction in the book value of certain
assets. The offer is subject to the preparation, negotiation, and execution
of an agreement of definitive documentation and the Company's due diligence.
Such negotiation and investigations are continuing. There can, however, be
no assurance that such negotiations and due diligence will be satisfactory
or that this transaction will be in fact consummated.
In addition, also in March 1997, the Company received subscriptions of
$1.0 million in connection with a private placement of common and Board
Designated Preferred Stock. Further subscriptions for this limited private
placement are expected shorlty from other existing offeree shareholders,
although there can be no assurance that any further subscription will in
fact be received.
19. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 1996, in conjunction with the
SEC's review of a Registration Statement on Form S-3 filed by the Company in
December 1997, the SEC, pursuant to the Financial Accounting Standards
Board's Emerging Issues Task Force - Topic D 60 ["Accounting for the
Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature"] issued March 13, 1997, which formally
announced the SEC staff's position that any discounts resulting from an
allocation of proceeds to the beneficial conversion feature is analogous
to a dividend and should be recognized as a return to the preferred
shareholders over the minimum conversion period, requested that the
Company retroactively apply the accounting suggested to the Company's
Series B Stock issued in July 1996. Accordingly, the Company's management
determined that the consolidated financial statements and footnotes for
the Company's year ended December 31, 1996 should be restated.
Under this accounting treatment, the value of the discount ($625,000) has
been reflected in the restated 1996 consolidated financial statements as
additional preferred dividends and has been accreted through the first
possible conversion date of the Series B Stock. The restatement also gives
effect to the recognition in the calculations of net loss per share of
additional preferred dividends on the Series B Stock representing the
accretion of the issuance discount which had not been previously recognized
in the calculation of net loss per share. The restatement had no effect on
previously reported total stockholders equity as of December 31, 1996 or on
previously reported 1996 consolidated net income (prior to preferred stock
accretion, discount and dividends) and cash flows.
A summary of significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
REPORTED RESTATED
<S> <C> <C>
At December 31, 1996:
Additional paid-in-capital $ 21,314,678 $ 21,939,678
Accumulated deficit $(15,658,464) $(16,283,464)
For the Year Ended December 31, 1996:
Accretion, discount and dividends on
preferred stock 373,924 $ 998,924
Net loss available for common stockholders $ (4,669,843) $ (5,294,843)
Net loss per share $ (0.31) (0.36)
</TABLE>
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<PAGE> 36
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY AND AFFILIATE
<S> <C> <C>
Paul L. Devine 42 Chairman of the Board of Directors,
President, Chief Executive Officer
Timothy B. Owen 38 Treasurer and Secretary
Shawn J. Collins 41 Controller - U.S. Operations
Derrick W. Lyon 54 Chief Executive Officer - EPL
Technologies (Europe) Limited
Dr. William R. Romig 51 Vice President - Research and
Development
Karen A. Penichter 43 Vice President - Sales
Antony E. Kendall 54 Chief Executive Officer of Bakery
Packaging Services Ltd. and EPL
Flexible Packaging Ltd.
Joel Longstreath 44 President of Respire Films, Inc.
Robert D. Mattei (1)(2) 58 Member of the Board of Directors
Dr. Rainer G. Bichlbauer (1)(2) 57 Member of the Board of Directors
William J. Hopke(1)(2)(3) 41 Member of the Board of Directors
</TABLE>
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Resigned December 1996
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 United Kingdom (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. From 1981 until 1986, he
worked for a U.K. clearing bank and prior to that was a research graduate at
London University spending time both teaching and lecturing. He is a
graduate of London University and holds Bachelors and Masters degrees in
curriculum research. Throughout his business career, he has been intimately
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<PAGE> 37
involved in the design and implementation of new product strategies, both in
financial services and health/hygiene services.
Timothy B. Owen. Mr. Owen was appointed Secretary and Treasurer in October
1996 having been 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.
Shawn J. Collins. Mr. Collins joined the Company in July 1993 as Controller.
He was appointed Treasurer in July 1994 and Secretary in October 1994 until
October 1996. Prior to joining the Company, Mr. Collins served from 1988 to
1993, as Vice-President of a privately held environmental
engineering/construction company. From 1978 to 1987, Mr. Collins was
controller for a Philadelphia-based economic development corporation. Mr.
Collins received his MBA from Drexel University and his B.S. degree in
accounting from Villanova University.
Derrick W. Lyon. Mr. Lyon was appointed Chief Operating Officer of Bakery
Packaging Services Limited (BPS), following its acquisition by the Company
in September 1995. Following the appointment of Mr. Anthony Kendall in
August 1996, Mr. Lyon became Chief Executive Officer of EPL Technologies
(Europe) Limited. From 1981 to 1995, Mr. Lyon was Managing Director and a
founder shareholder of BPS. Prior to this, Mr. Lyon held senior management
positions within Bernard Wardle & Co. Smurfit Limited, and W.R. Grace,
where he has gained 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 to the Company in September of 1994. From 1988, Dr. Romig was
first Senior Director of Vegetable Genetics and then Senior Director of
Business Development and Director of Product Development for a joint venture
with DuPont, for DNA Plant Technology Corporation. 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 PhD 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.
Karen A. Penichter. Ms. Penichter joined the Company as Vice President Sales
in March 1996. From 1986, Ms. Penichter worked for FMC Corporation - Food
Ingredients Division in several sales management positions until attaining
the position of Director of Sales in 1993. She worked as a Sales
Representative and then Sales Manager for SCM Corporation - Durkee Foods
Division until 1986. Ms. Penichter was employed by Thomas J. Lipton Company
as a Food Technologist from 1978-1982. Ms. Penichter holds a BA in Biology
from SUNY Binghampton and an MS in Food Technology from Rutgers University.
Antony P. Kendall. Mr. Kendall joined the Company as chief executive of BPS
and EPL Flexible, subsidiaries of the Company in August 1996. 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 their specialty packaging products
in the UK and for Pepsico European contracts. He holds a B.S. degree in
Mechanical Engineering from the University of London.
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<PAGE> 38
From 1964 until 1970 he worked for Wiggins Teape Group reaching the position
of Production Manager of their main factory in Cheshire.
Joel Longstreth. Mr. Longstreth was appointed President of Respire Films,
Inc., a subsidiary of the Company and a Pennsylvania corporation, following
the acquisition of Respire Films, Inc., and Ohio Corporation ("RFI") on
September 30, 1994. From 1991 to 1994 Mr. Longstreth was President and a
founding shareholder of RFI.
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 over
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.
Dr. Rainer G. Bichlbauer. Dr. Bichlbauer was elected to the Board of
Directors of the Company in July 1994. He currently serves as Director of
Finance and Marketing of Jungbunzlauer Holding AG and Jungbunzlauer AG, and
Chairman and President of Jungbunzlauer International AG, ("JI") all based
in Basel, Switzerland. He is also Manager Director of Jungbunzlauer GmbH,
based in Vienna, Austria, which post he has held since 1988. From 1981 to
1987, he was Chief Financial Officer of Elin Union, a state-owned
electronics and electrical engineering conglomerate, based in Vienna. He has
also held key positions within Royal Dutch Shell Group, in Austria, Germany,
and the Netherlands. Dr. Bichlbauer received his Doctorate in law and
political science from the University of Vienna. In March 1997, JI and Dr.
Bichlbauer entered into a plea agreements with the US Justice Department,
which are subject to US District Court approval in San Francisco,
California, under which JI agreed to pay a $11.0 million fine and Dr.
Bichlbauer agreed to plead guilty and pay a $150,000 criminal fine in
connection with the Justice Department's investigation into the setting of
prices worldwide for citric acid.
William J. Hopke. Mr. Hopke has served as Vice President of Trilon Dominion
Partners LLC since June 1995. Mr. Hopke served as Senior Vice President and
Treasurer of Dominion Capital, Inc. and Assistant Treasurer - Finance of
Dominion Resources, Inc. from April 1993 to June 1995. Mr. Hopke held the
position of Vice President and Treasurer of Dominion Capital, Inc. and
Assistant Treasurer-Finance of Dominion Resources, Inc. from 1988 to April
1993. Mr. Hopke joined Dominion Resources, Inc. in 1984. Mr. Hopke served as
Director of Advanced Materials, Inc., Caldera Resources, Inc.,
Organogenesis, Inc., and Wilshire Technologies, Inc. Mr. Hopke was elected
to the Board of Directors of the Company in March 1993. Mr. Hopke resigned
for personal reasons from all of the above companies, including as a
director of the Company, in December 1996 for personal reasons.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company for the year ended December 31, 1996 for services rendered in all
capacities to each of the Company's most highly compensated executive
officers whose aggregate cash compensation for that period exceeded $100,000
(the "Named Executive Officers").
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<PAGE> 39
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------- --------------------
NAME AND OTHER RESTRICTED ALL OTHER
PRINCIPAL COMPEN- STOCK OPTIONS/ LTIP COMPEN-
POSITION SALARY BONUS SATION AWARD(S) SARs PAYOUTS SATION
YEAR ($) ($) ($) ($) #S ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine, 1996 $225,000 $210,798 $ 0 $0 500,000 $ 0 $ 0
CEO 1995 56,250 100,000 120,000 0 200,000 0 0
1994 0 0 160,000 0 0 0 0
Howard S. Kravitz 1996 109,264 0 0 0
1995 109,264 0 0 0 50,000 0 0
1994 106,618 0 0 0 0 0 0
</TABLE>
No other executive officers are presented in the Summary Compensation Table
as no other officer of the Company during the period from 1994 to 1996
earned salary and bonus of more than $100,000 for any such year.
COMPENSATION OF DIRECTORS
With the exception of Mr. Devine, no cash compensation was paid to any
director of the Company during the year ended December 31, 1996. In May
1996, in accordance with the terms of the Company's 1994 Stock Incentive
Plan, William J. Hopke, Robert D. Mattei and Dr. Rainer G. Bichlbauer were
each granted 15,000 options at an exercise price of $7.625 per share, for
their services as members of the audit and compensation 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.
EMPLOYMENT AND CONSULTING CONTRACTS
Effective October 1, 1995 Mr. Devine signed a new employment agreement with
the Company, serving as Chairman of the Board of Directors, President and
Chief Executive Officer. This agreement expires on September 30, 1997,
subject to automatic renewal for successive one-year terms, at a base salary
to be fixed by the Board of Directors to be, as of October 1, 1995, no less
than $225,000 per year.
Howard S. Kravitz was a party to an employment agreement pursuant to which
he served as the Company's Vice President - Sales and Marketing. Notice that
the Company did not desire to renew this contract was served on January 30,
1996, and thus, currently are being made on a month-to-month basis at the
equivalent annual rate of $109,264. Mr. Kravitz remains with the Company and
is now Director - Engineering and Technical Services.
The following table sets forth certain information concerning grants of
stock options made during the year ended December 31, 1996 to Named
Executive Officers.
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<PAGE> 40
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------
% OF
TOTAL POTENTIAL REALIZABLE VALUE AT
OPTIONS ASSUMED ANNUAL RATES OF
GRANTED STOCK PRICE APPRECIATION FOR
TO OPTION TERM (5 YEARS)(1)
OPTIONS EMPLOYEES EXERCISE -----------------------------
GRANTED IN FISCAL OR BASE EXPIRATION
NAME (#) YEAR PRICE DATE 0% 5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine, CEO 300,000 16.62% $4.00 3/7/01 $0 $331,538 $732,612
200,000 11.08 $4.063 12/4/01 0 224,429 496,039
</TABLE>
(1) The dollar amounts under these columns are the result of calculations at 0%,
5% and 10% rates set by the Securities Exchange Commission and therefore are not
intended to forecast possible future appreciation of the price of the Common
Stock. The Company did not use an alternative formula for a grant date
valuation, an approach which would state gains present, and therefore lower,
value. The Company is not aware of any formula which will determine with
reasonable accuracy a present value based on future unknown or volatile factors.
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<PAGE> 41
The following table sets forth certain information concerning exercises of
stock options during the year ended December 31, 1996 and the value of
unexercised stock options at December 31, 1996 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 OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996
ACQUIRED VALUE ------------------------------------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paul Devine, CEO 0 $0 1,000,000 0 $3,450,000 $0
Howard S. Kravitz 0 0 205,000 0 1,021,563 0
</TABLE>
(1) At December 31, 1996 the closing price of a share of unrestricted Common
Stock on the Nasdaq Small Cap market was $6.063.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1996
regarding the beneficial ownership of all directors, Named Executive
Officers, all directors and Named Executive Officers as a group, and each
person known to the Company to be a beneficial owner of more than five
percent of the Company's outstanding Common Stock and/or Series A Preferred
Stock (on an as converted basis) and/or Series B Preferred Stock (on an as
converted basis) (each beneficial owner has sole voting and investment power
with respect to the shares indicated as beneficially owned, except as
noted):
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<PAGE> 42
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT PERCENT
BENEFICIALLY OF OF OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNER(1) COMMON A PREFERRED B PREFERRED
<S> <C> <C> <C> <C>
CERTAIN BENEFICIAL OWNERS
Trilon Dominion Partners, L.L.C.
245 Park Avenue
Suite 2820
New York, NY 10017 5,425,106(2) 29.72% 78.80% 0%
Lancer Partners
200 Park Avenue, 39th Floor
New York, NY 10017 3,257,079(3) 20.27% 0% 100.00%
Quaestas S.A.
38a Route de Malagnou
CH-1208
Geneva, Switzerland 413,333(4) 2.59% 10.04% 0%
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Paul L. Devine 1,340,833(5) 8.07% 2.00% 0%
Director and
Chief Executive Officer
2 International Plaza
Suite 245
Philadelphia, PA 19113-1507
Robert D. Mattei 428,965(6) 2.73% 0% 0%
Director
7060 Greenhill Road
Philadelphia, PA 19151
Dr. Rainer G. Bichlbauer 30,000(7) *(9) 0% 0%
Director
St. Alban Vorstadt 90
CH-4002 Basel,
Switzerland
Directors and executive officers as a
group (ten persons) 3,050,998(8) 17.03% *(9) 0%
Total number of shares outstanding--
common 15,531,200 100.00%
Preferred (as converted)--Series A 3,320,000 100.00%
Series B 531,915 100.00%
</TABLE>
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<PAGE> 43
(1) Unissued shares of each owner subject to currently exercisable options
or options or other rights to acquire securities exercisable within 60
days 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 owner. Such calculation is required under Rule 13d-3(d) of the
Securities Exchange Act of 1934, as amended, which states that a person
shall be deemed to be the beneficial owner of a security if that person
has the right to acquire beneficial ownership of such security within
60 days, including the right to acquire such shares through the
exercise of any option or warrant or through the conversion of any
security. For purposes of Rule 13-d-3(d)(1) and the required
calculation of the Percent of Class outstanding, any securities not
outstanding which are beneficially owned, subject to the exercise of
options or warrants or through the conversion of any security, shall be
deemed to be outstanding for the purpose of computing the percentage of
outstanding securities by such person but shall not be deemed to be
outstanding for computing the percentage of class by any other person.
The effect of this rule is to increase the stated total ownership
percentage currently controlled.
(2) Includes 2,717,333 shares of Common Stock through the rights to convert
1,963,000 shares of Series A Preferred Stock into 2,617,333 shares
of Common Stock and through the rights to exercise 100,000 warrants to
acquire shares of Common Stock.
(3) Includes 468,085 shares of Common Stock through the rights to convert
468,085 shares of Series B Preferred Stock into shares of Common Stock.
It also includes 705,000 shares of Common Stock, and 63,830 shares of
Common Stock through the rights to convert 63,830 shares of Series B
Preferred Stock into shares of Common Stock, both held by other funds
but through which common management is exercised.
(4) Includes 413,333 shares of Common Stock through the right to convert
250,000 shares of Series A, Preferred Stock into 333,333 shares of
Common Stock and to exercise 80,000 warrants to acquire shares of
Common Stock.
(5) Includes 1,080,000 shares of Common Stock through the right to exercise
1,000,000 options to acquire shares of Common Stock and through the
rights to convert 50,000 shares of Series A, Preferred Stock into
66,667 shares of Common Stock and to exercise 13,333 warrants to
acquire shares of Common Stock.
(6) Includes 180,000 shares of Common Stock issuable upon the exercise of
outstanding options, and 20,000 shares of Common Stock owned by Mr.
Mattei's wife, as to which he disclaims beneficial ownership
(7) Includes 30,000 shares of Common Stock issuable upon the exercise of
outstanding options.
(8) Includes 2,380,000 shares of Common Stock through the rights to
exercise 2,300,000 options to acquire shares of Common Stock, the right
to convert 50,000 shares of Series A, Preferred Stock into 66,667
shares of Common Stock and to exercise 13,333 warrants to acquire
shares of Common Stock.
(9) "*" indicates less than one percent of class.
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<PAGE> 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Consulting Agreement (the "Agreement") with Dr.
Joe H. Cherry, a former director of the Company, dated January 1, 1993, to
provide consultancy services to the Company in the area of research and
development. The Agreement had an original term of two years, expiring
December 31, 1994, with an annual consulting fee of $60,000 in 1993 and
$78,000 in 1994, plus certain bonuses based on the receipt of new patents by
the Company for applications previously approved by the Board of Directors.
This Agreement has not been renewed, and thus currently, payments are being
paid on a month-to-month basis.
The Company entered into a Consulting Agreement with DWL Associates Ltd.
(the "DWL Agreement") for the provision of consulting and advisory services
by Mr. Derrick W. Lyon. The DWL Agreement, which was signed as part of the
acquisition by the Company of BPS in September 1995, has an original term of
two years, expiring September 30, 1997. Annual fees of GBP 90,000
($154,125 at an exchange rate of $1.7125) per annum are payable, with this
Agreement plus the reimbursement of directly incurred expenses.
The Company currently obtains all of its requirements for certain raw
materials from Jungbunzlauer, Inc., a U.S. subsidiary of a Swiss-based
company, which is one of the Company's principal stockholders and with which
Dr. Bichlbauer, one of the Company's directors, is affiliated. In the years
ended December 31, 1996 and 1995, these purchases totaled $35,280 and
$35,760, respectively.
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<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
See index to Financial Statements and Supplemental Data at page 12.
REPORTS ON FORM 8-K AND FORM 8
On January 30, 1996, the Company filed a report on Form 8-K under Item 5
thereof, in connection with the execution of a letter of intent with
Potandon Produce, L.L.C.
On July 9, 1996 the Company filed a report on Form 8-K under Item 5 thereof,
in connection with trading of the Company's shares of common stock on the
Nasdaq Small Cap market.
On July 19, 1996 the Company filed a report on Form 8-K under Item 2
thereof, in connection with the acquisition of certain assets and certain
liabilities of Printpack Europe (St. Helens) Limited.
On September 12, 1996 the Company filed a report on Form 8-K under Item 5
thereof, in connection with the execution by BPS of a supply contract with
DuPont.
On November 27, 1996 the Company filed a report on Form 8-K under Item 5
thereof, in connection with the effectiveness of the Company's Registration
Statement on Form S-3 (File no. 333-09719).
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:
Exhibit
No.
3.1 Amended and Restated Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-3 (File no. 333-09719) on file with the Commission).
3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 on file with the Commission).
4.1 Specimen Common Stock Certificate (Incorporated by reference to Exhibit
4.1 to the Company's Annual Report on Form 10-K for the eight months
ended December 31, 1992 on file with the Commission).
4.2 Specimen Series A, Preferred Stock Certificate (Incorporated by reference
to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 on file with the Commission).
4.3 Specimen Series A, Preferred Stock, Subscription Agreement (Incorporated
by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended
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<PAGE> 46
December 31, 1993 on file with the Commission).
10.1 Office Lease Agreement dated October 15, 1993 between Extended Product
Life, Inc. and B.I.G., a Partnership for Fresno, CA Applications
Laboratory (Incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993
on file with the Commission).
10.2 Stock Purchase and Supply Agreement dated May 19, 1994 between
Jungbunzlaur 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 Commission).
10.3 1994 Stock Incentive Plan (Incorporated by reference to Exhibit 10.11
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994 on file with the Commission).
10.4 Employment Agreement between EPL Packaging, Inc. (now known as Respire
Films, Inc.) and Joel Longstreath, President, dated September 30, 1994.
(Incorporated by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,1994 on file
with the Commission).
10.5 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 Commission).
10.6 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
Commission).
10.7 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
Commission).
10.8 Employment agreement between EPL Technologies, Inc. and P. L. Devine,
Director, President and Chief Executive Officer, dated October 1, 1995
(Incorporated by reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 on file
with the Commission
10.9 Employment agreement dated March 4, 1996 between EPL Technologies, Inc.
and Karen Penichter, Vice-President Sales (Incorporated by reference to
Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 on file with the Commission).
10.10* Office Lease Agreement dated September 11, 1996 between EPL
Technologies, Inc. and K/B Fund II for Headquarters office.
11.01 Computation of Earnings per Common Share and Fully Diluted Earnings per
Common Share.
21 Subsidiaries of the Registrant
27 Financial Data Schedules (submitted pursuant to Item 601(c)(1)(iv) of
Regulation S-K, but not deemed filed for purposes of Section 11 of the
Securities Act or Section 18 of the Exchange Act)
* Previously filed
-45-
<PAGE> 47
SIGNATURES
Pursuant to the requirements 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 February 13, 1998
/s/ Paul L. Devine
-------------------------
Paul L. Devine
Chairman and President
Principal Executive Officer
-47-
<PAGE> 1
EPL Technologies, Inc.
EXHIBIT 11.1
Computation of Earnings per Common Share and
Fully Diluted Earnings per Common Share
<PAGE> 2
EXHIBIT 11.1
EPL TECHNOLOGIES, INC.
COMPUTATION OF LOSS PER COMMON SHARE AND
FULLY DILUTED LOSS PER COMMON SHARE
(in thousands except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
12/31/96 12/31/95 12/31/94
(As Restated)
<S> <C> <C> <C>
Net Loss $(4,296) $(3,320) $(3,373)
Accretion, discount and dividends on Preferred Stock 999 314 324
------- ------- -------
Adjusted net loss for loss per share computation $(5,295) $(3,634) $(3,697)
======= ======= =======
Weighted average number of common shares $14,874 9,311 7,259
outstanding ======= ======= =======
Primary loss per share $ (0.36) $ (0.39) $ (0.51)
======= ======= =======
Net loss for fully diluted loss per common share $(4,296) $(3,320) $(3,373)
computation ======= ======= =======
Weighted average number of common shares 14,874 9,311 7,259
outstanding
Common share equivalent applicable to:
Series A, convertible preferred stock 2,618 4,143 4,333
Series A, warrants 248 313 464
Series B, convertible preferred stock 266
Other warrants 499 1,530 1,031
Stock options outstanding 2,477 1,579 1,043
------- ------- -------
Weighted average number of common shares and
common share equivalents used to compute fully
diluted loss per share 20,982 16,876 14,130
======= ======= =======
Fully diluted loss per share $ (0.20) $ (0.20) $ (0.24)
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21
List of Subsidiaries
Integrated Produce Systems, Inc., a Pennsylvania corporation
IPS Produce, Inc., a Pennsylvania corporation
Pure Produce, Inc., a Massachusetts corporation
Respire Films, Inc., a Pennsylvania corporation
Crystal Specialty Films, Inc., an Illinois corporation
Agra Research, Inc., an Indiana corporation
NewCorn Co LLC, a Delaware limited liability company
EPL Technologies (Europe) Limited, an English company
EPL Flexible Packaging Limited, an English company
Bakery Packaging Services Limited, an English company
BPS Produce Packaging Limited, an English company
Integrated Produce System Limited, an English company
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 1996 AND THE AUDITED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE 12 MONTHS ENDED DECEMBER 31, 1996 TOGETHER WITH
ALL NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,639,567
<SECURITIES> 0
<RECEIVABLES> 2,911,660
<ALLOWANCES> 153,057
<INVENTORY> 1,938,819
<CURRENT-ASSETS> 7,147,939
<PP&E> 4,660,904
<DEPRECIATION> 655,193
<TOTAL-ASSETS> 15,215,422
<CURRENT-LIABILITIES> 4,878,738
<BONDS> 0
0
2,405,319
<COMMON> 15,581
<OTHER-SE> 5,907,627
<TOTAL-LIABILITY-AND-EQUITY> 15,215,422
<SALES> 11,314,141
<TOTAL-REVENUES> 11,314,141
<CGS> 9,136,286
<TOTAL-COSTS> 9,136,286
<OTHER-EXPENSES> 6,357,003
<LOSS-PROVISION> 9,827
<INTEREST-EXPENSE> 20,223
<INCOME-PRETAX> (4,194,487)
<INCOME-TAX> 101,432
<INCOME-CONTINUING> (4,295,919)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,295,919)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.20)
</TABLE>
