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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 1998
REGISTRATION NO. 333-46397
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EPL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
COLORADO 2869 84-0990658
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE) IDENTIFICATION NO.)
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2 INTERNATIONAL PLAZA, SUITE 245
PHILADELPHIA, PENNSYLVANIA 19113-1507
(610) 521-4400
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PAUL L. DEVINE
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
2 INTERNATIONAL PLAZA, SUITE 245
PHILADELPHIA, PENNSYLVANIA 19113-1507
(610) 521-4400
(NAME, ADDRESS, INCLUDING ZIP CODE AND
TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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RAYMOND D. AGRAN, ESQ. BRYAN E. DAVIS, ESQ.
BALLARD SPAHR ANDREWS & INGERSOLL, LLP ALSTON & BIRD LLP
1735 MARKET STREET ONE ATLANTIC CENTER
51ST FLOOR 1201 WEST PEACHTREE STREET
PHILADELPHIA, PA 19103-7599 ATLANTA, GA 30309-3424
(215) 864-8524 (404) 881-7000
(215) 864-8999 (FAX) (404) 881-7777 (FAX)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED MAY 4, 1998
PROSPECTUS
- - --------------------------------------------------------------------------------
3,500,000 Shares
[EPL TECHNOLOGIES, INC. LOGO]
Common Stock
- - --------------------------------------------------------------------------------
Of the 3,500,000 shares of common stock, par value $.001 per share (the "Common
Stock"), offered hereby (the "Offering"), 809,097 shares are being sold by EPL
Technologies, Inc. ("EPL" or the "Company") and 2,690,903 shares are being sold
by a shareholder of the Company (the "Selling Shareholder"). The Company will
not receive any of the proceeds from the sale of shares of Common Stock by the
Selling Shareholder. See "Principal and Selling Shareholders."
The Common Stock of the Company is included in The Nasdaq Stock Market's
SmallCap Market (the "Nasdaq SmallCap Market") under the symbol "EPTG." An
application has been made to include the Common Stock on The Nasdaq Stock
Market's National Market (the "Nasdaq National Market"). On April 30, 1998, the
last reported sales price of the Common Stock on the Nasdaq SmallCap Market was
$13.75 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" ON PAGES 8 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- - --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
=========================================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Shareholder(2)
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
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Total(3)..................... $ $ $ $
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(1) The Company and the Selling Shareholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated to be
$416,000 and expenses payable by the Selling Shareholder estimated to be
$1,384,000. See "Use of Proceeds."
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 525,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ , the total Proceeds to Company will be $ and the total
Proceeds to the Selling Shareholder will be $ . See "Underwriting."
- - --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Shareholder and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made through the facilities of the Depository Trust Company, New York, New
York, on or about May , 1998.
PRUDENTIAL SECURITIES INCORPORATED PENNSYLVANIA MERCHANT GROUP
May , 1998
<PAGE> 3
Fresh-cut french fries, sweet corn, apple slices and "baby" carrots are
processed with the Company's processing aids. Other products displayed are
products of the Company's packaging and printing customers.
------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. This Prospectus contains
"forward-looking statements" which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed under "Risk Factors." Unless
otherwise indicated, the information in this Prospectus (i) gives retroactive
effect to a 1-for-2 reverse stock split, which became effective in March 1998,
(ii) assumes the conversion of 1,933,000 shares of the Company's Series A 10%
Cumulative Convertible Preferred Stock into 1,288,666 shares of Common Stock by
the Selling Shareholder in connection with the Offering and (iii) assumes that
the Underwriters' over-allotment option will not be exercised.
THE COMPANY
The Company is a leading developer and marketer of integrated produce
systems solutions specifically designed to address the needs of the rapidly
growing market for fresh-cut produce. In this regard, the Company develops,
manufactures and markets proprietary produce processing aids, packaging
technologies, and scientific and technical services, which are designed to
maintain the quality and integrity of fresh-cut produce. The foundation of the
Company's integrated systems solutions is its proprietary produce processing aid
technology, which inhibits the natural enzymatic degradation of fruits and
vegetables after they have been processed. Fresh-cut fruits and vegetables that
are treated with the Company's proprietary processing aids better maintain their
natural characteristics such as color, texture, taste and smell. The use of the
Company's processing aids allows for increased availability of certain fresh-cut
produce products, such as sliced apples, potatoes and corn. The Company has
concluded that the use of the Company's processing aids, in accordance with the
Company's recommended protocols, is "generally recognized as safe" ("GRAS")
under U.S. Food and Drug Administration ("FDA") regulations. See
"Business -- Regulatory Requirements." The Company also uses a variety of film
technologies to create packaging specifically designed to complement and enhance
the effectiveness of the Company's processing aids by allowing fruits and
vegetables to "breathe" after they have been cut and packaged. The Company
markets these packaging products to produce growers and processors. In addition,
the Company's scientific and technical services, which include food safety and
microbiological testing, provide fresh produce processors with expertise in food
safety, post-harvest horticulture and processing techniques, and support
cross-marketing efforts for the Company's other products. The Company believes
its processing aids are safe and environmentally "friendly" and, together with
its packaging and scientific and technical services, add significant value to
the businesses of its customers. In addition to its integrated systems solutions
for fresh-cut produce, the Company also markets flexible packaging for uses in
the snack food, bakery and confectionery industries and for other uses.
According to industry statistics, the U.S. fresh-cut produce industry
totaled $6.0 billion in 1997, and is expected to grow to $19.1 billion by 2003.
The Company believes that the market for fresh produce is evolving toward
ready-to-eat, pre-packaged, fresh-cut fruits and vegetables in response to
increasing consumer preferences for healthy foods, convenience and variety. In
this regard, according to industry estimates, U.S. sales of fruits and
vegetables sold in pre-cut, pre-packaged form are expected to grow from 9.5% of
all fruits and vegetables sold in the U.S. in 1997 to 22.4% by 2003. In addition
to increasing consumer preferences for fresh-cut produce, the Company believes
that food service providers have increased their demand for fresh-cut, packaged
produce to reduce the risk of bacterial contamination, enhance food safety and
improve produce consistency. The Company believes that its integrated systems
solutions for fresh-cut produce uniquely position the Company to address the
evolving needs of the rapidly growing and developing fresh-cut produce market
and enable the development of a number of new fresh-cut produce products.
Development of new fresh-cut produce applications is further supported by
produce growers and processors who are seeking to increase revenues and margins
by establishing differentiated, brand-name, fresh-cut alternatives to their
existing commodity produce lines. Despite the significant market potential of
pre-cut, pre-packaged fruits and vegetables, the Company recognizes that the
demand for, and market acceptance of, its products is uncertain.
3
<PAGE> 5
To capitalize on these industry trends and as a key part of its operating
strategy, the Company has formed strategic alliances with leading growers,
processors and brand-name marketers of fresh-cut french fries, sliced apples,
"baby" carrots and sweet corn. In 1997, the Company formed an alliance with
Potandon Produce LLC, a major U.S. supplier of fresh potatoes and licensee of
the Green Giant Fresh(R) brand name from the Pillsbury Company for use on
potatoes and onions. This alliance allows the Company to market fresh-cut french
fries to the food service market under the Green Giant Fresh(R) brand name.
Additionally, in 1997, the Company entered into a strategic alliance with
Farmington Fresh, a major grower and marketer of Fuji apples. Under this
alliance, the Company has licensed its "Apple Fresh(R)" processing aids and
provides flexible packaging and scientific and technical services in connection
with the production by Farmington Fresh of certain varieties of pre-packaged,
fresh-cut sliced apples, targeted at the retail market.
The Company's goal is to become a world-class provider of products and
scientific and technical services designed to maintain the quality and integrity
of fresh-cut produce. The principal elements of the Company's business strategy
include: (i) continuing the Company's focus on developing and marketing
integrated produce systems solutions that incorporate the Company's processing
aids, packaging technologies and scientific and technical services, (ii) forming
and maintaining strategic alliances with leading produce companies which will
enable the Company to influence the sourcing, processing, distribution and
brand-name identification of fresh-cut products that utilize the Company's
technologies, and (iii) maintaining its commitment to scientific integrity in
its products and services. The Company recognizes, however, that implementation
of its business strategy may be limited by, among other things, its needs for
capital, including for acquisitions, which needs have been and are expected to
continue to be significant.
The Company's growth strategy is designed to capitalize on its proprietary
technologies and the growing market demand for fresh-cut produce by: (i)
continuing its focus on fresh-cut french fries, sweet corn, sliced apples and
"baby" carrots, four targeted produce categories for which the Company has a
commercially available proprietary product, has identified significant market
potential and has established key strategic alliances; (ii) introducing its
processing aid technology into new fruit and vegetable categories; (iii) cross-
marketing its complementary products and services to current and prospective
customers; (iv) expanding its growing international business, principally in
Europe; and (v) acquiring related packaging and scientific and technical service
companies. Achievement of such growth, however, may be limited by factors such
as the Company's sales and marketing process, which may be lengthy and
resource-intensive.
The Company's revenues consist of (i) revenues derived from the sale of
processing aids and flexible packaging, (ii) revenues derived from the sale of
certain fresh-cut fruits and vegetables, (iii) royalties from the sale of
certain fresh-cut fruits and vegetables, and (iv) fees received for scientific
and technical services provided by the Company. The Company's revenues from the
sale of produce and royalty revenues are derived from sales of various kinds and
varieties of fresh-cut fruits and vegetables which use the Company's proprietary
technologies and which the Company believes would not be available commercially
without the use of its proprietary technologies. Historically, substantially all
of the Company's revenues have been derived from the sale of flexible packaging
to the snack food, produce, bakery, and confectionery industries and for other
uses. The Company's long-term growth, however, will depend on the success of its
integrated systems solutions for fresh-cut produce. The Company believes that
its packaging technologies, coupled with acquisitions of produce packagers,
provide a platform to increase its sales of packaging, processing aids and
scientific and technical services to growers and processors of fresh produce.
Therefore, the Company anticipates that the proportion of its revenues derived
from the sale of its products and services addressing the needs of the fresh-cut
produce industry will increase over time and constitute a significant portion of
the Company's future revenue growth. However, it should be noted that, to date,
the Company has generated limited revenues from operations.
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.
4
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RISK FACTORS
Investors should consider the material risk involved in connection with an
investment in the Common Stock and the impact to investors from various events
that could adversely affect the Company's business. Risks that should be
considered include the Company's history of limited revenues from operations,
losses and uncertainty of future profitability; limited relevant operating
history; future capital needs and uncertainty of obtaining additional financing;
extended product development and sales process; uncertainty of market
acceptance; limited marketing and sales experience; multiple product lines;
dependence on proprietary technology and other intellectual property, and risks
of infringement or misappropriation; dilution to new investors; government
regulation and risks associated with food processing products; environmental
matters; integration of acquisitions and possible adverse effect of rapid
expansion; and reliance on key employees. See "Risk Factors."
SELLING SHAREHOLDER
The Selling Shareholder, Trilon Dominion Partners, L.L.C., a Delaware
limited liability company, is the beneficial owner of 1,402,236 shares of Common
Stock and 1,288,666 shares of Common Stock issuable upon conversion of 1,933,000
of the Company's Series A 10% Cumulative Convertible Preferred Stock (the
"Series A Preferred Stock"). Founded in 1995, the Selling Shareholder is the
successor to a significant portion of the venture capital portfolio of Dominion
Capital, Inc. ("Dominion"), a wholly-owned subsidiary of Dominion Resources,
Inc. In June 1995, Dominion contributed its investment in the Company, as well
as investments in 17 other portfolio companies, to the Selling Shareholder in
exchange for a significant membership interest in the Selling Shareholder. The
sole managing member of the Selling Shareholder is VC Holdings, Inc., a Delaware
corporation. The Operating Agreement of the Selling Shareholder contemplates a
three-year time horizon, to expire on December 31, 1998 (subject to extension),
to monetize all of the investments contributed by Dominion to the Selling
Shareholder. The sale by the Selling Shareholder of its entire holdings of
Common Stock is consistent with this stated objective and the sale of other
investments that comprise the Selling Shareholder's portfolio. See "Principal
and Selling Shareholders" and "Certain Transactions."
THE OFFERING
Common Stock Offered by the Company... 809,097 shares
Common Stock Offered by the Selling
Shareholder........................... 2,690,903 shares
Common Stock to be Outstanding after
the Offering.......................... 11,247,203 shares(1)
Use of Proceeds by the Company........ To repay long-term debt, to make
additional capital expenditures in
its corn, potato and packaging
businesses, and for working capital
and general corporate purposes. See
"Use of Proceeds."
Nasdaq SmallCap Market Symbol......... EPTG
Proposed Nasdaq National Market
Symbol................................ EPTG
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(1) Excludes (i) 1,758,125 shares of Common Stock issuable upon exercise of
stock options outstanding at December 31, 1997, at a weighted average
exercise price of $8.92 per share, (ii) 341,198 shares of Common Stock
issuable upon exercise of warrants outstanding at December 31, 1997, at a
weighted average exercise price of $14.26 per share, and (iii) 165,555
shares of Common Stock issuable upon conversion of the Company's Series A
Preferred Stock (other than those shares to be converted into Common Stock
by the Selling Shareholder in connection with this Offering) and conversion
of the Company's Series C Convertible Preferred Stock (the "Series C
Preferred Stock") outstanding at December 31, 1997. Also excludes 1,163,627
shares of Common Stock issuable as of April 30, 1998, upon conversion of the
Company's Series D Convertible Preferred Stock (the "Series D Preferred
Stock"). As of December 31, 1997, an additional 512,125 shares of Common
Stock were reserved for issuance under the Company's 1994 Stock Incentive
Plan, as amended (the "Option Plan").
5
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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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<CAPTION>
YEAR ENDED DECEMBER 31, PRO FORMA(1)
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YEAR ENDED
DECEMBER 31,
1994 1995 1996 1997 1997
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STATEMENT OF OPERATIONS DATA:
Sales....................................................... $ 578 $ 3,240 $ 11,314 $ 19,953 $ 26,781
Cost of Sales............................................... 387 2,469 9,136 18,090 23,714
Gross Profit................................................ 191 771 2,178 1,863 3,067
Total operating expenses.................................... 3,472 3,813 6,362 9,185 10,664
Net loss from operations.................................... (3,281) (3,042) (4,184) (7,322) (7,597)
Net loss.................................................... (3,373) (3,320) (4,296) (7,187) (7,291)
Net loss for common shareholders............................ (3,697) (3,634) (5,295) (8,355) (10,841)
Loss per common share....................................... $ (1.02) $ (0.78) $ (0.71) $ (1.00) $ (1.29)
Weighted average number of common shares outstanding........ 3,629,362 4,655,529 7,436,759 8,372,537 8,372,537
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AT DECEMBER 31, 1997
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HISTORICAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Working capital............................................. $ 6,513 $14,883
Long-term debt, less current maturities..................... 1,792 215
Convertible Series D Preferred Stock........................ 10,617 10,617
Accumulated deficit......................................... (24,207) (24,207)
Total shareholders' equity.................................. 6,615 16,656
</TABLE>
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(1) The Pro Forma Statement of Operations Data for the year ended December 31,
1997 reflect (i) the Company's acquisition of Fabbri Artes Graficas Valencia
S.A. ("Fabbri"), located in Valencia, Spain, which was consummated on
December 11, 1997 (the "Fabbri Acquisition") and (ii) the $12.5 million
private placement of the Series D Preferred Stock and the Series D Warrants
consummated on November 11, 1997 (the "Series D Placement") as if both such
transactions had occurred on January 1, 1997.
(2) Adjusted to give effect to the sale of 809,097 shares of Common Stock
offered hereby by the Company at an assumed public offering price of $13.75
per share (the last reported sales price on the Nasdaq SmallCap Market on
April 30, 1998), and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
6
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RECENT DEVELOPMENTS
GREEN GIANT FRESH(R) LICENSE AGREEMENT FOR FRESH-CUT CORN PRODUCTS
On April 21, 1998, the Company announced that NewCorn Co. LLC, an entity in
which the Company has a 51% ownership interest ("Newcorn"), has entered into a
trademark sublicense agreement with The Sholl Group II, Inc. ("Sholl"), the
exclusive licensee of The Pillsbury Company's Green Giant Fresh(R) brand name.
The agreement grants Newcorn the right to use the Green Giant Fresh(R) brand
name on the Company's fresh-cut corn products on an exclusive basis in North
America. Under this agreement, Freshcorn LLC, a newly-formed joint venture owned
equally by Newcorn and Sholl ("Freshcorn") will provide marketing support for
the Company's fresh-cut corn products. The Company believes that the Green Giant
Fresh(R) brand will enhance consumer awareness and acceptance of its fresh-cut
corn products and facilitate the development of a market for branded fresh-cut
corn available nationally on a year-round basis.
Newcorn's license expires on December 31, 2020, subject to automatic
renewal or earlier termination in certain events, including termination of
Sholl's license from The Pillsbury Company. Newcorn will pay a royalty to Sholl
based on the number of cases of licensed corn products sold by Newcorn.
Additionally, Newcorn will pay to Freshcorn a fee based on the profitability of
Newcorn's sales of fresh-cut corn products (the "Fee"), against which the
royalty payments to Sholl will be credited. As members of Freshcorn, Newcorn and
Sholl have agreed that, generally, 25% of the Fee in each year will be used to
reimburse expenses incurred by Newcorn for the advertising, marketing and
promotion of the Company's fresh-cut corn products.
JOINT VENTURE WITH AMERICAN NATIONAL CAN COMPANY
On March 13, 1998, the Company announced it had entered into an agreement
with American National Can Company ("ANC") to create a joint venture company to
market flexible packaging systems for the U.S. fresh produce market. ANC, a
major supplier of packaging materials and containers in the U.S. is a U.S.
subsidiary of Paris, France-based Pechiney (NYSE:PY), an international packaging
group with reported annual revenues of approximately $11.6 billion as of its
fiscal year ended December 31, 1997.
It is anticipated that the new company, ANC-RESPIRE LLC ("ANC-Respire"),
will develop, manufacture, market, promote and sell variety-specific,
proprietary and other packaging products to the fresh produce industry under a
new brand name - "ANC-RESPIRE."
EPL and ANC will have equal ownership interests in the venture and intend
to introduce perforated film into the fresh produce market as the first of a
broad range of products designed to capitalize on the combined expertise of EPL
and ANC. The joint venture agreement has an initial three-year term (subject to
earlier termination) and can be extended upon the agreement of EPL and ANC.
EPL believes that the new joint venture company will have competitive
advantages derived from the respective technologies and customer relationships
of each party. ANC is one of the world's leading manufacturers of flexible
packaging for a broad cross-section of industries, including the packaged food
industry. The Company believes that the significant manufacturing capability of
ANC and its knowledge of packaging technology, when combined with EPL's
variety-specific know-how and experience in produce microbiology and related
packaging requirements, will enhance ANC-Respire's ability to penetrate an
established and growing market.
7
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative
and involves a high degree of risk. Prospective investors should consider
carefully the following risk factors, in addition to the other information
presented in this Prospectus, before purchasing the shares of Common Stock
offered hereby.
This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act (and Section
21E of the Exchange Act). Such statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief or expectations
of the Company, its directors or its officers with respect to, among other
things: (i) trends affecting the Company's financial condition or results of
operations; (ii) the Company's financing plans; (iii) the Company's business and
growth strategies; and (iv) the use of the net proceeds to the Company of this
Offering. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors. The
accompanying information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business," as well as information contained in the Company's
filings with the SEC, identify important factors that could cause such
differences.
HISTORICAL LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. To date, the
Company has generated limited revenues from operations. Primarily as a result of
expenses incurred in organization, efforts to build an appropriate
infrastructure, research and development and marketing activities, the Company
has accumulated net losses aggregating $24,207,000 through December 31, 1997.
The Company expects that it will continue to incur significant operating losses
until such time, if ever, that the Company is able to attain sales levels from
its products and services that are sufficient to support its operations. There
can be no assurance that the Company's products and services can be successfully
marketed or that the Company will ever achieve significant revenues or
profitable operations.
LIMITED RELEVANT OPERATING HISTORY. Historically, the Company operated
exclusively as a manufacturer and marketer of processing aids for fruits and
vegetables. After the advent of new management in December 1992, the Company
began to alter its operational and growth strategies by seeking to add
incremental resources and capabilities, in an effort to develop integrated
systems solutions designed to maintain the quality and integrity of fresh-cut
produce. Since 1994, a majority of the Company's revenues have been derived from
sales of packaging materials, a substantial portion of which are used in
applications in the snack food, bakery and confectionery industries, and for
other uses unrelated to the Company's systems approach to fresh produce.
However, the Company's long term growth will depend on the success of its
integrated systems solutions for fresh-cut produce, in general, and on its
processing aids, in particular. Consequently, the Company's limited relevant
operating history makes it difficult to predict future operating results on an
annual or quarterly basis. The Company's prospects must be considered in light
of the risks, uncertainties, expenses and difficulties frequently encountered by
companies marketing new technologies in new and evolving markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the related notes
thereto appearing elsewhere in this Prospectus.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF OBTAINING ADDITIONAL FINANCING. The
Company has sustained operating losses and, as of December 31, 1997, had
accumulated net losses aggregating $24,207,000. The Company's revenues have not
been sufficient to fund the development of the Company's business, and thus it
has had to finance its operating losses externally, principally through equity
financing. The Company's needs for capital, including for acquisitions, have
been and are expected to continue to be substantial as the Company pursues its
operating and growth strategies. The Company's continued ability to operate is
dependent upon its ability to obtain adequate financing and to achieve levels of
revenue necessary to support its cost structure. There can be no assurance that
the Company will be successful in obtaining additional financing on commercially
acceptable terms, if at all. Failure to obtain additional financing on terms
satisfactory to the Company could materially limit the Company's ability to fund
its operations and its growth plan.
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EXTENDED PRODUCT DEVELOPMENT AND SALES PROCESS. The process by which the
Company develops and sells its integrated systems solutions for certain kinds
and varieties of fresh-cut produce is both expensive and time-consuming. After
preliminary discussions with a potential customer, the Company performs a
comprehensive review of the potential customer's methods and facilities and
initiates a series of tests in an effort to tailor the application of the
Company's proprietary and other technologies to the kind or variety of produce
to be processed. The Company also works closely with the potential customer to
develop a detailed protocol to be followed in processing such produce. Once the
development of this integrated systems solution is substantially complete, the
Company conducts increasingly sophisticated tests in an effort to refine the
prescribed solution before the potential customer makes any purchase decision.
Although the Company believes it has improved its sales efforts significantly,
the Company's product development and sales process continues to be lengthy and
resource-intensive and could limit the Company's growth. Additionally, limited
awareness of the Company and its products in the marketplace and the highly
fragmented nature of the fresh-cut produce industry may extend the Company's
product development and sales process. The Company does not believe that this
process is likely to shorten significantly, and there can be no assurance that
the Company will have adequate resources to continue to fund this process.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's penetration to date of the
various markets it is seeking to develop has been limited. Some of the markets
targeted by the Company are newly defined or emerging, such as fresh-cut
potatoes and sliced apples. In light of the evolving nature of these markets,
there can be no assurance as to the ultimate or continuing level of demand for,
or market acceptance of, the Company's products or services. Consequently, there
is no assurance that the Company will be able to obtain sufficient market
acceptance of its processing aids to achieve profitability on a timely basis, or
at all. Failure to gain sufficient market acceptance for the Company's
processing aids would have a material adverse effect on the Company's business,
financial condition and results of operations.
LIMITED MARKETING AND SALES EXPERIENCE. The Company has limited experience
in marketing and selling its products and services as integrated systems
solutions designed to maintain the quality and integrity of fresh-cut produce.
The marketing and sales process requires use of scientific and technical
services and the Company's process engineering capabilities. To achieve broad
market penetration for its products, the Company will be required to develop an
expanded marketing and sales force, including technical and scientific service
and support personnel. Limited market awareness of the Company and its products,
the highly fragmented nature of the fresh produce processing industry and the
lengthy sales cycle for the Company's products heighten the need for an
increased number of sufficiently skilled marketing and sales personnel. There
can be no assurance that the Company will be able to recruit and retain skilled
sales, marketing, service or support personnel on a timely basis, or at all, or
that the Company's marketing and sales efforts will be successful. Failure to
further develop and maintain a marketing and sales staff would have a material
adverse effect on the Company's business, financial condition and results of
operations.
MULTIPLE PRODUCT LINES. The Company currently is engaged in three related
areas of business, which are focused primarily on the fresh-cut produce
industry: processing aids, packaging, and scientific and technical services. The
Company believes that its products and services are complementary and present
cross-marketing opportunities. However, there can be no assurance that the
Company's products or services can be successfully cross-marketed. Additionally,
if problems are encountered with any area of the Company's business, the
financial and personnel resources available to a business of the size of the
Company may be diverted from the other business areas, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND OTHER INTELLECTUAL PROPERTY; RISKS
OF INFRINGEMENT OR MISAPPROPRIATION. The Company's success is dependent in part
on its ability to obtain patent protection for its products, maintain trade
secret protection and operate without infringing the proprietary rights of
others. The Company currently has two U.S. patents, four U.S. patents pending
and numerous others licensed to the Company or under review for application.
Furthermore, the Company has two patents outside the U.S. and 23 patent
applications pending in countries outside the U.S. for its processing aid
technologies, with others under review. There can be no assurance that patent
applications owned by or licensed to the Company will be issued or that patents
issued or licensed to the Company will provide the Company with any competitive
advantages
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or adequate protection for its products. Moreover, no assurance can be given
that any patents issued or licensed to the Company will not be challenged,
invalidated or circumvented by others. The Company's products might conflict
with the patent rights of others, whether existing now or in the future.
Alternatively, the products of others could infringe the patent rights of the
Company. Although the Company intends to defend its proprietary intellectual
property rights, the defense and prosecution of patent claims is costly and
time-consuming, even if the outcome were favorable to the Company. An adverse
outcome could subject the Company to significant liabilities to third parties,
require that disputed rights be licensed from third parties or require the
Company to cease selling its products.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect in part by confidentiality agreements with its collaborators,
employees and consultants, as much of the Company's technology may not be
patentable. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any such breach or
that the Company's trade secrets will not otherwise become known or be developed
independently by competitors.
In addition, the Company uses through licensing agreements certain
trademarks owned by others. For example, the Company uses the Green Giant
Fresh(R) brand on its fresh-cut potato products sold to the food service
industry pursuant to a license agreement, the initial term of which expires in
2007. There can be no assurance that any such licensing agreements will not be
terminated or will be renewed in the future. The inability of the Company to use
the trademarks of such other companies in the future would have a material
adverse effect on the Company's business, financial condition and results of
operations.
DILUTION IN THIS OFFERING. Purchasers of the Common Stock offered hereby
will experience an immediate and substantial dilution of $12.65 per share,
assuming a public offering price of $13.75 (the last reported sales price of the
Common Stock on the Nasdaq SmallCap Market on April 30, 1998), in the net
tangible book value per share of Common Stock from the public offering price.
See "Dilution."
GOVERNMENT REGULATION; RISKS ASSOCIATED WITH FOOD PROCESSING PRODUCTS. The
Company is subject to numerous U.S. and foreign regulations. Although the
Company has concluded that the use of the Company's processing aids in
accordance with the Company's protocols is GRAS under FDA regulations, there is
a risk that new scientific information about an ingredient could change its GRAS
status, that the FDA could revise its regulations governing the GRAS status of
the ingredients, or that the FDA might take the position that an ingredient is
not GRAS under the current regulations. Any such change could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company is subject to risks generally associated
with food processing products, which include, among others, that (i) production
defects may occur; (ii) an ingredient used in the Company's products may be
banned, have its use limited or be found to cause health problems; and (iii)
sales may be limited or discontinued due to perceived health concerns
(regardless of actual effects), adverse publicity or other reasons within or
beyond the control of the Company. Moreover, although the Company has concluded
that the use of the Company's processing aids in accordance with the Company's
recommended protocols currently does not require the Company's customers to list
the Company's processing aids in the list of ingredients on labels on fresh-cut
fruits and vegetables under the FDA's current labeling requirements for such
foods, and production of the Company's processing aids and packaging materials
has not been subject to intensive regulation, regulations applicable to the
Company and its products, including the FDA's requirements regarding current
"good manufacturing practices" and labelling requirements applicable to food,
may change. Any such change could have a material adverse effect on the Company.
The FDA also regulates the material content of direct-contact food containers
and packages. The Company purchases the plastic film used in its food-related
packaging from third parties which guarantee or warrant the compliance of such
films with applicable FDA or foreign regulations. The failure, however, of any
such third party to comply with applicable regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's processing aids and packaging businesses are subject
to regulation comparable to that of the FDA by various authorities in Europe.
See "Business -- Regulatory Requirements."
ENVIRONMENTAL MATTERS. The Company's operations are subject to federal,
state and local U.S., U.K., Spanish and other European environmental laws and
regulations that impose limitations on the generation,
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storage, transport, disposal and emission of various substances into the
environment, including laws that restrict the discharge of pollutants into the
air, ground and water and establish standards for the treatment, storage and
disposal of solid and hazardous wastes. The Company is subject to U.S. and
foreign laws and regulations regarding the use, storage, transport and disposal
of inks and other substances used in its operations. There can be no assurance
that there will not be an accidental contamination, disposal or injury from the
use, storage, transport or disposal of inks or other substances used in the
Company's business. Additionally, the Company's use of plastic film in its
packaging operations may subject it, in certain jurisdictions, to laws and
regulations designed to reduce solid wastes by requiring, among other things,
plastics to be degradable in landfills, minimum levels of recycled content,
various recycling requirements, disposal fees and limits on the use of plastic
products. New laws with respect to such wastes either have recently been adopted
or are pending in the U.S. and in various countries in Europe, including Spain
and the U.K. In addition, various consumer and special interest groups in the
U.S., Europe and elsewhere have lobbied from time to time for the implementation
of additional environmental protection measures. The Company may be required to
make capital expenditures in response to changing compliance standards and
environmental regulations. Furthermore, unknown contamination of sites currently
or formerly owned or operated by the Company (including contamination caused by
prior owners and operators of such sites) or adjacent properties or groundwater
and off-site disposal of hazardous substances and wastes may give rise to
additional compliance costs or other risks. There can be no assurance that the
Company will not incur liabilities for environmental matters in the future,
including those resulting from changes in environmental regulations or unknown
contamination, that may have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Regulatory Requirements."
INTEGRATION OF ACQUISITIONS; POSSIBLE ADVERSE EFFECT OF RAPID
EXPANSION. An element of the Company's growth strategy is the pursuit of
acquisitions that either expand or complement its existing lines of business.
There can be no assurance that the Company will be able to identify and acquire
acceptable acquisition candidates on terms favorable to the Company and in a
timely enough manner to the extent necessary to fulfill its expansion plans, or
that any such acquisitions can be operated profitably or successfully integrated
into the Company's operations. The Company's failure to complete acquisitions
and continue its expansion could have a material adverse effect on the Company's
business, financial condition and results of operations. As the Company proceeds
with its acquisition strategy, there can be no assurance that the Company's
management and financial controls, personnel, computer systems and other
corporate support systems will be adequate to manage the resulting increase in
the size and scope of the Company's operations. In addition, acquisitions
involve a number of special risks, including adverse short-term effects on the
Company's reported financial results, the diversion of management's attention,
the dependence on retention, hiring and training of key personnel, and risks
associated with unanticipated problems or legal liabilities, some or all of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Additionally, if the Company acquires an
existing business, a significant portion of the purchase price for such business
may be allocated to goodwill and intangibles if such acquisition does not
involve the purchase of significant amounts of tangible property. All of such
goodwill and intangibles must be amortized over time, which amortization would
reduce the Company's reported earnings.
PRODUCT OBSOLESCENCE. The market for products used in maintaining the
integrity of fresh-cut produce is characterized by changing technologies and
evolving industry standards, which could result in product obsolescence or short
product life cycles. The Company's ability to achieve and maintain
profitability, therefore, may be dependent upon its ability to continually
enhance its products and its related applications technology, which may require
the Company to make substantial, unexpected expenditures. The Company may find
it necessary to develop additional products and services to satisfy evolving
industry and customer requirements, which may consume significant funds and
resources. There can be no assurance that the Company will be able to allocate
or obtain the funds and resources as may be necessary to improve its current
products or develop new products, or that the Company will be successful in such
efforts.
RELIANCE ON KEY EMPLOYEES. The Company's success is dependent upon the
efforts of certain key personnel, including Paul L. Devine, the Company's
Chairman, President and Chief Executive Officer. The loss of the services of Mr.
Devine or other key employees could have a material adverse effect on the
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<PAGE> 13
Company's business, financial condition and results of operations. Additional
suitably qualified staff will also need to be recruited and retained to expand
the business as planned. There can be no assurance that the Company will be able
to recruit or retain any such personnel to the extent necessary. The Company
currently maintains key person life insurance on Mr. Devine in the amount of
$1,000,000. The Company is not the beneficiary of any life insurance policies on
any other executive officers.
COMPETITION. The Company's direct, indirect and potential competitors
include producers of sulfites and "sulfite substitutes," as well as other
providers of alternative preservation and packaging technologies for fresh-cut
produce, including those employing temperature, gas and humidity control. Many
competitors and potential competitors, particularly in the market for produce
packaging, are larger, have greater financial, marketing, sales, distribution,
technological and management resources, and enjoy greater name recognition than
does the Company. Certain of these companies may also enjoy long-standing
relationships with processors of fresh produce. Accordingly, there can be no
assurance that the Company will be able to compete effectively against such
competitors and potential competitors.
POTENTIAL FOR DILUTION FROM OUTSTANDING SECURITIES. To the extent
outstanding options or warrants are exercised or shares of preferred stock are
converted, there will be dilution to new investors. At December 31, 1997, (i)
1,758,125 shares of Common Stock were issuable upon exercise of outstanding
stock options at a weighted average exercise price of $8.92 per share, (ii)
341,198 shares of Common Stock were issuable upon exercise of warrants
outstanding, at a weighted average exercise price of $14.26 per share, and (iii)
165,555 shares of Common Stock were issuable upon conversion of the Company's
Series A Preferred Stock (other than those shares to be converted into Common
Stock by the Selling Shareholder in connection with this Offering) and Series C
Preferred Stock outstanding. As of April 30, 1998, the outstanding shares of
Series D Preferred Stock are convertible into 1,163,627 shares of Common Stock.
See "Description of Capital Stock."
INTERNATIONAL SALES. A significant portion of the Company's revenues is
generated outside of the United States, principally in the U.K. and, to a lesser
extent, in Spain and elsewhere in Europe, and, therefore, is subject to the
risks associated with international sales, including economic or political
instability, shipping delays, changes in regulation, adverse tax consequences
and various trade restrictions, all of which could have a significant impact on
the Company's ability to deliver products on a competitive and timely basis.
Future imposition of, or significant increases in the level of, customs, duties,
export quotas or other trade restrictions, could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States, although this effect is lessened in countries that adhere to the General
Agreement on Tariffs and Trade. Although the impact of currency fluctuation has
not been significant in the past with respect to the Company's operations in the
U.K., the impact of future fluctuations in exchange rates cannot be predicted
with any measure of accuracy. As the Company increases its operations abroad,
particularly in light of the Fabbri Acquisition, no assurance can be given that
any future exchange rate fluctuations will not have a material adverse effect on
the Company's business, financial condition and results of operations.
CERTAIN RISKS ASSOCIATED WITH AGRICULTURAL PRODUCTS. Because the Company's
business relies, both directly and indirectly, on the availability of fresh
produce, the Company's results of operations will be subject to certain risks
associated with agricultural products. The market for agricultural products is
unpredictable and volatile, and is affected by numerous factors. The most
important of such factors are weather conditions and patterns, current and
projected produce stocks and prices, and governmental agricultural policies,
including those that directly or indirectly influence the number of acres
planted, the mix of crops planted, and crop prices. Any or all of such factors
may adversely affect the Company's business, financial condition and results of
operations.
PRICE AND AVAILABILITY OF RAW MATERIALS. The Company's results of
operations may be affected by the price and availability of raw materials used
in the Company's products. Should there be an increase in the price of one or
more of the raw materials used in the manufacture of the Company's products, the
Company may not be able to increase sufficiently the sales price of its products
to compensate for any such increase in
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raw material costs. Certain of the raw materials used in the Company's products
are obtained from single source suppliers and the Company has not arranged for
alternative supply sources. The Company's inability to obtain sufficient
quantities of such raw materials on commercially reasonable terms, or in a
timely manner, would have a material adverse effect on its business, financial
condition or results of operations.
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Although,
historically, the management of the Company has not discerned a seasonal pattern
in the Company's business on a consolidated basis, certain aspects of the
Company's business are seasonal. For example, Fabbri, one of the Company's
subsidiaries, historically has reported relatively higher sales and income in
the Company's first and fourth fiscal quarters because of the timing of citrus
and other crop harvests. The Company's results of operations may become subject
to greater seasonality as its various businesses develop at different rates.
The Company may experience significant quarter to quarter fluctuations in
its results of operations. Quarterly results of operations may fluctuate as a
result of a variety of factors including, but not limited to, the timing, market
acceptance and speed of proposed nationwide roll-outs of fresh-cut potato, corn
and apple products by the Company or through its strategic alliances and the
timing of introduction, commercialization and market acceptance of other such
produce products that utilize the Company's proprietary processing aids. In
addition, significant quarterly fluctuations may occur due to the timing of any
new acquisitions. Additional factors that may affect the quarter to quarter
results of operations include competitive conditions in the industry and general
economic conditions. As a result, the Company believes that period to period
comparisons of its results of operations are not necessarily meaningful or
indicative of the results that the Company may achieve in any subsequent
quarters or full years. Such quarterly fluctuations may result in volatility in
the market price of the Common Stock of the Company, and it is possible that in
future quarters the Company's results of operations could be below the
expectations of the public markets. Such an event could have a material adverse
effect on the market price of the Common Stock of the Company.
PRODUCT LIABILITY. The Company's agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential product
liability claims. These agreements generally contain provisions such as
disclaimers of warranties and limitations on liability. It is possible, however,
that the limitation of liability provisions contained in such agreements may not
be effective as a result of existing or future federal, state or local laws or
ordinances or unfavorable judicial decisions. Although EPL has not experienced
any product liability claims to date, the sale and support of products by the
Company may entail the risk of such claims. Although the Company currently
maintains product liability insurance coverage, there can be no assurance that
this coverage will be adequate to protect the Company against future product
liability claims or that product liability insurance will be available to the
Company in the future on commercially reasonable terms, if at all. Furthermore,
there can be no assurance that the Company will be able to avoid significant
product liability claims and the attendant adverse publicity. Consequently, a
product liability claim or other claim with respect to uninsured or underinsured
liabilities could have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON KEY CUSTOMERS. For the year ended December 31, 1997, on a pro
forma basis reflecting the Fabbri Acquisition, two packaging customers accounted
for an aggregate of approximately 28% of the Company's total sales. The Company
has entered into strategic alliances with certain of its major customers;
however, there can be no assurance that the Company's customer relationships can
be maintained. The loss of any of the Company's major customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Furthermore, the development and evolution of markets for the Company's
processing aids is substantially dependent upon the efforts of its customers.
Although the Company believes that its customers will be motivated to
commercialize the products covered by these relationships in a timely and
effective manner, the amount of financial and other resources devoted to these
activities generally is beyond the Company's control.
POSSIBLE VOLATILITY OF SHARE PRICE. The market price of the Common Stock
could be subject to significant fluctuations in response to the Company's
operating results and other factors, and there can be no assurance that the
market price of the Common Stock will not decline below the public offering
price herein. Factors such as operating results, contractual arrangements with
customers, natural disasters or other
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developments relating to the Company's products or its competitors, changes in
analysts' estimates or in conditions of the economy or the financial markets,
and regulatory changes, as well as changes within the industry, may have a
significant effect on the market price of the Common Stock. In addition, the
stock market has experienced from time to time extreme price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. Historically, the average daily trading volume of the Common Stock as
reported on the Nasdaq SmallCap Market has been relatively low. Additionally,
liquidity could be adversely affected by the reduced number of shares of Common
Stock outstanding after the 1-for-2 reverse stock split. There can be no
assurance that a more active trading market will develop in the future. See
"Price Range of Common Stock."
DIVIDEND POLICY. Other than in connection with the payment of accumulated
dividends, which have not been declared or paid, on its Series A Preferred
Stock, Series B Convertible Preferred Stock and Series C Preferred Stock
(collectively with the Series D Preferred Stock, the "Preferred Stock"), the
Company intends to retain earnings, if any, which may be generated from
operations to finance the expansion and development of its business. No cash
dividends have been declared or paid to date on the Common Stock or the
Preferred Stock. The Company does not expect to declare or pay cash dividends to
the holders of the Common Stock in the foreseeable future and no such dividends
may be declared or paid until all accumulated dividends on the Series A, Series
B and Series C Preferred Stock have been paid. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this Offering, the
Company will have 11,247,203 shares of Common Stock outstanding (11,772,203
shares if the Underwriters' over-allotment option is exercised in full), and an
additional 1,254,606 shares of Common Stock will be issuable upon conversion of
Preferred Stock. The 3,500,000 shares offered hereby (4,025,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restrictions or further registration under the Securities Act.
Substantially all of the remaining shares, including those shares issuable upon
conversion of the Preferred Stock, are registered with the SEC pursuant to
registration statements currently declared effective by the SEC, or are
otherwise freely tradeable without restriction, except for approximately
1,870,316 shares which are held by "affiliates" of the Company within the
meaning of the Securities Act and not covered by an effective registration
statement, which will be subject to the resale limitations of Rule 144. In
addition, an aggregate of 1,881,875 shares are issuable upon the exercise of
outstanding stock options and 290,798 shares are issuable upon the exercise of
warrants. An additional 380,875 shares of Common Stock are reserved for issuance
under the Option Plan. The Company, its executive officers and directors, and
the Selling Shareholder have agreed that they will not, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase, or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition of) any shares of Common Stock
or any other securities convertible into, or exercisable for shares of Common
Stock or other similar securities of the Company, currently beneficially owned
or hereafter acquired by such persons, for a period of 180 days after the date
of this Prospectus. Prudential Securities Incorporated may, in its sole
discretion, at any time and without prior notice, release all or any portion of
the shares of Common Stock subject to such agreements. Further sales of
substantial amounts of Common Stock (including shares issued upon the exercise
of outstanding options and warrants) in the public market after this Offering or
the prospect of such sales could adversely affect the market price of the Common
Stock and may have a material adverse effect on the Company's ability to raise
any necessary capital to fund its future operations.
CONTROL BY PRINCIPAL SHAREHOLDERS; ANTI-TAKEOVER CONSIDERATIONS. After the
Offering, Paul L. Devine, the Company's Chairman of the Board, President and
Chief Executive Officer, will beneficially own or control approximately 6.6% of
the outstanding shares of Common Stock (6.4%, assuming that the Underwriters'
over-allotment option is exercised in full). Lancer Partners, L.P. will own
approximately 15.9% of the outstanding shares of the Common Stock (15.3%,
assuming that the Underwriters' over-allotment option is exercised in full).
Such persons will have the ability to significantly influence the election of
the Company's directors and the outcome of all other issues submitted to the
Company's shareholders. The beneficial ownership of such persons, together with
the ability of the Board of Directors of the Company to issue shares of
preferred stock and to fix the rights and preferences thereof, also may have the
effect of delaying, deferring or preventing an
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unsolicited change in the control of the Company, which may adversely affect the
market price of the Common Stock or the ability of shareholders to participate
in a transaction in which they might otherwise receive a premium for their
shares. See "Management" and "Principal and Selling Shareholders."
BANK COVENANTS. Through its subsidiary, EPL Technologies (Europe) Limited
("EPL Europe"), the Company maintains a credit facility for its U.K. operations
(the "U.K. Credit Facility"). The U.K. Credit Facility includes certain
covenants, including covenants relating to the conduct of EPL Europe's
operations and the maintenance of certain financial ratios. During the final
quarter of 1997, EPL Europe informed the Bank of Scotland that it expected to be
unable to meet certain covenants under the U.K. Credit Facility for 1997.
Subsequent to December 31, 1997, EPL Europe and its subsidiaries and the Bank of
Scotland amended certain provisions of the U.K. Credit Facility in relation to
these covenants. The Company's inability to meet such covenants in the future,
in the absence of a waiver or further amendment by the Bank of Scotland, could
have an adverse effect on the business, financial condition or results of
operations of the Company's U.K. operations. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 8 to Consolidated
Financial Statements.
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications used in manufacturing, product development, financial business
systems and various administrative functions. To the extent that these software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year "2000," some level of modification or even possibly
replacement of such source code or applications will be necessary. The Company
is currently in the process of completing its identification of software
applications that are not "Year 2000" compliant and expects to make appropriate
responses to address any issue identified by the end of 1998. Given the
information known at this time about the Company's systems, coupled with the
Company's ongoing, normal course-of-business efforts to upgrade or replace
business critical systems as necessary, it is currently not anticipated that
these "Year 2000" costs will have any material adverse effect on the Company's
business, financial condition or results of operations. However, the Company is
still in the preliminary stages of analyzing its software applications and, to
the extent they are not fully "Year 2000" compliant, there can be no assurance
that the costs necessary to update software, or potential systems interruptions,
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
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USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholder. The net proceeds to the Company from the sale of the
809,097 shares of Common Stock being offered by the Company hereby, at an
assumed public offering price of $13.75 per share (the last reported sales price
of the Common Stock on the Nasdaq SmallCap Market on April 30, 1998) and after
deducting underwriting discounts and commissions and the Company's estimated
Offering expenses, are estimated to be $10,041,472 ($17,260,222 if the
Underwriters' over-allotment option is exercised in full). See "Principal and
Selling Shareholders."
The Company expects to use approximately $1,853,000 of the estimated net
proceeds of this Offering to repay outstanding borrowings under the U.K. Credit
Facility, and the remainder to make additional capital expenditures in its corn,
potato and packaging businesses and for working capital and general corporate
purposes, including the possibility that the Company may use a portion of the
net proceeds of the Offering for the acquisition of businesses, products and
technologies that are complementary to those of the Company (for which
additional equity or debt financing may be required), although no such
acquisitions are currently being negotiated and no portion of the net proceeds
has been allocated for any specific acquisition. Furthermore, there can be no
assurance that suitable acquisition candidates will be identified or that any
acquisition will be consummated. In addition, no particular capital expenditures
to be made from the proceeds of this Offering have been identified; the
Company's current capital expenditure budget for 1998 is approximately $3.6
million. The U.K. Credit Facility includes a term loan and a revolving facility.
The term loan matures in annual installments from December 1998 through December
2003. Upon repayment, the Company expects that the revolving facility, in the
amount of $660,000 (assuming an exchange rate of L1:$1.65), will remain
available for borrowings. The revolving facility matures in annual installments
from December 2001 through December 2003. Borrowings under both the term loan
and the revolving facility bear interest at a variable rate equal to a base rate
(currently 7.25%) plus 2% to 2.25%. Pending such uses, the Company intends to
invest the net proceeds in interest-bearing, investment grade securities or
guaranteed obligations of the United States government. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
Other than in connection with the payment of accumulated dividends, which
have not been declared or paid, on its Series A Preferred Stock, Series B
Convertible Preferred Stock and Series C Preferred Stock, the Company intends to
retain earnings, if any, which may be generated from operations to finance the
expansion and development of its business. No cash dividends have been declared
or paid to date on the Common Stock. The Company does not expect to declare or
pay cash dividends to the holders of the Common Stock in the foreseeable future
and no such dividends may be declared or paid until all accumulated dividends on
the Series A, Series B and Series C Preferred Stock have been paid. See Note 9
to the Company's Consolidated Financial Statements and "Description of Capital
Stock."
16
<PAGE> 18
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq SmallCap Market
under the symbol "EPTG" in July 1996. From September 1995 to July 1996, the
Common Stock traded on the National Association of Securities Dealers "bulletin
board." Prior to September 1995, the Common Stock traded on the National
Association of Securities Dealers "pink sheets." Over-the-counter market
quotations for securities traded on the National Association of Securities
Dealers "bulletin board" or "pink sheets" reflect interdealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions. An application has been made to include the Common Stock on
the Nasdaq National Market under the symbol "EPTG." The following table sets
forth the high and low reported closing bid prices for the Company's Common
Stock during the periods indicated (reflecting actual prices before the reverse
stock split and assuming a post-split price that is twice the pre-split price):
<TABLE>
<CAPTION>
HIGH LOW
--------------- ---------------
PRE- POST- PRE- POST-
SPLIT SPLIT SPLIT SPLIT
----- ------ ----- ------
<S> <C> <C> <C> <C>
1996
First quarter........................................ $5.88 $11.75 $3.25 $6.50
Second quarter....................................... 8.75 17.50 4.88 9.75
Third quarter........................................ 7.38 14.75 5.25 10.50
Fourth quarter....................................... 6.88 13.75 4.06 8.13
1997
First quarter........................................ 6.63 13.25 4.88 9.75
Second quarter....................................... 6.56 13.13 4.06 8.13
Third quarter........................................ 8.50 17.00 5.88 11.75
Fourth quarter....................................... 9.25 18.50 5.25 10.50
1998
First quarter........................................ 7.25 14.50 5.03 10.06
Second quarter (through April 30, 1998).............. -- 13.75 -- 11.38
</TABLE>
On April 30, 1998, the last reported sales price of the Company's Common
Stock was $13.75 on the Nasdaq SmallCap Market under the symbol "EPTG." As of
April 30, 1998, there were approximately 300 holders of record of the Company's
Common Stock.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth, as of December 31, 1997 the actual
capitalization of the Company and the capitalization of the Company as adjusted
to reflect the sale of the 809,097 shares of Common Stock being offered by the
Company in this Offering at an assumed public offering price of $13.75 per share
(the last reported sales price of the Common Stock on the Nasdaq SmallCap Market
on April 30, 1998) and the application by the Company of the estimated net
proceeds therefrom (less the underwriting discounts and commissions and
estimated Offering expenses payable by the Company), and the conversion of
1,933,000 shares of Series A Preferred Stock into 1,288,666 shares of Common
Stock by the Selling Shareholder in connection with the Offering. See "Use of
Proceeds" and "Principal and Selling Shareholders." This table should be read in
conjunction with the Consolidated Financial Statements and the related Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... 396 215
Long-term debt.............................................. 1,792 120
Convertible Series D Preferred Stock, $0.01 par
value -- authorized, issued and outstanding, 12,500
shares(1)................................................. 10,617 10,617
Shareholders' equity:
Convertible Series A Preferred Stock, $1.00 par
value -- authorized, 3,250,000 shares; issued and
outstanding, 2,073,000 shares actual and 140,000 shares as
adjusted(2)............................................... 2,073 140
Convertible Series C Preferred Stock, $0.01 par
value -- authorized, issued and outstanding, 144,444
shares(2)(3).............................................. -- --
Undesignated Preferred Stock $0.01 par
value -- authorized, 3,843,056 shares; issued and
outstanding, no shares actual or as adjusted.............. -- --
Common Stock, $0.01 par value -- authorized, 50,000,000
shares; issued and outstanding, 9,047,982 shares actual
and 11,145,746 shares as adjusted(2)...................... 9 11
Additional paid-in capital................................ 28,698 40,670
Accumulated deficit....................................... (24,207) (24,207)
Foreign currency translation adjustments.................. 42 42
-------- --------
Total shareholders' equity................................ 6,615 16,656
-------- --------
Total capitalization........................................ $ 19,420 $ 27,608
======== ========
</TABLE>
- - ---------------
(1) As of April 30, 1998, the outstanding shares of Series D Preferred Stock are
convertible into an aggregate of 1,163,627 shares of Common Stock.
(2) Excludes (i) 1,758,125 shares of Common Stock reserved for issuance upon
exercise of options outstanding at December 31, 1997 at a weighted average
exercise price of $8.92 per share and (ii) 341,198 shares of Common Stock
issuable upon the exercise of warrants at a weighted average exercise price
of $14.26 per share. As of December 31, 1997, an additional 512,125 shares
of Common Stock were reserved for issuance under the Company's Option Plan.
All of the outstanding shares of the Company's Series B Preferred Stock were
converted into an aggregate of 265,957 shares of Common Stock on August 20,
1997. As of December 31, 1997, the outstanding shares of Series A Preferred
Stock and Series C Preferred Stock were convertible into an aggregate of
165,555 shares of Common Stock.
(3) All of the outstanding shares of the Company's Series C Preferred Stock were
converted into an aggregate of 72,222 shares of Common Stock on March 6,
1998.
18
<PAGE> 20
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value of their Common Stock
from the public offering price. The net tangible book value of the Company as of
December 31, 1997 was $2.2 million, or $0.24 per share of Common Stock. Net
tangible book value represents the amount of the Company's tangible net worth
divided by the total number of shares of Common Stock outstanding as of December
31, 1997. After giving effect to the sale of 809,097 shares of Common Stock by
the Company in the Offering and the application of the estimated net proceeds
therefrom (at an assumed public offering price of $13.75 per share, the last
reported sales price of the Common Stock on the Nasdaq SmallCap Market on April
30, 1998, and after the deduction of underwriting discounts and commissions and
estimated Offering expenses payable by the Company), the pro forma net tangible
book value of the Company as of December 31, 1997 would have been $12.2 million
or $1.10 per share of Common Stock. This represents an immediate increase in net
tangible book value of $0.86 per share to existing shareholders and an immediate
dilution of $12.65 per share to purchasers of shares in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price.......................... $13.75
Net tangible book value at December 31, 1997.... $0.24
Increase attributable to new investors.......... 0.86
-----
Pro forma net tangible book value after the Offering... 1.10
------
Dilution in net tangible book value to new
investors(1).......................................... $12.65
======
</TABLE>
- - ---------------
The calculation of pro forma net tangible book value and the other
computations above assume no exercise of outstanding options or warrants or the
conversion of the Company's Series A Preferred Stock (other than those shares to
be converted into Common Stock by the Selling Shareholder in connection with
this Offering) or Series C Preferred Stock. At December 31, 1997, (i) 1,758,125
shares of Common Stock were issuable upon exercise of outstanding stock options
at a weighted average exercise price of $8.92 per share which, if exercised,
would provide the Company with gross proceeds of approximately $15,689,000, (ii)
341,198 shares of Common Stock were issuable upon exercise of warrants
outstanding, at a weighted average exercise price of $14.26 per share which, if
exercised, would provide the Company with gross proceeds of approximately
$4,866,000, and (iii) 165,555 shares of Common Stock were issuable upon
conversion of the Company's Series A Preferred Stock (other than those shares to
be converted into Common Stock by the Selling Shareholder in connection with
this Offering) and Series C Preferred Stock outstanding. As of April 30, 1998,
the outstanding shares of Series D Preferred Stock are convertible into an
aggregate of 1,163,627 shares of Common Stock. To the extent the outstanding
options or warrants are exercised or shares of Preferred Stock are converted,
there will be further dilution to purchasers of the Common Stock offered hereby.
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected condensed consolidated statement of
operations and balance sheet data for the Company. The selected condensed
consolidated financial data for the years ended December 31, 1995, 1996 and 1997
and as of December 31, 1996 and 1997 are derived from the audited Consolidated
Financial Statements of the Company, which are included elsewhere in this
Prospectus, and are qualified by reference to such Consolidated Financial
Statements and the related Notes thereto. The selected condensed consolidated
financial data for the years ended December 31, 1993, and 1994 and as of
December 31, 1993, 1994 and 1995 are derived from audited consolidated financial
statements of the Company not included herein. The selected consolidated
financial data set forth below is qualified in its entirety by, and should be
read in conjunction with the Consolidated Financial Statements, the related
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.......................... $ 178 $ 578 $ 3,240 $ 11,314 $ 19,953
Cost of Sales.................. 47 387 2,469 9,136 18,090
Gross Profit................... 131 191 771 2,178 1,863
Total operating expenses....... 2,768 3,472 3,813 6,362 9,185
Loss from operations........... (2,637) (3,281) (3,042) (4,184) (7,322)
Net loss....................... (2,666) (3,373) (3,320) (4,296) (7,187)
Net loss for common
shareholders................. (2,666) (3,697) (3,634) (5,295) (8,355)
Net loss per common share...... $ (0.88) $ (1.02) $ (0.78) $ (0.71) $ (1.00)
Weighted average number of
common shares................ 3,035,620 3,629,362 4,655,529 7,436,759 8,372,537
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital (deficiency)... $ (623) $ (378) $ 1,167 $ 2,269 $ 6,513
Total assets................... 2,630 3,189 10,041 15,215 26,200
Long-term debt................. 76 1,812 844 1,554 1,792
Total liabilities.............. 984 2,771 3,665 6,797 8,967
Series D Convertible Preferred
Stock........................ -- -- -- -- 10,617
Accumulated deficit............ (4,670) (8,043) (11,363) (16,283) (24,207)
Total shareholders' equity..... $ 1,646 $ 418 $ 6,376 $ 8,418 $ 6,615
</TABLE>
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading developer, manufacturer and marketer of
proprietary produce processing aids, packaging technologies, and scientific and
technical services, which are designed to maintain the quality and integrity of
fresh-cut produce. The Company designs products that are components of
integrated systems solutions, specifically to address the needs of a variety of
fresh-cut produce categories. The foundation of the Company's integrated system
is its proprietary produce processing aid technology, which inhibits the natural
enzymatic degradation of fruits and vegetables after they have been processed.
Fresh-cut fruits and vegetables that are treated with the Company's proprietary
processing aids better maintain their natural characteristics, such as color,
texture, taste and smell. In certain fresh-cut produce categories, such as
fresh-cut sliced apples, fresh-cut potatoes and fresh corn, the Company's
processing aids allow increased availability of these fresh-cut produce products
in retail and commercial markets. The Company has concluded that the use of the
Company's processing aids, in accordance with the Company's recommended
protocols, is GRAS under FDA regulations. The Company also uses a variety of
film technologies to create packaging specifically designed to complement and
enhance the effectiveness of the Company's processing aids by allowing fruits
and vegetables to "breathe" after they have been cut and packaged. The Company
markets these packaging products to produce growers and processors. The Company
also markets flexible packaging for uses in the snack food, bakery and
confectionery industries, and for other uses. In addition, the Company's
scientific and technical services, which include food safety and microbiological
testing, provide fresh produce processors with expertise in food safety,
post-harvest horticulture and processing techniques, and serve to support the
cross-marketing efforts for the Company's other products.
The Company's revenues consist of (i) revenues derived from the sale of
processing aids and flexible packaging, (ii) revenues derived from the sale of
certain fresh-cut fruits and vegetables, (iii) royalties from the sale of
certain fresh-cut fruits and vegetables and (iv) fees received for scientific
and technical services provided by the Company. The Company's revenues from the
sale of produce and royalty revenues are derived from sales of various kinds and
varieties of fresh-cut fruits and vegetables which use the Company's proprietary
technologies and which the Company believes would not be available commercially
without such use. Historically, substantially all of the Company's revenues have
been derived from the sale of flexible packaging to the snack food, produce,
bakery, and confectionery industries and for other uses. The Company believes
that its packaging technologies, coupled with acquisitions of produce packagers,
provide a platform to increase its sales of packaging, processing aids and
scientific and technical services to growers and processors of fresh produce.
Therefore, the Company expects that the proportion of its revenues derived from
the sale of its products and services addressing the needs of the fresh-cut
produce industry will increase over time and constitute a significant portion of
the Company's future revenue growth.
Prior to 1994, the Company was a development-stage enterprise with limited
capital resources and limited revenues operating exclusively as a manufacturer
and marketer of processing aids. After the advent of new management and an
infusion of capital in December 1992, the Company began to expand its business
to include packaging and scientific and technical services in an effort to
develop integrated systems solutions designed to maintain and support the
quality and integrity of fresh-cut produce. The Company has made the following
acquisitions to accomplish this objective:
- In September 1994, the Company acquired Respire Films, Inc. ("Respire"),
a U.S.-based business involved in the marketing of packaging films.
- In September 1995, the Company acquired Bakery Packaging Services
Limited, based near Runcorn, England (the "Runcorn Facility"). The
Runcorn Facility provided the Company with a U.K. base for packaging,
together with access to numerous produce and other food companies in the
U.K. and elsewhere in Europe. The Runcorn Facility also provided the
Company with proprietary perforating technology to enhance the Company's
strategic position, as well as an incremental source of packaging
revenue. In July 1996, the U.K. packaging business was further enhanced
by the acquisition of a food-grade printing facility and certain other
assets located at Gainsborough, Lincolnshire, England (the "Gainsborough
Facility"), from Printpack Europe (St. Helens) Limited.
21
<PAGE> 23
The Company has consolidated the operations of the Runcorn Facility and
the Gainsborough Facility into those of its subsidiary, EPL Flexible
Packaging Limited ("EPL Flexible").
- In April 1996, the Company, through its Pure Produce, Inc. subsidiary
("Pure Produce"), acquired the assets of Pure Produce, a general
partnership based in Worcester, Massachusetts, providing the Company with
in-house scientific and technical capabilities, specifically in the areas
of food safety and microbiological testing.
- In July 1996, the Company, through its Crystal Specialty Films, Inc.
subsidiary ("Crystal"), acquired the assets of Crystal Plastics, Inc.,
located outside Chicago, to provide a base for EPL Flexible's proprietary
gas flame perforation equipment and increase the Company's packaging
presence in the U.S. Crystal uses "K" and polystyrene resins to
manufacture and convert a range of films for numerous applications, some
of which are used to support the Company's U.S. packaging business as a
part of the Company's integrated systems solutions. Crystal also provides
the U.S. base for facilitating fulfillment of an exclusive agreement with
E.I. duPont de Nemours & Co. Inc. ("DuPont"), whereby the Company
provides all of DuPont's perforating requirements for DuPont's Mylar(R)
films (the "DuPont Agreement").
- In October 1997, the Company acquired California Microbiological
Consulting, Inc., based in Walnut Creek, California ("CMC"). Together
with Pure Produce, CMC specializes in food safety, forensic testing and
microbiological consulting, and provides the Company with scientific and
technical facilities on the East and West Coasts.
- In December 1997, the Company acquired Fabbri Artes Graficas Valencia
S.A., a converter, printer and marketer of specialty flexible packaging,
serving principally the European produce market, based in Valencia,
Spain. The Company believes that this acquisition complements and
enhances the Company's existing U.K.-based packaging businesses,
providing incremental capacity for more efficient production of the
combined product mix, as well as a strategic foothold on the European
continent for the launch of the Company's related processing aid and
scientific and technical services businesses.
The Company's packaging technologies complement and enhance the
effectiveness of its processing aids, making packaging an integral component of
the integrated system. In marketing its packaging technologies, the Company
works closely with its customers in an effort to determine optimal packaging
characteristics for the customer's products, thereby being in a position to
influence a customer's buying decision with respect to its packaging needs. The
Company's packaging business also provides a revenue stream that helps to fund
market development and the Company's lengthy sales process, and the presence of
its packaging infrastructure in regions where produce is grown enhances its
sales prospects to produce growers and processors.
The scientific and technical services the Company provides complement the
processing aids and packaging as a part of its integrated systems solutions. The
Company's scientific and technical expertise provides the Company with an
expanding base of knowledge about food technology, and the Company believes this
expertise helps to establish credibility with customers and support the
commercialization of the Company's products.
The Company markets its processing aids, packaging technologies and
scientific and technical services to processors of packaged, fresh-cut produce
as part of integrated systems solutions for processing fresh-cut produce. To
this end, the Company has been developing relationships with produce processors
and other companies in an effort to penetrate further the fresh-cut produce
market.
- In July 1996, the Company formed Newcorn, a limited liability company in
which the Company has a 51% membership interest. Newcorn is a joint
venture among the Company and Underwood Ranches and Twin Garden Farms,
two major regional growers and processors of fresh-cut sweet corn.
Newcorn processes, packages, markets and sells fresh-cut corn products
using the Company's processing aids and packaging materials, with the aim
of developing year-round, nationally available branded fresh-cut corn
products.
22
<PAGE> 24
- In September 1997, the Company executed a ten-year exclusive trademark
license agreement (subject to extension) and strategic alliance with
Potandon Produce LLC ("Potandon"), a Green Giant Fresh(R) brand licensee
of the Pillsbury Company. The agreement is subject to the terms of
Potandon's license of the Green Giant Fresh(R) brand, and contains
certain minimum royalty requirements and other customary provisions.
During the first three years of the term of the agreement, Potandon has
the option to require the Company to negotiate in good faith to form a
business entity in which Potandon and the Company would jointly
participate in the fresh-cut potato products business, on terms yet to be
established. The Company sells fresh-cut potato products, such as french
fries, to the food service industry under the Green Giant Fresh(R) brand
name, utilizing the Company's "Potato Fresh(R) System" processing aid
technologies and related protocols in processing potatoes supplied by
Potandon. In order to produce and market its fresh-cut potato products,
the Company uses one co-packer and plans to add several other regional
co-packers, and is building a dedicated sales and marketing
infrastructure to support its efforts.
- In October 1997, the Company entered into a strategic alliance with
Farmington Fresh, a major grower and marketer of Fuji apples. Under this
alliance, the Company has licensed its "Apple Fresh(R)" processing aids
and provides flexible packaging and scientific and technical services in
connection with the production by Farmington Fresh of certain varieties
of fresh-cut sliced apples. The agreement, which currently extends until
December 2002, grants Farmington Fresh production and sales exclusivity
in its local geographic market. In addition to revenues from sales of the
Company's processing aids, packaging and scientific and technical
services, the agreement entitles the Company to receive a royalty from
each package of fresh-cut apple slices sold.
- In March 1998, the Company announced that it had entered into an
agreement with ANC to create a joint venture company to market flexible
packaging systems for the U.S. fresh produce market. Although the Company
believes that this joint venture will have a favorable impact on the
Company's results of operations, no assurance can be given as to the
timing or extent of any such impact. The Company will account for such
joint venture under the equity method of accounting. For further
discussion of this joint venture, see "Recent Developments."
- On April 21, 1998, the Company announced that Newcorn has entered into a
trademark sublicense agreement with Sholl, the exclusive licensee of The
Pillsbury Company's Green Giant Fresh(R) brand name. The agreement
grants Newcorn the right to use the Green Giant Fresh(R) brand name on
the Company's fresh-cut corn products on an exclusive basis in North
America. Under this agreement, Freshcorn will provide marketing support
for the Company's fresh-cut corn products. The Company believes that the
Green Giant Fresh(R) brand will enhance consumer awareness and
acceptability of its fresh-cut corn products and facilitate the
development of a market for branded fresh-cut corn available nationally
on a year-round basis.
Newcorn's license expires on December 31, 2020, subject to automatic
renewal or earlier termination in certain events, including termination
of Sholl's license from The Pillsbury Company. Newcorn will pay a
royalty to Sholl based on the number of cases of licensed corn products
sold by Newcorn. Additionally, Newcorn will pay to Freshcorn the Fee,
against which the royalty payments to Sholl are credited. As members of
Freshcorn, Newcorn and Sholl have agreed that, generally, 25% of the Fee
in each year will be used to reimburse expenses incurred by Newcorn for
the advertising, marketing and promotion of the Company's fresh-cut corn
products.
Management believes changes in prices of raw materials for its products
have not had a material effect on the Company's results of operations; however,
as the Company's business becomes more reliant upon sales of its processing
aids, results of operations may be more susceptible to the effects of changing
prices due to the pricing of certain kinds of produce, as well as ingredients
used in the Company's processing aids.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales. Sales increased from $11,314,000 in 1996 to $19,953,000 in 1997, an
increase of $8,639,000 or 76%. Sales of processing aids in the U.S. and Europe
increased from $1,327,000 in 1996 to $3,035,000 in 1997,
23
<PAGE> 25
an increase of $1,708,000 or 129%. Sales of U.S. packaging materials increased
from $1,717,000 in 1996 to $2,716,000 in 1997, an increase of $999,000 or 58%.
Sales of U.K. and European packaging materials increased from $8,270,000 in 1996
to $14,202,000 in 1997, an increase of $5,932,000 or 72%.
The increase in processing aid sales was mainly due to the inclusion of a
full year of revenue from the sale of fresh-cut corn through the Company's
majority-owned affiliate, Newcorn, which commenced sales in the third quarter of
1996, as well as internal growth. The Company is continuing to focus on the sale
and development of its processing aid technologies, particularly with respect to
corn, potatoes and apples. Product testing continues, and in some cases has been
expanded or accelerated, and significant costs have been incurred to date which
have yet to yield material revenues. Some of the initial results of this work
are evidenced by the agreements with Potandon and Farmington Fresh. The Company
believes that both of these agreements have the potential to result in increased
sales in the future, although there can be no assurance that this will be the
case.
The growth in the U.S. packaging materials business was principally
attributable to the inclusion of a full year of the results of operations of
Crystal, which was acquired in the third quarter of 1996, and, to a lesser
extent, growth in the Company's Respire business. The sales increase in the U.K.
and Europe of packaging materials was principally attributable to internal
growth in the core packaging business, the inclusion of a full year of the
results of operations attributable to EPL Flexible's Gainsborough Facility, and,
to a lesser extent, sales attributable to Fabbri, which was acquired in December
1997.
In 1997, two packaging customers, Walkers Snack Foods Ltd., a division of
Frito-Lay Europe, a subsidiary of Pepsico, Inc. ("Pepsico"), and Geest Bananas
Ltd. ("Geest"), a leading marketer of fresh produce, accounted for
approximately, 32% and 6%, respectively, of the Company's sales.
Gross Profit. Gross profit decreased from $2,178,000 in 1996 to $1,863,000
in 1997, a decrease of $315,000 or, as a percentage of sales, from 19.2% to
9.3%. This reduction was principally due to: (i) increased fixed costs related
to newly-acquired packaging operations at EPL Flexible's Gainsborough Facility,
(ii) costs incurred in the relocation of film printing activities from the
Runcorn Facility to the Gainsborough Facility, (iii) initial operating
inefficiencies associated with the reorganization at the Runcorn Facility and
the Gainsborough Facility and (iv) proportionally greater sales of packaging
products which yield lower margins than the Company's perforated packaging
products. The reorganization of the Company's Runcorn and Gainsborough
facilities, which resulted in significant operating inefficiencies during 1997,
especially in the second half of 1997, has been completed. Operating results
from period to period may continue to be impacted by variations in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $4,413,000 in 1996 to $6,693,000 in 1997,
an increase of $2,280,000 or 52%. This increase was due primarily to (i)
incremental expenses from the inclusion of a full year of expenses from the
Gainsborough Facility, and the operation of Newcorn and Crystal, as well as
incremental expenses from the Fabbri Acquisition, (ii) the continuing and
accelerating development of the Company's sales and marketing efforts, including
projects supporting prospective large customers, particularly in the processing
aid area for potatoes and corn, and (iii) other costs, including increased costs
of patent preparation and filing, as well as the appointment of additional
personnel.
The Company's sales and marketing efforts with respect to processing aids
are primarily focused on fresh-cut potatoes, corn and apples and, to a lesser
extent, other produce categories. These expenses in 1997 also include certain
one-time costs, such as (i) bonuses paid to certain executive officers in
connection with the consummation of certain transactions, including the Series D
Placement and the Fabbri Acquisition, and (ii) costs associated with a line of
credit obtained from Trilon in the third quarter of 1997, which was repaid and
canceled in the fourth quarter of 1997. Excluding such one-time costs, the
Company expects that sales and marketing expenses will continue at recent levels
and may increase.
Research and Development Costs. Research and development costs increased
from $939,000 in 1996 to $1,203,000 in 1997, an increase of $264,000 or 28%.
This reflects increased costs of the scientific activities related to sales
efforts for prospective large customers, principally related to broccoli,
mushrooms and
24
<PAGE> 26
perforated films. The Company expects that research and development costs will
continue at recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization increased from
$1,010,000 in 1996 to $1,290,000 in 1997, an increase of $280,000 or 28%. This
is a result of a full year of expenses for the Gainsborough Facility, Crystal
and Newcorn since their acquisitions made in the second half of 1996, plus
capital expenditures during 1997.
Loss from Operations. Loss from operations increased from $4,184,000 to
$7,322,000, an increase of $3,138,000 or 75%. The increase was principally
attributable to the increase in total operating expenses. However, total
operating expenses, excluding depreciation and amortization, decreased as a
percentage of sales, from 47.3% in 1996 to 39.6% in 1997. This reflects the
leveraging of the Company's infrastructure through the expansion of the
Company's business.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Sales. Sales increased from $3,240,000 in 1995 to $11,314,000 in 1996, an
increase of $8,075,000 or 249%. Sales of processing aids increased from $473,000
in 1995 to $1,327,000 in 1996, an increase of $854,000 or 181%. Sales for the
U.S. packaging materials business increased from $868,000 in 1995 to $1,717,000
in 1996, an increase of $849,000 or 98%. Sales from the U.K. and European
packaging materials businesses grew from $1,899,000 in 1995 to $8,270,000 in
1996, an increase of $6,372,000 or 336%.
The increase in processing aid sales was mainly from the inclusion of
revenue from the sale of fresh-cut corn through the Company's majority-owned
subsidiary, Newcorn, which commenced sales in the third quarter of 1996. The
growth in the U.S. packaging materials business mainly reflected the
contribution of the Crystal business acquired in July 1996. The sales increase
from U.K. and European packaging materials reflected a full period contribution
from the Runcorn Facility, acquired in September 1995, together with an initial
contribution from the Gainsborough Facility, which includes sales to its main
customer Pepsico.
In 1996, one customer, Pepsico, accounted for 13.0% of consolidated sales
and in 1995, no customer accounted for more than 10.0% of consolidated sales.
Gross Profit. Gross profit increased from $771,000 in 1995 to $2,178,000
in 1996, an increase of $1,407,000 or 183%, but decreased as a percentage of
sales from 23.8% in 1995 to 19.2% in 1996. This reduction was due principally to
the increase in sales of packaging materials as a percentage of total sales.
Packaging sales generate a lower average margin than processing aids.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $2,638,000 in 1995 to $4,413,000 in 1996,
an increase of $1,775,000 or 67%. A significant part of the increase was due to
the inclusion of expenses from the Runcorn Facility operations, as well as
incremental expenses from the inclusion of the Gainsborough Facility, Crystal
and Newcorn in consolidated results. The remainder of the increase was due to
the continuing development of the sales and marketing effort as well as projects
to support prospective large customers. This effort was focused on a number of
produce categories, including potatoes and apples, where market test activity
continued. Furthermore, additional investor relations costs were incurred,
including SEC-related and other legal work.
Research and Development Costs. Research and development costs increased
from $601,000 in 1995 to $939,000 in 1996, an increase of $338,000 or 56%. This
reflects the costs of third-party collaborative projects commenced during 1995,
as well as the costs associated with additional staff to support the Company's
scientific and technical objectives relating to sales efforts for prospective
large customers.
Depreciation and Amortization. Depreciation and amortization increased
from $574,000 in 1995 to $1,010,000 in 1996, an increase of $435,000 or 76%. The
most significant portion of this increase was due to a full year of depreciation
of fixed assets and amortization of goodwill arising from the acquisition of the
Runcorn Facility in September 1995, with the remainder due to capital
expenditures and the assets acquired in the Gainsborough Facility, Crystal and
Newcorn acquisitions during 1996.
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Loss from Operations. Loss from operations increased from $3,042,000 in
1995 to $4,184,000 in 1996, an increase of $1,142,000 or 38%. The increase was
due to an increase in total operating expenses. However, total operating
expenses, excluding depreciation and amortization, decreased as a percentage of
sales from 100.0% in 1995 to 47.3% in 1996, reflecting the leveraging of the
Company's infrastructure through the expansion of its business.
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
manufacturing, product development, financial business systems and various
administrative functions. To the extent that these software applications contain
source code that is unable to appropriately interpret the upcoming calendar year
"2000," some level of modification or even possibly replacement of such source
code or applications will be necessary. The Company is currently in the process
of completing its identification of software applications that are not "Year
2000" compliant and expects to make appropriate responses to address any issue
identified by the end of 1998. Given the information known at this time about
the Company's systems, coupled with the Company's ongoing, normal
course-of-business efforts to upgrade or replace business critical systems as
necessary, it is currently not anticipated that these "Year 2000" costs will
have any material adverse effect on the Company's business, financial condition
or results of operations. However, the Company is still in the preliminary
stages of analyzing its software applications and, to the extent they are not
fully "Year 2000" compliant, there can be no assurance that the costs necessary
to update software, or potential systems interruptions, would not have a
material adverse effect on the Company's business, financial condition or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $3,757,000 in cash and short term
investments, compared with $1,640,000 at December 31, 1996, an increase of
$2,117,000. During the year ended December 31, 1997, $5,921,000 was used in
operating activities. In addition, $8,334,000 was used in investing activities,
of which $1,040,000 was used to purchase fixed assets and $7,330,000 was used in
the purchase of businesses, notably the Fabbri Acquisition and the acquisition
of assets from Twin Garden ("Twin Garden"). The increase in cash used in
operating activities of $2,081,000 in 1997 compared to 1996 reflects the
increased loss in 1997, net of increased depreciation and amortization, offset
by lower amounts used in accounts receivable and increases in amounts in
accounts payable.
Total financing activities during 1997 provided $16,581,000, compared with
$6,439,000 in 1996. Of this, gross proceeds of $12,500,000 were raised in the
Series D Placement. The balance came principally from the issuance of Series C
Preferred Stock and Common Stock in the second quarter of 1997 and the exercise
of previously issued stock options and warrants.
At December 31, 1997, the Company had warrants outstanding and exercisable
to purchase 341,198 shares of common stock at a weighted average price of $14.26
per share, which, if exercised, would provide the Company with gross proceeds of
approximately $4,866,000. In addition, at December 31, 1997, the Company had
1,758,125 options outstanding and exercisable to purchase shares of common stock
at a weighted average price of $8.92 per share, which, if exercised, would
provide the Company with gross proceeds of up to approximately $15,689,000. At
December 31, 1997, there were no material commitments for capital expenditures.
The Company, through EPL Europe, has a line of credit in the amount of
L150,000 ($248,000 at an exchange rate of L1:$1.65) with the Bank of Scotland as
part of its U.K. Credit Facility, under which L16,000 ($26,000 at an exchange
rate of L1:$1.65) was outstanding as of December 31, 1997. The U.K. Credit
Facility also contains a term loan and a revolving facility, under which
L710,000 ($1,168,000 at an exchange rate of L1:$1.65) and L400,000 ($658,000 at
an exchange rate of L1:$1.65), respectively, were outstanding as of December 31,
1997. The Company plans to repay the outstanding amounts under the term loans
and the revolving facility with the net proceeds of the Offering. While the term
loan will be terminated upon repayment, the Company currently anticipates that
the revolving facility, in the amount of L400,000 ($658,000 at an exchange rate
of L1:$1.65), will remain available for future borrowings. The U.K. Credit
Facility is
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secured by the assets of EPL Europe and its subsidiaries. See "Use of Proceeds."
The debt agreements with the Bank of Scotland contain certain covenants
applicable to the results of operations of the businesses of EPL Europe and its
subsidiaries, which provide for maintenance of minimum earnings before income
taxes and cash flows to interest expense ratios. Pursuant to the U.K. Credit
Facility, EPL Europe is restricted in its ability to make certain payments to
the Company. During the final quarter of 1997, EPL Europe informed the Bank of
Scotland that it expected to be unable to meet certain covenants for fiscal
1997. Subsequent to December 31, 1997, EPL Europe and its subsidiaries and the
Bank of Scotland amended certain provisions of the facility agreements in
relation to these covenants.
The Company is currently expecting to make capital expenditures of
approximately $3,600,000 during 1998. Of this amount, approximately $1,900,000
is expected to be used to refurbish and expand certain Newcorn facilities, with
the remainder to be used primarily to expand capacity in EPL's flexible
packaging business and in the fresh-cut potato business.
Historically, the Company's revenues have not been sufficient to fund the
development of the Company's business, and thus it has had to finance its
operating losses externally principally through equity financing. The Company's
management believes that cash flows from consolidated operations and existing
resources, together with the net proceeds of this Offering, will be sufficient
to meet the Company's operating needs for the next twelve months. The Company
may, however, be required to seek additional debt or equity financing to
implement its growth strategy.
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BUSINESS
OVERVIEW
The Company is a leading developer, manufacturer and marketer of
proprietary produce processing aids, packaging technologies, and scientific and
technical services, which are designed to maintain the quality and integrity of
fresh-cut produce. The Company markets products which are components of
integrated systems solutions, and which are specifically designed to address the
needs of a variety of fresh-cut produce categories. The foundation of the
Company's integrated system is its proprietary produce processing aid
technology, which inhibits the natural enzymatic degradation of fruits and
vegetables after they have been processed. Fresh-cut fruits and vegetables that
are treated with the Company's proprietary processing aids better maintain their
natural characteristics, such as color, texture, taste and smell. In certain
fresh-cut produce categories, such as fresh-cut sliced apples, fresh-cut
potatoes and fresh corn, the Company's processing aids allow increased
availability of these fresh-cut produce products in retail and food service
markets. The Company has concluded that the use of the Company's processing
aids, in accordance with the Company's recommended protocols, is generally
recognized as safe ("GRAS") under FDA regulations. The Company also uses a
variety of film technologies to create packaging specifically designed to
complement and enhance the effectiveness of the Company's processing aids by
allowing fruits and vegetables to "breathe" after they have been cut and
packaged. The Company markets these packaging products to produce growers and
processors. The Company also markets flexible packaging for uses in the snack
food, bakery and confectionery industries, and for other uses. In addition, the
Company's scientific and technical services, including food safety and
microbiological testing, provide fresh produce processors and wholesalers with
expertise in food safety, post-harvest horticulture and product formulation
techniques, and serve to support the cross-marketing efforts for the Company's
other products. The Company believes its products are safe and environmentally
"friendly" and, together with its scientific and technical services, add
significant value to the businesses of its customers. For a discussion of the
general development of the Company's business, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
INDUSTRY OVERVIEW
According to industry statistics, the U.S. fresh-cut produce industry
totaled $6.0 billion in 1997, and is expected to grow to $19.1 billion by 2003.
The Company believes that the market for fresh produce is evolving toward
ready-to-eat, pre-packaged, fresh-cut fruits and vegetables in response to
increasing consumer preferences for healthy foods, convenience and variety. In
this regard, according to industry estimates, U.S. sales of fruits and
vegetables sold in pre-cut, pre-packaged form are expected to grow from 9.5% in
1997 to 22.4% by 2003. Promotion by the U.S. government and others of
consumption of fresh fruits and vegetables in the government's "five-a-day"
program the Company believes has made consumers more conscious of the benefits
of including as many as five servings of such foods every day as part of a
balanced diet. In addition to increasing consumer preferences for fresh-cut
produce, the Company believes that food service providers have increased their
demand for fresh-cut, packaged produce to reduce the risk of bacterial
contamination, enhance food safety and improve produce consistency. Further, the
FDA and the U.S. Department of Agriculture ("USDA") are working in cooperation
with the agricultural community to develop safety standards specifically
applicable to growing and harvesting fruits and vegetables as part of an
initiative to enhance consumer confidence in the consistent availability of safe
produce. The Company believes that its integrated systems solutions for
fresh-cut produce uniquely position the Company to address the evolving needs of
the rapidly growing and developing fresh-cut produce market and enable the
development of a number of new fresh-cut produce products. Development of new
fresh-cut produce applications is further supported by produce growers and
processors who are seeking to increase revenues and margins by establishing
differentiated, brand-name, fresh-cut alternatives to their existing commodity
produce lines.
Furthermore, as consumer awareness of the potential health hazards of
untreated produce and traditional produce processing aids using sulfite-based
preservatives increases, the Company believes that the demand for fresh produce
processed without sulfites or other comparable preservatives will rise.
Moreover, for some types of produce, the trend toward pre-packaging has been
limited by the fact that many fruits and vegetables are
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subject to rapid enzymatic degradation, a natural process that causes
discoloration (such as browning) and spoilage. For example, the flavor,
integrity and quality of fresh-cut apples, potatoes and corn deteriorate rapidly
after harvest and these fruits and vegetables, therefore, generally are not
suitable for pre-packaging as fresh-cut produce without the use of processing
aids, such as those marketed by the Company, or the use of alternative methods.
OPERATING STRATEGY
The Company's goal is to become a world-class provider of products and
scientific services designed to maintain the integrity of fresh produce. The
Company has developed the following operating strategies to support this goal:
Integrated Systems Solutions. The Company pursues a total systems approach
to fresh produce, marketing its processing aids, packaging and food safety and
scientific services to producers of pre-packaged, fresh-cut produce as part of
integrated systems solutions which are designed to maintain the quality and
integrity of fresh-cut produce. While the foundation of the Company's business
is its proprietary food processing aids, the Company's packaging capabilities
and technologies can be and are used to enhance the effectiveness of its
processing aids. In marketing its packaging technologies, the Company works
closely with its customers in an effort to determine the optimal packaging
characteristics for customers' products. As a result, the Company is in a
position to influence a customer's buying decision with respect to its packaging
needs. In addition, by offering packaging infrastructure in regions where
produce is grown, the Company enhances its sales prospects by accessing new
customers. The Company believes its food safety and scientific expertise helps
establish its credibility in the fresh-cut produce industry, and that its
scientific and technical services support the commercialization of the Company's
products and provide the Company with an expanding base of food technology
knowledge. The Company believes that its integrated systems solutions for
fresh-cut produce uniquely position the Company to address the evolving needs of
the rapidly growing and developing fresh-cut produce market and enable the
development of a number of new fresh-cut produce products.
Strategic Alliances. The Company intends to continue to form strategic
alliances with leading produce companies. The Company will also seek, where
appropriate and available, alliances with produce, packaging and scientific
services companies. In entering into such alliances, the Company will seek
allies which will enable it to influence the four key elements of
commercialization: (i) sourcing; (ii) processing; (iii) distribution; and (iv)
brand name identification. By requiring higher standards of quality in each of
these aspects of production, the Company seeks to ensure the integrity of
produce products that utilize the Company's technologies and services. During
1997, the Company formed strategic alliances with leading growers, processors
and brand-name marketers, including Potandon in the case of potatoes and
Farmington Fresh in the case of apples.
Commitment to Scientific Integrity. The Company believes the safety and
scientific integrity of its products are crucial to its long-term success. In
this regard, the Company carefully scrutinizes the selection of its strategic
allies. In addition, the Company has created research alliances with leading
institutes of produce and food research, as well as trade associations. Since
1994, the Company has had a Cooperative Research and Development Agreement
("CRADA") with the USDA/Agricultural Research Services in Philadelphia,
Pennsylvania, principally regarding peeled potatoes. The Company's collaborative
projects also include a research grant from the Washington Apple Commission for
a study of enzymatic browning of apples; a collaborative effort with Rutgers
University for post-processing residue analysis; a collaborative agreement with
Penn State University for research on the preservation of mushrooms; and a grant
from the Ben Franklin Technology Center, also for research on the preservation
of mushrooms. The Company also maintains a Scientific Advisory Board, consisting
of experts in the field of food science. Members of the Scientific Advisory
Board meet regularly and consult with the Company to provide advice on the
design and development of the Company's processing aid and packaging products
and scientific and technical services. See "-- Scientific Advisory Board."
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GROWTH STRATEGY
Capitalize on Existing Technology and Strategic Alliances. The Company
intends to increase sales and results of operations by capitalizing on its
proprietary processing aids and network of strategic alliances. The Company
currently is targeting four specific produce categories in which it has: (i) a
commercially available proprietary product; (ii) perceived consumer demand for
such a product; and (iii) strategic alliances with capabilities in either raw
material supply, processing, distribution, or brand recognition. Four current
markets where the Company believes significant growth opportunities exist are:
Fresh-Cut French Fries. In September 1997, the Company executed a
ten-year exclusive trademark license agreement and strategic alliance with
Potandon, a Green Giant Fresh(R) brand licensee of the Pillsbury Company,
to market fresh-cut potato products, such as french fries, under the Green
Giant Fresh(R) brand name to the food service market. The Company intends
to target the approximately 18% of food service (non fast-food) providers
that prepare their own fresh french fries or other potato products,
in-house. The Company believes that its fresh-cut potato products enable
restaurant operators to serve a fresh french fry product, which is
consistent in quality and of high food safety standards, while reducing
significant associated processing and storage costs.
Fresh-Cut Sweet Corn. The Company has entered into a majority-owned
joint venture with Underwood Farms and Twin Garden Farms, leading regional
growers and processors of fresh corn, to market processed fresh-cut sweet
corn on the cob utilizing the Company's processing aids and packaging
technology. The Company is seeking to develop a market for year-round,
nationally available branded fresh-cut corn products.
Fresh-Cut Apple Slices. The Company has entered into a five-year
license agreement (subject to extension) under which it provides its "Apple
Fresh(R)" processing aids, packaging and scientific and technical services
to Farmington Fresh, a major grower and marketer of Fuji apples in
California, for use in the production of pre-packaged, fresh-cut Granny
Smith and Fuji sliced apples targeted at the retail market. Fresh-cut
sliced apples are currently being marketed only in a limited geographic
region in California.
Fresh-Cut "Baby" Carrots. The Company sells its processing aids to
several processors of fresh-cut, packaged carrots. The Company believes
that its processing aids will enable processors of fresh-cut carrots to
distinguish their products from those of their competitors. The fresh-cut
carrot market is highly developed and the Company believes substantial
opportunities exist to expand sales of its processing aids to additional
fresh-cut carrot processors.
Introduce Proprietary Processing Aid Technology into New Produce
Categories. The Company has developed or is developing processing aids for
other vegetables and fruits, including artichokes, broccoli florets, baby leaf
lettuce, mushrooms, onions and parsnips. The Company believes that opportunities
may exist in each of these produce categories for a pre-packaged, fresh-cut
branded product.
Develop Cross-Marketing Opportunities. The Company believes that its
proprietary processing aids, packaging technologies and scientific and technical
services represent complementary components of the Company's integrated systems
solutions for fresh-cut produce. As a result, the Company believes that
significant cross-marketing opportunities exist for its products and services.
Expand International Business. The Company believes that the trends
driving the growth of the fresh-cut produce market in the U.S. are more mature
in the European food markets, where there is a heightened sensitivity to food
safety and freshness. Currently, the Company's European revenues are principally
generated through its specialty packaging businesses in the U.K., which are used
primarily in the packaging of snack food, produce and bakery products. The
Company believes its proprietary perforating technology provides it with a
competitive advantage in servicing the needs of produce processors. In December
1997, the Company completed the acquisition of Fabbri, which is located in the
Valencia region of Spain, one of the principal agricultural growing areas in
Southern Europe. Fabbri provides specialty packaging products to the Southern
European produce industry. The Company believes its current specialty packaging
business and its relationships with European produce processors present
opportunities to introduce its processing aid technology in
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selected produce categories. The Company believes additional opportunities exist
to market its technology and products throughout the world.
Pursue Strategic Acquisitions. The Company seeks to make opportunistic
acquisitions of companies that enable the Company to increase sales of its
products and services. In pursuing such acquisitions, the Company seeks to (i)
gain immediate access to the acquired company's customer base, (ii) gain access
to large produce processing companies, and (iii) cross-market the Company's
proprietary processing aids, packaging technologies, and scientific and
technical services.
PRODUCTS AND SERVICES
The Company's products and services fall into three major classifications:
processing aids, packaging technologies and scientific and technical services,
which are complementary components of the Company's integrated systems solutions
for fresh-cut produce.
Processing Aids. The Company develops, manufactures and markets
proprietary and patented processing aids, designed to inhibit the enzymatic
degradation that causes fruits and vegetables to begin to deteriorate
immediately after processing, thereby better maintaining their natural
characteristics, such as color, texture, taste and smell. The Company believes
its processing aids provide it with competitive advantages over other existing
fresh-cut produce processing technologies.
According to FDA regulations, a processing aid is a substance used as a
manufacturing aid to enhance the appeal or utility of a food. FDA regulations do
not require packaged produce to identify certain processing aids used in
processing the products. The Company's processing aids are designed to be
applied to produce during post-harvest processing. The Company's processing aids
are then removed from the produce prior to packaging, although insignificant
amounts may remain on the produce. As a result, the Company believes that
produce treated with the Company's processing aids does not require labeling
referring to those processing aids under FDA regulations. Based on advice from
FDA counsel and on assessment of relevant scientific literature by the Company
and by third parties, the Company has concluded that the use of the Company's
processing aids in accordance with the Company's protocols is GRAS under FDA
regulations. See "Risk Factors -- Government Regulation; Risks Associated with
Food Processing Products."
The Company formulates processing aids for certain varieties of produce in
accordance with its detailed scientific protocols. The Company believes that its
Apple Fresh(R), Corn Fresh(R) and Potato Fresh(R) processing aids have the
potential to create new markets for fresh-cut apple slices, fresh-cut sweet corn
and fresh-cut potato products because effective, non-sulfite based processing
aids have not previously been commercially available. For example, Apple
Fresh(R), when used in conjunction with the Company's packaging technology, can
be used to inhibit browning and other enzymatic degradation in certain varieties
of fresh apple slices for up to 14 days after processing. Corn Fresh(R) and
Potato Fresh(R) are designed to provide similar pre-packaged distribution
capability for fresh-cut corn on the cob and fresh-cut potato products. In
addition to Apple Fresh(R), Potato Fresh(R) and Corn Fresh(R), the Company
currently markets its Carrot Fresh(R) processing aid for carrots. The Company is
developing processing aids for artichokes, broccoli florets, baby leaf lettuce,
mushrooms, onions and parsnips. Because several variables influence the efficacy
of the Company's processing aids, the Company must work closely with each
customer and potential customer, using its scientific and technical services for
product formulation and extensive on-site testing, as well as assisting in
designing packaging to optimize the effectiveness of the processing aid for the
particular type of produce.
Packaging. The Company's produce packaging business involves perforating,
converting and printing flexible packaging, using technologies and processes,
some of which are proprietary to the Company. The Company also designs packaging
films, the structure of which allows gas and moisture transmission at different
rates, thereby maintaining a balance that enhances the effectiveness of the
Company's processing aids. As with processing aids, in marketing its packaging
technology the Company works closely with each customer and potential customer,
using its scientific and technical services to determine optimal packaging
characteristics, such as the type of film and extent of perforation, including
the size, shape and number of holes, of the packaging, based on the respiration
rate of the particular type of produce.
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As one of the leading perforators of packaging film, the Company is
targeting specialty and, in some instances, new markets. Although historically
the films used in the produce industry have not been perforated, perforating has
been shown to be beneficial to the packaging of certain varieties of fresh-cut
produce, which by their nature continue to consume oxygen and produce carbon
dioxide and moisture after being cut and packaged. Proper perforation of the
packaging materials allows the produce to "breathe," thereby permitting the
packaging to work with the processing aid to inhibit the process of enzymatic
degradation. The Company's microperforation technology is proprietary. The
Company's proprietary production capability allows the Company to produce
perforated films of high quality and great consistency in a cost-effective
manner, which provide control over moisture and oxygen transmission rates, among
other performance characteristics. The Company believes its broad range of
capabilities to produce perforated films provides it with a competitive
advantage. The Company has an exclusive agreement with DuPont, whereby DuPont
purchases its entire requirement for flame perforation services for its Mylar(R)
film from the Company.
Another aspect of the Company's packaging business is the conversion of
packaging film into bags designed for its customer's food packaging needs for
applications such as produce and bakery. The Company also has food-grade
standard printing capabilities in the U.K., utilizing three six-color presses.
The Company's packaging business provides additional market presence in certain
geographic regions that the Company believes can enhance sales prospects for the
Company's processing aids and provide cross-marketing opportunities. In the
U.S., the Company subcontracts its printing and converting requirements.
In addition to its produce packaging capabilities, the Company provides
packaging to the snack food, bakery and confectionery industries, and for other
uses.
Scientific and Technical Services. The Company provides scientific and
technical services in the areas of post-harvest horticulture, the forensic
analysis of food contaminants and food safety, which are areas of critical
importance for processors of fresh produce. The Company's post-harvest
horticulture services are designed to help processors understand the impact of
harvesting and handling methods on the flavor, texture and nutritional value of
produce. In providing these services, the Company focuses on solving particular
problems unique to certain kinds and varieties of fruits and vegetables in an
effort to maintain the quality and integrity of fresh-cut produce and reduce
post-harvest loss. The Company's forensic testing services involve the analysis
of food adulteration by foreign or unlabelled substances or contaminants. The
Company's food safety services, which are intended to reduce or eliminate
pathogens known to cause serious illness in humans, include research,
microbiological testing, production monitoring, and the implementation of Total
Quality Management and Hazard Analysis and Critical Control Point ("HACCP")
programs at its customers' facilities. The FDA recently announced its intention
to introduce a new rule requiring HACCP programs, which programs are designed to
prevent microbial and other safety hazards in food products through appropriate
controls during production and processing, at certain juice processing plants.
The Company believes that HACCP programs ultimately will become standard in the
produce processing industry in response to emerging concerns about the microbial
safety of fresh fruits and vegetables.
The Company's scientific and technical services team consists of four
Ph.D.'s, four senior scientists, and additional support technicians, with
expertise in the areas of microbiology, food science, post-harvest plant
physiology and plant pathology. The Company maintains two laboratories dedicated
to microbiological testing, as well as an applications laboratory used as part
of the Company's sales and marketing program. The Company also maintains a
laboratory at the USDA's Eastern Regional Research Center through a USDA CRADA.
As part of its sales force, the Company also employs process engineers and a
chemical engineer with expertise in applying the Company's scientific and
technical expertise to a full-scale production facility.
The Company believes its scientific and technical expertise enhances its
credibility in marketing its processing aids and packaging materials to
fresh-cut produce processors. Accordingly, the majority of the Company's
scientific and technical services are provided to support marketing efforts for
the Company's other products, as an integral component of the Company's
integrated systems solutions for fresh-cut produce. The Company also provides
microbiological services on a contract basis for some customers, in what the
Company believes is a growing market for food safety-based testing and
consulting services. In addition to providing
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incremental revenue, these consulting relationships may provide cross-marketing
opportunities for the Company's products.
To increase its scientific resources and expertise, the Company has entered
into research alliances with leading institutes of produce and food research, as
well as trade associations. These include a CRADA with the USDA/Agricultural
Research Services in Philadelphia, Pennsylvania; a research grant from the
Washington Apple Commission for a study of enzymatic browning of apples; a
collaborative effort with Rutgers University for residue analysis; a
collaborative agreement with Penn State University for research on the
preservation of mushrooms; and a grant from the Ben Franklin Technology Center,
also for research on the preservation of mushrooms. As an additional technical
resource, the Company maintains a Scientific Advisory Board, consisting of
experts in the field of food science, the members of which are available for
consulting on an as-needed basis. See "-- Scientific Advisory Board."
Company-sponsored research and development expenditures for the years ended
December 31, 1995, 1996 and 1997 were approximately $601,000, $939,000 and
$1,203,000, respectively. See Consolidated Financial Statements.
MARKETS
The Company's products are used in the processing of fresh-cut fruits and
vegetables for both the retail and food service markets. By helping to maintain
the quality and integrity of fresh-cut produce, the Company can meet the needs
of its customers who are seeking to offer differentiated, brand-name, nationally
available fresh-cut alternatives to commodity produce lines. In certain produce
categories, such as fresh-cut sweet corn on the cob, the Company's processing
aids have the potential to develop a national market for its customers, who have
previously been limited to regional markets. The Company's packaging products
are used in the fresh-cut produce industry in the U.S. and by leading companies
in the U.K. and Europe in the fresh-cut produce, bakery, snack food and
confectionery industries, and for other uses. The scientific and technical
services offered by the Company provide companies in the produce industry,
especially those involved with fresh-cut and minimally processed produce, with
analysis, protocols and plans relating to food safety and quality assurance
programs, including microbiological testing, and provides additional internal
technical support in developing the Company's processing aid and packaging
protocols. The Company's products are increasingly being marketed in concert as
integrated systems solutions comprised of products, processes and scientific and
technical services to maintain the quality and integrity of fresh-cut produce.
The Company's penetration to date of the various markets it is seeking to
develop has been limited. The Company's Respire(R) packaging is used on a number
of produce categories, including apples and potatoes. The Company has been
developing relationships with processors and other companies in connection with
the use of the Company's processing aid technology and related protocols in
various fruit and vegetable categories.
The Company believes that demand for fresh-cut produce is being driven at
the retail level by consumer preferences for healthy foods, convenience and
variety. Similarly, demand for fresh-cut produce by food service providers is
increasingly driven by the need to be able to deliver a product which is
consistent in quality and of high food safety standards while reducing
significant processing and storage costs associated with fresh-cut produce.
Development of new fresh-cut produce applications is further supported by
produce growers and processors who are seeking to increase revenues and margins
by establishing differentiated, brand-name, fresh-cut alternatives to commodity
produce lines.
SALES AND PRODUCT COMMERCIALIZATION PROCESS
In developing its processing aid products, the Company first seeks to
identify the physiological and biochemical issues associated with a particular
fresh-cut fruit or vegetable (e.g., white blush on carrots) and to determine the
cause of any issue so identified. Then the Company seeks to develop an
appropriate solution in a laboratory setting when it perceives a significant
market opportunity may exist.
The Company has compiled an extensive database of processors, their
processing capabilities and the varieties of fruits and vegetables they process
and, therefore, can approach potential customers from a position of extensive
knowledge and experience with a proposed produce solution. After initial
discussions, the Company initiates a detailed review and testing process to
customize the application of the Company's technologies to the potential
customer's processing system. The testing process involves both application of
the
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<PAGE> 35
Company's processing aids and, where appropriate, other scientific and technical
support services, such as HACCP and the design of tailored packaging solutions.
Once such development is completed, the product moves through successive steps
of an increasingly sophisticated testing program, during which the Company
identifies and proposes any processing changes that may be needed and which
ultimately leads to a product decision. The Company also works with the customer
to develop specific protocols that should be applied. See "Risk
Factors -- Extended Sales and Product Commercialization Process."
With respect to its packaging business, the Company plans to meet the
growing needs of existing customers, develop new products that can be sold to
existing customers, and sell existing and new products to new customers as such
opportunities are identified. The experience accumulated by the Company in all
aspects of the produce industry, together with its scientific expertise, is
helping to facilitate an integrated systems solution approach to the packaging
needs of the processor.
In the area of scientific and technical services, the Company has an
existing customer base that it has built up over time. Since the acquisition of
CMC, the Company has been actively marketing an increased range of available
services, with a specific emphasis on enhancing cross-marketing opportunities.
The Company has been developing relationships with produce processors and
other companies in an effort to penetrate the fresh-cut produce market. The
Company believes that its recent packaging acquisitions in regions where produce
is grown will serve as a platform to enhance the Company's ability to
cross-market its other products and services to other produce processors and
growers in those regions. Similarly, with sales of processing aids, the Company
has an opportunity to sell its complementary packaging. The Company also plans
to make proposals for product development or food safety programs to other
existing customers of its processing aids and packaging.
Due to the extended nature of the development, testing and sales process
for processing aids, the Company has experienced no significant backlog of
orders to date for these products and, based on the relatively small incremental
cost and time frame required to increase product output, the Company does not
believe that any backlog measurement is material. Similarly, the Company has not
experienced a significant backlog of orders for its packaging materials.
SOURCES OF SUPPLY
The Company purchases its U.S. processing aid ingredient requirements from
a number of suppliers, some of which use sources outside the U.S. Requirements
for certain raw materials used in the Company's processing aids are obtained
pursuant to a contract with Jungbunzlauer, Inc., a U.S. subsidiary of a Swiss-
based company which is a former Company shareholder. These raw materials
transactions are undertaken on a commercial, arm's-length basis. The mixing of
the Company's processing aids is currently conducted under a subcontract with a
third party. The Company believes that the mixing of its processing aids could
be performed in-house or by numerous other parties on an out-sourcing basis
without incurring substantial additional expense.
Potatoes used in processing are provided under a long-term supply agreement
with Potandon. This long-term agreement represents a source of supply that might
be difficult for the Company to replace without incurring potentially
substantial additional expense. Corn is supplied under a number of fixed-price
supply agreements, principally with the parties to the Newcorn strategic
alliance.
The Company's U.S. packaging business utilizes a number of subcontractors
for film manufacturing, conversion and printing. The U.K. packaging business
sources its film and other requirements from a number of suppliers, most of
which are based in the U.K. and Europe. The U.K. packaging business performs its
own conversion and printing. The Company believes that it is not dependent on a
single or a few suppliers or subcontractors for its packaging businesses.
INDUSTRY AND GEOGRAPHIC AREAS
Of the Company's two primary product lines, processing aids are sold
primarily in the U.S. with smaller amounts also sold in Canada, while packaging
materials are marketed in North America, the U.K. and, to a lesser extent,
Continental Europe. Since the acquisition of Bakery Packaging Services Limited
("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,
some of the proprietary perforating technologies developed by
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<PAGE> 36
BPS have been introduced into the U.S. market. Other proprietary perforating
technologies held by BPS may be introduced into the U.S. market after the
Company forms a joint venture with Derrick Lyon, the current Chief Executive
Officer of EPL Technologies (Europe) Limited and a former shareholder of BPS.
See "Management -- Employment and Consulting Agreements," "Certain Transactions"
and Note 17 to Consolidated Financial Statements.
CUSTOMER CONCENTRATION
During the year ended December 31, 1997, two packaging customers, Pepsico
and Geest, accounted for approximately 32% and 6%, respectively, of the
Company's sales. During the same period, on a pro forma basis reflecting the
Fabbri Acquisition, these two customers accounted for an aggregate of
approximately 28% of the Company's sales. During 1996, Pepsico accounted for 13%
of the Company's sales. During 1995, no customer accounted for more than 10% of
the Company's sales.
SEASONALITY
Although, historically, the management of the Company has not discerned a
seasonal pattern in the Company's business on a consolidated basis, certain
aspects of the Company's business are seasonal. For example, Fabbri, one of the
Company's subsidiaries, historically has reported relatively higher sales and
income in the Company's first and fourth fiscal quarters because of the timing
of citrus and other crop harvests. The Company's results of operations may
become subject to greater seasonality as its various businesses develop at
different rates.
COMPETITION
Although many other companies provide packaging or microbiological testing
and, to a lesser extent, processing aids for fresh produce, the Company is
unaware of any competitor which provides each of these as components of
integrated systems solutions for processing fresh-cut produce. The Company's
direct, indirect and potential competitors include producers of sulfites and
"sulfite substitutes," as well as other providers of alternative preservation
and packaging technologies, including those employing temperature, gas and
humidity control. The Company believes its products may provide technological
advantages over competing technologies and processes, particularly in terms of
their safety and effectiveness. Despite the potential advantages of the
Company's products and technologies, however, many competitors and potential
competitors, particularly in the market for produce packaging, are larger, have
greater financial, marketing, sales, distribution and technological resources,
and enjoy greater name recognition than the Company. Certain of these companies
may also enjoy long-standing relationships with processors of fresh produce.
Accordingly, there can be no assurance that the Company will be able to compete
effectively against such competitors.
The Company believes the primary competitive factors in the market for
fresh-cut produce technologies include safety and consistency,
cost-effectiveness and ease of use, availability of technical service and
support and product innovation.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
The Company currently has two U.S. patents, four U.S. patents pending and
numerous others licensed to the Company or under review for application. The
U.S. patents for the Company's "Potato Fresh(R)" and "Carrot Fresh(R)" products
were granted on June 26, 1990 and September 13, 1994, respectively. Patents are
pending for the Company's processing aids for broccoli and apples. Patents that
had been granted, or applications that were pending as of June 8, 1995 run for
the longer of 17 years from the date of formal grant or 20 years from the date
of filing. For all subsequent filings, U.S. patents (once granted) run for 20
years from the date of formal application. The Company also has various
registered U.S. trademarks, including Respire(R), and its processing aid names,
such as Potato Fresh(R), and five trademark applications. The Company will also
seek licenses for other trademarks which it believes will add value to a
proposed product, as evidenced by its license of the "Green Giant Fresh(R)"
brand for fresh-cut potato products. Furthermore, the Company has two patents
and 23 patent applications pending outside the U.S. for its main technology,
with others under review. To help protect the Company's technology and
proprietary information, the Company has confidentiality agreements with its
customers, as well as internal non-disclosure agreements and safeguards,
although there can be no assurance that these safeguards will be adequate to
fully protect the Company. See "Risk Factors --
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<PAGE> 37
Dependence on Proprietary Technologies and Other Intellectual Property; Risks of
Infringement or Misappropriation." 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.
Green Giant Fresh(R) is a registered trademark of the Pillsbury Company.
This Prospectus contains trademarks and tradenames of companies other than the
Company.
REGULATORY REQUIREMENTS
Based on advice from FDA counsel and on assessment of relevant scientific
literature by the Company and by third parties, the Company has concluded that
the use of the Company's processing aids in accordance with the Company's
recommended protocols is GRAS under FDA regulations. There is a risk that new
scientific information about an ingredient could change its GRAS status, that
the FDA could revise its regulations governing the GRAS status of the
ingredients, or that the FDA might take the position that an ingredient is not
GRAS under the current regulations. Any such change could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company employs a firm of Washington-based FDA lawyers to advise
the Company on the effect of FDA regulations on the Company's operations,
together with any planned or potential changes in government attitude and
legislation. The Company also consults with advisors outside the U.S. concerning
foreign regulatory issues. Compliance with existing FDA regulations has not been
a material burden on the Company's operations to date, although there can be no
assurance that the regulatory requirements will not change and increase the
burden to the Company. See "Risk Factors -- Government Regulation; Risks
Associated With Food Processing Products."
The Company's operations are subject to federal, state and local U.S.,
U.K., Spanish and other European environmental laws and regulations that impose
limitations on the generation, storage, transport, disposal and emission of
various substances into the environment, including laws that restrict the
discharge of pollutants into the air, ground and water and establish standards
for the treatment, storage and disposal of solid and hazardous wastes. The
Company is subject to U.S. and foreign laws and regulations regarding the use,
storage, transport and disposal of inks and other substances used in its
operations. Although the Company believes it is in compliance with applicable
federal, state and local U.S., U.K., Spanish and other European environmental
laws and regulations in all material respects, there can be no assurance that
there will not be an accidental contamination, disposal or injury from the use,
storage, transport or disposal of inks and other substances used in the
Company's business. Additionally, the Company's use of plastic film in its
packaging operations may subject it, in certain jurisdictions, to laws and
regulations designed to reduce solid wastes by requiring, among other things,
plastics to be degradable in landfills, minimum levels of recycled content,
various recycling requirements, disposal fees and limits on the use of plastic
products. New laws with respect to such plastic products and other wastes either
have recently been adopted or are pending in the U.S. and various countries in
Europe, including Spain and the U.K. In addition, various consumer and special
interest groups have lobbied from time to time for the implementation of
additional environmental protection measures. Moreover, environmental law
enforcement authorities in the U.S. and Europe have a considerable degree of
discretion when considering possible enforcement actions. The Company may be
required to make capital expenditures in response to changing compliance
standards and environmental regulations. Furthermore, unknown contamination of
sites currently or formerly owned or operated by the Company (including
contamination caused by prior owners and operators of such sites) or adjacent
properties or groundwater and off-site disposal of hazardous substances and
wastes may give rise to additional compliance costs. There can be no assurance
that the Company will not incur liabilities for environmental matters in the
future, including those resulting from changes in environmental regulations or
unknown contamination, that may have a material adverse effect on the Company's
business, financial condition and results of operations.
Specifically, during its due diligence investigation in connection with the
Fabbri Acquisition, the Company was informed that from time to time in the past
Fabbri disposed of certain hazardous waste (such as used oil cans, empty dye
cans and electrolytic salts residue) using some waste management companies that
were not authorized handlers of hazardous waste under applicable Spanish
legislation. Some drums of such hazardous waste also were not labelled as
required and stored longer than permitted under Spanish legislation.
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Under Spanish law, a producer of hazardous wastes remains responsible for
damages to third parties or the environment if these wastes are collected by a
non-authorized hauler. As part of the documentation of the Fabbri Acquisition,
the Company obtained from the prior owner of Fabbri, Sidlaw Group plc, a U.K.
public-company ("Sidlaw"), an indemnification for any fines or penalties levied
against the Company from the collection of waste by unauthorized haulers during
the period Fabbri was owned by Sidlaw, subject to a limit of approximately
$4,500,000. The Company is not aware that the collection of waste by
unauthorized haulers resulted in any environmental damages, and therefore does
not believe that these represent possible material losses. To the extent that
the Company incurs liabilities in respect of the foregoing that are not covered
by the indemnity from Sidlaw, or Sidlaw fails to fulfill its indemnity
obligations, there could be a material adverse effect on the Company's business,
financial condition and results of operations. Nevertheless, the Company is not
aware that any claims have been made or are pending, and is not aware of any
past or current environmental conditions that it believes will result in any
material adverse effect on the Company's business, financial condition and
results of operations and believes it is currently in compliance in all material
respects with environmental laws applicable to the Company's operations in the
U.S. and Europe, the failure to comply with which could have a material adverse
effect on the Company. See "Risk Factors -- Environmental Matters."
EMPLOYMENT
As of December 31, 1997, the Company had 191 employees providing services
in the U.S. and Europe, of which 19 were engaged in sales and marketing, 127 in
production, 16 in technical services and research and 29 in management and
administration. Some of the managerial employees are employed pursuant to
employment agreements, and the Company maintains key man insurance on Mr. Devine
in the amount of $1,000,000. See "Management -- Employment and Consulting
Contracts." The Company expects to recruit additional personnel as and when
required.
PROPERTIES
The Company believes that its current facilities are adequate for its
present needs and that it would not have any difficulty in obtaining additional
or alternate space at prevailing rates if necessary. The Company's current
facilities are as follows:
<TABLE>
<CAPTION>
SQUARE
LOCATION FEET OWNED/LEASED (EXPIRATION) CHARACTER OF USE
-------- ------- ------------------------- ----------------
<S> <C> <C> <C>
Philadelphia, PA............ 6,600 Leased (1/2002) Principal administrative office
Fresno, CA.................. 2,600 Leased (1/1999) Applications laboratory
Oswego, IL.................. 16,400 Leased (6/1999) Packaging operations
Gainsborough, England....... 19,500 Leased (10/2004) Printing facility
Runcorn, England............ 17,500 Owned Perforating and converting facilities
Runcorn, England............ 5,100 Leased (4/2007) Perforating and converting facilities
Runcorn, England............ 8,500 Leased (12/2000) Perforating and converting facilities
Somis, CA(a)................ 74,200 Leased (9/2002) Fresh-cut corn processing facility
Worcester, MA............... 1,200 Leased (12/1998) Food safety and microbiological
testing laboratory and office space
Valencia, Spain............. 142,100 Owned Packaging operations
</TABLE>
- - ---------------
(a) Property is leased by Newcorn and the lease is guaranteed by the Company.
Newcorn will occupy approximately 25% of the facility. The Company intends
to sublease the remaining space.
The Company also occupies additional space under agreements with third
parties, primarily in connection with research and development arrangements and
processing activities.
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In addition, Newcorn currently is negotiating with the proposed landlord of
a food packaging, processing and warehouse facility in Darien, Wisconsin. If
such lease is obtained, Newcorn expects the facility to cover approximately
39,000 square feet, at an annual rental of approximately $127,000, for a ten
year term commencing no later than the beginning of May 1998. Newcorn also
expects to provide the landlord with approximately one-third of the $300,000
estimated cost of required improvements to the facility. The Company expects
that it will be required to guarantee any such lease and other obligations.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject. None of the Company's officers
or directors are involved in any legal proceedings relating to the Company. To
the best of the Company's knowledge, there are no proceedings being contemplated
by governmental authorities.
SCIENTIFIC ADVISORY BOARD
The Company has arrangements with professionals in the field of food
science, who serve as the Company's Scientific Advisory Board. Members are
chosen for their expertise in areas that are important to the development of the
Company's products. The Company's advisors devote only a small portion of their
time to the affairs of the Company and have commitments to, or consulting or
advisory contracts with, other institutions which may conflict or compete with
their obligations to the Company. Members of the Scientific Advisory Board
consult with the Company to provide advice on the design and development of the
Company's products. With the exception of Dr. Romig, none of the advisors is a
Company employee. The Company requires each of its scientific advisors to
execute a confidentiality agreement upon the commencement of his or her
relationship with the Company. The agreements generally provide that all
confidential information made known to the individual during the term of the
relationship shall be the exclusive property of the Company and shall be kept
confidential and not disclosed to third parties except in specified
circumstances. Members of the Scientific Advisory Board receive reimbursement of
travel expenses for Company business. Certain members of the Scientific Advisory
Board or entities with which they are associated perform services for the
Company in addition to their Scientific Advisory Board duties, for which they
may be separately compensated. The Company's current Advisory Board consists of
the following persons:
Dr. Margaret M. Barth. Director, Research and Development, Redi-Cut Foods,
Inc., Chicago, Illinois. Dr. Barth has conducted research on the effect of
modified atmosphere packaging for the retention of vitamin and market quality
characteristics of intact and fresh-cut vegetables and on novel approaches to
the retention of sensory and nutritional properties of fresh-cut vegetables.
Dr. Robert B. Beelman. Professor, Department of Food Science, The
Pennsylvania State University. Dr. Beelman's principal research concentration is
in pre- and post-harvest factors influencing the quality of mushrooms.
Dr. Larry R. Beuchat. Research Professor, Center for Food Safety,
University of Georgia. Dr. Beuchat has published extensively in the area of
microbiology and is on the Editorial Board for Food Microbiology, the
International Journal of Food Microbiology, and the Journal of Food Mycology. He
is also an associate editor for the Journal of Food Science.
Dr. Joe E. Cherry. Professor, Department of Botany and Microbiology,
Auburn University. Dr. Cherry's current research focuses on plant physiology,
biochemistry, and molecular biology in relation to environmental stress biology,
particularly thermotolerance in plants. Dr. Cherry was the founder of Agra
Research, Inc., where he developed the Company's processing aids. The Company
completed the acquisition of Agra Research, Inc. in early 1993.
Dr. William R. Romig. Vice President, Research and Development, EPL
Technologies, Inc.
Dr. Mikal E. Saltveit. Professor, Department of Vegetable Crops,
University of California, Davis. Dr. Saltveit's research focus is on the
physiological effects of abiotic stresses (e.g., heat, chilling, low oxygen,
elevated carbon dioxide, and wounding) on plant tissue.
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<PAGE> 40
Dr. Gerald Sapers. Supervisory Research Food Technologist and Lead
Scientist, USDA/ERRC, Philadelphia. Dr. Sapers has expertise in various areas of
food chemistry, including the inhibition of browning reactions in food systems.
His research emphasis is on minimally processed juices, the preservation of
sensory characteristics in fresh-cut fruits and vegetables, and microbiology of
minimally processed fruits and vegetables. Dr. Sapers is the Principal
Investigator on a CRADA with the Company.
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<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of
the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY AND AFFILIATES
---- --- -----------------------------------------
<S> <C> <C>
Paul L. Devine............................ 43 Chairman of the Board of Directors, President, Chief
Executive Officer
Bruce M. Crowell.......................... 43 Vice President and Chief Financial Officer
Timothy B. Owen........................... 39 Secretary and Treasurer
Derrick W. Lyon........................... 55 Chief Executive Officer of EPL Technologies (Europe)
Limited
Dr. William R. Romig...................... 52 Senior Vice President -- Science and Technology
Antony E. Kendall......................... 56 Chief Executive Officer of EPL Flexible Packaging
Ltd.
Virginia N. Finnerty...................... 38 Chief Operating Officer of IPS Produce, Inc.
Jose Saenz de Santa Maria................. 40 Managing Director of Fabbri Artes Graficas Valencia
SA
Robert D. Mattei(1)(2).................... 59 Director
Ronald W. Cantwell(3)..................... 54 Director
A. S. Clausi(1)(2)(4)..................... 75 Director
</TABLE>
- - ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Mr. Cantwell has informed the Company that he intends to resign from the
Board of Directors following completion of the Offering or at such later
time as his replacement has been identified and appointed. The Company is
currently interviewing potential candidates for additional directors, but no
particular individual has yet been identified.
(4) Appointed March 25, 1998.
Paul L. Devine. Mr. Devine was appointed Chairman and Chief Executive
Officer of the Company in March 1992. From 1989 to 1992, Mr. Devine was involved
as a business consultant in the identification and targeting of acquisitions for
various public companies. During this time, he also served as a director and
chief executive officer of various companies, including three U.K. subsidiaries
of Abbey Home Healthcare, Inc., a U.S. public health care group. Prior to this,
he was the Chief Executive of Leisure Time International, plc from 1986 to 1989.
He is a graduate of London University and holds Bachelors and Masters degrees in
curriculum research. Throughout his business career, he has been intimately
involved in the design and implementation of new product strategies, both in
financial services and health/hygiene services.
Bruce M. Crowell. Mr. Crowell joined the Company as Vice President and
Chief Financial Officer in February 1998. From 1994 until 1998, Mr. Crowell
served as Vice President and Chief Financial Officer, Secretary and Treasurer of
Datron Inc., a privately held international aerospace company. From 1988 until
1994, Mr. Crowell was Vice President, Chief Financial Officer and Treasurer of
Miltrope Group Inc., a publicly held defense electronics company. Mr. Crowell
holds a BBA in Accounting from Florida Atlantic University.
Timothy B. Owen. Mr. Owen was appointed Secretary and Treasurer in October
1996, having served as European Financial Controller of the Company since 1995.
From 1992 until 1995, Mr. Owen performed financial and accounting services for
the Company as an independent consultant. From 1990 to 1993, Mr. Owen served as
chief financial officer and secretary of various companies, including three U.K.
subsidiaries of Abbey Home Healthcare, Inc. Prior to this, from 1986 to 1990, he
was a financial controller for The Foseco Group Plc, holding both corporate and
operational positions. Mr. Owen qualified as a chartered accountant with Touche
Ross & Co. (now Deloitte & Touche) in 1985. He is a graduate of Brunel
University, and holds an Honors degree in economics.
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<PAGE> 42
Derrick W. Lyon. Mr. Lyon was appointed Chief Executive Officer of EPL
Technologies (Europe) Limited in September 1995. Mr. Lyon previously served as
Chief Operating Officer of BPS (now EPL Flexible Packaging Ltd.) following its
acquisition by the Company in September 1995 until December 1996. From 1981 to
1995, Mr. Lyon was Managing Director and a founding shareholder of BPS. Prior to
this, Mr. Lyon held senior management positions within Bernard Wardle & Co.,
Smurfit Limited, and W.R. Grace, where he had over 25 years experience in the
printing and packaging industries. He holds a degree in mechanical engineering
from City University, London, and Bachelors and Masters degrees in economics
from St. John's College, Cambridge.
Dr. William R. Romig. Dr. Romig was appointed Vice President of Research
and Development of the Company in September of 1994, and, as of January 1, 1998,
serves as Senior Vice President of Science and Technology. From 1988 until 1994,
Dr. Romig was first Senior Director of Vegetable Genetics and then Senior
Director of Business Development and Director of Product Development for
FreshWorld, a joint venture between DNA Plant Technology Corporation, a public
company, and DuPont. Prior to 1988, he worked for General Foods Corporation
(Kraft) eventually attaining the highest technical position of Principal
Scientist. Dr. Romig received his B.S. in Plant Pathology from Cornell
University and his Ph.D. from the University of Delaware. He has held positions
of Adjunct Professor at several universities and has lectured and published in
the area of fresh-cut fruits and vegetables. Dr. Romig is also Chairman of the
Company's Scientific Advisory Board.
Antony E. Kendall. Mr. Kendall joined the Company in August 1996 as chief
executive of BPS (now EPL Flexible Packaging Ltd.). From 1970 to 1996, Mr.
Kendall worked for the UCB group of companies in various senior management
positions. Most recently he was Managing Director of UCB Flexible Ltd.,
responsible for marketing its specialty packaging products in the U.K. and for
Pepsico European contracts. He holds a B.S. degree in Mechanical Engineering
from the University of London.
Virginia N. Finnerty. Ms. Finnerty has served as Chief Operating Officer
of IPS Produce, Inc., the subsidiary through which the Company conducts its
activities related to fresh-cut potatoes, since June 1997. From June 1994 to
June 1997, Ms. Finnerty served as the Company's Director of Business
Development. From February 1994 to June 1994, Ms. Finnerty worked in sales and
marketing development for the Greater Philadelphia Chamber of Commerce. From
1990 to 1993, Ms. Finnerty served as a sales and marketing manager for Osterman
Foods. Ms. Finnerty holds a BFA and an Education Certification from Temple
University and an MBA in marketing from St. Joseph's University.
Jose Saenz de Santa Maria. Mr. Saenz has served as Managing Director of
Fabbri since its acquisition by the Company in December 1997. Mr. Saenz joined
the Company in July 1997 as an independent consultant, and was responsible for
conducting the Company's on-site due diligence with respect to the Fabbri
Acquisition. From January 1994 to July 1997 Mr. Saenz served as Managing
Director of AMCOR Flexibles Espano. Prior to this, Mr. Saenz served as a senior
executive of Ramondine, Inc., a specialty packaging company, from August 1987 to
December 1993. He is a law graduate of the University of Madrid and holds
Masters degrees in Commercial Management and Marketing from CESEM Business
School (Madrid).
Robert D. Mattei. Mr. Mattei is an investor and entrepreneur. Mr. Mattei
has been self-employed in various aspects of the food service industry for more
than 20 years. As a restaurateur, Mr. Mattei has developed, operated and sold
many successful operations. Mr. Mattei currently owns three restaurants, and
acts as an industry consultant primarily involved in the development of
restaurant concepts. Mr. Mattei has been a member of the Board of Directors of
the Company since February 1988 and was Secretary of the Company from February
1988 to March 1993.
Ronald W. Cantwell. Mr. Cantwell currently serves as President of Trilon
and has done so since its inception in June 1995. Mr. Cantwell also serves as
President of VC Holdings, Inc., the sole manager of Trilon. Mr. Cantwell has
also served as President of The Catalyst Group, Inc. since 1992, where he has
executed a variety of merchant banking activities and developed and directed the
strategic plan for a diverse mix of utility assets. In addition, he was involved
in advising numerous mergers, acquisitions and restructuring matters for The
Edper Group, the principal investor in The Catalyst Group. Prior to joining The
Catalyst Group, Mr. Cantwell spent nineteen years in the practice of public
accounting, most recently with Ernst &
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<PAGE> 43
Young, where he was a tax partner and headed the Dallas-based Mergers and
Acquisitions practice. Mr. Cantwell has been a director of the Company since May
1997.
A. S. Clausi. Mr. Clausi was elected to the Board of Directors in March
1998. For more than five years, Mr. Clausi has served as a consultant and
adviser to the food industry. He was Senior Vice President and Chief Research
Officer of General Foods Corporation worldwide, prior to his retirement. Mr.
Clausi is a past President of the Institute of Food Technologists (IFT), past
Chairman of the IFT Foundation and past Chairman of the Food Safety Council. He
has a chemistry degree from Booklyn College and has done graduate work at
Stevens Institute of Technology. Mr. Clausi is the holder of 13 patents, has
authored chapters in food technology texts and has delivered numerous papers on
various aspects of the management of food science and technology. Mr. Clausi is
currently a director of Opta Food Ingredients, Inc. and also serves as a member
of the Technical Advisory Board of Goodman Fielder, Ltd. He served on the
Technical Advisory Board of Martek Biosciences, Inc. from 1990 to 1997. Mr.
Clausi serves as a director and a member of Technical Advisory Boards of a
number of private companies, as well.
The Company is currently interviewing potential candidates to fill the seat
to be vacated by Mr. Cantwell upon completion of the Offering or at such later
time as his replacement has been appointed. No one has yet been appointed.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company for the year ended December 31, 1997 for services rendered in all
capacities to the Chief Executive Officer and each of the other four most highly
compensated executive officers (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ----------------------------------------------
AWARDS PAYOUTS
--------------------- ----------------------
RESTRICTED
OTHER STOCK OPTIONS/ LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- - --------------------------- ---- ------- ------- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine............ 1997 275,000 225,000 0 100,000 0 0
Chairman, President 1996 225,000 210,978 0 0 250,000 0 0
and Chief Executive 1995 56,250 100,000 120,000 0 100,000 0 0
Officer
Derrick W. Lyon........... 1997 0 0 148,500(1) 0 0 0 0
CEO -- EPL 1996 0 0 184,000(1) 0 50,000 0 0
Technologies 1995 0 0 36,000(1) 0 50,000 0 0
(Europe) Ltd
Antony Kendall............ 1997 125,470 8,200 13,089(2) 0 25,000 0 0
Chief Executive 1996 47,839 0 2,470(2) 0 50,000 0 0
EPL Flexible 1995 0 0 0 0 0 0 0
Packaging Ltd
Timothy B. Owen........... 1997 105,000 40,000 0 0 50,000 0 0
Secretary and 1996 90,000 0 0 0 57,500 0 0
Treasurer 1995 60,000 0 30,000 0 62,500 0 0
William R. Romig.......... 1997 105,750 14,075 1,634 0 75,000 0 0
Vice President, 1996 94,089 5,000 0 0 87,500 0 0
Research & 1995 85,000 0 0 0 17,500 0 0
Development
</TABLE>
- - ---------------
(1) includes payments made to DWL Associates Limited, an entity controlled by
Mr. Lyon, for the provision of consulting and advisory services. Amounts
assume an exchange rate in 1995/6 of L1:$1.60 and L1:$1.65 in 1997.
(2) assumes an exchange rate of L1:$1.65.
COMPENSATION OF DIRECTORS
With the exception of Mr. Devine in his capacity as an officer of the
Company, no cash compensation was paid to any director of the Company during the
year ended December 31, 1997. In May 1997, in accordance with the terms of the
Company's 1994 Stock Incentive Plan, Robert D. Mattei and former director Dr.
Rainer G. Bichlbauer were each granted an option to acquire 7,500 shares of
Common Stock at an exercise price of
42
<PAGE> 44
$10.50 per share, for their services as members of the audit and compensation
committees. Also pursuant to the 1994 Stock Incentive Plan, Mr. William Hopke,
also a former director, served for part of fiscal 1996 and was granted an option
to acquire 5,000 shares of Common Stock at an exercise price of $10.50 per share
for his services as a member of such committees. These options are exercisable
for five-year terms and have exercise prices equal to the fair market value of
such shares on the date of grant.
EMPLOYMENT AND CONSULTING CONTRACTS
Mr. Devine and the Company are parties to an employment agreement dated as
of January 1, 1997 which provides that Mr. Devine is to serve as the Company's
Chairman of the Board, President and Chief Executive Officer. The agreement
provides for a rolling three year term. The Agreement provides for a base salary
to be fixed by the Board which, as of January 1, 1997, was $275,000 per year.
Pursuant to the agreement the Company will maintain life insurance on Mr.
Devine's life with a face amount equal to at least $1,000,000, for which Mr.
Devine may designate a beneficiary. Under the agreement Mr. Devine also will be
entitled to receive a retirement benefit if he remains continuously employed (as
defined) by the Company until age fifty. Generally, if Mr. Devine retires at age
65, the retirement benefit to be received annually will be equal to 50% of his
average annual base salary and bonus during the final three years of his
employment (less benefits from any other defined benefit pension plan of the
Company). The percentage of Mr. Devine's average annual base salary and bonus
will be reduced or increased by 6% for each year by which Mr. Devine elects to
have such retirement benefit commence earlier or later than his 65th birthday.
The agreement also provides that Mr. Devine is entitled to participate in all
benefit plans and arrangements of the Company and may also receive bonuses, if
any, as determined by the Board of Directors. In the past, the Board has made
such bonus awards upon the achievement of various goals by Mr. Devine, including
the completion of various financings, acquisitions and other transactions. The
agreement also provides certain disability and death benefits to Mr. Devine, as
well as severance payments approximately equal to Mr. Devine's average salary
and bonus for the previous three years, to continue for three years if Mr.
Devine is terminated under certain conditions. Additionally, Mr. Devine is
entitled to receive a payment of slightly less than three times his "base
amount" (as defined in the Internal Revenue Code of 1986) in the event of a
"change of control" of the Company (as defined in the agreement). This agreement
also contains certain customary provisions regarding confidentiality and
non-competition.
Through its subsidiary EPL Europe, the Company entered into a Consulting
Agreement with DWL Associates Ltd., an entity controlled by Mr. Lyon, for the
provision of consulting and advisory services. The agreement, which was signed
as part of the acquisition by the Company of BPS (now known as EPL Flexible
Packaging Limited ("EPL Flexible")) in September 1995, had an original term of
two years, expiring September 14, 1997. Under its terms, however, the agreement
continues in effect until terminated by either party serving six months notice.
In March 1998, on behalf of DWL Associates Ltd., Mr. Lyon notified the Company
of DWL Associates Ltd.'s intention to terminate the agreement six months
thereafter. Annual fees of L90,000 ($149,000 at an exchange rate of L1: $1.65)
are payable under this agreement, plus the reimbursement of directly incurred
expenses. In addition, under the terms of another agreement signed as part of
the acquisition of BPS, the Company's ability to use in the U.S. certain slit
perforating technology, certain other development stage perforating technology
and gas perforating technology not previously assigned to BPS under arrangements
between BPS, Mr. Lyon and others in or about 1983 (collectively, the "Prior
Technology"), is limited until Mr. Lyon, a principal former shareholder of BPS,
owns or rejects the offer of 49% of the share capital (on terms and conditions
yet to be finalized) of any Company subsidiary that the Company proposes will
use the Prior Technology in activities in the U.S. (the "Proposed JV"). The
Company and Mr. Lyon expect to form the Proposed JV by the end of 1998. In the
unlikely event that Mr. Lyon rejects the offer of such equity, the Company will
not be limited in its use of the Prior Technology. The Company believes the
arrangement with Mr. Lyon will not have a material effect on the Company's
business, financial condition or results of operations.
The Company, through EPL Flexible, entered into an employment agreement
with Mr. Kendall commencing on August 1, 1996, which provides that Mr. Kendall
is to serve as Chief Executive of EPL Flexible. The agreement originally
provided for an annual salary of L70,000 ($115,000 at an exchange rate of
43
<PAGE> 45
L1:$1.65), which salary is reviewable on January 1 annually and has been
increased to L83,000 ($137,000 at an exchange rate of L1:$1.65) as of July 1,
1997, together with customary benefits, such as vacation, the provision of an
automobile, healthcare coverage and contributions into a defined contribution
pension scheme. A bonus is also payable upon the achievement of certain
performance targets, as agreed on an annual basis. After the first twelve
months, the contract may be terminated by either side upon six months' notice.
The agreement also contains certain customary provisions regarding
confidentiality and non-competition. The Company currently is considering
further amending the employment agreement with Mr. Kendall to provide that Mr.
Kendall will receive a payment equal to twice his annual salary if a change of
control (to be defined) of the Company's U.K. packaging businesses occurs.
The Company entered into an employment agreement with Dr. Romig effective
September 1, 1994, which provides for a twelve month term, with annual renewal
terms. Effective January 1, 1998, the Company entered into a new agreement with
Dr. Romig, which runs for an initial term of two years, with annual renewal
terms thereafter. Either party may terminate the contract upon six months'
notice. The initial annual salary is $120,000, with a bonus of up to 25% of the
salary based upon the achievement of agreed-upon objectives. In addition to the
customary provisions on vacation and healthcare coverage, the agreement also
provides that, in the event of a termination of employment by either party due
to a change in control (as defined in the agreement), Dr. Romig would receive a
total payment equal to twice his annual salary plus a bonus equal to his average
bonus earned over the previous twelve months. The agreement also contains
certain customary provisions regarding confidentiality and non-competition.
The Company entered into an employment agreement with Mr. Crowell dated
February 18, 1998, under which Mr. Crowell will serve as Vice President and
Chief Financial Officer. The contract has an initial term of two years with
annual renewal terms thereafter. Either party may terminate the agreement upon
four weeks notice. If the Company terminates Mr. Crowell's employment without
cause, or the initial or any renewal term expires without being renewed, Mr.
Crowell will receive an amount, paid in monthly installments, equal to his
annual base salary and bonus (if any) earned in the previous twelve months. The
initial annual salary is $180,000, with a bonus of up to 35% of the salary based
upon the achievement of agreed-upon objectives. In addition to customary
provisions on vacation and healthcare coverage, the agreement also provides for
relocation expenses. The agreement further provides that, in the event of a
termination of employment by either party due to a change in control (as defined
in the agreement), Mr. Crowell would receive a total payment equal to twice his
annual salary plus a bonus equal to his average bonus earned over the previous
twelve months. The agreement also contains certain customary provisions
regarding confidentiality and non-competition. Mr. Crowell was also awarded
options to purchase 100,000 shares of Common Stock, which vested on the date of
grant.
1994 STOCK INCENTIVE PLAN
The Company's 1994 Stock Incentive Plan was adopted by the shareholders on
July 21, 1994, and modified by the shareholders to increase the shares issuable
thereunder and to make certain other changes on July 22, 1996, and again on July
21, 1997. The Plan is intended as an additional incentive to employees, certain
consultants or advisors and non-employee members of the Board of Directors to
enter into or remain in the employ of the Company or to serve on the Board of
Directors by providing them with an additional opportunity to increase their
proprietary interest in the Company and to align their interests with those of
the Company's shareholders generally through the receipt of options to purchase
Common Stock and has been structured to comply with the applicable provisions of
Section 16(b) of the Securities Exchange Act of 1934, as amended, and Rule 16b-3
thereunder. The Plan provides for the grant of incentive stock options within
the meaning of the Internal Revenue Code of 1986, as amended, and non-qualified
stock options and the award of shares of Common Stock. The particular terms of
each option grant or stock award are set forth in a separate agreement between
the Company and the optionee or award recipient. The Plan is administered by the
1994 Stock Incentive Plan Administration Committee appointed by the Board of
Directors, which is currently comprised of Robert D. Mattei and A. S. Clausi.
The committee has the discretion to determine the number of shares subject to
each award, and other applicable terms and conditions, including a grant's
vesting schedule. The term of an option may not be more than five years from the
grant date. Options granted under the Plan generally terminate three months
after an optionee ceases to be employed by the Company (twelve
44
<PAGE> 46
months in the case of death or disability). The Plan provides that no option may
be granted under it after May 4, 1999.
The following table sets forth certain information concerning grants of
stock options made during the year ended December 31, 1997 to Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------- POTENTIAL REALIZABLE VALUE AT
% OF ASSUMED ANNUAL RATES OF
SHARES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (5 YEARS)(1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 0% 5% 10%
---- ---------- ------------- -------- ----------- ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine............... 100,000 19.2% $14.00 11/14/2002 0 $386,794 $854,714
Derrick W. Lyon.............. 0 0 0 N/A N/A N/A N/A
Antony Kendall............... 25,000 4.8 14.00 11/14/2002 0 96,699 213,679
Timothy B. Owen.............. 50,000 9.6 14.00 11/14/2002 0 193,397 427,357
William R. Romig............. 75,000 14.4 14.00 11/14/2002 0 290,096 641,036
</TABLE>
- - ---------------
(1) The dollar amounts under these columns are the result of calculations at 0%,
5% and 10% rates set by the Securities and Exchange Commission and therefore
are not intended to forecast possible future appreciation of the price of
the Common Stock.
The following table sets forth certain information concerning exercises of
stock options during the year ended December 31, 1997 and the value of
unexercised stock options at December 31, 1997 for Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul L. Devine......... 200,000(1) $2,212,500(1) 400,000 0 $1,462,500 0
Derrick W. Lyon........ 0 0 100,000 0 618,750 0
Antony Kendall......... 0 0 75,000 0 109,375 0
Timothy B. Owen........ 5,000(1) 60,625(1) 170,000 0 669,375 0
William R. Romig....... 0 0 180,000 0 468,751 0
</TABLE>
- - ---------------
(1) None of the shares underlying the exercised options has been sold as at
December 31, 1997.
(2) At December 31, 1997, the split-adjusted closing price of a share of Common
Stock on the Nasdaq SmallCap Market was $12.25.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee during fiscal 1997 were
Mr. Mattei, who served for the entire year, and Mr. Cantwell, who was elected to
the committee in May 1997. Neither Mr. Mattei nor Mr. Cantwell were officers of
the Company during such period. Except as disclosed under "Certain
Transactions," neither of the members of the Compensation Committee nor any of
their affiliates entered into any transactions with the Company during 1997.
45
<PAGE> 47
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 13, 1998, and as adjusted to reflect
the sale of the Common Stock offered hereby by: (i) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each director, (iii) each of the executive officers named in the Summary
Compensation Table, (iv) all executive officers and directors of the Company as
a group, and (v) the Selling Shareholder. Except as set forth below, the
shareholders named below have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(1) NUMBER OF THE OFFERING
--------------------- SHARES BEING --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ --------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Trilon Dominion Partners, L.L.C...... 2,690,903(2) 25.8% 2,690,903 -- --
Lancer Partners, L.P. ............... 1,788,505(3) 19.6 -- 1,788,505 15.9%
Norwich Union Investment Management
Limited............................ 481,250(4) 5.3 -- 481,250 4.3
Paul L. Devine....................... 770,416(5) 8.0 -- 770,416 6.6
Robert D. Mattei..................... 214,482(6) 2.3 -- 214,482 1.9
Ronald W. Cantwell................... 2,690,903(7) 25.8 -- -- --
Derrick W. Lyon...................... 100,000(8) 1.1 -- 100,000 *
Dr. William R. Romig................. 180,000(8) 1.9 -- 180,000 1.6
Timothy B. Owen...................... 187,500(9) 2.0 -- 187,500 1.6
Antony E. Kendall.................... 75,000(8) * -- 75,000 *
Directors and executive officers as a
group (11 persons)................. 4,549,552(10) 38.7 2,690,903 1,858,649 14.8
</TABLE>
- - ---------------
* Less than one percent.
(1) Unissued shares of Common Stock of each owner subject to currently
exercisable options or other rights to acquire securities exercisable
within 60 days of the date hereof are included in the totals listed and are
deemed to be outstanding for the purpose of computing the percentage of
Common Stock owned by such person, but are not deemed to be outstanding for
the purpose of computing the percentage of the class owned by any other
person. The effect of this calculation is to increase the stated total
ownership percentage currently controlled. Information in the table is
based solely upon information contained in filings with the Securities and
Exchange Commission, pursuant to sections 13(d) and 13(g) of the Securities
Exchange Act of 1934, as amended, and the records of the Company.
(2) Includes 1,288,666 shares of Common Stock that may be acquired by
converting 1,933,000 shares of Series A Preferred Stock into shares of
Common Stock. Trilon Dominion Partners, L.L.C. beneficially owns 93.2% of
the Company's outstanding Series A Preferred Stock. The address for Trilon
Dominion Partners, L.L.C. is 245 Park Avenue, Suite 2820, New York, NY
10017.
(3) Includes shares of Common Stock held by funds other than Lancer Partners,
L.P., but which are commonly managed in a group that includes Lancer
Partners, L.P. The address for Lancer Partners, L.P. is 375 Park Avenue,
Suite 2006, New York, NY 10017.
(4) Includes 31,250 shares of Common Stock issuable upon exercise of warrants.
The address for Norwich Union Investment Management Limited is Sentinel
House, 37 Surrey Street, Norwich NR13UZ U.K.
(5) Includes 440,000 shares of Common Stock that may be acquired by (i)
converting 50,000 shares of A Preferred Stock into 33,333 shares of Common
Stock, (ii) exercising options to acquire 400,000 shares of Common Stock
and (iii) exercising warrants to acquire 6,666 shares of Common Stock. Mr.
Devine beneficially owns 2.4% of the Series A Preferred Stock. The address
for Mr. Devine is c/o the Company, 2 International Plaza, Suite 245,
Philadelphia, PA 19113-1507.
(6) Includes 47,500 shares of Common Stock that may be acquired by exercising
options to acquire 47,500 shares of Common Stock and 10,000 shares of
Common Stock owned by Mr. Mattei's wife, as to which he disclaims
beneficial ownership.
46
<PAGE> 48
(7) Mr. Cantwell may be considered to be an indirect beneficial owner of such
shares of Common Stock by virtue of his ownership of all of the voting
stock of VC Holdings, the sole manager of Trilon Dominion Partners, L.L.C.
("Trilon") and owner of 100% of the voting interest in Trilon. The only
other member of Trilon is Dominion Capital, Inc., a Virginia Corporation
("Dominion Capital"), which holds a non-voting membership interest in
Trilon. Dominion Capital is a wholly owned subsidiary of Dominion
Resources, Inc., a Virginia corporation ("Dominion Resources"). Both
Dominion Capital and Dominion Resources may be considered to be indirect
beneficial owners of such shares of Common Stock of the Company. However,
both entities disclaim any indirect beneficial ownership of such shares.
(8) Amount shown represents shares of Common Stock issuable upon exercise of
options.
(9) Includes 170,000 shares of Common Stock that may be acquired by exercising
options.
(10) Includes 2,631,166 shares of Common Stock that may be acquired by (i)
converting 1,983,000 shares of A Preferred Stock into 1,322,000 shares of
Common Stock, (ii) exercising options to acquire 1,302,500 shares of Common
Stock and (iii) exercising warrants to acquire 6,666 shares of Common
Stock.
RELATIONSHIPS BETWEEN THE COMPANY AND THE SELLING SHAREHOLDER
The Company had a revolving line of credit under an agreement originally
obtained from Dominion Capital, Inc. ("Dominion"), a related party of the
Selling Shareholder, which was to have expired on March 21, 1998, bearing
interest at prime plus 2.5%. In July 1995, Dominion transferred its interest in
this line of credit to the Selling Shareholder. On October 2, 1995, the Selling
Shareholder agreed to convert the outstanding principal amount of $4,050,000
under the line of credit into 1,012,500 shares of Common Stock and Warrants to
purchase 50,000 shares of Common Stock for $4.00 per share. The Company also
issued 81,306 shares of Common Stock in settlements of accrued interest under
this facility of $310,164, and 23,250 shares of Common Stock in settlement of
commitment fees.
Effective October 21, 1997, the Company completed a revolving line of
credit agreement with the Selling Shareholder (the "Trilon Line"). In connection
with obtaining the Trilon Line, Company paid the Selling Shareholder a total
transaction fee of $100,000. Under the Trilon Line, the Selling Shareholder made
available to the Company $2.1 million for working capital purposes. Any amounts
drawn were secured by, among other things, a blanket lien on the assets of the
Company's wholly-owned U.S. subsidiaries and on the assets of the Company
itself. Interest was at the "prime rate" (as published in the Wall Street
Journal) plus 4% and payable quarterly in arrears. Part of the proceeds of the
Series D Placement was used to repay the Trilon Line on November 12, 1997,
whereupon the Company instructed the Selling Shareholder to cancel the Trilon
Line and to file appropriate releases of all collateral securing the Trilon
Line. The Trilon Line therefore is no longer available for drawings.
Trilon's investment in the Company constitutes a substantial portion of
Trilon's overall investment portfolio and as such, Mr. Cantwell, by virtue of
his share ownership in VC Holdings, may be deemed to have a significant economic
interest in the proposed Offering. The Company and Trilon have agreed that the
expenses of the Offering will be apportioned to and paid by Trilon in the same
proportion as the gross proceeds of the Offering received by Trilon bears to the
aggregate gross proceeds of the Offering. The Company and Trilon also have
agreed to indemnify each other from certain liabilities in connection with the
Offering, including liabilities under the Securities Act.
47
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 50,000,000 shares of Common Stock,
3,250,000 shares of Series A Preferred Stock, and 4,000,000 shares of preferred
stock, par value $0.01 per share ("Board Designated Preferred Stock"), of which
3,843,056 shares remain undesignated. All outstanding shares of Common Stock
issued are fully paid and nonassessable. As of December 31, 1997, the Company
had 9,047,983 shares of Common Stock outstanding. All of the Series A Preferred
Stock has been issued and 2,073,000 shares remain outstanding (including the
1,933,000 shares of Series A Preferred Stock that are to be converted by the
Selling Shareholder as part of this Offering). The Board designated and issued
531,915 shares of Board Designated Preferred Stock as Series B Preferred Stock
in July 1996. These shares were converted into shares of Common Stock in August
1997. In May 1997, the Board designated and issued 144,444 shares of Board
Designated Preferred Stock as Series C Preferred Stock. These shares were
converted into shares of Common Stock on March 6, 1998. In November 1997, the
Board designated and issued 12,500 shares of Board Designated Preferred Stock as
Series D Preferred Stock, and as of April 17, 1998, all such shares of Series D
Preferred Stock were outstanding. As of December 31, 1997, assuming exercise of
all outstanding options and warrants to purchase Common Stock and conversion of
all outstanding Preferred Stock, there would have been 13,872,095 shares of
Common Stock outstanding.
The following is a summary description of the Company's capital stock and
is qualified in its entirety by reference to the Company's Amended and Restated
Articles of Incorporation, as amended (the "Articles of Incorporation"), and the
Company's Amended and Restated Bylaws, as amended (the "Bylaws"), which are
exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share owned of
record on all matters submitted to the vote of shareholders. The holders of a
majority of the outstanding shares entitled to vote constitute a quorum for the
taking of corporate action by shareholders. There are no cumulative voting
rights. Except on matters for which a higher vote is required by law, the vote
of the holders of a majority of the outstanding shares present or represented
and entitled to vote is required. Subject to preferences of the Preferred Stock,
the holders of Common Stock will be entitled to such dividends as may be
declared from time to time by the Board of Directors from funds legally
available therefor and will be entitled, after payment of all prior claims, to
receive, on a pro rata basis, all assets of the Company upon liquidation,
dissolution or winding up of the Company. The Common Stock is not redeemable,
does not have any conversion rights and is not subject to call. Holders of
Common Stock have no preemptive right to maintain their respective percentage of
ownership in future offers and sales of stock by the Company. The rights,
preferences and privileges of holders of Common Stock are subject to the rights,
preferences and privileges of the Preferred Stock.
The Common Stock currently is included on the Nasdaq SmallCap Market under
the symbol EPTG. An application has been made to include the Common Stock on the
Nasdaq National Market under the same symbol.
SERIES A PREFERRED STOCK
Holders of the Series A Preferred Stock are entitled to dividends at the
rate of 10% of par value ($1.00 per share) per annum. At the option of the
Company, dividends may be paid either in cash or in Common Stock. If dividends
are paid in Common Stock, the Common Stock will be valued at the conversion
price of $1.50 per share (subject to adjustment for stock splits, stock
dividends, the effect of mergers and the like). If dividends are not paid, the
right to receive unpaid dividends will accumulate, but without interest. No
dividends may be paid on the Common Stock at a time when payment of dividends on
the Series A Preferred Stock is in arrears. As of December 31, 1997, accumulated
dividends on the Series A Preferred Stock were $1,334,000. At the election of a
holder of Series A Preferred Stock, each share of Series A Preferred Stock may
be converted into that number of shares of Common Stock determined by dividing
$1.00 by the conversion price of $1.50 per share (subject to adjustment for
stock splits, stock dividends, the effect of
48
<PAGE> 50
mergers and the like). Each holder of Series A Preferred Stock is entitled to
the number of votes equal to the number of whole shares of Common Stock into
which such holder's shares of Series A Preferred Stock are convertible. Except
when voting by class or series is required by law or the Articles of
Incorporation, holders of the Series A Preferred Stock are entitled to vote
together with the holders of the Common Stock as a single class. In the event of
the liquidation, dissolution or winding up of the Company, the holders of shares
of Series A Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to its shareholders at the rate of $1.00 per
share (subject to adjustment for stock splits, stock dividends, the effect of
mergers and the like). This payment to the holders of Series A Preferred Stock
shall be made in full by the Company prior to any payment being made to the
holders of Common Stock. With respect to dividends, the Series A Preferred Stock
ranks pari passu with the Series B and Series C Preferred Stock and with respect
to liquidation, ranks pari passu with the Series B, Series C and Series D
Preferred Stock.
SERIES B PREFERRED STOCK
In August 1997, the holders of all 531,915 shares of Series B Preferred
Stock converted their shares into 265,958 shares of Common Stock, at which time
dividends ceased to accumulate. As of the date on which such stock was
converted, accumulated dividends on the Series B Preferred Stock were $270,000.
Accrued but unpaid dividends do not bear interest and may, at the Company's
option, be paid in cash or in Common Stock at a stated conversion price of $9.40
per share (subject to adjustment for stock splits, stock dividends, the effect
of mergers and the like). No dividends may be paid, declared or set apart for
payment on the Common Stock until all accumulated dividends on the Series B
Preferred Stock have been paid, or declared and set apart for payment. With
respect to dividends, the Series B Preferred Stock ranks pari passu with the
Series A and Series C Preferred Stock and with respect to liquidation, ranks
pari passu with the Series A, Series C and Series D Preferred Stock.
SERIES C PREFERRED STOCK
On March 6, 1998, the holders of all 144,444 shares of Series C Preferred
Stock converted their shares into 72,222 shares of Common Stock, at which time
dividends ceased to accumulate. As of the date on which such stock was
converted, accumulated dividends on the Series C Preferred Stock were $49,417.
Accrued but unpaid dividends do not bear interest and may, at the Company's
option, be paid in cash or in Common Stock at a stated conversion price of $9.00
per share (subject to adjustment for stock splits, stock dividends, the effect
of mergers and the like). No dividends may be paid, declared or set apart for
payment on the Common Stock until all accumulated dividends on the Series C
Preferred Stock have been paid, or declared and set apart for payment. With
respect to dividends, the Series C Preferred Stock ranks pari passu with the
Series A and Series B Preferred Stock and with respect to liquidation, ranks
pari passu with the Series A, Series B and Series D Preferred Stock.
SERIES D PREFERRED STOCK
Holders of the Series D Preferred Stock, which has a stated value of $1,000
per share (the "Stated Value"), are not entitled to any dividends. So long as
any shares of Series D Preferred Stock remain outstanding, the Company may not
(i) declare or pay any dividend upon, (ii) make any distribution upon, or (iii)
purchase or redeem, any shares of Common Stock without the approval of the
holders of at least two-thirds of the outstanding shares of Series D Preferred
Stock, voting together as a class.
At the option of each holder, each share of the Series D Preferred Stock is
convertible, subject to certain limitations, into such number of shares of
Common Stock as is determined by dividing the sum of (i) the Stated Value and
(ii) a premium equal to 4% of the Stated Value per annum accruing from the date
of issuance, by the "Conversion Price" then in effect (generally, the lesser of
(x) 94% of the lowest five-day average closing bid price per share of Common
Stock during a specified period of time and (y) $11.63, subject to adjustment),
subject to certain limitations and exceptions; provided, however, that no holder
of shares of Series D Preferred Stock may convert any such shares during the
180-day period following the issuance thereof, and may thereafter convert only a
percentage of such shares prior to the 271st day after such issuance, subject to
certain exceptions. At the option of the holder of shares of Series D Preferred
Stock, such shares are redeemable upon the occurrence of certain events,
including defaults under certain agreements relating to the Series D Preferred
Stock and the failure to maintain the listing of the Common Stock on certain
stock
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<PAGE> 51
exchanges. The Series D Preferred Stock is redeemable immediately upon the
occurrence of other events, including (i) an assignment by the Company for the
benefit of creditors or the filing of an application for or the appointment of a
receiver or trustee for its business or property, (ii) the institution of
bankruptcy or similar proceedings, or (iii) the failure to obtain the requisite
approval of the Corporation's shareholders if required by Nasdaq in connection
with the issuance of shares of Common Stock upon the conversion of the Series D
Preferred Stock, or the waiver by Nasdaq of such requirement.
The holders of the Series D Preferred Stock have limited voting rights. To
the extent holders of the Series D Preferred Stock are entitled by law to vote
on a matter with holders of Common Stock, voting together as one class, each
share of Series D Preferred Stock shall be entitled to a number of votes equal
to the number of shares of Common Stock into which it is convertible. So long as
any shares of Series D Preferred Stock are outstanding, the Company cannot take
the following actions without first obtaining the approval of the holders of at
least two-thirds of the then outstanding shares of the Series D Preferred Stock:
(i) altering or changing the rights, preferences or privileges of the Series D
Preferred Stock or any other securities of the Company as to affect adversely
the Series D Preferred Stock ("Change of Rights"); (ii) creating any new class
or series of capital stock having a preference over the Series D Preferred Stock
as to distribution of assets upon liquidation, dissolution or winding up of the
Company; (iii) creating any new class or series of capital stock ranking pari
passu with the Series D Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Company; (iv) increasing the
authorized number of shares of Series D Preferred Stock, or any other shares of
capital stock that rank senior to or pari passu with the Series D Preferred
Stock as to distribution of assets upon liquidation, dissolution or winding up
of the Company; or (v) taking any action not authorized or contemplated by the
Series D Certificate that would result in taxation of the holders of shares of
Series D Preferred Stock under Section 305 of the Internal Revenue Code of 1986,
as amended. In the event holders approve a Change of Rights by at least a
two-thirds vote, any dissenting holder of Series D Preferred Stock shall have
the right for a period of thirty (30) days to convert its shares to Common Stock
pursuant to the Series D Certificate.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of the Series D Preferred Stock are entitled to be paid out of the
assets of the Company available for distribution to its shareholders an amount
equal to 115% of the Liquidation Preference (as defined below) with respect to
each outstanding share of Series D Preferred Stock. The "Liquidation Preference"
shall mean an amount equal to the sum of (a) the stated value of the Series D
Preferred Stock, plus (b) an amount equal to 4% per annum of such stated value
for the period beginning on the date of issuance of such share and ending on the
date of final distribution to the holder thereof, pro rated for any portion of
such period. If, upon liquidation, dissolution or winding up of the Company, the
assets and funds available for distribution among the holders of Series D
Preferred Stock and holders of pari passu securities are insufficient to permit
payment to all such holders of all preferential amounts, the Company's assets or
funds shall be distributed ratably among such shares in proportion to the ratio
that the Liquidation Preference payable on each share of Series D Preferred
Stock bears to the aggregate liquidation preference payable on all such shares.
The (i) disposition of substantially all the assets of the Company, (ii)
effectuation of a transaction or series of related transactions (other than an
underwritten public offering) in which more than 50% of the voting power of the
Company is disposed of or (iii) consolidation, merger or other business
combination of the Company with or into any other entity when the Company is not
the survivor, shall, at the option of any holder of Series D Preferred Stock,
either (a) be deemed a liquidation, dissolution or winding up of the Company,
pursuant to which the Company will be required to distribute upon consummation
of the transaction an amount equal to 115% of the Liquidation Preference with
respect to each share of Series D Preferred Stock, or (b) be treated, in
accordance with the Series D Certificate, as an adjustment to the conversion
price by which shares of Series D Preferred Stock may be converted into Common
Stock.
In addition, in connection with the issuance of the Series D Preferred
Stock, the Company issued warrants to purchase 201,614 shares of Common Stock
exercisable at $20.16 at any time until November 6, 2002. As to liquidation, the
Series D Preferred Stock ranks pari passu with the Series A, Series B and Series
C Preferred Stock.
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<PAGE> 52
BOARD DESIGNATED PREFERRED STOCK
The Board of Directors currently has the authority to issue up to 3,843,056
additional shares of Board Designated Preferred Stock, in one or more classes or
series with full, limited, multiple, fractional or no voting rights and with
such designation, preferences, qualification, privileges, limitations,
restrictions, options, conversion rights or other special or relative rights,
without any further vote by shareholders, except for and subject to, in each
case, the limitations and provisions of the Colorado Business Corporation Act.
REGISTRATION RIGHTS
The holders of a total of approximately 207,750 shares of Common Stock
either issued in the acquisition of CMC, or purchased during the period in which
the private placement of the Series C Preferred Stock was pending and
consummated (the "1997 Common Sale Shares"), and all of the Preferred Stock
convertible into shares of Common Stock are entitled to certain rights with
respect to the registration under the Securities Act of such shares of Common
Stock.
Series A Preferred Stock. Under registration rights agreements concluded
in connection with the issuance of the Series A Preferred Stock, at any time
after the conversion of Series A Preferred Stock into shares of Common Stock, a
holder of such shares of Common Stock may require the Company to file with the
SEC a registration statement on Form S-3 or such other registration statement
for which the Company may then be eligible and appropriate amendments, if any,
to such registration statement necessary to cause such registration statement to
become effective and to register such holder's shares of Common Stock under the
Securities Act. On October 11, 1996, the Company filed a registration statement
on Form S-3 with the SEC (declared effective by the SEC on November 12, 1996)
(the "1996 Form S-3") registering, among other shares, all 1,586,666 shares of
Common Stock issuable upon conversion of the outstanding shares of Series A
Preferred Stock. The Selling Shareholder owns Series A Preferred Stock
convertible into 1,288,666 shares of Common Stock, which are proposed to be sold
in this Offering, and are also covered by the 1996 Form S-3. Upon completion of
the Offering, the Selling Shareholder will no longer hold any shares carrying
registration rights and 140,000 shares of Series A Preferred Stock convertible
into 93,333 shares of Common Stock will remain outstanding.
Series B Preferred Stock. Upon written request of the holders representing
not less than 51% of the shares of Common Stock registerable upon conversion of
the Series B Preferred Stock, given at any time after conversion, the Company is
required to prepare and file with the SEC a registration statement on Form S-3
or such other registration statement for which the Company may then be eligible
and appropriate amendments, if any, to the registration statement necessary to
cause such registration statement to become effective and to register such
shares of Common Stock under the Securities Act. During the three months ended
September 30, 1997, the holders of all 531,915 shares of Series B Preferred
Stock elected to fully exercise their right to convert such shares into 265,957
shares of Common Stock. The registration rights associated with such shares of
Common Stock expire on July 11, 1999. The 1996 Form S-3 registered, among other
shares, all 265,957 shares of Common Stock issued upon conversion of the
outstanding shares of Series B Preferred Stock.
Series C Preferred Stock. On no more than three occasions after
conversion, the holders representing not less than 51% of the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock into Common
Stock, may require the Company to prepare and file with the SEC a registration
statement on Form S-3 or such other registration statement for which the Company
may then be eligible and appropriate amendments, if any, to cause such
registration statement to become effective and to register such shares of Common
Stock under the Securities Act. A holder's registration right terminates upon
written agreement between the Company and the holder of the Series C Preferred
Stock. On December 12, 1997, the Company obtained such an agreement and filed a
registration statement on Form S-3 (the "1997 Form S-3") with the SEC (declared
effective by the SEC on February 17, 1998) registering, among other shares, the
1997 Common Sale Shares and all 72,222 shares of Common Stock issued upon
conversion of the outstanding shares of Series C Preferred Stock.
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<PAGE> 53
Series D Preferred Stock. On December 12, 1997, in accordance with the
terms of a registration rights agreement by and among the Company and the
initial purchasers of the Series D Preferred Stock and related warrants, the
Company filed the 1997 Form S-3 with the SEC registering, among other shares, up
to 1,500,000 shares of Common Stock issuable upon conversion of the outstanding
shares of Series D Preferred Stock and 201,614 shares of Common Stock issuable
upon the exercise of the related warrants. However, in the nine months following
November 11, 1997, there are restrictions on the ability of the holders to
convert the Series D Preferred Stock into shares of Common Stock and, thus,
restrictions on their ability to sell such shares of Common Stock, subject to
certain exceptions. Starting May 11, 1998, the holders of the Series D Preferred
Stock have the right to convert 25% of the Series D Preferred Stock into shares
of Common Stock and for each 30-day period thereafter may convert an additional
25%. The maximum number of shares into which the Series D Preferred Stock is
convertible (calculated on April 30, 1998 in accordance with the provisions of
the Series D Preferred Stock) would be 1,163,627.
Furthermore, in the event that the Company fails to maintain effectiveness
of such registration statement during the Registration Period (as hereinafter
defined), the holders of the Series D Preferred Stock and related warrants shall
have certain "piggy back" registration rights upon the Company's filing of
another registration statement relating to an offering for the Company's own
account or the account of others under the Securities Act of any of the
Company's equity securities (with limitations). The Registration Period is
defined to be the time during which the Company obtains and maintains
effectiveness of the 1997 Form S-3 until such date as is the earlier of (i) the
date on which all of the shares of common stock issued upon conversion of the
Series D Preferred Stock have been sold and (ii) the date on which such shares
may be immediately sold without restriction and without registration under the
Securities Act.
Common Stock Owned by Clifford M. Coles. On October 17, 1997, in
connection with the Company's acquisition of CMC, the Company issued 39,000
shares of Common Stock to Clifford M. Coles ("Coles"). At the time of the
acquisition, the Company and Coles also entered into a registration rights
agreement whereby the Company granted Coles certain "piggy back" registration
rights. In accordance with the registration rights agreement, Coles is entitled
to participate in a registered offering by the Company up to, in the aggregate,
no more than 50% of the Common Stock issued to Coles in connection with the
acquisition (less the number of shares otherwise sold or transferred by Coles).
The 1997 Form S-3 registers, among other shares, 19,500 of the shares owned by
Coles. The Company has obtained a waiver from Coles with respect to any
registration rights he may have in connection with the Offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
Securities Transfer Corporation, based in Dallas, Texas. The Company acts as the
transfer agent and registrar for all classes of Preferred Stock.
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<PAGE> 54
CERTAIN TRANSACTIONS
Effective October 21, 1997, the Company completed the Trilon Line. In
connection with obtaining the Trilon Line, Company paid Trilon a total
transaction fee of $100,000. Under the Trilon Line, Trilon made available to the
Company $2.1 million for working capital purposes. Amounts drawn were secured
by, among other things, a blanket lien on the assets of the Company's
wholly-owned U.S. subsidiaries and on the assets of the Company itself. Interest
was at the "prime rate" (as published in the Wall Street Journal) plus 4% and
payable quarterly in arrears. Part of the proceeds of the placement of the
Series D Preferred Stock and the warrants issued in connection with the Series D
Preferred Stock was used to repay the Trilon Line on November 12, 1997,
whereupon the Trilon Line was cancelled. The Trilon Line therefore is no longer
available for drawings. Mr. Cantwell, a director of the Company, is the
President of Trilon and President of VC Holdings, the sole managing member of
Trilon.
The Company had a revolving line of credit under an agreement originally
obtained from Dominion Capital, Inc. ("Dominion"), a related party of Trilon,
which was to have expired on March 21, 1998, bearing interest at prime plus
2.5%. In July 1995, Dominion transferred its interest in this line of credit to
Trilon. On October 2, 1995, Trilon agreed to convert the outstanding principal
amount of $4,050,000 under the line of credit into 1,012,500 shares of Common
Stock and warrants to purchase 50,000 shares of Common Stock for $4.00 per
share. In addition, the Company issued 81,306 shares of Common Stock in
settlement of accrued interest of $310,164, and 23,250 shares of Common Stock in
settlement of commitment fees.
Trilon's investment in the Company constitutes a substantial portion of
Trilon's overall investment portfolio and as such, Mr. Cantwell, by virtue of
his share ownership in VC Holdings, may be deemed to have a significant economic
interest in the proposed Offering. The Company and Trilon have agreed that the
expenses of the Offering will be apportioned to and paid by Trilon in the same
proportion as the gross proceeds of the Offering received by Trilon bears to the
aggregate gross proceeds of the Offering. The Company and Trilon also have
agreed to indemnify each other from certain liabilities in connection with the
Offering, including liabilities under the Securities Act.
Through its subsidiary EPL Europe, the Company entered into a Consulting
Agreement with DWL Associates Ltd., an entity controlled by Mr. Lyon, for the
provision of consulting and advisory services. The agreement, which was signed
as part of the acquisition by the Company of BPS (now known as EPL Flexible) in
September 1995, had an original term of two years, expiring September 14, 1997.
Under its terms, however, the agreement continues in effect until terminated by
either party serving six months notice. In March 1998, on behalf of DWL
Associates Ltd., Mr. Lyon notified the Company of DWL Associates Ltd.'s
intention to terminate the agreement six months thereafter. Annual fees of
L90,000 ($149,000 at an exchange rate of L1: $1.65) are payable under this
agreement, plus the reimbursement of directly incurred expenses. In addition,
under the terms of another agreement signed as part of the acquisition of BPS,
the Company's ability to use in the U.S. certain slit perforating technology,
certain other development stage perforating technology and gas perforating
technology not previously assigned to BPS under arrangements between BPS, Mr.
Lyon and others in or about 1983 (collectively, the "Prior Technology"), is
limited until Mr. Lyon, a principal former shareholder of BPS, owns or rejects
the offer of 49% of the share capital (on terms and conditions yet to be
finalized) of any Company subsidiary that the Company proposes will use the
Prior Technology in activities in the U.S. (the "Proposed JV"). The Company and
Mr. Lyon expect to form the Proposed JV by the end of 1998. In the unlikely
event that Mr. Lyon rejects the offer of such equity, the Company will not be
limited in its use of the Prior Technology. The Company believes the arrangement
with Mr. Lyon will not have a material effect on the Company's business,
financial condition or results of operations.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 11,247,203 shares
of Common Stock outstanding (11,772,203 shares if the Underwriters'
over-allotment option is exercised in full), and an additional 1,256,960 shares
of Common Stock will be issuable upon conversion of Preferred Stock, calculated
as of April 30, 1998 in accordance with the provisions of the Series D Preferred
Stock. The 3,500,000 shares offered hereby (4,025,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restrictions or further registration under the Securities Act.
Substantially all of the remaining shares, including those issuable upon
conversion of Preferred Stock, are registered with the SEC pursuant to effective
registration statements, or are otherwise freely tradeable without restriction,
except for approximately 1,870,316 shares held by "affiliates" of the Company
within the meaning of the Securities Act and not covered by an effective
registration statement, which will be subject to the resale limitations of Rule
144.
In general, under Rule 144, a person who has beneficially owned shares for
at least one year, including an "affiliate," as that term is defined in the
Securities Act, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then-outstanding
shares of Common Stock (approximately 112,472 shares after the completion of the
Offering), or the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale, subject to certain requirements
concerning availability of public information, manner and notice of sale.
In addition, affiliates must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirement, in order to
sell shares of Common Stock which are not restricted securities. Under Rule
144(k), a person who is not an affiliate and has not been an affiliate for at
least three months prior to the sale and who has beneficially owned restricted
shares for at least a two-year holding period may resell such shares without
compliance with the foregoing requirements.
The Company, its executive officers (except as described below), directors
and the Selling Shareholder (except in connection with the Offering), who will
own upon completion of the Offering an aggregate of 1,870,316 shares of Common
Stock, have agreed that they will not, directly or indirectly, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition of) any shares of Common Stock or other capital stock of the Company
or any other securities convertible into, or exercisable or exchangeable for,
any shares of Common Stock, or other capital stock of the Company, for a period
of 180 days from the date of this Prospectus, without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters.
Principally in connection with his exercise of Company stock options, Paul L.
Devine, the Company's President and Chief Executive Officer pledged 337,084
shares of Common Stock as collateral for a margin loan made by a brokerage firm.
If a margin call occurs and Mr. Devine does not provide additional collateral to
the brokerage firm, the brokerage firm will be entitled to sell pledged shares
of Common Stock. Prudential Securities Incorporated may, in its sole discretion,
at any time and without notice, release all or any portion of the securities
subject to such lock-up agreements.
As of December 31, 1997, the Company has effective registration statements
covering an aggregate of 1,758,125 shares available for issuance upon the
exercise of options granted under the Option Plan and another plan and 341,198
shares issuable upon the exercise of warrants. An additional 512,125 shares of
Common Stock are reserved for issuance under the Option Plan.
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<PAGE> 56
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Pennsylvania Merchant Group are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase from
the Company and the Selling Shareholder, the number of shares of Common Stock
set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated..........................
Pennsylvania Merchant Group ................................
Total....................................................... 3,500,000
=========
</TABLE>
The Company and the Selling Shareholder are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby, if any are purchased.
The Underwriters, through the Representatives, have advised the Company and
the Selling Shareholder that they propose to offer the shares of Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of
$ per share to certain other dealers. After the public offering, the
public offering price and the concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 525,000 additional shares of
Common Stock at the public offering price less underwriting discounts and
commissions, as set forth on the cover page of this Prospectus. The Underwriters
may exercise such option solely for the purpose of covering over-allotments
incurred in the sale of the shares of Common Stock offered hereby. To the extent
such option to purchase is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number of shares set forth opposite each
Underwriter's name in the preceding table bears to 3,500,000.
The Company, its executive officers and directors (except as described
below) and the Selling Shareholder have agreed that they will not, without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase, or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition of) any shares of Common Stock
or any other securities convertible into, or exercisable for shares of Common
Stock or other similar securities of the Company, currently beneficially owned
or hereafter acquired by such persons, for a period of 180 days after the date
of this Prospectus, except in connection with the Offering. Principally in
connection with his exercise of Company stock options, Paul L. Devine, the
Company's President and Chief Executive Officer pledged 337,084 shares of Common
Stock as collateral for a margin loan made by a brokerage firm. If a margin call
occurs and Mr. Devine does not provide additional collateral to the brokerage
firm, the brokerage firm will be entitled to sell pledged shares of Common
Stock. Prudential Securities Incorporated may, in its sole discretion, at any
time and without prior notice, release all or any portion of the shares of
Common Stock subject to such lock-up agreements.
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<PAGE> 57
The Company and the Selling Shareholder have agreed to indemnify the
several Underwriters and to contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act. The Company and the
Selling Shareholder also have agreed to indemnify each other from certain
liabilities in connection with the Offering, including liabilities under the
Securities Act.
In connection with this Offering, certain Underwriters or their respective
affiliates who are qualified market makers on the Nasdaq SmallCap Market or the
Nasdaq National Market may engage in passive market making transactions in the
Common Stock of the Company on the Nasdaq SmallCap Market or the Nasdaq National
Market in accordance with Rule 103 of Regulation M under the Exchange Act during
the business day prior to the pricing of the Offering before the commencement of
offers and sales of Common Stock. Passive market makers must comply with
applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess of
the highest independent bid for such security, if all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M promulgated by the Securities and Exchange
Commission, pursuant to which such persons may bid for or purchase Common Stock
for the purpose of stabilizing its market price. The Underwriters also may
create a short position for the account of the Underwriters by selling more
Common Stock in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase Common Stock in the open market
following the closing of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 525,000 shares of Common Stock, by exercising the Underwriters'
over-allotment option referred to above. In addition, Prudential Securities
Incorporated, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or selling group member participating in the Offering) for the
account of the other Underwriters, the selling concession with respect to Common
Stock that is distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph are required, and,
if they are undertaken, then they may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock being
offered hereby will be passed upon for the Company by Ballard Spahr Andrews &
Ingersoll, LLP, Philadelphia, Pennsylvania and Denver, Colorado, for the Selling
Shareholder by Pryor, Cashman, Sherman & Flynn, New York, New York, and for the
Underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The consolidated financial statements of EPL Technologies, Inc. as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997 included in this Prospectus and Registration Statement of
which this Prospectus is a part have been audited by Deloitte & Touche LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and have been so included in reliance
upon such report given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Fabbri Artes Graficas Valencia
S.A. as of September 30, 1997 and 1996 and for each of the two years in the
period ended September 30, 1997 included in this Prospectus and Registration
Statement of which this Prospectus is a part have been audited by Coopers &
Lybrand, S.A., independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration
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<PAGE> 58
Statement, and have been so included in reliance upon such report given upon
their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-1 (herein,
together with all amendments and exhibits thereto, the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities offered pursuant to this Prospectus. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information, reference is made to the
Registration Statement and the exhibits filed as a part thereof. Statements
contained herein concerning any document filed as an exhibit are, in each
instance, qualified by, and reference is made to, the copy of such document
filed as an exhibit to the Registration Statement.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy and information statements
and other information with the SEC. Reports, proxy statements and other
information concerning the Company filed with the SEC can be inspected and
copied at the public reference facilities maintained by the SEC at its office at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the
Regional Offices of the SEC at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The SEC maintains a Web site (http://www.sec.gov.) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. Shares of the
Company's Common Stock are currently traded on the Nasdaq SmallCap Market and an
application has been made to list the Common Stock on the Nasdaq National
Market. Such reports, proxy and information statements and other information can
also be inspected and copied at the offices of The Nasdaq Stock Market, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
57
<PAGE> 59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EPL TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997....................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
FABBRI ARTES GRAFICAS VALENCIA S.A.
Independent Auditors' Report.............................. F-22
Balance Sheets as of September 30, 1997 and 1996.......... F-23
Statements of Income for the Years Ended September 30,
1997 and 1996.......................................... F-24
Statements of Cash Flows for the Years Ended September 30,
1997 and 1996.......................................... F-25
Notes to the Accounts..................................... F-26
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA:
Introduction.............................................. F-35
Unaudited Condensed Consolidated Pro Forma Statement of
Operations............................................. F-36
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders 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
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of EPL Technologies, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 18, the accompanying financial statements give effect
to a 1-for-2 reverse stock split effective March 13, 1998.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 27, 1998 (March 13, 1998 as to Note 18)
F-2
<PAGE> 61
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,639,567 $ 3,756,956
Accounts receivable, net.................................. 2,911,660 5,382,125
Due from related parties.................................. 34,101 --
Inventories............................................... 1,938,819 3,411,213
Prepaid expenses and other current assets................. 623,792 1,060,506
------------ ------------
Total current assets.............................. 7,147,939 13,610,800
------------ ------------
PROPERTY AND EQUIPMENT, Net................................. 4,005,711 8,145,543
------------ ------------
INTANGIBLE ASSETS, Net:
Patent and distribution rights, net of accumulated
amortization of $2,459,757 and $2,772,371 at December
31, 1996 and 1997...................................... 1,303,121 977,903
Goodwill, net of accumulated amortization of $311,960 and
$633,827 at December 31, 1996 and 1997................. 2,503,655 3,247,229
Other intangibles, net of accumulated amortization of
$82,161 and $117,989 at December 31, 1996 and 1997..... 254,996 218,480
------------ ------------
Total other assets................................ 4,061,772 4,443,612
------------ ------------
TOTAL ASSETS................................................ $ 15,215,422 $ 26,199,955
============ ============
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,005,577 $ 4,738,369
Accrued expenses.......................................... 1,213,964 1,147,597
Other liabilities......................................... 396,418 815,280
Current portion of long-term debt......................... 262,779 396,070
------------ ------------
Total current liabilities......................... 4,878,738 7,097,316
LONG-TERM DEBT.............................................. 1,554,161 1,791,903
DEFERRED INCOME TAXES....................................... 161,926 77,964
MINORITY INTEREST........................................... 202,120 --
------------ ------------
Total liabilities................................. 6,796,945 8,967,183
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 13)
CONVERTIBLE SERIES D PREFERRED STOCK, $.01 par value --
authorized, issued and outstanding 0 and 12,500 shares in
1996 and 1997............................................. -- 10,617,346
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred Stock, $1.00 par
value -- authorized, 3,250,000 shares; issued and
outstanding 2,490,000 and 2,073,000 shares in 1996 and
1997, respectively..................................... 2,490,000 2,073,000
Convertible Series B Preferred Stock $0.01 par value
authorized, 531,915 shares; issued and outstanding
531,915 and 0 shares in 1996 and 1997, respectively.... 5,319 --
Convertible Series C Preferred Stock, $.001 par
value -- authorized, issued and outstanding, 0 and
144,444 shares in 1996 and 1997, respectively.......... -- 144
Common Stock, $0.001 par value -- authorized, 50,000,000
shares; issued and outstanding, 7,765,600 and 9,047,982
shares in 1996 and 1997, respectively.................. 7,765 9,048
Additional paid-in capital................................ 21,947,444 28,697,761
Accumulated deficit....................................... (16,283,464) (24,206,954)
Foreign currency translation adjustment................... 251,413 42,427
------------ ------------
Total stockholders' equity........................ 8,418,477 6,615,426
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 15,215,422 $ 26,199,955
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 62
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales............................................... $ 3,239,566 $11,314,141 $19,953,480
Cost of sales....................................... 2,468,843 9,136,286 18,090,546
----------- ----------- -----------
Gross profit........................................ 770,723 2,177,855 1,862,934
Selling, general and administrative expenses........ 2,638,116 4,413,365 6,692,727
Research and development costs...................... 600,529 938,719 1,202,645
Depreciation and amortization....................... 574,293 1,009,746 1,289,758
----------- ----------- -----------
Loss from operations................................ (3,042,215) (4,183,975) (7,322,196)
Interest expense, net............................... 267,176 20,223 122,025
Minority interest................................... -- (9,711) (202,120)
----------- ----------- -----------
Loss before income tax expense...................... (3,309,391) (4,194,487) (7,242,101)
Income tax expense (benefit)........................ 10,543 101,432 (55,043)
----------- ----------- -----------
Net loss............................................ (3,319,934) (4,295,919) (7,187,058)
Accretion, discount and dividends on preferred
stock............................................. 313,854 998,924 1,167,486
----------- ----------- -----------
Net loss applicable to common stockholders.......... $(3,633,788) $(5,294,843) $(8,354,544)
=========== =========== ===========
Loss per common share............................... $ (0.78) $ (0.71) $ (1.00)
=========== =========== ===========
Weighted average common shares outstanding.......... 4,655,529 7,436,759 8,372,537
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 63
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------ ---------------------- ----------------- ----------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
--------- ------ --------- ---------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995.......... 3,828,206 $3,828 3,250,000 $3,250,000
Shares issued in private
placement (net of issuance
cost)......................... 1,375,000 1,375
Conversion of note payable to
common shares (net of
write-off of deferred finance
costs)........................ 1,012,500 1,012
Shares issued to pay expenses
and fees...................... 115,236 115
Conversion of preferred shares
to common shares.............. 240,000 240 (360,000) (360,000)
Exercise of warrants............ 33,334 34
Net loss........................
Foreign currency translation
adjustment....................
--------- ------ --------- ---------- -------- ------ ------- ----
BALANCE, DECEMBER 31, 1995........ 6,604,276 6,604 2,890,000 2,890,000
Preferred shares issued for
cash.......................... 531,915 $5,319
Discount on Series B preferred
stock.........................
Exercise of options............. 192,000 192
Shares issued to pay expenses
and fees...................... 2,992 3
Conversion of preferred shares
to common shares.............. 266,667 267 (400,000) (400,000)
Exercise of warrants (net of
costs)........................ 699,665 699
Net loss........................
Foreign currency translation
adjustment....................
--------- ------ --------- ---------- -------- ------ ------- ----
BALANCE, DECEMBER 31, 1996........ 7,765,600 7,765 2,490,000 2,490,000 531,915 $5,319
Shares issued in private
placement (net of issuance
costs)........................ 168,750 169
Preferred shares issued for
cash:
Series C preferred stock...... 144,444 $144
Series D preferred stock......
Accretion of Series C warrant
value.......................
Accretion of Series D
warrants, discount, increase
in stated value and issuance
costs.......................
Discount on Series C preferred
stock.......................
Exercise of options (net of
costs)...................... 410,250 410
Conversion of preferred shares
to common shares............ 543,957 544 (417,000) (417,000) (531,915) (5,319)
Exercise of warrants (net of
costs)...................... 119,425 120
Shares issued for
acquisitions................ 40,000 40
Net loss........................
Foreign currency translation
adjustment....................
--------- ------ --------- ---------- -------- ------ ------- ----
BALANCE, DECEMBER 31, 1997........ 9,047,982 $9,048 2,073,000 $2,073,000 0 $ 0 144,444 $144
--------- ------ --------- ---------- -------- ------ ------- ----
<CAPTION>
ADDITIONAL CURRENCY TOTAL
PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
CAPITAL DEFICIT ADJUSTMENT EQUITY
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995.......... $ 5,210,046 $ (8,042,611) $ (3,124) $ 418,139
Shares issued in private
placement (net of issuance
cost)......................... 4,878,625 4,880,000
Conversion of note payable to
common shares (net of
write-off of deferred finance
costs)........................ 3,910,643 3,911,655
Shares issued to pay expenses
and fees...................... 424,889 425,004
Conversion of preferred shares
to common shares.............. 359,760
Exercise of warrants............ 66,633 66,667
Net loss........................ (3,319,934) (3,319,934)
Foreign currency translation
adjustment.................... (5,692) (5,692)
----------- ------------ --------- -----------
BALANCE, DECEMBER 31, 1995........ 14,850,596 (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............. 255,328 255,520
Shares issued to pay expenses
and fees...................... 23,929 23,932
Conversion of preferred shares
to common shares.............. 399,733
Exercise of warrants (net of
costs)........................ 3,298,177 3,298,876
Net loss........................ (4,295,919) (4,295,919)
Foreign currency translation
adjustment.................... 260,229 260,229
----------- ------------ --------- -----------
BALANCE, DECEMBER 31, 1996........ 21,947,444 (16,283,464) 251,413 8,418,477
Shares issued in private
placement (net of issuance
costs)........................ 1,246,672 1,246,841
Preferred shares issued for
cash:
Series C preferred stock...... 622,549 622,693
Series D preferred stock...... 1,943,569 1,943,569
Accretion of Series C warrant
value....................... 19,833 (19,833)
Accretion of Series D
warrants, discount, increase
in stated value and issuance
costs....................... (644,377) (644,377)
Discount on Series C preferred
stock....................... 72,222 (72,222)
Exercise of options (net of
costs)...................... 1,489,557 1,489,967
Conversion of preferred shares
to common shares............ 421,775
Exercise of warrants (net of
costs)...................... 369,180 369,300
Shares issued for
acquisitions................ 564,960 565,000
Net loss........................ (7,187,058) (7,187,058)
Foreign currency translation
adjustment.................... (208,986) (208,986)
----------- ------------ --------- -----------
BALANCE, DECEMBER 31, 1997........ $28,697,761 $(24,206,954) $ 42,427 $ 6,615,426
----------- ------------ --------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 64
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(3,319,934) $(4,295,919) $(7,187,058)
Adjustments to reconcile net loss to net cash
used in operating activities:
Expenses paid with common stock......................... 425,004 23,932 --
Depreciation and amortization........................... 574,293 1,009,746 1,289,758
Minority interest and gain on sale of fixed assets...... -- (10,376) (189,954)
Changes in assets and liabilities, net of effects from
acquisitions of businesses, which provided (used) cash:
Accounts receivable..................................... 536,394 (1,381,262) 218,752
Due from related parties................................ 1,429 40,676 34,101
Inventories............................................. 247,262 (1,136,800) 36,617
Prepaid expenses and other current assets................. (8,549) (168,520) (274,905)
Accounts payable........................................ (185,067) 1,192,893 529,792
Accrued expenses........................................ (207,513) 669,632 (405,749)
Other liabilities....................................... 43,237 216,022 27,900
----------- ----------- -----------
Net cash used in operating activities................. (1,893,444) (3,839,976) (5,920,746)
----------- ----------- -----------
INVESTING ACTIVITIES:
Fixed assets acquired..................................... (442,438) (1,997,071) (1,036,638)
Proceeds from sale of fixed assets........................ -- 23,033 36,822
Acquisition of businesses, net of cash acquired........... (3,172,528) (767,869) (7,330,279)
Cost of patent acquired................................... (8,000) -- (4,157)
----------- ----------- -----------
Net cash used in investing activities................. (3,622,966) (2,741,907) (8,334,252)
----------- ----------- -----------
FINANCING ACTIVITIES:
Repayment to stockholders................................. (74,912) -- --
Proceeds from long-term debt.............................. -- 1,511,127 1,800,410
Payment of long-term debt................................. (145,719) (1,126,377) (1,429,377)
Proceeds from notes payable stockholder.................. 2,250,000 -- --
Proceeds from sale of common stock/warrants/options....... 4,946,667 3,554,396 3,671,110
Proceeds from sale of preferred stock..................... -- 2,500,000 12,539,230
----------- ----------- -----------
Net cash provided by financing activities............. 6,976,036 6,439,146 16,581,373
----------- ----------- -----------
EFFECT OF EXCHANGE RATE ON CASH............................. (5,692) 260,229 (208,986)
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 1,453,934 117,492 2,117,389
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 68,141 1,522,075 1,639,567
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 1,522,075 $ 1,639,567 $ 3,756,956
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................. $ 26,683 $ 107,027 $ 195,857
Income taxes paid......................................... -- $ 55,635 $ 23,951
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock............... -- $ 625,000 $ 736,432
Issuance of common stock for:
Conversion of note payable to common shares............... $ 4,050,000 -- --
Acquisition of subsidiary................................. -- -- $ 565,000
Exchange for services and other fees...................... $ 114,840 $ 23,932 $ --
Payment of interest....................................... $ 310,164 -- --
Conversion of preferred shares to common shares........... $ 360,000 $ 400,000 $ 422,319
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 65
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization -- EPL Technologies, Inc. (the "Company") is engaged in
the development, manufacture and marketing of proprietary food
processing aids, packaging technologies and related scientific services
that facilitate the maintenance of the quality and integrity of fresh
produce.
B. Principles of Consolidation -- The consolidated financial statements
include the accounts of EPL Technologies, Inc. and its majority and
wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
C. Cash and Cash Equivalents -- The Company considers all short-term
investments with a maturity of three months or less to be cash
equivalents.
D. Accounts Receivable -- Accounts receivable are shown net of allowance
for doubtful accounts of $153,037 and $419,212 as of December 31, 1996
and 1997, respectively.
E. Inventories -- Inventories are stated at the lower of cost or net
realizable value. Cost is determined by the first-in, first-out (FIFO)
method (Note 3).
F. Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization is calculated by the straight-line
method, based upon the estimated useful lives of the assets which are
as follows:
<TABLE>
<S> <C>
Production and laboratory
equipment..................... 5-10 years
Machinery and office equipment... 3-11 years
Leasehold improvements........... The term of the lease or the estimated life of
the asset, whichever is shorter.
Motor Vehicles................... 3-6 years
Buildings........................ 20-40 years
</TABLE>
G. Other Assets --
GOODWILL (NOTE 6) -- Goodwill related to the acquisition of certain
subsidiaries is being amortized on a straight-line basis over 10 years.
DISTRIBUTION RIGHTS (NOTE 5) -- Are being amortized on a straight-line
basis over the ten-year life of the distribution rights agreement.
PATENTS (NOTE 5) -- Are being amortized on a straight-line basis over
the life of the patent. Initially, costs related to new patents are
expensed as incurred. However, once a patent has been confirmed to
patent pending status, then the direct incremental cost is capitalized
and amortized over the estimated useful life of the patent.
OTHER INTANGIBLES (NOTE 6) -- Other intangibles which consist of
trademarks, formulations and non-compete agreements are being amortized
on a straight-line basis over 5 to 10 years.
Total amortization expense related to intangible assets was $452,364,
$624,844 and $670,309 for the years ended December 31, 1995, 1996 and
1997, respectively.
H. Income Taxes -- The Company has adopted the provisions of Financial
Accounting Standards Board Statement No. 109, Accounting for Income
Taxes (SFAS No. 109). SFAS No. 109 requires that deferred income taxes
reflect the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial report amounts
using the enacted marginal rate in effect for the year in which the
differences are expected to reverse.
F-7
<PAGE> 66
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. Revenue Recognition -- Revenues are recognized either at the time of
shipment to customers or, for inventory held at customers' facilities,
at the time the product is utilized in the customers' processing
operations.
J. Foreign Currency Translation Adjustment -- The financial statements of
the Company's foreign subsidiaries have been translated into U.S.
dollars in accordance with SFAS No. 52. All balance sheet accounts
have been translated using the current exchange rate at the balance
sheet date. Income statement amounts have been translated using the
average rate for the year. The profit or loss resulting from the
change in exchange rates has been reported separately as a component
of stockholders' equity.
K. Reclassifications -- Certain reclassifications have been made to the
1995 and 1996 consolidated financial statements in order to conform
with the 1997 presentation.
L. Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
M. Long Lived Assets -- The Company evaluates the carrying value of its
long lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Measurement of the amount of impairment, if any, is based
upon the difference between the carrying value and estimated fair
value.
N. Stock-Based Compensation -- During the year ended December 31, 1996,
the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation. The Company will
continue to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees. See Note 11
for pro forma disclosures of net income and earnings per share as if
the fair value-based method prescribed by SFAS No. 123 had been
applied in measuring compensation expense.
O. New Accounting Pronouncements -- As discussed in Note 12, during the
year ended December 31, 1997, the Company adopted SFAS No. 128,
Earnings Per Share.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement, which establishes standards for reporting and
disclosing comprehensive income, is effective for interim and annual
periods beginning after December 15, 1997, although earlier adoption
is permitted. Reclassification of financial information for earlier
periods presented for comparative periods is required under SFAS No.
130. As this statement only requires additional disclosures in the
Company's consolidated financial statements, its adoption will not
have any impact on the Company's consolidated financial position or
results of operations. The Company will adopt SFAS No. 130 effective
January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This statement which
establishes standards for the reporting of information about operating
segments and requires the reporting of selected information about
operating segments in interim financial statements, is effective for
fiscal years beginning after December 15, 1997, although earlier
application is permitted. Reclassification of segment information for
earlier periods presented for comparative periods is required under
SFAS No. 131. The Company does not expect adoption of this statement
to result in changes to its presentation of financial information. The
Company will adopt SFAS No. 131 effective January 1, 1998.
F-8
<PAGE> 67
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. OPERATIONS
The Company's continued ability to operate is dependent upon its ability to
maintain adequate financing and to achieve levels of revenue necessary to
support the Company's cost structure. Historically, the Company's revenues have
not been sufficient to fund the development of the Company's business, and thus
it has had to finance its operating losses externally, principally through
equity financing.
The Company has undergone a number of operational improvements as well as
made significant investments in development and marketing activities related to
its various processing aids businesses in 1997, which the Company's management
believes will improve cash flows from operations. Management believes that such
changes, together with existing resources will be sufficient to meet the
Company's operating needs for the next twelve months. The Company may, however,
be required to seek additional debt or equity financing to implement its growth
strategy.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Raw materials and supplies.......................... $ 938,050 $2,285,588
Finished goods...................................... 1,000,769 1,125,625
---------- ----------
Total inventories......................... $1,938,819 $3,411,213
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Production and laboratory equipment................. $3,489,187 $5,352,748
Buildings........................................... 814,154 3,491,214
Machinery and office equipment...................... 243,213 306,843
Leasehold improvements.............................. 26,099 20,077
Motor vehicles...................................... 88,251 43,776
---------- ----------
Total property and equipment...................... 4,660,904 9,214,658
Accumulated depreciation and amortization........... (655,193) (1,069,115)
---------- ----------
Property and equipment (net)........................ $4,005,711 $8,145,543
========== ==========
</TABLE>
Depreciation expense was $121,929, $384,902, and $619,449 for the years
ended December 31, 1995, 1996 and 1997, respectively.
5. PATENT AND DISTRIBUTION RIGHTS
In connection with the acquisition of Agra Research, Inc. on December 31,
1992, the purchase cost was allocated primarily to patents acquired. The patent
was formally approved in June 1990, and, therefore, the patent value is being
amortized over the remaining fourteen and one-half years of its life commencing
January 1, 1993. Patents, net, totaled $1,073,522 and $977,903 as of December
31, 1996 and 1997, respectively. The Company owns the exclusive right to
establish the worldwide sales, marketing and distribution network for the food
processing products of Agra Research, Inc. for a period of ten years. The
F-9
<PAGE> 68
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company issued 1,530,656 restricted shares of common stock for these product
rights at a value of $1.50 per share for a total of $2,295,984. The asset is
being amortized on a straight-line basis over the ten-year life of the
distribution rights agreement. Distribution rights, net, totaled $229,599 as of
December 31, 1996. As of December 31, 1997, distribution rights have been fully
amortized.
6. ACQUISITIONS
In December 1997, the Company acquired all of the issued and outstanding
share of capital of Fabbri Artes Graficas Valencia S.A. ("Fabbri"), a Spanish
company, through a newly formed, wholly owned subsidiary of the Company, EPL
Technologies SL. Fabbri is based in Valencia, Spain and is a converter, printer
and marketer of specialty flexible packaging, serving principally the southern
European citrus fruit market. The business was acquired for cash of US
$5,500,000 (825 million pesetas @ $1.00 = 150 pesetas). The Company has
accounted for the Fabbri acquisition under the purchase method of accounting.
The cost of the acquisition has been allocated on the basis of the estimated
fair market value of the assets acquired and the liabilities assumed. This
allocation resulted in net write-up of the property, plant and equipment
acquired of approximately $1,658,000 over the book value of such assets. The
Fabbri acquisition was financed with a portion of the proceeds from a private
placement of 12,500 shares of its Series D Preferred Stock, par value $0.01 per
share (the "Series D Stock"), raising gross proceeds of $12,500,000 before
deducting associated costs of approximately $583,000 (see Note 9).
The results of Fabbri have been included with those of the Company since
the date of acquisition. The following summarized unaudited consolidated pro
forma information for the years ended December 31, 1996 and 1997 has been
presented as if the Fabbri acquisition had occurred on January 1, 1996. This
unaudited pro forma information is based on the historical results of operations
adjusted for acquisition costs and, in the opinion of management, is not
necessarily indicative of what the results would have been had the Company
operated Fabbri since January 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Sales................................... $ 19,435,000 $ 26,781,000
Net loss................................ (5,238,000) (10,841,000)
Loss per common share................... (0.70) (1.29)
</TABLE>
In October 1997 the Company acquired 100% of California Microbiological
Consulting, Inc. ("CMC"), based in Walnut Creek, California. CMC was acquired in
a primarily stock transaction valued at approximately $650,000 (including
acquisition costs). The cost of acquisition has been allocated on the basis of
the estimated fair market value of the assets acquired and the liabilities
assumed. This allocation resulted in goodwill of approximately $509,000 which is
being amortized over 10 years. CMC specializes in food safety, forensic testing
and microbiological consulting.
In July 1996, the Company formed NewCorn Co., LLC, a jointly owned limited
liability company in which the Company owns a 51% equity interest. As of
December 31, 1996 the remaining 49% interest was owned by Underwood Ranches, the
trade name of Agricultural Innovation and Trade, Inc. In December 1997, NewCorn
Co. acquired certain assets of Twin Garden Sales Inc. ("Twin Garden") in
exchange for $600,000 in cash and a 15% membership interest in NewCorn Co. Twin
Garden acquired from Underwood Ranches. The cost of the acquisition has been
allocated on the basis of the estimated fair market value of the assets
acquired. This allocation resulted in goodwill of approximately $498,000, which
is being amortized over 10 years. The Company continues to own 51% of the joint
venture while Underwood Ranches' interest was reduced to 34%. Since the equity
of the minority partners has been reduced to zero, the Company is recording 100%
of NewCorn Co.'s losses until such time as NewCorn Co. achieves a profitable
level. NewCorn Co.
F-10
<PAGE> 69
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
utilizes the Company's proprietary processing aid and packaging technologies and
Underwood's and Twin Garden's existing corn processing and distribution
capabilities.
On April 19, 1996, the Company acquired substantially all of the tangible
and intangible assets of Pure Produce, a Massachusetts general partnership,
through a wholly owned subsidiary, Pure Produce, Inc., a Massachusetts
corporation. The total cost of the acquisition was approximately $150,000. Pure
Produce is in the business of providing companies in the food industry,
especially those involved with fresh and minimally processed produce, with
analysis, protocols and plans relating to food and quality assurance programs
including microbial testing.
In July 1996, the Company acquired, through a wholly-owned U.K. subsidiary
(EPL Flexible Packaging Limited ("EPL Flexible")), some of the fixed assets
located at Gainsborough, Lincolnshire, UK, of a division of Printpack Europe
(St. Helens) Limited ("Printpack St. Helens"). EPL Flexible also assumed a real
estate lease and offered employment to some of the employees of Printpack St.
Helens. The total net consideration paid was $1,286,500. This company
specializes in the printing of flexible packaging films serving primarily the
snack food industry.
In July 1996, the Company formed a wholly-owned U.S. subsidiary, Crystal
Specialty Films, Inc., to acquire the assets and assume some of the liabilities
of Crystal Plastics, Inc., based in Illinois. Crystal uses "K" resin and
polystyrene resins to manufacture a range of proprietary films for a variety of
applications. After an initial payment of approximately $400,000, an additional
amount of $267,000 is payable in quarterly installments over two years, with a
final payment based on the performance of the business over the next two years.
Crystal serves as the site for proprietary gas-flame perforation equipment which
the Company has had custom-built in the U.K. and which is planned to be the
basis for penetration of the U.S. film perforation market.
Except as noted above, the pro forma effects of these acquisitions were not
significant in 1997 and 1996.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1996 and
1997 consists of deferred foreign income tax expense (benefit) of $101,432 and
$(55,043), 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.
F-11
<PAGE> 70
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1997
---------- ----------
<S> <C> <C>
Deferred Tax Asset:
Other assets.............................................. $ 31,340 $ 59,983
Foreign assets............................................ -- 160,706
Operating loss carryforwards.............................. 4,552,532 6,628,944
---------- ----------
Gross deferred tax asset.................................. 4,583,872 6,849,633
Valuation allowance....................................... (4,570,246) (6,830,508)
---------- ----------
Deferred tax asset..................................... 13,626 19,125
---------- ----------
Deferred Tax Liability:
Fixed assets.............................................. 13,626 19,125
Foreign liability......................................... 161,926 77,964
---------- ----------
Deferred tax liability.................................... 175,552 97,089
---------- ----------
Net deferred tax liability.................................. $ 161,926 $ 77,964
========== ==========
</TABLE>
For income tax reporting purposes, the Company has net operating loss
carryforwards of $19,496,893 which will expire between 2003 and 2012.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Bank term loan and lines of credit.................. $1,387,125 $1,852,578
Notes payable....................................... 233,625 100,125
Capital leases...................................... 196,190 235,270
---------- ----------
1,816,940 2,187,973
Less current portion................................ 262,779 396,070
---------- ----------
Long-term debt...................................... $1,554,161 $1,791,903
========== ==========
</TABLE>
In 1996, the Company refinanced its existing debt by EPL Technologies
(Europe) Limited entering into a bank term loan agreement. The bank term loan
matures in 2003 and carries an interest rate ranging from 2% to 2 1/4% over the
Bank of Scotland Base Rate, which base rate at December 31, 1997 was 7.25%. At
December 31, 1996 and 1997, $1,387,125 and $1,168,234 were outstanding under
this term loan agreement, respectively. In 1996, EPL Europe also entered into a
short term line of credit with Bank of Scotland for up to approximately $514,000
which bears interest of 2% over bank base rate. At December 31, 1997, $26,183
has been drawn on this line of credit. In 1997, EPL Europe entered into another
line of credit with Bank of Scotland for up to approximately $658,000, which
bears interest of 2% over bank base rate. At December 31, 1997, the entire
balance has been drawn on this line. The term loan and the lines of credit are
collateralized by the assets of EPL Europe and its subsidiaries. The debt
agreements with the Bank of Scotland contain certain covenants applicable to the
results of operations of these businesses which provide for maintenance of
minimum earnings before income taxes and cash flows to interest expense ratios.
During the final quarter of 1997, EPL Europe informed the Bank of Scotland that
it expected to be unable to meet certain covenants for fiscal 1997. Subsequent
to December 31, 1997, EPL Europe and its subsidiaries, and the Bank of Scotland
amended certain provisions of the facility agreements in relation to these
covenants.
F-12
<PAGE> 71
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 31, 1997, the Company also reduced the availability under
its short-term line of credit to approximately $248,000.
In conjunction with the acquisition of some of the assets of Crystal
Plastics, Inc., (Note 6), the Company entered into a $267,000 note payable with
the prior owner. The note was payable in 8 quarterly principal installments of
$33,375 through 1998. Subsequent to December 31, 1997, this note payable was
repaid in full.
Other debt relates to capital leases that bear interest rates from 5.9%
through 13.0%, with varying monthly principal and interest payments.
At December 31, 1997, aggregate annual maturities of long-term debt
(including current portion) were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- - ------------
<S> <C>
1998............................................. $ 396,070
1999............................................. 272,558
2000............................................. 265,879
2001............................................. 469,158
2002............................................. 466,197
Thereafter....................................... 318,111
----------
$2,187,973
==========
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock (the "Series A Stock"), which has been issued
up to its authorized limit of 3,250,000, was issued at a price of $1.00 per
share with each share of Series A Stock carrying the option to convert into such
number of shares of Common Stock as is determined by dividing $1.00 by the
conversion price of $1.50 per share. The Series A Stock carries equal voting
rights to the common shares, based on the underlying number of common shares
after conversion. The Series A Stock carries a dividend rate of 10% per annum,
payable in cash and/or common shares ($1.50 per share) at the Company's option
(dividends in arrears at December 31, 1997 and 1996 totaled $1,334,159 and
$1,100,716, respectively.) During 1997, shareholders holding 417,000 shares of
Series A Stock elected to exercise their right of conversion, leaving 2,073,000
shares of Series A Stock outstanding at December 31, 1997. In addition, 20% of
the common stock conversion option carries detachable warrants at a price of
$2.00 per warrant. During 1997,1996 and 1995, 54,200, 12,333 and 33,334 warrants
were exercised, respectively, leaving 65,065 unexercised at December 31, 1997.
At the Annual Meeting of the Company held on July 22, 1996, the
stockholders of the Company authorized the issuance of up 2,000,000 shares of
Board Designated Preferred Stock with such designations and preferences as the
Company's Board of Directors may determine from time to time. On July 23, 1996,
the Company issued 531,915 of these shares, designated as Series B Convertible
Preferred Stock at an aggregate consideration of $2,500,000 to two existing
institutional investors in the Company (the "Series B Stock"). Such issuance was
made under Regulation D under the Securities Act of 1933, as amended, as a
transaction not involving a public offering. The Series B Stock contains the
option to convert into such number of shares of Common Stock as is determined by
dividing $4.70 by the Conversion Price (as defined in the documentation for the
Series B Stock) in effect at the time of conversion for each share of Series B
Stock and votes as a class, except as otherwise provided by law, with the Series
A stock, the Series C stock (as defined below) and the common stock, based on
the underlying number of shares of Common Stock after conversion. The extent of
the beneficial conversion feature, representing the difference between, the
$9.40 conversion price and the prevailing market price of the Common Stock at
the date of issuance, a total of $625,000, was
F-13
<PAGE> 72
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
immediately accreted upon issuance. The Series B Stock carries a dividend rate
of 10% per annum, payable in cash and/or shares at the Company's option. The
outstanding dividends on the Series B Stock at December 31, 1997 and 1996
totaled $270,092 and $110,445, respectively. During 1997, the shareholders of
the Series B Preferred Stock elected to fully exercise their right of conversion
into common stock and thus there were no Shares of Series B Stock outstanding at
December 31, 1997.
During 1997, the Company received gross proceeds of $1.0 million, before
deducting associated costs of approximately $42,000, from an existing
institutional stockholder in connection with a private offering of common and
Board Designated Preferred Stock. This resulted in the issuance of 43,750 shares
of common stock, together with 144,444 shares of Board Designated Preferred
Stock -- designated Series C Convertible Preferred Stock (the "Series C Stock").
Such issuance was made under Regulation D under the Securities Act of 1933, as
amended, as a transaction not involving a public offering. The Series C Stock
carries the option to convert into such number of shares of Common Stock as is
determined by dividing $4.50 by the Conversion Price (as defined in the
documentation for the Series C Stock) in effect at the time of conversion for
each share of Series C Stock and votes as a class, except as otherwise provided
by law, with the Series A Stock, the Series B Stock and the common stock, based
on the underlying number of shares of common stock after conversion. The extent
of the beneficial conversion feature, representing the difference between the
$9.00 conversion price and the prevailing market price of the common stock at
the date of issuance, a total of $72,222, was accreted immediately upon
issuance. The Series C Stock carries a dividend rate of 10% per annum, payable
in cash and/or shares at the Company's option. Dividends in arrears on the
Series C Stock at December 31, 1997 totaled $37,842. In connection with the
issuance of the Series C Stock, the Company issued warrants to purchase 30,993
shares of the Company's Common Stock at an exercise price of $10.00 per share.
The value of these warrants will be accreted over the estimated lives of the
warrants (5 years).
At the Annual Meeting of the Company held on July 21, 1997, the
stockholders of the Company approved an increase in the number of shares of
Board Designated Preferred Stock reserved for issuance from 2,000,000 to
4,000,000. During 1997, the Company issued 12,500 shares of Board Designated
Preferred Stock -- designated Series D Convertible Preferred Stock -- at an
aggregate consideration, before associated costs and expenses of $12,500,000, to
three new institutional investors (the "Series D Stock"). Such issuance was made
under Regulation D under the Securities Act of 1933, as amended, in a
transaction not involving a public offering. The Series D Stock certificate of
designation contains provisions which in certain circumstances outside of the
Company's control, could provide the Series D Stockholders with the ability to
redeem their shares. The amount to be paid by the Company in the event of a
redemption would be calculated as the greater of (a) 115% of the stated value of
the Series D Stock plus 4% appreciation accrued from the issuance date to the
redemption date or (b) the "parity value" of the shares to be redeemed, which is
calculated as the number of shares issuable upon conversion multiplied by the
closing price on the redemption date.
The Series D Stock carries the option to convert into shares of common
stock at a variable rate, based on the stated value ($1,000) divided by 94% of
the prevailing market price at the time of conversion, as calculated based on
the lowest five-day average closing bid price per share of Common Stock during a
specified period of time, and subject to certain limitations. The extent of the
beneficial ownership feature, representing the 6% discount from the market price
at the conversion date, a total of $800,000, will be accreted over the earliest
period after which all such shares are convertible, or nine months (the
"Conversion Period"). In addition, the Series D Stock agreement contains a
provision whereby the stated value of the Series D Stock is to increase by 4%
per annum, accruing from the date of issuance until conversion. In connection
with the issuance of the Series D Stock, the Company issued 201,614 warrants to
purchase the Company's Common Stock at an exercise price of 130% of the closing
price on the issuance date (i.e., $20.16 per share). The fair value of these
warrants ($1,200,000) will be accreted over the Conversion Period of the Series
D Stock. Holders of the Series D Stock have limited voting rights and are not
entitled to any dividends.
F-14
<PAGE> 73
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMON STOCK
During 1995, the Company issued a total of 2,776,070 shares of Common
Stock. In September 1995, the Company completed a private placement transaction
of 1,375,000 restricted shares of its Common Stock (the "Offering"), par value
$0.001 per share, at a price of $4.00 per share, to raise gross proceeds of
$5,500,000. Proceeds were used for the acquisition of Bakery Packaging Services
Limited and for working capital. Expenses associated with the Offering were
$620,000, which were charged against additional paid-in capital. Furthermore,
the Company issued 1,012,500 shares of Common Stock in the conversion of a note
payable. A total of 23,250 shares were issued as a commitment fee for a line of
credit from a corporate stockholder, resulting in the capitalization of deferred
finance costs totaling $77,459. Additionally, 81,306 shares of Common Stock were
issued to this stockholder in settlement of accrued interest of $310,164. A
further 10,680 shares were issued as compensation to employees and as payment
for professional services pursuant to the Company's Option Plan, resulting in
expense of $37,381. In 1995, a total of 240,000 shares were issued on conversion
of Series A stock.
During 1996 the Company issued a total of 1,161,324 shares of Common Stock.
A total of 699,665 shares were issued from the exercise of warrants, resulting
in net proceeds to the Company of $3,298,876. A total of 192,000 shares were
issued from the exercise of options, resulting in net proceeds to the Company of
$255,520. A total of 266,667 shares were issued on conversion of Series A
Preferred Stock. A further 2,992 shares were issued in a non-public transaction
as payment for professional services resulting in expense of $23,932.
During 1997 the Company issued a total of 1,282,382 shares of Common Stock.
A total of 119,425 shares were issued from the exercise of warrants, resulting
in net proceeds to the Company of $369,300. A total of 410,250 shares were
issued from the exercise of options, resulting in net proceeds to the Company of
$1,489,967. 278,000 and 265,957 shares of Common Stock were issued upon
conversion of 417,000 shares of Series A Preferred Stock and all 531,915 Shares
of Series B Preferred Stock, respectively. A total of 168,750 shares were issued
in connection with two private placements, which resulted in net proceeds to the
Company of $1,246,841. A further 40,000 shares were issued in connection with
the CMC acquisition.
At December 31, 1997 the Company had warrants outstanding to purchase
341,198 shares of Common Stock at between $2.00 and $20.16 per share, which, if
exercised, would provide the Company with gross proceeds of approximately
$4,866,000. In addition, the Company had options outstanding to purchase
1,758,125 shares of Common Stock at an average price of $8.92 per share (See
Note 11), which, if exercised, would provide the Company with gross proceeds of
approximately $15,689,000.
11. STOCK OPTION PLANS
The 1994 Stock Incentive Plan (the "1994 Plan") originally provided for up
to 750,000 shares of unissued Common Stock to be made available for the granting
of options. This was approved by stockholders on July 21, 1994. On July 22,
1996, stockholders approved an increase in the number of shares available for
the granting of options under the 1994 Plan to 1,500,000. On July 21, 1997, the
stockholders approved another amendment to the 1994 Plan, which increased the
number of shares of common stock reserved for issuance under the Plan to
2,250,000. On December 31, 1996 and 1997, 512,125 and 332,750 shares,
respectively, were available for grant.
F-15
<PAGE> 74
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1994............ 515,000 $ 1.20
Activity for the Year Ended December 31, 1995
Granted................................................... 437,250 $ 3.68
Expired................................................... (15,000) $ 9.24
---------
Outstanding and Exercisable at December 31, 1995............ 937,250 $ 2.24
Activity for the Year Ended December 31, 1996
Granted................................................... 902,500 $ 8.94
Exercised................................................. (192,000) $ 1.34
---------
Outstanding and Exercisable at December 31, 1996............ 1,647,750 $ 6.02
Activity for the Year Ended December 31, 1997
Granted................................................... 520,625 $13.56
Exercised................................................. (410,250) $ 3.68
---------
Outstanding and Exercisable at December 31, 1997............ 1,758,125 $ 8.92
--------- ------
</TABLE>
These options expire between March 10, 1998 and December 11, 2002. No
options issued during 1997 were issued outside of the 1994 Plan.
The following table summarizes information about the Company's stock
options outstanding of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE
EXERCISE OF REMAINING EXERCISE
PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE PRICE
- - ----------------- ----------------- ---------------- --------
<S> <C> <C> <C>
$ 1.00 -- $4.00 431,250 2.1 years $ 3.30
$ 8.00 354,500 3.2 years $ 8.00
$8.125 -- $12.00 413,250 4.0 years $ 8.64
$12.50 -- $15.25 559,125 4.6 years $14.06
---------
1,758,125
---------
</TABLE>
The estimated fair value of options granted during 1995, 1996 and 1997
ranged between $3.46 -- $3.96, $5.86 -- $12.62 and $2.48 -- $3.21 per share,
respectively. The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized for its fixed stock option plans and
its stock purchase plan. Had compensation cost for the Company's stock option
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of FASB Statement No. 123, the
Company's
F-16
<PAGE> 75
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net loss and loss per share for the years ended December 31, 1995, 1996 and 1997
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net loss available for common shareholders:
As reported........................................ $3,633,788 $ 5,294,843 $ 8,354,544
Pro forma.......................................... $5,224,529 $11,666,398 $11,550,509
Net loss per common share:
As reported........................................ $ 0.78 $ 0.71 $ 1.00
Pro forma.......................................... $ 1.12 $ 1.57 $ 1.38
</TABLE>
The fair value of options granted under the Company's stock option plans
during 1995, 1996 and 1997 was estimated on the date of grant using the
Black-Scholes option-pricing mode with the following assumptions used: no
dividend yield, expected volatility ranging from 45% to 224%, risk free interest
rate ranging from 5.6% -- 7.0%, and expected lives of 5 years. Pro forma
compensation cost of options granted under the 1994 Plan is measured based on
the discount from market value. The pro forma effect on net income for 1995,
1996 and 1997 is not representative of the pro forma effect on net income in
future years because it does not take into consideration pro forma compensation
expense related to grants made prior to 1995. SFAS No. 123 does not apply to
awards prior to 1995, and additional awards in future years are anticipated.
12. NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the loss applicable to
common stockholders by the weighted average number of common shares outstanding
during the period.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
was adopted by the Company effective for the year ended December 31, 1997, as
required by the statement. For the years ended December 31, 1997, 1996 and 1995,
the potential common shares have an antidilutive effect on the net loss per
common share for common stockholders. Accordingly, diluted net loss per common
share for common shareholders has not been presented.
The following table summarizes those securities that could potentially
dilute loss (earnings) per common share for common shareholders in the future
that were not included in determining net loss per common stockholders as the
effect as antidilutive.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Potential Common Shares resulting from:
Stock options............................................. 937 1,648 1,758
Convertible preferred stock............................... 1,927 1,926 2,724
Warrants.................................................. 896 197 341
----- ----- -----
3,760 3,771 4,823
===== ===== =====
</TABLE>
F-17
<PAGE> 76
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS
The Company has entered into various operating leases for facilities,
vehicles and equipment. At December 31, 1997, future minimum lease payments were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1998............................................. $ 709,281
1999............................................. 614,965
2000............................................. 536,985
2001............................................. 537,677
2002............................................. 360,224
----------
Future Minimum Lease Payments.................... $2,759,132
==========
</TABLE>
Rental expense for operating leases amounted to $162,559, $224,461 and
$430,039 for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company has entered into agreements for services with certain executive
officers. In addition to a base salary, certain other benefits are provided. At
December 31, 1997, minimum annual payments to executive officers under these
agreements totaled approximately $681,000.
In connection with the Fabbri Acquisition, the Company was informed that
from time to time in the past, Fabbri disposed of certain hazardous waste using
some waste management companies that were not authorized handlers of hazardous
waste under applicable Spanish legislation. The Company obtained from the prior
owner of Fabbri an indemnification for any fines or penalties levied against the
Company from such actions. Management believes that this matter will not have a
material adverse effect on the Company's financial position and results of
operations.
14. RELATED PARTY TRANSACTIONS
In October 1997, the Company entered into a line of credit with a
stockholder for up to $2.1 million for working capital purposes. The Company
paid a transaction fee of $100,000 in connection with obtaining this line of
credit. Interest on this line was at prime rate plus 4%. This line of credit was
repaid in full and cancelled in November, 1997.
The Company purchased certain raw materials from Jungbunzlauer Inc., a
subsidiary of a former stockholder, in the amount of $35,280 and $29,572 for the
years ended December 31, 1996 and 1997, respectively. At December 31, 1997, the
Company had a payable to Jungbunzlauer, Inc. in the amount of $10,080.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, due
from related parties and accounts payable approximate fair value because of the
short maturities of these items.
Interest rates that are currently available to the Company for issuance of
long-term debt (including current maturities) with similar terms and remaining
maturities are used to estimate fair value for long-term debt. The estimated
fair values of the long-term debt approximate its carrying value.
The fair values are based on pertinent information available to the
management as of respective year ends. Although management is not aware of any
factors that could significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these
consolidated financial statements since that date, and current estimates of fair
value may differ from amounts presented herein.
F-18
<PAGE> 77
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CUSTOMER CONCENTRATION
In 1995, no customers accounted for 10% or more of total consolidated
revenues. One customer, within the European packaging materials operations,
accounted for approximately 13% and 32% of total consolidated revenues in 1996
and 1997, respectively.
17. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION
The Company develops, manufactures, and markets proprietary technologies
designed to maintain the integrity of fresh produce. These products fall into
two major classifications; processing aids and packaging materials. Processing
aids are sold primarily in the United States with smaller amounts also sold in
Canada. Packaging materials are marketed in North America and Europe. Sales in
the United Kingdom comprised 93.3%, 94.2% and 90.3% of the European operations
in 1997, 1996 and 1995, respectively.
F-19
<PAGE> 78
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
SALES
Domestic Operations:
Processing aids................................ $ 472,747 $ 1,326,669 $ 3,034,795
Packaging materials............................ 868,229 1,716,984 2,715,938
----------- ----------- -----------
Total Domestic............................... 1,340,976 3,043,653 5,750,733
European Operations -- packaging materials........ 1,898,590 8,270,488 14,202,747
----------- ----------- -----------
Total..................................... $ 3,239,566 $11,314,141 $19,953,480
=========== =========== ===========
NET (LOSS) INCOME FROM OPERATIONS
Domestic Operations:
Processing aids................................ $(2,661,480) $(2,700,793) $(4,742,326)
Packaging materials............................ (385,653) (1,552,376) (2,023,855)
----------- ----------- -----------
Total Domestic............................... (3,047,133) (4,253,169) (6,766,181)
European Operations -- packaging materials........ 4,918 69,194 (556,015)
----------- ----------- -----------
Total..................................... $(3,042,215) $(4,183,975) $(7,322,196)
=========== =========== ===========
TOTAL ASSETS
Domestic Operations:
Processing aids................................ $ 3,061,720 $ 2,876,117 $ 5,872,115
Packaging materials............................ 657,357 2,149,822 2,977,607
----------- ----------- -----------
Total Domestic............................... 3,719,077 5,025,939 8,849,722
European Operations -- packaging materials........ 6,322,120 10,189,483 17,350,233
----------- ----------- -----------
Total..................................... $10,041,197 $15,215,422 $26,199,955
=========== =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE
Domestic Operations:
Processing aids................................ $ 432,135 $ 434,313 $ 543,960
Packaging materials............................ 43,172 117,543 129,801
----------- ----------- -----------
Total Domestic............................... 475,307 551,856 673,761
European Operations -- packaging materials........ 98,986 457,890 615,997
----------- ----------- -----------
Total..................................... $ 574,293 $ 1,009,746 $ 1,289,758
=========== =========== ===========
CAPITAL EXPENDITURES
Domestic Operations:
Processing aids................................ $ 127,471 $ 92,858 $ 419,608
Packaging materials............................ 75,989 4,994 66,555
----------- ----------- -----------
Total Domestic............................... 203,460 97,852 486,163
European Operations -- packaging materials........ 238,978 1,899,219 550,475
----------- ----------- -----------
Total..................................... $ 442,438 $ 1,997,071 $ 1,036,638
=========== =========== ===========
</TABLE>
18. SUBSEQUENT EVENTS
On February 17, 1998, the Company filed a Registration Statement on Form
S-1 for the purpose of offering a total of up to 3,500,000 shares of common
stock. Of the 3,500,000 shares offered, 2,690,903 are being offered by an
existing shareholder of the Company, and the remaining 809,097 are being offered
by the
F-20
<PAGE> 79
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company. Additionally, the Company has granted the underwriters an
over-allotment option to purchase 525,000 shares of common stock.
On March 12, 1998, the Company entered into an agreement with American
National Can Company to create a joint venture company, in which the Company
will own 50%, to market flexible packaging systems for fresh produce for the
U.S. market. The Company will account for such joint venture under the equity
method of accounting.
On March 13, 1998, a one-for-two reverse stock split was approved by the
Company's shareholders, which became effective on March 13, 1998. Per share
information and share amounts in these financial statements have been adjusted
to reflect this stock split.
F-21
<PAGE> 80
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Unique Shareholder of
FABBRI ARTES GRAFICAS VALENCIA, S.A.
We have audited the accompanying balance sheets of FABBRI ARTES GRAFICAS
VALENCIA, S.A as of September 30, 1997 and 1996 and the related statements of
income and cash flows for each of the two years in the period ended September
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
2. We conducted our audits in accordance with auditing standards generally
accepted in United States. 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.
3. In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of FABBRI ARTES
GRAFICAS VALENCIA, S.A as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended September 30, 1997, in conformity with accounting principles generally
accepted in United States.
4. In accordance with Royal Decree Law 7/1996 of June 7, on urgent tax and
other measures designed to promote and deregulate economic activities, the
Company has revalued its tangible assets as for statutory purposes. The effect
of this revaluation has led to an increase in tangible assets of Ptas 104,4
million and a revaluation reserve of Ptas 101,3 million, net of the tax thereon
of Ptas 3,1 million. Due to the fact that the revaluation of tangible assets is
not acceptable under generally accepted accounting principles in the United
States, the effect has been offset. As a consequence, the tax bases of the
revalued assets are higher than the reported amounts as for United States
purposes, which supposes a temporary difference according with SFAS-109.
Therefore the Company has recorded a deferred tax asset against the provision
for income taxes for an amount of Ptas 33,1 million, which will be reversed with
the tax effect of the annual depreciation of the revaluation. Ptas 6,4 million
have been reversed in the twelve month period ended on September 30, 1997. This
effect supposes that the income statement for the year ended September 30, 1997
is not strictly comparable with 1996.
COOPERS & LYBRAND, S.A.
Jorge Molina
February 9, 1998
Valencia, Spain
F-22
<PAGE> 81
FABBRI ARTES GRAFICAS VALENCIA, S.A.
BALANCE SHEETS
(THOUSAND PESETAS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. 54.074 11.893
Marketable securities (note 4)............................ 25.000 25.000
Accounts receivable (note 5).............................. 225.073 299.434
Deferred tax assets....................................... 9.536 333
Inventories (note 6)...................................... 221.959 173.944
------- -------
TOTAL CURRENT ASSETS.............................. 535.642 510.604
------- -------
Property and equipment, net (note 7)...................... 286.084 294.856
Deferred tax assets (note 10)............................. 26.753 --
Long-term receivables and other assets (note 8)........... 1.096 812
------- -------
TOTAL LONG-TERM ASSETS............................ 313.933 295.668
------- -------
TOTAL ASSETS...................................... 849.575 806.272
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade (note 9).......................... 135.650 89.990
Amounts owed to group undertakings........................ 12.050 10.685
Other accrued liabilities (note 9)........................ 27.680 21.147
------- -------
TOTAL CURRENT LIABILITIES......................... 175.380 121.822
------- -------
LONG-TERM LIABILITIES:
Deferred tax liabilities.................................. 2.354 6.215
------- -------
TOTAL LONG-TERM LIABILITIES....................... 2.354 6.215
------- -------
TOTAL LIABILITIES................................. 177.734 128.037
------- -------
SHAREHOLDERS' EQUITY (NOTE 10)
Share capital............................................. 74.686 74.686
Reserves.................................................. 573.270 593.362
Profit for the year....................................... 23.885 10.187
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 671.841 678.235
------- -------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.......... 849.575 806.272
======= =======
</TABLE>
F-23
<PAGE> 82
FABBRI ARTES GRAFICAS VALENCIA, S.A.
STATEMENTS OF INCOME
(THOUSAND PESETAS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Net sales................................................... 1.088.634 1.030.015
Cost of sales............................................. (937.374) (855.567)
--------- ---------
Gross profit........................................... 151.260 174.448
Selling, general and administrative exp................... (187.729) (193.851)
--------- ---------
Operating income....................................... (36.469) (19.403)
Interest expense, net (note 13)........................... 12.275 23.838
Other income, net......................................... 8.262 9.389
--------- ---------
Income before income taxes................................ (15.932) 13.824
Provision for income taxes................................ 39.817 (3.637)
--------- ---------
Net income............................................. 23.885 10.187
========= =========
</TABLE>
F-24
<PAGE> 83
FABBRI ARTES GRAFICAS VALENCIA, S.A.
STATEMENTS OF CASH FLOWS
(THOUSAND PESETAS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
NET INCOME................................................ 23.885 10.187
Adjustments to reconcile net income to net cash from
operating activities:
Amortization........................................... 40.836 38.153
Provisions............................................. (375) 2.283
Other income........................................... (279) (965)
Gain or losses on sale of fixed assets................. 1.210 --
Deferred income taxes.................................. (39.817) (3.662)
Changes in current assets and liabilities:
Accounts receivable.................................... 73.629 (119.665)
Inventories............................................ (46.908) 14.416
Accounts payable....................................... 53.558 17.131
NET CASH FROM OPERATING ACTIVITIES........................ 105.739 (42.122)
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sales of marketable securities........... 285.000 677.000
Purchases of marketable securities..................... (285.000) (605.000)
Purchase of fixed and intangible assets................ (37.260) (31.850)
Proceeds from sales of fixed and intangible assets..... 3.986 --
(Increase)/Decrease in other assets.................... (284) (184)
NET CASH FROM (USED IN) INVESTING ACTIVITIES.............. (33.558) 39.966
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Dividends paid......................................... (30.000) --
NET CASH FROM (USED IN) FINANCING ACTIVITIES.............. (30.000) --
-------- --------
INCREASE OR DECREASE IN CASH AND CASH EQUIVALENTS...... 42.181 (2.156)
-------- --------
Cash and cash equivalents, beginning of the year....... 11.893 14.049
CASH AND CASH EQUIVALENTS, END OF THE YEAR............. 54.074 11.893
======== ========
</TABLE>
F-25
<PAGE> 84
FABBRI ARTES GRAFICAS VALENCIA, S.A.
NOTES TO THE ACCOUNTS
1. ACTIVITIES
FABBRI ARTES GRAFICAS VALENCIA, S.A. (hereinafter, Fabbri, S.A.) is
primarily engaged in printing text and images, in addition to manufacturing
plastic containers. Its industrial installations, together with its registered
domicile for tax and mercantile purposes are located at Avda. de les Comarques
del Pais Valencia, 56, in Quart de Poblet (Valencia).
In accordance with Additional Provision 2 of Law 2/1995 of 23 March on
Limited Liability Companies, which amends the content of the Spanish Companies
Act, the Company has registered at the Mercantile Registry as a Single
Shareholder Company.
2. BASIS OF PRESENTATION
a) True and fair view
The annual accounts have been prepared on the basis of the Company's
accounting records and are presented in compliance with the United States
generally accepted accounting principles so as to provide a true and fair view
of the Company's net worth, its financial situation and the results of its
operations.
b) Comparability
At the General Meeting held on 20 June 1997, a resolution was adopted to
revalue as for Spanish accounting and tax purposes its fixed assets in
accordance with Royal Decree-Law 7/1996, of 7 June, on Urgent Tax Measures to
Liberalise Economic Activities. As a result the Company has recorded an increase
in tangible fixed assets totalling Ptas 114,428,000 pesetas and a revaluation
reserve totalling Ptas 101,295,000 pesetas. Therefore the 1997 financial
statements are not necessarily comparable with those from 1996.
The effect of the fixed assets revaluation has been offset in these
financial statements in order to comply with United States generally accepted
accounting principles. This accounting treatment supposes a difference between
the tax bases of fixed assets and their amounts for financial reporting. As a
consequence and in accordance with SFAS-109, the Company has recorded a deferred
tax asset-non current for the effect of the revalued amount corresponding to
depreciable assets, which raises to Ptas 33.1 million. This asset will be
reversed in future years with the tax effect corresponding to the excess of the
tax over accounting depreciation.
As a consequence, the income statement for the year ended September 30,
1997 is not strictly comparable with 1996.
3. ACCOUNTING POLICIES
a) Property and equipment, net
Property and equipment are stated at cost and are depreciated on a straight
line basis over their estimated useful lives, which are as follows:
<TABLE>
<CAPTION>
%
----
<S> <C>
Buildings................................................... 3-5
Plant and machinery......................................... 9-15
Tooling..................................................... 10
Fixtures.................................................... 10
Data-processing equipment................................... 25
Vehicles.................................................... 16
Other tangible fixed assets................................. 10
</TABLE>
F-26
<PAGE> 85
FABBRI ARTES GRAFICAS VALENCIA, S.A.
NOTES TO THE ACCOUNTS
Improvements which extend the useful lives of existing assets are
capitalized. Repair and maintenance costs are expensed in the year in which they
are incurred. When tangible fixed assets are retired or otherwise disposed of,
the asset and accumulated depreciation accounts are adjusted accordingly.
The Company adopted Statement of Financial Accounting No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of", as of October 1, 1996. No effect has been recorded of adopting this
standard.
b) Inventories
Inventories are stated at the lower of acquisition or production cost and
market value. Production cost includes materials, labour and manufacturing
expense and is calculated using average weighted cost method.
In those cases where the market or replacement value of inventories is
lower than the acquisition/production cost the relevant corrections in value are
made.
c) Transactions denominated in foreign currencies
Debtors and creditors denominated in foreign currencies are stated at
year-end exchange rates. Transactions in foreign currencies are recorded in the
profit and loss account at the exchange rates on the dates when they took place.
Realized gains, together with realized and unrealized losses on exchange, are
taken to profit and loss for the year.
d) Marketable securities
Marketable securities are recorded according with Statement of Financial
Accounting Standards N(0).115, "Accounting for certain investments in debt and
equity securities". SFAS N(0) 115 requires certain securities to be categorized
as either trading, available for sale or held to maturity. Trading securities
are carried at fair value with unrealized gains and losses included in income.
Available for sale securities are carried at fair value with unrealized gains
and losses recorded as a separate component of shareholders' equity. Held to
maturity securities are carried at amortized cost.
e) Corporation tax
Corporation tax expense is recognized based on the reported profit as
adjusted for permanent differences between reported and taxable profits and the
effects of any tax credits and deductions. Deferred tax assets and liabilities
arising from timing differences in the recognition of income and expense for
accounting and tax purposes and other events that create differences between the
tax bases of assets and their amounts for financial reporting, are recorded in
the balance sheet until the underlying timing differences reverse.
Tax credits and deductions and the tax effect of applying tax loss
carryforwards are treated as a reduction in the corporation tax expense for the
year in which the losses and credit occurred, if the compensation is reasonably
secured in future years.
The Company provides in full for all its deferred tax liabilities even
though they may not be expected to reverse in the foreseeable future. The
provision is adjusted to reflect changes in the Corporation Tax rate. Deferred
tax assets are recorded if there is reasonable assurance that they will be
realized.
f) Creditors
Short and long-term loans are stated at the amount at which they are to be
repaid and any implicit interest included either in their face value or their
repayment value is recorded as long-term receivables and others. Such interest
is charged to earnings using a financial method.
F-27
<PAGE> 86
FABBRI ARTES GRAFICAS VALENCIA, S.A.
NOTES TO THE ACCOUNTS
g) Severance payments
According with SFAS-5 and EITF Issue 94-3 the Company records the liability
for certain employee termination benefits, when it has been approved by the
management having the appropriate level of authority and it has been announced
to a group of employees that includes the affected employees.
h) Revenue Recognition and Allowance for doubtful accounts
Revenue is recognized when products are shipped. The Company provides for
all receivables which collection is not reasonably assured.
4. MARKETABLE SECURITIES
The movements and the classification of marketable securities are set out
below:
<TABLE>
<CAPTION>
THOUSAND PESETAS
----------------------------------------------
OPENING CLOSING
BALANCE BALANCE
01.10.96 ADDITIONS DISPOSALS 30.09.97
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Securiting portfolio......................... 25.000 285.000 285.000 25.000
------ ------- ------- ------
(Government debt)............................ 25.000 285.000 285.000 25.000
====== ======= ======= ======
</TABLE>
5. ACCOUNTS RECEIVABLE
A breakdown of this account is as follows:
<TABLE>
<CAPTION>
THOUSAND PESETAS
------------------------
30.09.1997 30.09.1996
---------- ----------
<S> <C> <C>
Trade debtors............................................... 271.612 250.069
Other debtors............................................... 965 2.986
Notes receivable to group undertakings...................... -- 101.953
Taxes refundable.......................................... 9.292 760
------- -------
281.869 355.768
Less provisions for doubtful accounts....................... (56.796) (56.334)
------- -------
225.073 299.434
======= =======
</TABLE>
6. INVENTORIES
A breakdown of this account is as follows:
<TABLE>
<CAPTION>
THOUSAND PESETAS
------------------------
30.09.1997 30.09.1996
---------- ----------
<S> <C> <C>
Raw material and other consumables.......................... 171.056 135.424
Goods purchased for resale.................................. 56.492 42.845
Payments on account......................................... -- 2.371
------- -------
227.548 180.640
Less provision for obsolescence............................. (5.589) (6.696)
------- -------
221.959 173.944
======= =======
</TABLE>
F-28
<PAGE> 87
FABBRI ARTES GRAFICAS VALENCIA, S.A.
NOTES TO THE ACCOUNTS
7. PROPERTY AND EQUIPMENT, NET
Movements in the accounts included under Property and equipment, net are
set out below:
<TABLE>
<CAPTION>
THOUSAND
COST PESETAS
---- --------
<S> <C>
OPENING BALANCE 01.10.96.................................... 768.855
Additions................................................... 37.260
Disposals................................................... (15.462)
-------
CLOSING BALANCE 30.09.97.................................... 790.653
-------
AMORTIZATION
- - ------------------------------------------------------------
OPENING BALANCE 01.10.96.................................... 473.999
Additions................................................... 40.836
Disposals................................................... (10.266)
-------
CLOSING BALANCE 30.09.97.................................... 504.569
-------
NET BOOK VALUE
- - ------------------------------------------------------------
OPENING BALANCE 01.10.96.................................... 294.856
=======
CLOSING BALANCE 30.09.97.................................... 286.084
=======
</TABLE>
- - ---------------
a) Fully-depreciated assets
At 30 September 1997 fully depreciated assets with an original cost of Ptas
127,921,000 pesetas are still being used in operations (1996: Ptas 92,868,000
pesetas)
b) Commitments
The company has no commitments to purchase new tangible fixed assets.
c) Liens and encumbrances
There are no liens or encumbrances on any tangible fixed assets owned by the
company.
d) Fixed assets no longer used in operations
At 30 September 1997 tangible fixed assets with an original cost of Ptas
2,573,000 pesetas and accumulated depreciation totalling Ptas 15,094,000 were
no longer used in operations. (1996: Ptas 42,573,000 and Ptas 13,752,000
respectively).
The Company has entered an agreement with a third Company to hire this asset.
The Company has not recorded any impairment loss for this asset, because it
considers that the future cash inflows of the agreement will exceed the
depreciation and other fixed charges of the asset.
8. LONG-TERM RECEIVABLES AND OTHER ASSETS
The balance recorded under this heading refers to deposits and guarantees
which at the year end amounted to Ptas. 1.096.000.
F-29
<PAGE> 88
FABBRI ARTES GRAFICAS VALENCIA, S.A.
NOTES TO THE ACCOUNTS
9. CURRENT LIABILITIES
a) Accounts payable, trade
<TABLE>
<CAPTION>
THOUSAND
PESETAS
----------
30.09.1997
----------
<S> <C>
Prepayments received for orders............................. 226
Payables for goods or services.............................. 135.931
Containers to be returned to suppliers...................... (507)
-------
135.650
=======
</TABLE>
b) Other accrued liabilities
<TABLE>
<CAPTION>
THOUSAND
PESETAS
----------
30.09.1997
----------
<S> <C>
Employee taxes and VAT payable.............................. 19.853
Accrued wages and salaries.................................. 7.827
------
27.680
======
</TABLE>
c) Bank loans and overdrafts falling due within one year
The Company maintains facilities for discounting of bills with the credit
institutions listed below:
<TABLE>
<CAPTION>
DRAWN COLLECTION
ENTITY LIMIT DOWN MANAGEMENT
------ ------- ----- ----------
<S> <C> <C> <C>
Banco Bilbao-Vizcaya........................ 75.000 -- --
Banesto..................................... 50.000 -- --
Bankinter................................... 50.000 -- --
Banco de Santander.......................... 70.000 -- 2.974
------- -- -----
245.000 2.974
======= == =====
</TABLE>
10. CORPORATION TAX AND TAX SITUATION
Because certain items are treated differently for tax and financial
reporting purposes, the tax profit differs from the profit reported in these
accounts. Deferred tax assets and liabilities arise when an item is recorded
under income or expense for the computation of taxable income in one period but
is included for the computation of accounting income in another period.
F-30
<PAGE> 89
FABBRI ARTES GRAFICAS VALENCIA, S.A.
NOTES TO THE ACCOUNTS
The reconciliation between reported profits and taxable profits is set out
below:
<TABLE>
<CAPTION>
THOUSAND PESETAS
-----------------------------------------------
30.09.1996 30.09.1997
--------------------------------- ----------
INCREASES DECREASES
--------- ---------
<S> <C> <C> <C> <C>
Reported net profit/(loss)....... 23.885 10.187
Corporation tax.................. (39.817) 3.637
------- ------
Profit/(loss) before taxes....... (15.932) 13.824
Permanent differences............ 3.220 (244) 2.976 2.063
Timing differences:
- - -arising during the year......... (1.508) (1.508) 10.465
- - -from prior years................ 12.596 (19.085) (6.489) --
Offset of tax-loss
carryforwards.................. -- --
------- ------
Taxable income................... (20.953) 26.352
======= ======
</TABLE>
Corporation tax is as follows:
<TABLE>
<CAPTION>
THOUSAND PESETAS
------------------------
30.09.1997 30.09.1996
---------- ----------
<S> <C> <C>
Current taxes........................................ -- 7.299
Deferred tax liability............................... (3.861) (4.369)
Deferred tax assets.................................. (35.956) 707
------- ------
(39.817) 3.637
======= ======
</TABLE>
Current corporation tax is the result of applying the 35% rate to taxable
income.
Tax loss carryforwards recorded by the company totalling Ptas 20,953,000
may be used to offset profits made over the next 7 years.
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
THOUSAND
PESETAS
--------
1997
--------
<S> <C>
Spanish operations.......................................... (15.932)
-------
(15.932)
=======
</TABLE>
The Corporation tax charge for the year is analyzed as follows:
<TABLE>
<CAPTION>
THOUSAND PESETAS
-----------------
1997 1996
------- ------
<S> <C> <C>
Corporation tax payable for the year.................... -- 7.299
Deferred tax liability.................................. (3.861) (4.369)
Deferred tax assets..................................... (7.068) 707
Revaluation's net tax effect............................ (26.753) --
Tax credits............................................. (2.135) --
------- ------
(39.817) 3.637
======= ======
Effective tax rate...................................... (249,9) 26,3
======= ======
</TABLE>
F-31
<PAGE> 90
FABBRI ARTES GRAFICAS VALENCIA, S.A.
NOTES TO THE ACCOUNTS
THE TAX EFFECTS OF THE SIGNIFICANT TEMPORARY DIFFERENCES THAT COMPRISE THE
DEFERRED TAX ASSETS AND LIABILITIES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
THOUSAND PESETAS
----------------
1997
----
<S> <C>
Assets:
Non-current
Revaluation's tax effect.................................... 26.753
------
Current:
Investment tax credits...................................... 2.135
Tax loss carry forward...................................... 7.334
Other....................................................... 67
------
9.536
------
Gross deferred tax assets................................... 36.289
======
Liabilities:
Non-Current:
Fixed assets................................................ 2.354
======
</TABLE>
The Company has recorded Ptas. 2,1 million pesetas corresponding to
investment tax credits, which may be reversed with taxable income during the
five following years.
All the Company's returns for the last five years for the main taxes to
which it is subject to are open to inspection by the tax authorities.
As a result, amongst other things, of the different interpretations to
which Spanish tax legislation lends itself, additional tax assessments may be
raised in the event of a tax inspection. The Directors consider, however, that
any additional assessments that might be made would not significantly affect
these accounts.
11. SHAREHOLDERS' EQUITY
Movements in Capital and reserves are set out below:
<TABLE>
<CAPTION>
THOUSAND PESETAS
---------------------------------------
OTHER PROFIT FOR
SHARE CAPITAL RESERVES THE YEAR
------------- -------- ----------
<S> <C> <C> <C>
CLOSING BALANCE 30.09.96................... 74.686 593.362 10.187
====== ======= =======
Distribution to reserves................... -- 10.187 (10.187)
Profit for the year........................ -- -- 23.885
Dividends.................................. -- (30.000) --
Other movements............................ -- (279) --
------ ------- -------
CLOSING BALANCE 30.09.97................... 74.686 573.270 23.885
====== ======= =======
</TABLE>
a) Share capital
Share capital consists of 149,372 fully paid registered shares with a par
value of Ptas 500 each.
F-32
<PAGE> 91
FABBRI ARTES GRAFICAS VALENCIA, S.A.
NOTES TO THE ACCOUNTS
At 30 September 1997 the companies which hold an interest equalling or
exceeding 10% of the Company are as follows:
<TABLE>
<CAPTION>
PERCENT INTEREST
------------------------
NUMBER OF SHARES 30.09.1997 30.09.1996
---------------- ---------- ----------
<S> <C> <C> <C>
Sidlaw Plc............................. 149.372 100% 75%
</TABLE>
b) Other reserves
Movements in other reserves are set out below:
<TABLE>
<CAPTION>
THOUSAND PESETAS
------------------------------
VOLUNTARY
LEGAL RESERVES TOTAL
------ --------- -------
<S> <C> <C> <C>
OPENING BALANCE 30.09.96....................... 14.937 578.425 593.362
Distribution profit............................ -- 10.187 10.187
Dividends...................................... -- (30.000) (30.000)
Other movements................................ -- (279) (279)
------ ------- -------
CLOSING BALANCE 30.09.97....................... 14.937 558.333 573.270
====== ======= =======
</TABLE>
Legal reserve
Appropriations to the legal reserve are made in compliance with Article 214
of the Spanish Companies Act, which stipulates that 10% of profits must be
transferred to this reserve until it represents at least 20% of share capital.
The legal reserve is not available for distribution. Should it be used to
offset losses in the event of no other reserves being available, it must be
replenished out of future profits.
Voluntary reserve
The voluntary reserve contains profits from prior years which were not
distributed or assigned to obligatory reserves. The balance of this reserve is
freely available. During the year, in accordance with a resolution adopted by
the General Meeting held on 28 November 1996 this reserve was distributed to
shareholders as a dividend totalling Ptas 200.84 per share, for a total amount
of Ptas 30,000,000 and charged to voluntary reserves.
c) Profit for the period
The distribution of 1997 profit and other reserves will be proposed at the
Annual General Meeting, as well as the distribution of profits for 1996 is set
out below.
<TABLE>
<CAPTION>
AVAILABLE FOR DISTRIBUTION 1997 1996
- - -------------------------- ------ ------
<S> <C> <C>
Profit and loss for the year............................... 23.885 10.187
====== ======
DISTRIBUTION
- - ------------
Voluntary reserves......................................... 23.885 10.187
====== ======
</TABLE>
F-33
<PAGE> 92
FABBRI ARTES GRAFICAS VALENCIA, S.A.
NOTES TO THE ACCOUNTS
12. INCOME AND EXPENSE
a) Transactions with Group undertakings
<TABLE>
<CAPTION>
30.09.1997 30.09.1996
---------- ----------
<S> <C> <C>
Net purchases.......................................... 10.070 96
Services received...................................... 12.050 --
Net sales.............................................. 3.738 659
</TABLE>
Services received records Ptas 11,000,000 relating to a contract concluded
with the single shareholder (Sidlaw Group Plc.), in accordance with which the
shareholder provides financial, human resource, market research and advisory
services. This agreement is in force between 1 October 1996 and 30 September
1997.
b) Transactions denominated in foreign currencies
The amounts of transactions denominated in foreign currencies are set out
below:
<TABLE>
<CAPTION>
THOUSAND PESETAS
------------------------
01.10.1996 TO 30.09.1997
------------------------
<S> <C>
Purchases................................................ 18.883
Sales.................................................... 107.638
Services received........................................ 2.606
Services rendered........................................ --
</TABLE>
13. INTEREST EXPENSE, NET
Interest expense, net comprises:
<TABLE>
<CAPTION>
THOUSAND PESETAS
------------------------
30.09.1997 30.09.1996
---------- ----------
<S> <C> <C>
Income Gains on exchange............................... 1.418 79
Other income........................................... 17.698 18.565
Income from trading securities......................... 841 5.899
------ ------
19.957 24.543
------ ------
Less expenses:
Losses on exchange................................... 103 466
Amounts owed to third parties and similar expenses... 7.579 239
------ ------
(7.682) (705)
------ ------
INTEREST EXPENSE, NET.................................. 12.275 23.838
====== ======
</TABLE>
14. POST-BALANCE SHEET EVENTS
Subsequent to the year end the Company's single shareholder, Sidlaw Group
Plc., sold its interest in the Company to the company "EPL TECHNOLOGIES, S.L.",
a subsidiary of EPL TECHNOLOGIES INC.
F-34
<PAGE> 93
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following unaudited condensed consolidated pro forma financial data
("the Pro Forma Data") of the Company is based on historical consolidated
financial statements of the Company as adjusted to give effect to the Fabbri
Acquisition and the Series D Placement, as described in the notes to the Pro
Forma Financial Statements below. The unaudited condensed consolidated pro forma
statement of operations for the year ended December 31, 1997 gives effect to the
Fabbri Acquisition and the Series D Placement as if they occurred as of January
1, 1997.
The pro forma adjustments are based upon available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The Pro Forma Financial Data and accompanying notes should be
read in conjunction with the historical Consolidated Financial Statements of the
Company, including the notes thereto, and other financial information pertaining
to the Company included elsewhere in this Prospectus. The Pro Forma Financial
Data does not purport to represent what the Company's actual results of
operations or actual financial position would have been if the Fabbri
Acquisition and the Series D Placement had, in fact, occurred on such date or to
project the Company's results of operations or financial position for any future
period or date. The Pro Forma Financial Data does not give effect to any
transactions other than the Fabbri Acquisition and the Series D Placement,
discussed in the notes to the Pro Forma Financial Data below.
F-35
<PAGE> 94
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
HISTORICAL RESULTS
----------------------- PRO FORMA
THE COMPANY FABBRI(A) ADJUSTMENTS PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................................... $ 19,953 $6,828 $ -- $ 26,781
Cost of sales..................................... 18,090 5,624 -- 23,714
--------- ------ ------- ---------
Gross profit...................................... 1,863 1,204 -- 3,067
Selling, general and administrative expenses...... 6,693 1,106 -- 7,799
Research and development costs.................... 1,203 -- -- 1,203
Depreciation and amortization..................... 1,289 263 110(c) 1,662
--------- ------ ------- ---------
Income (loss) from operations..................... (7,322) (165) (110) (7,597)
Allocations from corporate........................ -- 75 (75)(b) --
Interest expense (income), net.................... 122 (84) -- 38
Minority interest................................. (202) -- -- (202)
--------- ------ ------- ---------
Income (loss) before income taxes................. (7,242) (156) (35) (7,433)
Provision (benefit) for income taxes.............. (55) (285) 198(i) (142)
--------- ------ ------- ---------
Net income (loss)................................. (7,187) 129 (233) (7,291)
Accretion, discount and dividends on Preferred
Stock(f)........................................ 1,167 -- 3,550
800(e)
1,200(f)
527(g)
500(d)
(644)(h)
--------- ------ ------- ---------
Net income (loss) available for common
shareholders.................................... $ (8,354) $ 129 $(2,616) $ (10,841)
========= ====== ======= =========
Loss per common share............................. $ (1.00) $ (1.29)
========= =========
Weighted average number of common shares
outstanding..................................... 8,372,528 8,372,528
========= =========
</TABLE>
(a) To reflect the inclusion of the historical statement of operations of
Fabbri for the period through December 10, 1997, prior to the acquisition by the
Company. The historical statement of operations, denominated in pesetas, was
converted into U.S. dollars using an average exchange rate of 145.82.
(b) To eliminate corporate overhead, such as technology expenses and
management fees, allocated to Fabbri from its parent as recorded in Fabbri's
historical financial statements. These charges are not a component of the
on-going expense structure of the Company and are not expected to be incurred in
future periods.
(c) To reflect additional depreciation expense resulting from a $1.7
million increase in property and equipment valuation recorded as part of the
overall purchase price allocation of the Fabbri acquisition.
(d) To reflect the 4% per annum increase in value of the Series D Preferred
Stock as a dividend.
(e) To reflect the accretion of the discount on the Series D Preferred
Stock (6%) over nine months, the date after which all of the Series D Preferred
Stock could be converted into shares of Common Stock (the "Series D Conversion
Period").
(f) To reflect the accretion of the value of the warrants issued in
connection with the Series D Preferred Stock over the Series D Conversion
Period.
(g) To reflect the accretion of the issuance costs related to the Series D
Preferred Stock over the Series D Conversion Period.
(h) To eliminate the accretion of warrants, discount, issuance costs and
increase in value relative to the Series D Stock which are included in the
historical results of the Company.
F-36
<PAGE> 95
(i) In 1997, Fabbri revalued its property, plant and equipment to fair
market value to comply with Spanish law, resulting in the recording of a
one-time increase to both the book and tax bases of such assets in the amount of
104.4 million pesetas (approximately $716,000 at an exchange rate of
$1.00:145.82 pesetas). Because such adjustment is not permitted for financial
reporting purposes under U.S. generally accepted accounting principles, this
amount has been eliminated from the historical Fabbri balances included herein
to properly reflect the assets at historical cost. Accordingly, the Company has
recorded a one-time income tax benefit of 33.2 million pesetas to account for
the difference between the book and tax bases of its property, plant and
equipment. This amount is to eliminate this tax benefit due to uncertainty with
respect to the recoverability of such deferred tax asset.
F-37
<PAGE> 96
============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Recent Developments........................ 7
Risk Factors............................... 8
Use of Proceeds............................ 16
Dividend Policy............................ 16
Price Range of Common Stock................ 17
Capitalization............................. 18
Dilution................................... 19
Selected Consolidated Financial Data....... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 21
Business................................... 28
Management................................. 40
Principal and Selling Shareholders......... 46
Description of Capital Stock............... 48
Certain Transactions....................... 53
Shares Eligible for Future Sale............ 54
Underwriting............................... 55
Legal Matters.............................. 56
Experts.................................... 56
Available Information...................... 57
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
============================================================
============================================================
3,500,000 Shares
[EPL TECHNOLOGIES, INC. LOGO]
Common Stock
---------------------
PROSPECTUS
---------------------
PRUDENTIAL SECURITIES INCORPORATED
PENNSYLVANIA MERCHANT GROUP
May , 1998
============================================================
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated amount of various expenses in
connection with the sale and distribution of the securities being registered:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 12,841
NASD filing fee............................................. 4,853
Transfer agent's fee and expenses*.......................... 10,000
Accounting fees and expenses*............................... 200,000
Legal fees and expenses*.................................... 1,000,000
"Blue Sky" fees and expenses (including legal fees)*........ 75,000
Costs of printing and engraving*............................ 300,000
Miscellaneous*.............................................. 197,306
----------
Total*............................................ 1,800,000
</TABLE>
- - ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Article 109 of the Colorado Business Corporation Act, as amended (the
"CBCA"), the Company has the power to indemnify directors and officers under
prescribed circumstances and subject to certain limitations, against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party by reason of
his or her being a director or officer of the Company if it is determined that
he or she acted in accordance with the applicable standard of conduct set forth
in such statutory provisions.
Article V F. of the Company's Amended and Restated Articles of
Incorporation, as amended, and Article VI of the Company's Bylaws, as amended,
provide that the Company shall indemnify directors and officers of the Company
against all expenses, liability and loss incurred as a result of such person's
being a party to, or threatened to be made a party to, any proceeding (as
defined, which includes any threatened proceeding) by reason of the fact that he
or she is or was a director or officer of the Company or is otherwise the
subject of any such proceeding by reason of that person's relationship with the
Company, to the fullest extent authorized by the CBCA, if the person conducted
the activities in question in good faith, reasonably believed that the conduct
was in the Company's best interests or was not opposed to the Company's best
interests and, in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful. Article VI of the Bylaws, as amended, further
permits the Company to maintain insurance, at its expense, to protect itself and
any such director or officer of the Company against any such expenses, liability
or loss, whether or not the Company would have the power to indemnify such
person against such expenses, liability or loss under the Bylaws, as amended.
The Company has directors' and officers' liability insurance.
The Underwriting Agreement (to be filed as Exhibit 1.1 to an amendment to
this Registration Statement) will provide that the Underwriters severally and
not jointly will indemnify and hold harmless the Company and each director,
officer or controlling person of the Company from and against any liability
caused by any statement or omission in the Registration Statement or Prospectus
based upon information furnished to the Company by the Underwriters for use
therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Effective November 10, 1997, the Company issued 12,500 shares of Series D
Convertible Preferred Stock for aggregate consideration of $12,500,000 to three
new institutional investors (the "Series D Stock"). Such
II-1
<PAGE> 98
issuance was made under Section 4(2) of the Securities Act of 1933, as amended
(the "1933 Act"). The Series D Stock carries the option to convert into shares
of Common Stock at a variable rate, based on a formula linked to the prevailing
market price at the time of conversion, and subject to certain limitations. The
conversion rate may be up to a 50% premium to the closing market price at the
consummation of the transaction (i.e., a 50% premium to the November 7, 1997
closing price of $15.50). In addition, the Company issued warrants to purchase
201,614 shares of Common Stock exercisable at $20.16 for 5 years.
Effective October 31, 1997, the Company issued an aggregate of 40,000
shares of Common Stock to two individuals in exchange for all of the issued and
outstanding capital stock of California Microbiological Consulting, Inc., in a
transaction exempt from registration pursuant to Section 4(2) of the 1933 Act.
In June 1997, the Company issued 144,444 shares of 10% cumulative
convertible Series C Preferred Stock ("Series C Preferred Stock"), 43,750 shares
of Common Stock and warrants to purchase 30,993 shares of Common Stock at an
exercise price of $10 per share to an accredited investor in a transaction
exempt from registration pursuant to Section 4(2) of the 1933 Act. The Series C
Preferred Stock originally carried the option to convert its Common Stock on a
1-for-1 basis (1-for-2 after giving effect to the Company's reverse stock
split). The Series C Preferred Stock had equal voting rights with the shares of
Common Stock, based on the underlying number of shares of Common Stock after
conversion. The Series C Preferred Stock had a dividend rate of 10% per annum,
payable in cash and/or shares at the Company's option. Also in 1997, in another
transaction exempt from registration pursuant to Section 4(2) of the 1933 Act,
the Company issued 125,000 shares of Common Stock and warrants to purchase
31,250 shares of Common Stock at an exercise price of $10.00 per share to
another accredited investor.
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 originally carried the option to convert into shares of Common
Stock on a 1-for-1 basis (1-for-2 after giving effect to the Company's reverse
stock split). The Series B Preferred Stock had equal voting rights with the
shares of Common Stock, based on the underlying number of shares of Common Stock
after conversion. The Series B Preferred Stock had a dividend rate of 10% per
annum, payable in cash and/or shares at the Company's option.
During 1996, a total of 699,667 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.
In September 1995, the Company sold 1,375,000 shares of Common Stock to
"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 27,500 shares of Common Stock for $4.00
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 was converted into 1,012,500 shares of Common Stock
and warrants to purchase 50,000 shares of Common Stock for $4.00 per share. The
Company also issued to Trilon 81,306 shares of Common Stock in settlement of
accrued interest of $310,164, and 23,250 shares of Common Stock in settlement of
commitment fees.
All information provided under this Item 15 gives retroactive effect to the
1-for-2 reverse stock split.
II-2
<PAGE> 99
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended. (Incorporated by reference to Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 on file with the Securities
and Exchange Commission (the "SEC").)
3.2 Amended and Restated Bylaws of the Company, as amended.
(Incorporated by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 on file with the SEC.)
3.3 Plan of Reverse Stock Split. (Incorporated by reference to
the Company's definitive proxy statement for a special
meeting of shareholders dated February 27, 1998 on file with
the SEC).
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 year ended December 31, 1997 on file with
the SEC.)
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP as to the
validity of the shares of Common Stock being registered.
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 SEC.)
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 SEC.)
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 SEC.)
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 SEC.)
10.7 Agreement between EPL Technologies (Europe) Limited and DWL
Associates Ltd. for the services of D. W. Lyon as Chief
Operating Officer of Bakery Packaging Services Limited.
(Incorporated by reference to Exhibit 2.3 to the Company's
Report on Form 8-K dated October 3, 1995 on file with the
SEC.)
10.8 Employment agreement between EPL Technologies, Inc. and P.
L. Devine, Director, President and Chief Executive Officer,
dated as of January 1, 1997. (Incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-Q
for the quarter ended June 30, 1997 on file with the SEC.)
10.10 Office Lease Agreement dated September 11, 1996 between EPL
Technologies, Inc. and K/B Fund II for Headquarters office.
(Incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 on file with the SEC.)
10.11 License Agreement dated as of April 29, 1997 by and between
Integrated Produce Systems, Inc. and Farmington Fresh.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-3 (File No. 333-42185) on
file with the SEC.)
10.12 Amendment to License Agreement, dated December 1, 1997,
between Integrated Produce Systems, Inc. and Farmington
Fresh. (Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-3 (File No.
333-42185) on file with the SEC.)
</TABLE>
II-3
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13 Operating Agreement of NewCornCo, LLC, dated July 19, 1996,
between the Company and Agricultural Innovation & Trade,
Inc. (Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-3 (File No.
333-42185) on file with the SEC.)
10.14 Fresh-Cut Corn Processing Agreement, dated July 22, 1996,
between NewCornCo, LLC, and Agricultural Innovation & Trade,
Inc. (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-3 (File No.
333-42185) on file with the SEC.)
10.15 Assignment of Membership Interest, dated December 6, 1997,
between Agricultural Innovation & Trade, Inc. and Twin
Garden Sales, Inc. (Incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-3
(File No. 333-42185) on file with the SEC.)
10.16 Requirements Agreement, dated as of January 1, 1998, between
NewCornCo, LLC, and Twin Garden Farms. (Incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-3 (File No. 333-42185) on file with the
SEC.)
10.17 Employment Agreement, dated January 1, 1998, between the
Company and William R. Romig. (Incorporated by reference to
Exhibit 10.17 to the Company's Registration Statement on
Form S-3 (File No. 333-42185) on file with the SEC.)
10.18 Agreement for the Sale and Purchase of the entire issued
share capital of Fabbri Artes Graficas Valencia S.A., dated
December 11, 1997. (Incorporated by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K filed December
24, 1997.)
10.19 Securities Purchase Agreement dated as of November 6, 1997
between the Company and each of the purchasers of the
Company's Series D Preferred Stock. (Incorporated by
reference to Exhibit 4.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997.)
10.20 Registration Rights Agreement dated as of November 6, 1997
between the Company and each of the purchasers of the
Company's Series D Preferred Stock. (Incorporated by
reference to Exhibit 4.5 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997.)
10.21 Trademark License Agreement between IPS Produce, Inc. and
Potandon Produce LLC (confidential treatment has been
granted for certain portions of this document).
(Incorporated by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.)
10.22 ** Employment Agreement dated as of February 18, 1998, by and
between EPL Technologies, Inc. and Bruce M. Crowell.
10.23 ** Service Agreement dated as of October 1, 1997 by and between
EPL Technologies S.L. and Jose Saenz de Santa Maria.
10.24 Agreement dated February 1, 1998 by and between the Company
and American National Can Company. (Incorporated by
reference to Exhibit 99.2 to the Company's Current Report on
Form 8-K filed on March 30, 1998.)
10.25 Operating Agreement of ANC-RESPIRE, LLC. (Incorporated by
reference to Exhibit 99.3 to the Company's Current Report on
Form 8-K filed on March 30, 1998.)
10.26 ** Limited Liability Company Agreement of FreshCorn LLC, dated
April 15, 1998, by and between The Sholl Group II, Inc. and
NewCorn Co. LLC
10.27 ** Trademark Sublicense Agreement, dated April 15, 1998, by and
between FreshCorn LLC, NewCorn Co. LLC and The Sholl Group
II, Inc. (confidential treatment has been granted for
certain portions of this document).
11.01 ** Computation of Earnings per Common Share and Fully Diluted
Earnings per Common Share.
21 Subsidiaries of the Company.
</TABLE>
II-4
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand, S.A.
23.3 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included
in Exhibit 5.1).
24.1** Power of Attorney (included in signature page).
27.1** Financial Data Schedules.
</TABLE>
- - ---------------
* to be filed by amendment.
** previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused Amendment No. 3 to this Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Tinicum, Commonwealth of Pennsylvania, on May 4,
1998.
EPL TECHNOLOGIES, INC.
By /s/ PAUL L. DEVINE
------------------------------------
Paul L. Devine
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to Registration Statement on Form S-1 has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PAUL L. DEVINE Chairman, President and Chief May 4, 1998
- - --------------------------------------------------- Executive Officer (Principal
Paul L. Devine Executive Officer)
/s/ BRUCE M. CROWELL* Vice President and Chief Financial May 4, 1998
- - --------------------------------------------------- Officer (Principal Financial
Bruce M. Crowell Officer)
/s/ TIMOTHY B. OWEN* Secretary and Treasurer (Principal May 4, 1998
- - --------------------------------------------------- Accounting Officer)
Timothy B. Owen
/s/ ROBERT D. MATTEI* Director May 4, 1998
- - ---------------------------------------------------
Robert D. Mattei
/s/ RONALD W. CANTWELL* Director May 4, 1998
- - ---------------------------------------------------
Ronald W. Cantwell
Director
- - ---------------------------------------------------
A. S. Clausi
*By: /s/ PAUL L. DEVINE
---------------------------------------------
Attorney-in-fact
</TABLE>
II-6
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1** Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended. (Incorporated by reference to Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 on file with the Securities
and Exchange Commission (the "SEC").)
3.2 Amended and Restated Bylaws of the Company, as amended.
(Incorporated by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 on file with the SEC.)
3.3 Plan of Reverse Stock Split. (Incorporated by reference to
the Company's definitive proxy statement for a special
meeting of shareholders dated February 27, 1998 on file with
the SEC).
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 year ended December 31, 1997 on file with
the SEC.)
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP as to the
validity of the shares of Common Stock being registered.
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 SEC.)
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 SEC.)
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 SEC.)
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 SEC.)
10.7 Agreement between EPL Technologies (Europe) Limited and DWL
Associates Ltd. for the services of D. W. Lyon as Chief
Operating Officer of Bakery Packaging Services Limited.
(Incorporated by reference to Exhibit 2.3 to the Company's
Report on Form 8-K dated October 3, 1995 on file with the
SEC.)
10.8 Employment agreement between EPL Technologies, Inc. and P.
L. Devine, Director, President and Chief Executive Officer,
dated as of January 1, 1997. (Incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-Q
for the quarter ended June 30, 1997 on file with the SEC.)
10.10 Office Lease Agreement dated September 11, 1996 between EPL
Technologies, Inc. and K/B Fund II for Headquarters office.
(Incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 on file with the SEC.)
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.11 License Agreement dated as of April 29, 1997 by and between
Integrated Produce Systems, Inc. and Farmington Fresh.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-3 (File No. 333-42185) on
file with the SEC.)
10.12 Amendment to License Agreement, dated December 1, 1997,
between Integrated Produce Systems, Inc. and Farmington
Fresh. (Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-3 (File No.
333-42185) on file with the SEC.)
10.13 Operating Agreement of NewCornCo, LLC, dated July 19, 1996,
between the Company and Agricultural Innovation & Trade,
Inc. (Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-3 (File No.
333-42185) on file with the SEC.)
10.14 Fresh-Cut Corn Processing Agreement, dated July 22, 1996,
between NewCornCo, LLC, and Agricultural Innovation & Trade,
Inc. (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-3 (File No.
333-42185) on file with the SEC.)
10.15 Assignment of Membership Interest, dated December 6, 1997,
between Agricultural Innovation & Trade, Inc. and Twin
Garden Sales, Inc. (Incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-3
(File No. 333-42185) on file with the SEC.)
10.16 Requirements Agreement, dated as of January 1, 1998, between
NewCornCo, LLC, and Twin Garden Farms. (Incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-3 (File No. 333-42185) on file with the
SEC.)
10.17 Employment Agreement, dated January 1, 1998, between the
Company and William R. Romig. (Incorporated by reference to
Exhibit 10.17 to the Company's Registration Statement on
Form S-3 (File No. 333-42185) on file with the SEC.)
10.18 Agreement for the Sale and Purchase of the entire issued
share capital of Fabbri Artes Graficas Valencia S.A., dated
December 11, 1997. (Incorporated by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K filed December
24, 1997.)
10.19 Securities Purchase Agreement dated as of November 6, 1997
between the Company and each of the purchasers of the
Company's Series D Preferred Stock. (Incorporated by
reference to Exhibit 4.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997.)
10.20 Registration Rights Agreement dated as of November 6, 1997
between the Company and each of the purchasers of the
Company's Series D Preferred Stock. (Incorporated by
reference to Exhibit 4.5 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997.)
10.21 Trademark License Agreement between IPS Produce, Inc. and
Potandon Produce LLC (confidential treatment has been
granted for certain portions of this document).
(Incorporated by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.)
10.22** Employment Agreement dated as of February 18, 1998, by and
between EPL Technologies, Inc. and Bruce M. Crowell.
10.23** Service Agreement dated as of October 1, 1997 by and between
EPL Technologies S.L. and Jose Saenz de Santa Maria.
10.24 Agreement dated February 1, 1998 by and between the Company
and American National Can Company. (Incorporated by
reference to Exhibit 99.2 to the Company's Current Report on
Form 8-K filed on March 30, 1998.)
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.25 Operating Agreement of ANC-RESPIRE LLC. (Incorporated by
reference to Exhibit 99.3 to the Company's Current Report on
Form 8-K filed on March 30, 1998.)
10.26 ** Limited Liability Company Agreement of FreshCorn LLC, dated
April 15, 1998, by and between The Sholl Group II, Inc. and
NewCorn Co. LLC.
10.27 ** Trademark Sublicense Agreement, dated April 15, 1998, by and
between FreshCorn LLC, NewCorn Co. LLC and The Sholl Group
II, Inc. (confidential treatment has been granted for
certain portions of this document).
11.01** Computation of Earnings per Common Share and Fully Diluted
Earnings per Common Share.
21 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand, S.A.
23.3 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included
in Exhibit 5.1).
24.1** Power of Attorney (included in signature page).
27.1** Financial Data Schedules.
</TABLE>
- - ---------------
* to be filed by amendment.
** previously filed.
<PAGE> 1
EXHIBIT 5.1
May 4, 1998
EPL Technologies, Inc.
2 International Plaza, Suite 245
Philadelphia, Pennsylvania 19113
Re: EPL TECHNOLOGIES, INC.
REGISTRATION STATEMENT ON FORM S-1
(REGISTRATION NO. 333-46397)
Gentlemen:
We have acted as counsel to EPL Technologies, Inc., a Colorado
corporation (the "Company"), in connection with the preparation of the
Registration Statement, as amended to the date hereof, filed on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") in connection with the registration under the Securities Act of
1933, as amended, of 809,097 shares (with up to 525,000 additional shares of
Common Stock subject to an over-allotment option granted by the Company to the
underwriters) of the Company's common stock, $0.001 par value per share (the
"Common Stock"), being sold by the Company and 2,690,903 shares of Common Stock
being sold by a shareholder of the Company.
We are familiar with the proceedings taken and proposed to be taken by
the Company in connection with the proposed authorization, issuance and sale of
the Common Stock. In this connection, we have examined and relied upon such
corporate records and other documents, instruments and certificates and have
made such other investigation as we deemed appropriate as the basis for the
opinion set forth below. In our examination, we have assumed legal capacity of
all natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of such original documents.
The opinion expressed below is based on the assumption that the
Registration Statement will become effective.
Based upon the foregoing, we are of the opinion that the shares of
Common Stock to be sold pursuant to the Registration Statement have been duly
authorized and, when issued, delivered and
<PAGE> 2
EPL Technologies, Inc.
May 4, 1998
Page 2
paid for in accordance with the terms of the Underwriting Agreement, the form of
which is filed as Exhibit 1.1 to the Registration Statement, and upon
satisfaction of all conditions contained therein, will be legally issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus forming a part thereof.
Very truly yours,
<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
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
EPL Technologies S.L., a Spanish company
Fabbri Artes Graficas Valencia S.A., a Spanish company
California Microbiological Consulting, Inc., a California corporation
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to the Registration Statement of
EPL Technologies, Inc. on Form S-1 of our report dated February 27, 1998 (March
13, 1998 as to Note 18) appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ Deloitte & Touche LLP
- - -------------------------
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
May 1, 1998
<PAGE> 1
EXHIBIT 23.2
[COOPERS & LYBRAND LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to the Registration
Statement of EPL Technologies, Inc. on Form S-1 of our report dated February 9,
1998 (relating to the financial statements of Fabbri Artes Graficas Valencia,
S.A., for the years ended September 30, 1997 and 1996).
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
COOPERS & LYBRAND, S.A.
/s/ Jorge Molina
Jorge Molina
Valencia (Spain), May 1, 1998
