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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1998
REGISTRATION NO. 333-46397
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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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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 APRIL 21, 1998
PROSPECTUS
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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 17, 1998, the
last reported sales price of the Common Stock on the Nasdaq SmallCap Market was
$12.00 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)
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<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
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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.......................... 11,235,869 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 1,161,273
shares of Common Stock issuable as of April 17, 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 $13,552
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 15,325
</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 $12.00
per share (the last reported sales price on the Nasdaq SmallCap Market on
April 17, 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
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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 $11.02 per share,
assuming a public offering price of $12.00 (the last reported sales price of the
Common Stock on the Nasdaq SmallCap Market on April 17, 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 17, 1998, the outstanding shares of
Series D Preferred Stock are convertible into 1,161,273 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 11,235,869 shares of Common Stock outstanding (11,760,869
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
1,858,649 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 1,886,875 shares are issuable upon the exercise of
outstanding stock options and 297,465 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 $12.00 per share (the last reported sales price
of the Common Stock on the Nasdaq SmallCap Market on April 17, 1998) and after
deducting underwriting discounts and commissions and the Company's estimated
Offering expenses, are estimated to be $8,710,507 ($14,632,507 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." 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 17, 1998).............. -- 12.75 -- 11.38
</TABLE>
On April 17, 1998, the last reported sales price of the Company's Common
Stock was $12.00 on the Nasdaq SmallCap Market under the symbol "EPTG." As of
April 17, 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 $12.00 per share
(the last reported sales price of the Common Stock on the Nasdaq SmallCap Market
on April 17, 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 39,339
Accumulated deficit....................................... (24,207) (24,207)
Foreign currency translation adjustments.................. 42 42
-------- --------
Total shareholders' equity................................ 6,615 15,325
-------- --------
Total capitalization........................................ $ 19,420 $ 26,277
======== ========
</TABLE>
- ---------------
(1) As of April 17, 1998, the outstanding shares of Series D Preferred Stock are
convertible into an aggregate of 1,161,273 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 $12.00 per share, the last
reported sales price of the Common Stock on the Nasdaq SmallCap Market on April
17, 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 $10.9 million
or $0.98 per share of Common Stock. This represents an immediate increase in net
tangible book value of $0.74 per share to existing shareholders and an immediate
dilution of $11.02 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.......................... $ 12.00
Net tangible book value at December 31, 1997.... $ 0.24
Increase attributable to new investors.......... 0.74
----------
Pro forma net tangible book value after the Offering... 0.98
----------
Dilution in net tangible book value to new
investors(1).......................................... $ 11.02
==========
</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 17, 1998,
the outstanding shares of Series D Preferred Stock are convertible into an
aggregate of 1,161,273 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 (9/2007) 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.
40
<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 &
41
<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
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<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 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, the 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 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
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
43
<PAGE> 45
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 months in the
case of death or disability). The Plan provides that no option may be granted
under it after May 4, 1999.
44
<PAGE> 46
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
49
<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 17, 1998 in accordance with the provisions of
the Series D Preferred Stock) would be 1,161,273.
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 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, the 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.
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<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 11,235,869 shares
of Common Stock outstanding (11,760,869 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, calculated
as of April 17, 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 1,858,649 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 112,359 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 1,858,649 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 330,417
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 330,417 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.
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<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 55,000 shares of Common Stock for $2.00
per share to Hermitage Capital Corp., as placement agent for the 1995 Placement.
Additionally, on October 2, 1995, $4,050,000 in outstanding borrowings under a
line of credit with Trilon 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 Scholl 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 Scholl Group
II, Inc. (confidential treatment has been requested 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. 2 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 April
21, 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. 2 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 April 21, 1998
- --------------------------------------------------- Executive Officer (Principal
Paul L. Devine Executive Officer)
/s/ BRUCE M. CROWELL Vice President and Chief April 21, 1998
- --------------------------------------------------- Financial Officer (Principal
Bruce M. Crowell Financial Officer)
/s/ TIMOTHY B. OWEN* Secretary and Treasurer April 21, 1998
- --------------------------------------------------- (Principal Accounting
Timothy B. Owen Officer)
/s/ ROBERT D. MATTEI* Director April 21, 1998
- ---------------------------------------------------
Robert D. Mattei
/s/ RONALD W. CANTWELL* Director April 21, 1998
- ---------------------------------------------------
Ronald W. Cantwell
Director
- ---------------------------------------------------
A. S. Clausi
*By: /s/ PAUL L. DEVINE
---------------------------------------------
Attorney-in-fact
</TABLE>
We, the undersigned director and officer of EPL Technologies, Inc., do
hereby constitute and appoint each of Paul L. Devine and Timothy B. Owen, each
with full power of substitution, our true and lawful attorney-in-fact and agent
to do any and all acts and things in our names and in our behalf in our
capacities stated below, which acts and things either of them may deem necessary
or advisable to enable EPL Technologies, Inc. to comply with the Securities Act
of 1933, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but not limited to, power and authority to
sign for any or all of us in our names, in the capacities stated below, any and
all amendments (including post-effective amendments) hereto, and any
registration
II-6
<PAGE> 103
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended; and we do hereby ratify and confirm all that they shall do or cause to
be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BRUCE M. CROWELL Vice President and Chief April 21, 1998
- --------------------------------------------------- Financial Officer (Principal
Bruce M. Crowell Financial Officer)
Director
- ---------------------------------------------------
A. S. Clausi
</TABLE>
II-7
<PAGE> 104
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> 105
<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> 106
<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 Scholl 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 Scholl Group
II, Inc. (confidential treatment has been requested 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
EPL Technologies, Inc.
3,500,000 Shares(1)
Common Stock
UNDERWRITING AGREEMENT
, 1998
PRUDENTIAL SECURITIES INCORPORATED
PENNSYLVANIA MERCHANT GROUP
As the Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
EPL Technologies, Inc., a Colorado corporation (the "Company"), and
Trilon Dominion Partners, L.L.C., a Delaware limited liability company (the
"Selling Securityholder"), hereby confirm their agreement with the several
underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have
been duly authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
1. Securities. Subject to the terms and conditions herein contained,
the Company proposes to issue and sell to the several Underwriters an aggregate
of 809,097 shares of the Company's Common Stock, par value $.001 per share
("Common Stock"), and the Selling Securityholder proposes to sell to the several
Underwriters an aggregate of 2,690,903 shares of Common Stock; any and all of
such shares of Common Stock are hereinafter referred to as the "Firm
Securities." The Company also proposes to sell to the several Underwriters not
more than 525,000 additional shares of Common Stock if requested by the
Representatives as provided in Section 3 of this Agreement. Any and all shares
of Common Stock to be purchased by the Underwriters pursuant to such option are
referred to herein as the "Option Securities," and the Firm Securities and any
Option Securities are collectively referred to herein as the "Securities."
2. Representations and Warranties of the Company.
The Company represents and warrants to, and agrees with, each of the
several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-46397)
with respect to the Securities, including a prospectus subject to completion,
has been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed. After
the execution of this Agreement, the
- -------------
(1) Plus an option to purchase from the Company up to 525,000 additional shares
to cover over-allotments.
<PAGE> 2
Company will file with the Commission either (i) if such registration statement,
as it may have been amended, has been declared by the Commission to be effective
under the Act, either (A) if the Company relies on Rule 434 under the Act, a
Term Sheet (as hereinafter defined) relating to the Securities, that shall
identify the Preliminary Prospectus (as hereinafter defined) that it supplements
containing such information as is required or permitted by Rules 434, 430A and
424(b) under the Act or (B) if the Company does not rely on Rule 434 under the
Act, a prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by Rule
430A under the Act or permitted by Rule 424(b) under the Act, and in the case of
either clause (i)(A) or (i)(B) of this sentence as have been provided to and
approved by the Representatives prior to the execution of this Agreement, or
(ii) if such registration statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Representatives prior to the
execution of this Agreement. The Company may also file a related registration
statement with the Commission pursuant to Rule 462(b) under the Act for the
purpose of registering certain additional Securities, which registration shall
be effective upon filing with the Commission. As used in this Agreement, the
term "Original Registration Statement" means the registration statement
initially filed relating to the Securities, as amended at the time when it was
or is declared effective, including all financial schedules and exhibits thereto
and including any information omitted therefrom pursuant to Rule 430A under the
Act and included in the Prospectus (as hereinafter defined); the term "Rule
462(b) Registration Statement" means any registration statement filed with the
Commission pursuant to Rule 462(b) under the Act (including the Registration
Statement and any Preliminary Prospectus or Prospectus incorporated therein at
the time such Registration Statement becomes effective); the term "Registration
Statement" includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act,
the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and
if no prospectus is required to be filed pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or
suspending use of any Preliminary Prospectus. When any Preliminary Prospectus
was filed with the Commission it (i) contained all statements required to be
stated therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or part thereof or such amendment or supplement is not
2
<PAGE> 3
required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective) and on the Firm Closing Date and any Option Closing Date
(both as hereinafter defined), the Prospectus, as amended or supplemented at any
such time, (i) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply in all material respects
with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives specifically for use therein.
(c) If the Company has elected to rely on Rule 462(b) and the
Rule 462(b) Registration Statement has not been declared effective (i) the
Company has filed a Rule 462(b) Registration Statement in compliance with and
that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt and (ii) the Company has given irrevocable
instructions for transmission of the applicable filing fee in connection with
the filing of the Rule 462(b) Registration Statement, in compliance with Rule
111 promulgated under the Act, or the Commission has received payment of such
filing fee.
(d) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations or limited liability
companies (as the case may be) under the laws of their respective jurisdictions
of incorporation or formation and are duly qualified to transact business as
foreign corporations or limited liability companies (as the case may be) and are
in good standing under the laws of all other jurisdictions where the ownership
or leasing of their respective properties or the conduct of their respective
businesses requires such qualification, except where the failure to be so
qualified would not result in a material adverse change in the condition
(financial or otherwise), management, business prospects, net worth, or results
of operations of the Company and its subsidiaries, taken as a whole ("Material
Adverse Effect"). For purposes of this Underwriting Agreement, the term
"subsidiaries" when used with respect to the Company shall include, without
limitation, each of the entities listed in Exhibit 21 to the Registration
Statement and Freshcorn LLC.
(e) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement and the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.
(f) The issued shares of capital stock or other ownership
interests of each of the Company's subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable (or comparable concept under
foreign law) and, except as set forth in the Prospectus or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus, are owned beneficially
by the Company free and clear of any security interests, liens, encumbrances,
equities or claims.
(g) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued and
outstanding shares of capital stock of the Company as set forth therein have
been duly authorized and validly issued and are fully paid and nonassessable,
were issued in compliance with all applicable federal and state securities laws,
were not issued in violation of and are not subject to any preemptive rights or
other rights to subscribe for or purchase securities and were not issued in
violation of any other contractual or legal rights. The Firm Securities to be
sold by Selling Securityholder are duly authorized, validly issued, fully paid
and nonassessable, were issued in compliance with all applicable federal and
state securities laws, were not issued in violation of and are not subject to
any preemptive rights or other rights to subscribe for or purchase securities
and were not issued in violation of any
3
<PAGE> 4
other contractual or legal rights. The Firm Securities to be sold by the Company
and the Option Securities have been duly authorized and at the Firm Closing Date
or the related Option Closing Date (as the case may be), after payment therefor
in accordance herewith, will be validly issued, fully paid and nonassessable. No
holders of outstanding shares of capital stock of the Company are entitled to
any preemptive or other rights to subscribe for any of the Securities, and no
holder of securities of the Company has any right which has not been fully
exercised or waived to require the Company to register the offer or sale of any
securities owned by such holder under the Act in the public offering
contemplated by this Agreement.
(h) The capital stock of the Company conforms to the
description thereof contained under the heading "Description of Capital Stock"
in the Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus.
(i) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), there
are no outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to subscribe for
or purchase from the Company or any such subsidiary any such capital stock or
any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any such subsidiary to issue any shares of capital
stock, any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options.
(j) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present the financial position of the Company and
its consolidated subsidiaries and the results of operations and changes in
financial condition as of the respective dates or for the respective periods
therein specified. Such financial statements and schedules have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein). The
selected financial data set forth under the caption "Selected Consolidated
Financial Data" in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) fairly present, on the basis stated in
the Prospectus (or such Preliminary Prospectus), the information included
therein.
(k) Each of Deloitte & Touche LLP and Coopers & Lybrand, S.A.,
who have certified certain financial statements of the Company and delivered
their respective reports with respect to the audited consolidated financial
statements and schedules included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are independent public accountants as required by the
Act and the applicable rules and regulations thereunder.
(l) The execution, delivery and performance of this Agreement
have been duly authorized by the Company, and this Agreement has been duly
executed and delivered by the Company, and is the valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity.
(m) No legal or governmental proceedings are pending to which
the Company or any of its subsidiaries is a party or to which the property of
the Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not described
therein (or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and, to the knowledge of the Company, no such proceedings have been
threatened against the Company or any of its subsidiaries or with respect to any
of their respective properties; and no contract or other document is required to
be described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement that is not described therein (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus) or
filed as required.
4
<PAGE> 5
(n) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by the
Company with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be required under
state securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or (ii) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their respective
properties are bound, except as to which waivers have been received from the
holders of the Company's Series D Preferred Stock and Clifford M. Coles, or the
charter or other organizational documents or by-laws of the Company or any of
its subsidiaries, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to the Company or any of its subsidiaries.
(o) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus, neither the Company
nor any of its subsidiaries has sustained any material loss or interference with
its business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding and there has not been any Material Adverse
Effect, or any development involving a prospective Material Adverse Effect,
except in each case as described in or contemplated by the Prospectus or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus.
(p) The Company has not, directly or indirectly, (i) taken any
action designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Company and the Selling Securityholder under this
Agreement).
(q) The Company has not distributed and, prior to the later of
(i) the Firm Closing Date and (ii) the completion of the distribution of the
Securities, will not distribute any offering material in connection with the
offering and sale of the Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or other materials, if any, permitted by the Act.
(r) Subsequent to the respective dates as of which information
is given in any of the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), (A) the
Company and its subsidiaries have not incurred any material liability or
obligation, direct or contingent, nor entered into any material transaction not
in the ordinary course of business; (B) the Company has not purchased any of its
outstanding capital stock or declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock; and (C) there has not been any
material change in the capital stock, short-term debt or long-term debt of the
Company and its consolidated subsidiaries, except in each case as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(s) The Company and each of its subsidiaries have good and
marketable title to all items of real property and good title to all items of
personal property owned by each of them, in each case free and clear of any
security interests, liens, encumbrances, equities, claims and other defects,
except as described in the Prospectus or such as do not materially and adversely
affect the value of such property and do not interfere with the use made or
proposed to be made of such property by the Company or such subsidiary, and any
real property and buildings held
5
<PAGE> 6
under lease by the Company or any such subsidiary are held under valid,
subsisting and enforceable leases, with such exceptions as are not material and
do not interfere with the use made or proposed to be made of such property and
buildings by the Company or such subsidiary, in each case except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(t) No labor dispute with the employees of the Company or any
of its subsidiaries or with the employees of any of the Company's contract
manufacturers exists or is threatened or imminent that could result in a
Material Adverse Effect, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(u) The Company and its subsidiaries own, possess, or have the
right to use, or can acquire ownership, possession or the right to use on
reasonable terms, all material patents, patent applications, trademarks, service
marks, trade names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of infringement of or conflict with asserted rights of any third party
with respect to any of the foregoing, in each case except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(v) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not cause a Material Adverse Effect, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(w) Except as described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), no
subsidiary of the Company is currently prohibited, directly or indirectly, from
paying any dividends to the Company, from making any other distribution on such
subsidiary's capital stock or other ownership interest, from repaying to the
Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or any
other subsidiary of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(x) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material Adverse
Effect, in each case except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(y) The Company will conduct its operations in a manner that
will not subject it to registration as an investment company under the
Investment Company Act of 1940, as amended, and this transaction will not cause
the Company to become an investment company subject to registration under such
Act.
(z) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed by it or has requested
extensions thereof (except in any case in which the failure so to file would not
have a Material Adverse Effect) and has paid all taxes, tariffs and duties
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such
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<PAGE> 7
assessment, fine or penalty that is currently being contested in good faith or
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(aa) Neither the Company nor any of its subsidiaries is in
violation of any federal, state, local or foreign law or regulation relating to
its respective business and the Company and its subsidiaries have received all
permits, licenses or other approvals required under applicable federal, state,
local or foreign laws and regulations to conduct its business, and the Company
and each subsidiary is in compliance with all terms and conditions of any such
permit, license or approval, except any such violation of law or regulation,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
which would not, singly or in the aggregate, result in a Material Adverse
Effect, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(bb) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters pursuant to
Section 7(j) hereof shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters covered thereby.
(cc) Except for the shares of capital stock or other ownership
interests of each of the subsidiaries owned by the Company and such
subsidiaries, neither the Company nor any such subsidiary owns any shares of
stock or other ownership interests of or in any corporation, limited liability
company, firm, partnership, association or other entity, except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(dd) There are no holders of securities of the Company who, by
reason of the filing of the Registration Statement, have the right (and have not
waived such right) to request the Company to register under the Act, or to
include in the Registration Statement, securities held by them.
(ee) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(ff) No default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in the due
performance and observation of any term, covenant or condition of any indenture,
mortgage, deed of trust, lease or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company or any
such subsidiary or any of their respective properties are bound, which default
would have a Material Adverse Effect.
(gg) The business systems of the Company and its subsidiaries
include design, performance and functionality so that neither the Company, any
such subsidiary nor, to the Company's knowledge (which does not include direct
inquiry), any of their respective customers will experience invalid or incorrect
results or abnormal software operation related to the calendar year 2000 which
will have a Material Adverse Effect.
(hh) Neither the Company nor any of its subsidiaries is or
with the giving of notice or the lapse of time or both, will be in violation of
(i) its charter or other organizational documents or by-laws (ii) in violation
of any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any such subsidiary, the failure to comply with
which would have a Material Adverse Effect, or (iii) any decree of any court or
governmental agency or body having jurisdiction over the Company or any such
subsidiary.
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<PAGE> 8
(ii) The 1-for-2 reverse stock split described in the
Registration Statement was effected in compliance with all applicable legal and
regulatory requirements.
2A. Representations of the Selling Securityholder.
The Selling Securityholder represents and warrants to, and agrees with,
each of the several Underwriters that:
(a) The Selling Securityholder has full power (as a limited
liability company and otherwise) to enter into this Agreement and to sell,
assign, transfer and deliver to the Underwriters the Securities to be sold by
the Selling Securityholder hereunder in accordance with the terms of this
Agreement; the execution, delivery and performance of this Agreement has been
duly authorized by all necessary action of the Selling Securityholder; and this
Agreement has been duly executed and delivered by the Selling Securityholder.
(b) The Selling Securityholder has duly executed and delivered
a custody agreement (the "Custody Agreement"), in the form heretofore delivered
to the Representatives, appointing the Company as custodian thereunder (the
"Custodian"). Certificates in negotiable form, endorsed in blank or accompanied
by blank stock powers duly executed, with signatures appropriately guaranteed,
representing the Securities to be sold by the Selling Securityholder hereunder
have been deposited with the Custodian pursuant to the Custody Agreement for the
purpose of delivery pursuant to this Agreement. The Selling Securityholder has
full power (as a limited liability company and otherwise) to enter into the
Custody Agreement and to perform its obligations under the Custody Agreement.
The execution and delivery of the Custody Agreement has been duly authorized by
all necessary corporate action of the Selling Securityholder; the Custody
Agreement has been duly executed and delivered by the Selling Securityholder
and, assuming due authorization, execution and delivery by the Custodian, is the
legal, valid, binding and enforceable instrument of the Selling Securityholder,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity. The Selling Securityholder agrees that each of the
Securities represented by the certificates on deposit with the Custodian is
subject to the interests of the Underwriters hereunder, that the arrangements
made for such custody and to carry out the terms of this Agreement, are to that
extent irrevocable and that the obligations of the Selling Securityholder
hereunder shall not be terminated, except as provided in this Agreement or the
Custody Agreement, by any act of the Selling Securityholder, by operation of law
or otherwise, or by its liquidation or dissolution or by the occurrence of any
other event. If the Selling Securityholder shall liquidate or dissolve, or if
any other event should occur, before the delivery of such Securities hereunder,
the certificates for such Securities deposited with the Custodian shall be
delivered by the Custodian in accordance with the respective terms and
conditions of this Agreement as if such liquidation or dissolution or other
event had not occurred, regardless of whether the Custodian shall have received
notice thereof.
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<PAGE> 9
(c) The Selling Securityholder is the lawful owner of the
Securities to be sold by the Selling Securityholder hereunder and upon sale and
delivery of, and payment for, such Securities, as provided herein, the Selling
Securityholder will convey good and valid title to such Securities, free and
clear of any security interests, liens, encumbrances, equities, claims or other
defects.
(d) The Selling Securityholder has not, directly or
indirectly, (i) taken any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Securities or (B) paid or agreed
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company (except for the sale of Securities by the
Selling Securityholder under this Agreement).
(e) Based on a review of and participation in the preparation
of the Registration Statement, nothing came to the attention of the Selling
Securityholder that caused the Selling Securityholder to believe that (i) when
any Preliminary Prospectus and any amendment or supplement thereto was filed
with the Commission, it included any untrue statement of a material fact or
omitted to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; or (ii) when the Registration Statement or any amendment thereto was
or is declared effective, it included or will include any untrue statement of a
material fact or omitted or will omit to state any material fact necessary to
make the statements therein not misleading; or (iii) when the Prospectus or any
Term Sheet that is a part thereof or any Integrated Prospectus or any amendment
or supplement to the Prospectus is filed with the Commission pursuant to Rule
424(b) (or, if the Prospectus or part thereof or such amendment or supplement is
not required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective), on the date when the Prospectus is otherwise amended or
supplemented and on the Firm Closing Date and any Option Closing Date (both as
hereinafter defined), each of the Prospectus, [and, if required to be filed
pursuant to Rules 434(c)(2) and 424(b) under the Act, the Integrated Prospectus]
as amended or supplemented at any such time, included or will include any untrue
statement of a material fact or omitted or will omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (h) do not apply to statements or omissions made in
any Preliminary Prospectus or any amendment or supplement thereto, the
Registration Statement or any amendment thereto, the Prospectus or, if required
to be filed pursuant to Rules 434(c)(2) and 424(b) and the Act, the Integrated
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein.
(f) To the extent that any statements or omissions are made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by the Selling Securityholder specifically
for use therein, such Preliminary Prospectus did, and the Registration Statement
and the Prospectus and any amendments or supplements thereto, when they become
effective or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act and the respective rules
and regulations of the Commission thereunder and will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading. The Selling
Securityholder has made all filings required to be made under the Act and the
Exchange Act and all such filings comply in all material respects to the
requirements of the Act and the Exchange Act. The Selling Securityholder has
reviewed the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and the Registration Statement, and the
information regarding the Selling Securityholder set forth therein under the
captions "Prospectus Summary - Selling Shareholder," "Management - Directors and
Executive Officers - Ronald W. Cantwell," "Principal and Selling Shareholders"
and "Certain Transactions" is complete and accurate and the Company is entitled
to rely thereon.
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<PAGE> 10
(g) The sale by the Selling Securityholder of Securities
pursuant hereto is not prompted by any adverse information concerning the
Company that is not set forth in the Registration Statement or the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(h) The sale of the Securities to the Underwriters by the
Selling Securityholder pursuant to this Agreement, the compliance by the Selling
Securityholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein contemplated do
not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained, such as may be required under state securities or blue sky laws or to
clear the offering and the underwriting arrangements with the NASD and, if the
registration statement filed with respect to the Securities (as amended) is not
effective under the Act as of the time of execution hereof, such as may be
required (and shall be obtained as provided in this Agreement) under the Act or
the Exchange Act, or (ii) conflict with or result in a breach or violation of
any of the terms and provisions of, or constitute a default under any indenture,
mortgage, deed of trust, lease or other agreement or instrument to which the
Selling Securityholder or any of its affiliates is a party or by which the
Selling Securityholder or any of its affiliates or any of their respective
properties are bound, or the charter documents or by-laws of the Selling
Securityholder or any of its affiliates or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental authority or any
arbitrator applicable to the Selling Securityholder or any of its affiliates.
(i) Each certificate signed by an officer of the Selling
Securityholder and delivered to the Representatives or counsel for the
Underwriters pursuant to Section 7(k) hereof shall be deemed to be a
representation and warranty by the Selling Securityholder to each Underwriter as
to the matters covered thereby.
(j) The Selling Securityholder has not distributed and, prior
to the later of (i) the Firm Closing Date and (ii) the completion of the
distribution of the securities, will not distribute any offering material in
connection with the offering and sale of the securities other than the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or other materials, if
any, permitted by the Act.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to issue and sell and the
Selling Securityholder agrees to sell to each of the Underwriters, and each of
the Underwriters, severally and not jointly, agrees to purchase from the Company
and the Selling Securityholder, at a purchase price of $_____ per share, the
number of Firm Securities set forth opposite the name of such Underwriter in
Schedule 1 hereto. One or more certificates in definitive form for the Firm
Securities that the several Underwriters have agreed to purchase hereunder, and
in such denomination or denominations and registered in such name or names as
the Representatives request upon notice to the Company and the Selling
Securityholder at least 48 hours prior to the Firm Closing Date, shall be
delivered by or on behalf of the Company and the Selling Securityholder to the
Representatives for the respective accounts of the Underwriters, against payment
by or on behalf of the Underwriters of the purchase price therefor by wire
transfer in same-day funds (the "Wired Funds") to the account of the Company and
the Selling Securityholder. Such delivery of and payment for the Firm Securities
shall be made at the offices of Alston & Bird LLP, 1201 West Peachtree Street,
Atlanta, Georgia 30309-3424 at 9:30 A.M., New York time, on ___________ , 1998,
or at such other place, time or date as the Representatives and the Company may
agree upon or as the Representatives may determine pursuant to Section 9 hereof,
such time and date of delivery against payment being herein referred to as the
"Firm Closing Date." The Company and the Selling Securityholder will make such
certificate or certificates for the Firm Securities available for checking and
packaging by the Representatives at the offices in New York, New York of
Prudential Securities Incorporated at least 24 hours prior to the Firm Closing
Date.
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<PAGE> 11
(b) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as contemplated
by the Prospectus, the Company hereby grants to the several Underwriters an
option to purchase, severally and not jointly, the Option Securities. The
purchase price to be paid for any Option Securities shall be the same price per
share as the price per share for the Firm Securities set forth above in
paragraph (a) of this Section 3, plus if the purchase and sale of any Option
Securities takes place after the Firm Closing Date and after the Firm Securities
are trading "ex-dividend", an amount equal to the dividends payable on such
Option Securities. The option granted hereby may be exercised as to all or any
part of the Option Securities from time to time within 30 (thirty) days after
the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday
or a holiday, on the next business day thereafter when the New York Stock
Exchange is open for trading). The Underwriters shall not be under any
obligation to purchase any of the Option Securities prior to the exercise of
such option. The Representatives may from time to time exercise the option
granted hereby by giving notice in writing or by telephone (confirmed in
writing) to the Company setting forth the aggregate number of Option Securities
as to which the several Underwriters are then exercising the option and the date
and time for delivery of and payment for such Option Securities. Any such date
of delivery shall be determined by the Representatives but shall not be earlier
than two business days or later than five business days after such exercise of
the option and, in any event, shall not be earlier than the Firm Closing Date.
The time and date set forth in such notice, or such other time on such other
date as the Representatives and the Company may agree upon or as the
Representatives may determine pursuant to Section 9 hereof, is herein called the
"Option Closing Date" with respect to such Option Securities. Upon exercise of
the option as provided herein, the Company shall become obligated to sell to
each of the several Underwriters and, subject to the terms and conditions herein
set forth, each of the Underwriters (severally and not jointly) shall become
obligated to purchase from the Company, the same percentage of the total number
of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section 3,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph (b), to refer to such Option
Securities and Option Closing Date, respectively.
(c) The Company and the Selling Securityholder hereby
acknowledge that the wire transfer by or on behalf of the Underwriters of the
purchase price for any Securities does not constitute closing of a purchase and
sale of the Securities. Only execution and delivery of a receipt for Securities
by the Underwriters indicates completion of the closing of a purchase of the
Securities from the Company and the Selling Securityholder. Furthermore, in the
event that the Underwriters wire funds to the Company and the Custodian prior to
the completion of the closing of a purchase of Securities, the Company and the
Selling Securityholder hereby acknowledge that until the Underwriters execute
and deliver a receipt for the Securities, by facsimile or otherwise, the Company
and the Selling Securityholder will not be entitled to the Wired Funds and shall
return the Wired Funds to the Underwriters as soon as practicable (by wire
transfer of same-day funds) upon demand. In the event that the closing of a
purchase of Securities is not completed and the Wired Funds are not returned by
the Company and the Custodian to the Underwriters on the same day the Wired
Funds were received by the Company and the Custodian, the Company and the
Selling Securityholder agree to pay to the Underwriters in respect of each day
the Wired Funds are not returned by them, in same-day funds, interest on the
amount of such Wired Funds in an amount representing the Underwriters' cost of
financing as reasonably determined by Prudential Securities Incorporated.
(d) It is understood that any of you, individually and not as
one of the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall relieve
such Underwriter or Underwriters from any of its or their obligations hereunder.
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<PAGE> 12
4. Offering by the Underwriters. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company and the Selling Securityholder.
The Company covenants and agrees with each of the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as promptly as
possible. If required, the Company will file the Prospectus or any Term Sheet
that constitutes a part thereof and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rules 434 and
424(b) under the Act. During any time when a Prospectus relating to the
Securities is required to be delivered under the Act, the Company (i) will
comply with all requirements imposed upon it by the Act and the rules and
regulations of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented, and
(ii) will not file with the Commission the Prospectus, Term Sheet or the
amendment referred to in the second sentence of Section 2(a) hereof, any
amendment or supplement to such Prospectus, Term Sheet or any amendment to the
Registration Statement or any Rule 462(b) Registration Statement of which the
Representatives previously have not been advised and furnished with a copy for a
reasonable period of time prior to the proposed filing and as to which filing
the Representatives shall not have given their consent. The Company will prepare
and file with the Commission, in accordance with the rules and regulations of
the Commission, promptly upon request by the Representatives or counsel for the
Underwriters, any amendments to the Registration Statement or amendments or
supplements to the Prospectus that may be necessary or advisable in connection
with the distribution of the Securities by the several Underwriters, and will
use its best efforts to cause any such amendment to the Registration Statement
to be declared effective by the Commission as promptly as possible. The Company
will advise the Representatives, promptly after receiving notice thereof, of the
time when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide evidence satisfactory to the Representatives of each
such filing or effectiveness.
(b) The Company will advise the Representatives, promptly
after receiving notice or obtaining knowledge thereof, of (i) the issuance by
the Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
(ii) the suspension of the qualification of the Securities for offering or sale
in any jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Original Registration Statement or any Rule 462(b) Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will cooperate with the Representatives and
counsel to the Underwriters in qualifying or registering the Securities for
offering and sale under the securities or blue sky laws of such jurisdictions as
the Representatives may designate and will continue such qualifications or
registrations in effect for as long as may be necessary to complete the
distribution of the Securities; provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date
when a Prospectus relating to the Securities is required to be delivered under
the Act or (ii) the Option Closing Date, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state
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<PAGE> 13
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if for any
other reason it is necessary at any time to amend or supplement the Prospectus
to comply with the Act or the rules or regulations of the Commission thereunder,
the Company will promptly notify the Representatives thereof and, subject to
Section 5(a) hereof, will prepare and file with the Commission, at the Company's
expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission or effects
such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a conformed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, certified by the Secretary or an Assistant Secretary of
the Company to be true and complete copies thereof as filed with the Commission
by electronic transmission, (ii) as instructed by the Representatives, to each
other Underwriter, a conformed copy of such registration statement or any Rule
462(b) Registration Statement and each amendment thereto (in each case without
exhibits thereto) and (iii) so long as a Prospectus relating to the Securities
is required to be delivered under the Act, as many copies of each Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request; without limiting the application of
clause (iii) of this sentence, the Company, not later than (A) 6:00 PM, New York
City time, on the date of determination of the public offering price, if such
determination occurred at or prior to 10:00 A.M., New York City time, on such
date or (B) 2:00 PM, New York City time, on the business day following the date
of determination of the public offering price, if such determination occurred
after 10:00 A.M., New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any amendment
or supplement thereto as the Representatives may reasonably request for purposes
of confirming orders that are expected to settle on the Firm Closing Date.
(f) The Company, as soon as practicable, will make generally
available to its securityholders and to the Representatives a consolidated
earnings statement of the Company and its subsidiaries that satisfies the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of
the Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise dispose or transfer (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of any option to purchase
or other disposition or transfer) of any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock for a period of 180 days after the date hereof, except pursuant to
this Agreement and except for issuances pursuant to the exercise of employee
stock options or currently outstanding warrants, the conversion of any shares of
the Company's convertible preferred stock or grants of stock options by the
Company, each as described in the Prospectus.
(i) The Company will not, directly or indirectly, (i) take any
action designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Company and the Selling
Securityholder under this Agreement).
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(j) The Company will obtain the agreements described in
Section 7(l) hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the
Registration Statement becomes effective or the period prior to the Option
Closing Date, any rumor, publication or event relating to or affecting the
Company shall occur as a result of which in your opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after notice from you advising
the Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company
shall both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with Rule
111 promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on
the date of this Agreement and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included
for quotation on the Nasdaq Stock Market's National Market (the "Nasdaq National
Market") prior to the Firm Closing Date, subject to official notice of issuance.
The Company will ensure that the Securities remain included for quotation on the
Nasdaq National Market, the New York Stock Exchange or the American Stock
Exchange following the Firm Closing Date.
(n) The Company will conduct its operations in a manner that
will not subject it to registration as an investment company under the
Investment Company Act of 1940, as amended.
The Selling Securityholder covenants and agrees with each of the
Underwriters that:
(a) The Selling Securityholder will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise dispose or
transfer(or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other disposition or transfer) of any shares
of capital stock of the Company legally or beneficially owned by such Selling
Securityholder or any securities convertible into, or exchangeable or
exercisable for, such capital stock for a period of 180 days after the date
hereof.
(b) The Selling Securityholder will not, directly or
indirectly, (i) take any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (ii) (A) sell, bid for,
purchase, or pay anyone any compensation for soliciting purchases of, the
Securities or (B) pay or agree to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Company and the Selling Securityholder under this
Agreement).
6. Expenses. The Company will pay all costs and expenses incident to
the performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the registration statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and reasonable fees and disbursements of counsel for the
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<PAGE> 15
Underwriters relating thereto, (vi) the filing fees of the Commission and the
National Association of Securities Dealers, Inc. relating to the Securities,
(vii) any quotation of the Securities on the Nasdaq National Market, (viii) any
meetings with prospective investors in the Securities (other than as shall have
been specifically approved by the Representatives to be paid for by the
Underwriters), and (ix) advertising relating to the offering of the Securities
(other than as shall have been specifically approved by the Representatives to
be paid for by the Underwriters). The Selling Securityholder has agreed with the
Company to reimburse the Company for a portion of such expenses, although the
Company acknowledges that it shall remain the primary obligor under this
Agreement with respect to the foregoing. The fees and expenses of legal counsel
engaged to represent the Selling Securityholder shall be borne by the Selling
Securityholder. If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11 hereof or because of any failure, refusal or inability on
the part of the Company or the Selling Shareholder to perform all obligations
and satisfy all conditions on its part to be performed or satisfied hereunder
other than by reason of a default by any of the Underwriters, the Company and
the Selling Shareholder will jointly and severally reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company and the Selling
Shareholder shall not in any event be liable to any of the Underwriters for the
loss of anticipated profits from the transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Securityholder
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company and the Selling Securityholder of their covenants and
agreements hereunder and to the following additional conditions:
(a) If the Original Registration Statement or any amendment
thereto filed prior to the Firm Closing Date has not been declared effective as
of the time of execution hereof, the Original Registration Statement or such
amendment and, if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have been declared effective not later than
the earlier of (i) 11:00 A.M., New York time, on the date on which the amendment
to the registration statement originally filed with respect to the Securities or
to the Registration Statement, as the case may be, containing information
regarding the public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission in
the manner and within the time period required by Rules 430A, 434 and 424(b)
under the Act; no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or, to the knowledge
of the Company or the Representatives, shall be contemplated by the Commission;
and the Company shall have complied with any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated
the Firm Closing Date, of Ballard Spahr Andrews & Ingersoll, LLP, counsel for
the Company, to the effect that:
(i) the Company and each of its subsidiaries have been duly
incorporated and are validly existing or subsisting as corporations or
limited liability companies (as the case may be) under the laws of
their respective jurisdictions of incorporation or formation and are
duly qualified to transact business as foreign corporations or limited
liability companies, as the case may be, and are in good standing under
the laws of all other jurisdictions where the ownership or leasing of
their respective properties or the conduct of their
15
<PAGE> 16
respective businesses requires such qualification, except where the
failure to be so qualified does not amount to a material liability or
disability to the Company and its subsidiaries, taken as a whole.
(ii) the Company and each of its subsidiaries have full power
(corporate and other, as applicable) to own or lease their respective
properties and conduct their respective businesses as described in the
Registration Statement and the Prospectus, and the Company has
corporate power to enter into this Agreement and to carry out all the
terms and provisions hereof to be carried out by it;
(iii) the issued shares of capital stock or other ownership
interests of each of the Company's subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable and,
except as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus, are owned of record,
and to our knowledge, beneficially by the Company free and clear of any
perfected security interest created by the clear possession of a
certificated security or, to the knowledge of such counsel, any other
security interests, liens, encumbrances, equities or claims;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares
of capital stock of the Company including, without limitation, the Firm
Securities to be sold by the Selling Securityholder, have been duly
authorized and validly issued and are fully paid and nonassessable,
were issued in compliance with the registration provisions of all
applicable federal and state securities laws (or any actions thereunder
are effectively barred by effective waivers or statutes of limitation
or similar laws) and were not issued in violation of and are not
subject to any preemptive rights or other rights to subscribe for or
purchase securities known to such counsel and were not issued in
violation of any other contractual or legal rights known to such
counsel; the Firm Securities to be sold by the Company have been duly
authorized by all necessary corporate action of the Company and, when
issued and delivered to and paid for by the Underwriters pursuant to
and in accordance with this Agreement, will be validly issued, fully
paid and nonassessable; upon the completion of the Offering, the
Securities will be duly included for quotation on the Nasdaq National
Market; no holders of outstanding shares of capital stock of the
Company are entitled as such to any statutory preemptive rights to
subscribe for any of the Securities; and no holders of securities of
the Company are entitled to have such securities registered under the
Registration Statement under any agreement or arrangement known to such
counsel;
(v) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock (including associated
registration rights) of the Company, provide a fair and accurate, in
all material respects, summary of such provisions and the statements
set forth under the headings "Risk Factors - Environmental Matters" (as
to U.S. environmental laws), "Business - Regulatory Requirements" (as
to U.S. environmental laws), "Description of Capital Stock -
Registration Rights" and "Shares Eligible for Future Sale" in the
Prospectus, insofar as such statements constitute a summary of the
legal matters, documents or proceedings referred to therein, provide a
fair and accurate, in all material respects, summary of such legal
matters, documents and proceedings;
(vi) the execution, delivery and performance of this Agreement
have been duly authorized by all necessary corporate action of the
Company and this Agreement has been duly executed and delivered by the
Company;
(vii) (A) To the knowledge of such counsel after inquiry
consisting of (i) a search of such counsel's internal records
consistent with the search conducted to respond to an audit inquiry
letter, (ii) certifications of officers of the Company, and (iii) a
docket search of state courts of Pennsylvania and federal courts in
Pennsylvania, no legal or governmental proceedings are pending to which
the Company or
16
<PAGE> 17
any of its subsidiaries is a party or to which the property of the
Company or any such subsidiary is subject that are required to be
described in the Registration Statement or the Prospectus and are not
described therein, and, to the knowledge of such counsel, no such
proceedings have been threatened against the Company, any such
subsidiary or with respect to any of their respective properties; (B)
to the knowledge of such counsel, no contract or other document is
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
that is not described therein or filed as required; and (C) to the
knowledge of such counsel, the Company is not in violation of its
charter or other organizational documents or bylaws;
(viii) the execution and performance of this Agreement by the
Company and the compliance by the Company with the other provisions of
this Agreement do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained and except such as may be required
under state securities or blue sky laws (as to which such counsel need
express no opinion), or (B) conflict with or result in a breach or
violation (and with respect to clauses (1) and (3) below, a material
breach or violation) of any of the terms and provisions of, or
constitute a default under, (1) any indenture, mortgage, deed of trust,
lease or other agreement or instrument known to such counsel and to
which the Company or any of its subsidiaries is a party or by which the
Company, any such subsidiary or any of their respective properties are
bound, (2) the charter or other organizational documents or by-laws of
the Company or any such subsidiary, (3) any statute or (4) any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator known to such counsel and
applicable to the Company or any such subsidiary;
(ix) the Registration Statement is effective under the Act;
any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 430A, 434 and 424(b) has
been made in the manner and within the time period required by Rules
430A, 434 and 424(b); and no stop order suspending the effectiveness of
the Registration Statement or any amendment thereto has been issued and
no proceedings for that purpose have been instituted or, to the
knowledge of such counsel, threatened or are contemplated by the
Commission;
(x) the Registration Statement originally filed with respect
to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than the
financial statements, schedules and other financial or statistical
information contained therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the applicable
requirements of the Act and the rules and regulations of the Commission
thereunder; and
(xi) if the Company elects to rely on Rule 434, the Prospectus
is not "materially different", as such term is used in Rule 434, from
the prospectus included in the Registration Statement at the time of
its effectiveness or an effective post-effective amendment thereto
(including such information that is permitted to be omitted pursuant to
Rule 430A).
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Company, independent
auditors and special legal counsel of the Company and the Underwriters at which
the contents of the Registration Statement, the Preliminary Prospectus and the
Prospectus were discussed and, although such counsel is not passing upon and
does not assume responsibility for the accuracy, completeness or fairness of the
statements contained therein (except as and to the extent stated in
subparagraphs (v) and (x) above), on the basis of the foregoing (relying as to
materiality to a large extent on the statements of officers and other
representatives of the Company), such counsel has no reason to believe that the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they
17
<PAGE> 18
were made, not misleading (it being understood that such counsel need express no
belief with respect to the financial statements, schedules and other financial
and statistical information included in the Registration Statement, Preliminary
Prospectus or Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials and as to matters involving the
application of laws of any jurisdiction other than the State of Colorado, the
Commonwealth of Pennsylvania, the Delaware Limited Liability Company Act, or the
United States (except as described below), to the extent satisfactory in form
and scope to counsel for the Underwriters, upon the opinions of Heller, Ehrman,
White & McAuliffe; Katten Muchin & Zavis; Goodwin, Proctor & Hoan; Denton Hall;
Covington & Burling; Faus & Molina; Bufete Lupicinio Rodriguez; Fox, Bennett &
Turner and Woodward, Emhart, Naughton, Moriarity and McNab. The foregoing
opinion shall also state that the Underwriters are justified in relying upon
such opinions of the special counsel firms, and copies of such opinions shall be
delivered to the Representatives and counsel for the Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representatives and the Company shall have received
the opinion of Pryor, Cashman, Sherman & Flynn, counsel for the Selling
Securityholder, dated the Firm Closing Date, to the effect that:
(i) the Selling Securityholder has full power (as a limited
liability company and otherwise) to enter into this Agreement and the
Custody Agreement and to sell, assign, transfer and deliver to the
Underwriters the Securities to be sold by the Selling Securityholder
hereunder in accordance with the terms of this Agreement and to perform
its obligations under the Custody Agreement; the execution and delivery
of this Agreement and the Custody Agreement have been duly authorized
by all necessary action of the Selling Securityholder; this Agreement
and the Custody Agreement have been duly executed and delivered by the
Selling Securityholder; and assuming due authorization, execution and
delivery by the Custodian, the Custody Agreement is the legal, valid,
binding and enforceable obligation of the Selling Securityholder,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to
general principles of equity; provided, however, that no opinion need
be given as to the enforceability of the provisions of Section 8
hereof;
(ii) the delivery, for purposes of sale hereunder, by the
Selling Securityholder to the several Underwriters of certificates for
the Securities to be sold by the Selling Securityholder hereunder,
against payment therefor as provided herein, will convey good and
marketable title to such Securities to the several Underwriters, free
and clear of all security interests, liens, encumbrances, equities,
claims or other defects, provided that the Securities to be sold by the
Selling Securityholder are acquired by the several Underwriters for
value in good faith and without notice (within the meaning of 8-302 of
the Uniform Commercial Code) of any such security interests, liens,
encumbrances, equities, claims or other defects; and
(iii) the sale of the Securities to the Underwriters by the
Selling Securityholder pursuant to this Agreement, the compliance by
each Selling Securityholder with the other provisions of this Agreement
and the Custody Agreement, and consummation of the other transactions
herein contemplated do not (A) require the consent, approval,
authorization, registration or qualification of or with any
governmental authority by the Selling Securityholder, except such as
have been obtained and except such as may be required under state
securities or blue sky laws (as to which such counsel need express no
opinion); or (B) conflict with or result in a breach or violation of
any of the terms and provisions of, or constitute a default under (1)
any indenture, mortgage, deed of trust, lease or other agreement or
instrument known to such counsel to which the Selling Securityholder or
Ronald W. Cantwell is a party or by which the Selling Securityholder or
Ronald W. Cantwell or any of their respective properties are bound, (2)
the charter or other organizational documents or bylaws of the Selling
Securityholder, (3) any statute or (4) any
18
<PAGE> 19
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator known to such counsel and
applicable to the Selling Securityholder or Ronald W. Cantwell.
Such counsel shall also state that they have no reason to believe that
the information under the captions "Prospectus Summary - Selling Shareholder,"
"Management - Directors and Executive Officers - Ronald W. Cantwell," "Principal
and Selling Shareholders" (as to the Selling Securityholder and Ronald W.
Cantwell) and "Certain Transactions" in the Registration Statement, as of its
effective date, contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of its date or the
date of such opinion, included or includes any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading and that the disclosure provided under such sections, as they
relate to the Selling Securityholder and Ronald W. Cantwell, comply as to form
to the requirements of the Act.
References to the Registration Statement and the Prospectus in this
paragraph (c) shall include any amendment or supplement thereto at the date of
such opinions.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Selling Shareholder and public officials.
(d) The Representatives shall have received the opinion of
Woodard, Emhardt, Naughton, Moriarty & McNett, dated the Firm Closing Date, to
the effect that the statements in the Prospectus under the captions "Risk
Factors -- Dependence on Proprietary Technology and Other Intellectual Property;
Risks of Infringement or Misappropriation" and "Business -- Patents, Proprietary
Information and Trademarks" and other references therein to the protection of
intellectual property, insofar as such statements constitute a summary of the
legal matters, documents or proceedings referred to therein, provide a fair
summary of such legal matters, documents and proceedings.
Such opinion shall also state that they have no reason to believe that
the information under the captions "Risk Factors -- Dependence on Proprietary
Technology and other Intellectual Property; Risks of Infringement or
Misappropriation" and "Business -- Patents, Proprietary Information and
Trademarks" in the Registration Statement, at the time it became effective,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus, as of its date or the date of such
opinion contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading
In rendering such opinion, counsel may rely, as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers of
the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date of
such opinions.
(e) The Representatives shall have received the opinion of
Fox, Bennett & Turner, dated the Firm Closing Date, to the effect that the
statements in the Prospectus under the captions "Risk Factors --Government
Regulation; Risks Associated with Food Processing Products" and "Business --
Regulatory Requirements" and other references therein to U.S. Food and Drug
Administration regulations insofar as such statements constitute a summary of
the legal matters, documents or proceedings referred to therein, provide a fair
summary of such legal matters, documents and proceedings.
Such opinion shall also state that they have no reason to believe that
the information under the captions "Risk Factors -- Government Regulation; Risks
Associated with Food Processing Products" and "Business --
19
<PAGE> 20
Regulatory Requirements" in the Registration Statement, at the time it became
effective, contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as of its date or the
date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
In rendering such opinion, counsel may rely, as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers of
the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (e) shall include any amendment or supplement thereto at the date of
such opinions.
(f) The Representatives shall have received the opinion of
Covington & Burling (English FDA), Denton Hall (English general and
environmental), Faus & Moliner (Spanish FDA) and Bufete Lupicinio Rodriguez
(Spanish formation and environmental), dated the Firm Closing Date, to the
effect that the statements in the Prospectus under the captions "Risk Factors --
Government Regulation; Risks Associated with Food Processing Products" and "--
Environmental Matters" and "Business -- Regulatory Requirements" and other
references therein to the regulation of the operations of the Company and its
subsidiaries in the United Kingdom and in Spain, insofar as such statements
constitute a summary of the legal matters, documents or proceedings referred to
therein, provide a fair and accurate summary of such legal matters, documents
and proceedings.
Such opinion shall also state that they have no reason to believe that
the information under the captions "Risk Factors -- Government Regulation; Risks
Associated with Food Processing Products," "Risk Factors -- Environmental
Matters" and "Business -- Regulatory Requirements" in the Registration
Statement, at the time it became effective, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus, as of its date or the date of such opinion contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In rendering such opinion, counsel may rely, as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers of
the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (f) shall include any amendment or supplement thereto at the date of
such opinions.
(g) The Representatives shall have received an opinion, dated
the Firm Closing Date, of Alston & Bird LLP, counsel for the Underwriters, with
respect to the issuance and sale of the Firm Securities to be sold by the
Company, the Registration Statement and the Prospectus, and such other related
matters as the Representatives may reasonably require, and the Company and the
Selling Securityholder shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters. In rendering such opinion, such counsel may rely as to all matters of
Colorado law upon the opinion of Ballard Spahr Andrews & Ingersoll, LLP,
referred to in paragraph (b) above.
(h) The Representatives shall have received from Deloitte &
Touche LLP a letter or letters dated, respectively, the date hereof and the Firm
Closing Date, in form and substance satisfactory to the Representatives, to the
effect that:
(i) they are independent accountants with respect to the
Company within the meaning of the Act and the applicable rules and
regulations thereunder;
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<PAGE> 21
(ii) in their opinion, the audited consolidated financial
statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iii) on the basis of [a reading of the latest available
interim unaudited consolidated financial statements of the Company,]
carrying out certain specified procedures (which do not constitute an
examination made in accordance with generally accepted auditing
standards and that would not necessarily reveal matters of significance
with respect to the comments set forth in this paragraph (iii)), a
reading of the minute books of the shareholders, the board of directors
and any committees thereof of the Company, and inquiries of certain
officials of the Company and its subsidiaries who have responsibility
for financial and accounting matters, nothing came to their attention
that caused them to believe that:
[(A) the unaudited consolidated financial statements
of the Company and its consolidated subsidiaries included in
the Registration Statement and the Prospectus do not comply as
to form in all material respects with the applicable
accounting requirements of the Act and the related published
rules and regulations thereunder or are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement
and the Prospectus;]
[(B) at a specific date not more than five business
days prior to the date of such letter, there were any changes
in the capital stock or long-term debt of the Company and its
consolidated subsidiaries or any decreases in net current
assets or stockholders' equity of the Company and its
consolidated subsidiaries, in each case compared with amounts
shown on the latest [audited] consolidated balance sheet
included in the Registration Statement and the Prospectus, or
for the period from [date that is day after date of latest
balance sheet included in the Registration Statement and
Prospectus] to such specified date, there were any decreases,
as compared with [the comparable period] in the prior fiscal
year, in sales or cost of sales, except in all instances for
changes, decreases or increases set forth in such letter;]
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting
records of the Company and are included in the Registration Statement
and the Prospectus under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Price Range of Common Stock,"
"Capitalization," "Dilution," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," "Management," "Principal and
Selling Shareholders," "Description of Capital Stock," "Certain
Transactions," and "Shares Eligible from Future Sale," and in Exhibit
11 to the Registration Statement, and have compared such amounts,
percentages and financial information with such records of the Company
and with information derived from such records and have found them to
be in agreement, excluding any questions of legal interpretation; and
[(v) on the basis of a reading of the unaudited pro forma
condensed consolidated financial statements included in the
Registration Statement and the Prospectus, carrying out certain
specified procedures that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(v), inquiries of certain officials of the Company and its consolidated
subsidiaries (including, without limitation, Fabbri Artes Graficas
Valencia, S.A.) who have responsibility for financial and accounting
matters and proving the arithmetic accuracy of the application of the
pro forma adjustments to the historical amounts in the unaudited pro
forma consolidated condensed financial statements, nothing came to
their attention that caused them to believe that the unaudited pro
forma consolidated condensed financial statements do not comply as to
form in all material respects with the applicable accounting
21
<PAGE> 22
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of such statements.]
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (h) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(i) The Representatives shall have received from Coopers &
Lybrand, S.A. a letter or letters dated, respectively, the date hereof and the
Firm Closing Date, in form and substance satisfactory to the Representatives, to
the effect that:
(i) they are independent accountants with respect to Fabbri
Artes Graficas Valencia, S.A. ("Fabbri") within the meaning of the Act
and the applicable rules and regulations thereunder; and
(ii) in their opinion, the audited financial statements
audited by them and included in the Registration Statement and the
Prospectus comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations.
References to the Registration Statement and the Prospectus in this
paragraph (i) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(j) The Representatives shall have received a certificate,
dated the Firm Closing Date, of the principal executive officer and the
principal financial or accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing
Date, does not include any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented as of the
Firm Closing Date, does not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and the Company has performed all covenants
and agreements and satisfied all conditions on its part to be performed
or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to
the of the Company's knowledge, are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has sustained any
material loss or interference with its business or properties from
fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse
change, or, to his knowledge, any development involving a prospective
material adverse change, in the condition (financial or otherwise),
management, business prospects, net worth or results of operations of
the Company or any of its subsidiaries, except in each case as
described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto).
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<PAGE> 23
(k) The Representatives shall have received a certificate from
the Selling Securityholder, signed by the principal executive officer and the
principal financial or accounting officer of the Selling Securityholder, dated
the Firm Closing Date, to the effect that:
(i) the representations and warranties of such Selling
Securityholder in this Agreement are true and correct as if made on and
as of the Firm Closing Date;
(ii) with respect to statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto in reliance upon and in conformity
with written information furnished to the Company by the Selling
Securityholder specifically for use therein, the Registration
Statement, as amended, as of the Closing Date, does not include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Closing Date, does not
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading;
and
(iii) such Selling Securityholder has performed all covenants
and agreements on its part to be performed or satisfied at or prior to
the Firm Closing Date.
(l) The Representatives shall have received from each person
who is a director or executive officer of the Company an agreement to the effect
that such person will not, directly or indirectly, without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise dispose of or transfer (or announce any offer, sale, offer
of sale, contract of sale, pledge, grant of an option to purchase or other
disposition or transfer of) any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock for
a period of 180 days subsequent to the date of the final Prospectus filed with
the Commission pursuant to Rule 424(b) of the Act promulgated by the Commission
or if no filing under Rule 424(b) is made, the date of the final Prospectus
included in the Registration Statement when declared effective under the Act.
(m) The Selling Securityholder shall have delivered to the
Representatives on or prior to the Firm Closing Date a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form or
statements specified by Treasury Department regulations).
(n) On or before the Firm Closing Date, the Representatives
and counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company and the Selling Securityholder.
(o) Prior to the commencement of the offering of the
Securities, the Securities shall have been included for trading on the Nasdaq
National Market, subject to official notice of issuance.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
23
<PAGE> 24
8. Indemnification and Contribution.
(a) The Company, with respect to clauses (i) through (v)
below, and the Selling Securityholder, with respect to clauses (ii), (iii) and
(iv) below (and with respect to clauses (iii) and (iv) below only with respect
to statements or omissions in any (1) Preliminary Prospectus or Prospectus or
any amendment or supplement thereto, (2) Registration Statement or any amendment
thereto, or (3) any Application (as defined below), made in reliance upon and in
conformity with written information furnished to the Company by the Selling
Securityholder specifically for use therein), jointly and severally agree to
indemnify and hold harmless each Underwriter and each person if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter or such controlling person may become
subject under the Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
(i) any untrue statement or alleged untrue statement
made by the Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement
made by the Selling Securityholder in Section 2A of this
Agreement,
(iii) any untrue statement or alleged untrue
statement of any material fact contained in (A) the
Registration Statement or any amendment thereto or any
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document,
or any amendment or supplement thereto, executed by the
Company or the Selling Securityholder or based upon written
information furnished by or on behalf of the Company or the
Selling Securityholder filed in any jurisdiction in order to
qualify the Securities under the securities or blue sky laws
thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"),
(iv) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application a material fact
required to be stated therein or necessary to make the
statements therein not misleading, or
(v) any untrue statement or alleged untrue statement
of any material fact contained in any audio or visual
materials used in connection with the marketing of the
Securities, including, without limitation, slides, videos,
films and tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company and the Selling
Securityholder will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any Application in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein; and provided further that the Company and the Selling Securityholder
will not be liable to any Underwriter or any person controlling such Underwriter
with respect to any such untrue statement or omission made in any Preliminary
Prospectus that is corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting any such loss, claim, damage or liability
purchased Securities from such Underwriter but was not sent or given a copy of
the Prospectus (as amended or supplemented) prior to or at the
24
<PAGE> 25
written confirmation of the sale of such Securities to such person in any case
where such delivery of the Prospectus (as amended or supplemented) is required
by the Act, unless such failure to deliver the Prospectus (as amended or
supplemented) was a result of non-compliance by the Company with Section 5(d) or
5(e) of this Agreement. This indemnity agreement will be in addition to any
liability which the Company and the Selling Securityholder may otherwise have.
Neither the Company nor the Selling Securityholder will, without the prior
written consent of the Underwriter or Underwriters purchasing, in the aggregate,
more than fifty percent (50%) of the Securities, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
(b) Each Underwriter will, severally and not jointly,
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, the Selling Securityholder and
each person, if any, who controls the Company or the Selling Securityholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
against any losses, claims, damages or liabilities to which the Company, any
such director or officer of the Company, the Selling Securityholder or any such
controlling person of the Company or the Selling Securityholder may become
subject under the Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application or (ii) the omission or the alleged omission to
state therein a material fact required to be stated in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses reasonably incurred by the Company, any such director, officer
or controlling person or the Selling Securityholder in connection with
investigating or defending any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
25
<PAGE> 26
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 8 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (or actions in
respect thereof) in such proportion as is appropriate to reflect (i) the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party on the other from the offering of the Securities or
(ii) if the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Securityholder on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company and the Selling Securityholder bear
to the total underwriting discounts and commissions received by the
Underwriters. The relative fault of the parties shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Securityholder or
the Underwriters, the parties' relative intents, knowledge, access to
information and opportunity to correct or prevent such statement or omission,
and any other equitable considerations appropriate in the circumstances. The
Company, the Selling Securityholder and the Underwriters agree that it would not
be equitable if the amount of such contribution were determined by pro rata or
per capita allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take into
account the equitable considerations referred to above in this paragraph (d).
Notwithstanding any other provision of this paragraph (d), no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (d), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company or the
Selling Securityholder within the meaning of Section 15 of the Act or Section 20
of the Exchange Act, shall have the same rights to contribution as the Company
or the Selling Securityholder, as the case may be.
(e) The liability of Selling Securityholder under this Section
8 with respect to losses, claims, damages or liabilities (or actions in respect
thereof) relating to any untrue statement or alleged untrue statement made by
the Selling Securityholder in Section 2A(h) shall not exceed an amount equal to
the product of (A) such
26
<PAGE> 27
losses, claims, damages or liabilities (or actions in respect thereof) and (B) a
fraction, the numerator of which is the aggregate initial public offering price
(net of underwriting discounts and commissions) of the Securities sold by the
Selling Securityholder to the Underwriters and the denominator of which is the
aggregate initial public offering price (net of underwriting discounts and
commissions) of the Securities sold by the Selling Securityholders and the
Company to the Underwriters. Notwithstanding the immediately preceding sentence,
the liability of the Selling Securityholder under this Section 8 shall not
exceed an amount equal to the aggregate initial public offering price (net of
underwriting discounts and commissions) of the Securities sold by the Selling
Securityholder to the Underwriters.
(f) The parties hereto agree that the representations and
warranties made in Section 2A(h) of this Agreement and any indemnification
pursuant to Section 8 of this Agreement with respect thereto shall survive for
two years after the Firm Closing Date, or if there is an Option Closing Date,
then the Option Closing Date; provided that such limitation period shall not
apply with respect to claims made prior to the expiration of such two year
limitation period.
9. Default of Underwriters. If one or more Underwriters default in
their obligations to purchase Firm Securities or Option Securities hereunder and
the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters as
described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof, for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. Survival. Except as specifically limited in Section 8(f) of this
Agreement, the respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers, the Selling
Securityholder and the several Underwriters set forth in this Agreement or made
by or on behalf of them, respectively, pursuant to this Agreement shall remain
in full force and effect, regardless of (i) any investigation made by or on
behalf of the Company, any of its officers or directors, any Selling
Securityholder, any Underwriter or any controlling person referred to in Section
8 hereof and (ii) delivery of and payment for the Securities. The respective
agreements, covenants, indemnities and other statements set forth in Sections 6
and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
11. Termination. (a) This Agreement may be terminated with respect to
the Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company and the Selling Securityholder given
prior to the Firm Closing Date or the related Option Closing Date, respectively,
in the event that the Company or the Selling Securityholder shall have failed,
refused or been unable to perform all obligations and satisfy all
27
<PAGE> 28
conditions on their part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Firm Closing Date or such Option Closing Date,
respectively,
(i) the Company shall have, in the sole judgment of the
Representatives, sustained any material loss or interference with its
business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding or there shall have
been any material adverse change, or any development involving a
prospective material adverse change (including without limitation a
change in management or control of the Company), in the condition
(financial or otherwise), business prospects, net worth or results of
operations of the Company, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(ii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in securities
generally on the New York Stock Exchange or Nasdaq National Market
shall have been suspended or minimum or maximum prices shall have been
established on such exchange or market system;
(iii) a banking moratorium shall have been declared by New
York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended as
of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11
shall be without liability of any party to any other party except as provided in
Section 10 hereof.
12. Information Supplied by Underwriters. The statements set forth in
the last paragraph on the front cover page, the last two paragraphs on the
inside front cover, and the paragraphs under the heading "Underwriting" in any
Preliminary Prospectus or the Prospectus (to the extent such statements relate
to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(b) and 8 hereof. The Underwriters confirm that such statements (to
such extent) are correct.
13. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, and either
telex or facsimile transmission to Prudential Securities Incorporated, One New
York Plaza, New York, New York 10292, Attention: Equity Transactions Group; if
sent to the Company, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Company at 2 International Plaza,
Suite 245, Philadelphia, Pennsylvania 19113-1507, Attention: Paul L. Devine,
with a copy to Raymond D. Agran, Esq., Ballard Spahr Andrews & Ingersoll, LLP,
1735 Market Street, Philadelphia, Pennsylvania 19103-7599; and if sent to the
Selling Securityholder, shall be delivered to or sent by mail, telex or
facsimile transmission and confirmed in writing to the Selling Securityholder at
________________, with a copy to Selig D. Sacks, Esq., Pryor, Cashman, Sherman &
Flynn, 410 Park Avenue, New York, New York 10022.
14. Successors. This Agreement shall inure to the benefit of and shall
be binding upon the several Underwriters, the Company, the Selling
Securityholder and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement, or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company and the
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<PAGE> 29
Selling Securityholder contained in Section 8 of this Agreement shall also be
for the benefit of any person or persons who control any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the
indemnities of the Underwriters contained in Section 8 of this Agreement shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement, any person or persons who
control the Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, the Selling Securityholder and any person or persons who
control the Selling Securityholder within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, the Selling Securityholder accepts
for itself and in connection with its properties, generally and unconditionally,
the nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. The Selling Securityholder designates
and appoints Selig D. Sacks, and such other persons as may hereafter be selected
by the Selling Securityholder irrevocably agreeing in writing to so serve, as
its agent to receive on its behalf service of all process in any such
proceedings in any such court, such service being hereby acknowledged by the
Selling Securityholder to be effective and binding service in every respect. A
copy of any such process so served shall be mailed by registered mail to the
Selling Securityholder at its address provided in Section 13 hereof; provided,
however, that, unless otherwise provided by applicable law, any failure to mail
such copy shall not affect the validity of service of such process. If any agent
appointed by the Selling Securityholder refuses to accept service, the Selling
Securityholder hereby agrees that service of process sufficient for personal
jurisdiction in any action against the Selling Securityholder in the State of
New York may be made by registered or certified mail, return receipt requested,
to the Selling Securityholder at its address provided in Section 13 hereof, and
the Selling Securityholder hereby acknowledges that such service shall be
effective and binding in every respect. Nothing herein shall affect the right to
serve process in any other manner permitted by law or shall limit the right of
any Underwriter to bring proceedings against the Selling Securityholder in the
courts of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE> 30
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, the
Selling Securityholder and each of the several Underwriters.
Very truly yours,
EPL TECHNOLOGIES, INC.
By
Name:
Title:
TRILON DOMINION
PARTNERS, L.L.C.
By
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
PRUDENTIAL SECURITIES INCORPORATED
By
Jean-Claude Canfin
Managing Director
For itself and on behalf of the Underwriters.
30
<PAGE> 31
SCHEDULE 1
UNDERWRITERS
Number of Firm
Securities to
Underwriter be Purchased
Prudential Securities Incorporated
Pennsylvania Merchant Group
---------
3,500,000
<PAGE> 1
Limited Liability Company Agreement
of
FreshCorn LLC
This Limited Liability Company Agreement is made and entered into this
15th day of April, 1998, by and between The Sholl Group II, Inc (hereinafter
referred to sometimes as "TSG"), Newcornco LLC (hereinafter referred to
sometimes as "Newcornco") (hereinafter, such entities are referred to
collectively as the "Members" and each individually sometimes as a "Member").
WITNESSETH THAT
WHEREAS, FRESHCORN LLC, a Delaware limited liability company (the
"Company"), of which the undersigned constitute all of the Members, has been
formed for the purpose of marketing, selling and distributing of fresh corn or
engaging in such other activities as the Members may elect;
WHEREAS, the Company has been granted the right to use certain trademarks
by TSG in connection with the advertising, marketing, sale and distribution
of fresh and perishable sweet corn pursuant to the terms and conditions of a
trademark sublicense agreement by and between the Company and the Members dated
as of the date hereof (the "Sublicense");
WHEREAS, the Company has waived its rights to the use of the trademarks
which are the subject of the Sublicense in consideration of certain fees to be
paid to it by Newcornco, all as more fully set forth in the Sublicense; and
WHEREAS, the Company wishes to dedicate a portion of the fee it receives
from Newcornco to marketing efforts of Newcornco which are intended to promote
the sale and marketing of Green Giant branded sweet corn as more fully set forth
herein.
NOW THEREFORE, in consideration of the premises, the mutual covenants and
agreements hereinafter set forth, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the Members agree as
follows:
Article I
General
The parties hereto do hereby agree that this Agreement shall constitute
the "limited liability company agreement" of the Company within the meaning of
Section 18-101 (6) of the Delaware Limited Liability Company Act, as amended
(the "Act"). The parties agree that they shall comply with the provisions and
requirements of the Act and that the Act shall govern the rights, duties and
obligations of the Members, except as otherwise stated herein.
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1.1 Name. The name of the Company shall be and the business of the Company
shall be conducted under the name of "FRESHCORN LLC."
1.2 Principal Place of Business. The location of the principal place of
business of the Company shall be P.O. Box 1090, 3040 Somis Road, Somis,
California 93066, or such other place as the Members may from time to time
determine.
1.3 Names and Addresses of Members. The names and addresses of the Members
are as set forth in Schedule I.
1.4 Term of Existence. The Company shall be formed as of the time of the
filing of the initial certificate of formation, a copy of which is attached
hereto as Exhibit 1, in the Office of the Secretary of the State of Delaware and
its existence shall continue until the fiftieth anniversary of the filing of the
certificate of formation of the Company, unless earlier terminated, dissolved or
liquidated in accordance with the provisions of this Agreement.
1.5 Agent for Service of Process. The name and address of the agent for
service of process is, until changed by the Managers in their sole discretion,
The Corporate Trust Company, located at Corporation Trust Center, 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801.
Article II
Definitions
Unless the content otherwise specifies or requires, the terms defined in
this Article II shall, for purposes of this Agreement, have the meanings herein
specified. Certain other capitalized terms used herein are defined elsewhere in
the Agreement.
"Act" is defined in the introduction to Article I.
"Affiliate" means, when used with reference to a specified Person, (i) any
Person that, directly or indirectly, through one or more intermediaries,
controls or is controlled by or is under common control with the specified
Person, (ii) any Person that is an officer, partner, manager (if the Person is a
limited liability company) or trustee of, or serves in a similar capacity with
respect to, the specified Person or of which the specified Person is an officer,
partner, manager or trustee, or with respect to which the specified Person
serves in a similar capacity, (iii) any Person that, directly or indirectly, is
the beneficial owner of ten percent (10%) or more of any class of equity
securities of, or otherwise has a substantial beneficial interest (or other form
of ownership) in, the specified Person or of which the specified Person has a
substantial beneficial interest and (iv) any relative or spouse of the specified
Person.
"Agreement" means this limited liability agreement, as it may be amended
or supplemented from time to time.
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"Capital Account" means, with respect to any Member, the account
established for such Member and maintained in accordance with the principles set
forth in the Treasury Regulations under Code section 704, which shall generally
be credited with the Capital Contributions of such Member plus the Member's
distributive share of Company Income and decreased by the Member's share of
Company distributions and the Member's distributive share of Company's Losses.
"Capital Account Percentage" of each Member shall be equal to a fraction,
the numerator of which shall be the positive balance of its Capital Account and
the denominator of which shall be the aggregate balance of all the Capital
Accounts as of the date of determination.
"Capital Contribution" means the total amount of cash and the fair market
value of any property or services (as agreed to by all Members) contributed to
the Company by any Member as an initial Capital Contribution or as an additional
Capital Contribution under Section 4.7. Any reference in this Agreement to the
Capital Contribution of a then Member shall include a Capital Contribution
previously made by any prior Member with respect to the Interest of such then
Member.
"Code" means the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations promulgated thereunder. All references in this Agreement to
a section of the Code or the Treasury Regulations shall be considered also to
include any subsequent amendment or replacement of that section.
"Company Assets" means all assets and property, whether tangible or
intangible and whether real, personal or mixed, at any time owned by the
Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean the value determined by the parties. In the
event the parties are unable to agree in writing on such value within 30 days
from the date either of the parties notifies the other of its desire to
determine such value, then such value shall be determined by an independent
appraisal of the value a willing buyer under no compulsion to purchase the
Company would pay for the proportionate amount of the Member's Interest based
upon the value of the Company as a going concern. Such appraisal shall be
undertaken by an expert appraiser agreed upon by the parties or, if the parties
cannot agree upon an appraiser, by an appraiser appointed by the American
Arbitration Association.
"Free Cash Flow" of the Company for any period means the amount obtained
by (i) subtracting the Prospective Cash Uses for the relevant succeeding period
from the Total Cash Flow for the relevant preceding period and (ii) adding to
the result of such subtraction any portion of the money retained under clause
(iv) of the definition of "Prospective Cash Uses" which was not used during the
relevant preceding period.
"Income and Loss(es)" mean taxable income or loss plus income exempt from
federal income tax and reduced by any expenditures of the Company described in
Code section 705(a)
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(2)(B) or treated as Code section 705(a)(20)(b) expenditures pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(i), as determined in
accordance with the accounting methods followed by the Company for federal
income tax purposes, adjusted to reflect book-tax disparities as required by
Treasury Regulations Section 1.704-1(b)(2)(iv)(g).
"Initial Controlling Person," when used with respect to a Member who is
not a natural person, means the Person or Persons who Control such Member on the
date hereof.
"Initial Member" mean Newcornco and TSG.
"Interest" means the interest of a Member in the Company as represented by
Units which encompasses the entire ownership interest of the Member in the
Company at any particular time, including, without limitation, the right of such
Member to participate in the Company's Income or Losses, distributions and any
and all benefits to which a Member may be entitled as provided in this Agreement
and the Act, together with the obligations of such Member to comply with all the
terms and provisions of this Agreement.
"Managers" mean Paul L. Devine appointed by Newcornco and Jeffrey J. Sholl
appointed by TSG or any successors thereto appointed by the Member who appointed
the individual being replaced.
"Members" means the Persons who have been admitted to the Company as
members in accordance with the Act and this Agreement.
"Partnership Minimum Gain" means the aggregate amount of Income, if any,
with respect to each nonrecourse liability of the Company, that would be
realized by the Company if it disposed of (in a taxable transaction) the
property subject to the liability in full satisfaction thereof, determined
pursuant to Treasury Regulations Section 1.704-2(d).
"Percentage Interest" of each Member shall be equal to a fraction, the
numerator of which is the number of Units held by such Member as of the date of
determination and the denominator of which as the total number of Units
outstanding as of such date.
"Person" means any natural person, corporation, limited liability company
association, partnership (whether general or limited), joint venture,
proprietorship, governmental agency, trust, estate, association, custodian,
nominee or any other individual or entity, whether acting in an individual,
fiduciary, representative or other capacity.
"Prospective Cash Uses" of the Company for any period means the sum of (i)
all scheduled principal and interest payments with respect to all Company
indebtedness (whether or not owing to a Member) during such period, (ii) all
cash projected to be necessary to provide the Company with adequate working
capital for such period in excess of cash expected from operations, (iii) an
amount of cash, as determined by the Managers, sufficient to provide a
reasonable reserve against unforeseen liabilities and contingencies that may
arise during such period and (iv) an amount equal to 25% of the total fees paid
to the Company by Newcornco for
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the preceding period to be used for advertising, marketing and promotion as
contemplated in Article III of this Agreement (the "Marketing Fund").
"Reference Rate" shall mean the interest rate per annum publicly announced
from time to time by Harris Bank & Trust Company of Chicago, Illinois as its
reference rate.
"Reorganization" means any consolidation, merger of the Company with any
other Person or any exchange pursuant to which, in the case of any of the
foregoing events, all of the outstanding Interests are converted into other
securities or property or any sale or transfer of all or substantially all of
the Company Assets. A dissolution or liquidation of the Company pursuant to
Article XI will not constitute a "Reorganization" within the meaning of this
Agreement.
"Restoration Amount" means the amount of any unconditional obligation of
the Member to contribute additional amounts to the capital of the Company in the
future, provided such obligation is required to be satisfied no later than the
end of the Company taxable year in which such Member's Interest is liquidated
(or if later, within 90 days of such liquidation).
"Sublicense" means the trademark sublicense agreement between the Company,
Newcornco and TSG attached hereto as Exhibit 2 hereto, as it may be amended from
time to time.
"Total Cash Flow" of the Company for any period means the net income of
the Company for such period determined on the accrual method of accounting in
accordance with generally accepted accounting principles, plus the amount of any
deductions taken by the Company or depreciation, amortization or other non-cash
charges for such period and less the amount of any non-cash items of income or
gain and any amounts disbursed in respect of any capital expenditures.
"Transfer" is defined in Section 9.l.
"Transfer Option" is defined in Section 9.2(b).
"Treasury Regulations" or "Treas. Reg." refers to the regulations
promulgated by the United States Treasury Department under the Code.
"Units" mean the units representing the Interests held by a Member as
provided for in Section 4.1.
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Article III.
Purpose and Character of the Business
The purpose and character of the business of the Company shall be the
marketing of fresh corn and engaging in such other activities as the Members may
elect. The Company shall utilize the Marketing Fund to reimburse Newcornco for
expenditures incurred by Newcornco for the advertising, marketing and promotion
of fresh and perishable corn in preceding periods to the extent and up to the
limits of the Marketing Fund and, to the extent available after making such
reimbursements, for such activities in the then current period.
Article IV.
Capital
4.1. Authorized Interest. The Units in the Company shall be divided into
1000 Units. The Units shall have such rights and preferences, and such rights
with respect to the profits, gains, losses, tax credits and distributions of the
Company Assets, as are more fully set forth in this Agreement.
4.2. Capital Accounts. A separate Capital Account shall be maintained for
each Member holding Units. It is intended that the Capital Accounts of the
Members will be maintained in accordance with the capital accounting rules of
Treas. Reg. Section 1.704-1(b)(2)(iv) and the provisions of this Agreement
relating to the maintenance of Capital Accounts shall be interpreted and applied
in a manner consistent therewith.
4.3. No Right to Return of Contribution. Except as provided in this
Agreement, no Member shall have right to withdraw or receive any return of its
initial Capital Contribution or any additional Capital Contribution. Under
circumstances requiring a return of any Capital Contribution, no Member shall
have the right to receive any Company Assets other than cash. The Members shall
have no right to the withdrawal or to the return of their Capital Contribution
to the Company, except upon the dissolution and liquidation of the Company
pursuant to Article XI.
4.4. Loans to the Company; No Interest on Capital. The Members may, but
are not obligated to, make loans to the Company from time to time, as authorized
by the Managers. Any such loans shall not be treated as Capital Contributions to
the Company for any purpose hereunder nor entitle such Member to any increase in
its share of the profits and losses and cash distributions of the Company, but
the Company shall be obligated to such Member for the amount of any such loans
pursuant to the terms thereof, as the same are determined by the Managers and
such Member. Interest with respect to the outstanding amount of any loans made
by a Member to the Company shall accrue and be payable at such times and at such
rate as shall be determined by the Managers and such Member; provided, however,
that the terms of any loan from either of the Managers to the Company shall be
approved in advance by the Board of Governors. All scheduled principal and
interest payments with respect to any loans from a Member to the Company
pursuant to this Section 4.4 shall be paid prior to any distributions to any
Members pursuant to Section 5.4
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4.5. Creditor's Interest in the Company. No creditor who makes a loan to
the Company shall have or acquire at any time as a result of making the loan any
direct or indirect interest in the profits, capital or property of the Company,
other than such interest as may be accorded to a secured creditor.
Notwithstanding the foregoing, this provision shall not prohibit in any manner
whatsoever a secured creditor from participating in the profits of operation or
gross or net sales of the Company or in the gain on sale or refinancing of the
Company, all as may be provided in its loan or security agreements.
4.6. Liability of Members and Managers. Except as otherwise provided in
the Act, neither of the Managers nor any Member, as such, shall have any
personal liability whatsoever to the Company, any of the other Members or any of
the creditors of the Company for the debts, liabilities, contracts or other
obligations of the Company or any of the Company's losses beyond, with respect
to a Member, such Member's Capital Contribution and, solely to the extent and
for the period required by applicable law, the amount of such Member's Capital
Contribution which is returned to it. Each Interest, on issuance, shall be fully
paid and not subject to assessment for additional Capital Contributions. No
Member shall be required to lend any funds to the Company as a condition to
admission or continued membership of such Member in the Company. It is the
intent of the Members that (i) no distribution to any Member (other than a
distribution upon the dissolution and liquidation of the Company) shall be
deemed a withdrawal of capital, even if such distribution represents, for
Federal income tax purposes or otherwise (in full or in part), a distribution of
depreciation or any other non-cash item accounted for as a loss or deduction
from or offset to the Company's income, and (ii) no Member shall be obligated to
pay any such amount to or for the account of the Company or any creditor of the
Company. However, if any court of competent jurisdiction holds that,
notwithstanding the provisions of this Agreement, any distribution made by the
Company to a Member constitutes a withdrawal of capital, any obligation under
applicable law to return the same or any portion thereof to or for the account
of the Company or its creditors shall be the obligation of such Member.
4.7 Capital Contributions. Each of the Persons becoming Members on the
date hereof shall be required to make an initial cash Capital Contribution in
the amount set forth opposite its name on Schedule I. No additional Capital
Contributions shall be permitted or required without the consent of 90% of the
Units acting through the Board of Governors.
Article V.
Allocation of Income, Gains and Losses; Distributions to Members;
The Members agree that the income, profits, gains, losses and tax credits
of the Company shall be allocated, and cash distributions of the Company shall
be made, as follows:
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5.1. Allocation-General. The Income and Loss of the Company shall be
allocated among the Members in accordance with their respective Percentage
Interests.
5.2 Special Allocations. Notwithstanding any other provision of this
Article V, certain items of Income, Loss and deduction shall be allocated as
follows:
(a) Minimum Gain Chargeback. If there is a net decrease in the amount of
Partnership Minimum Gain during a calendar year, each Member will be
allocated, before any other allocation is made under this Article V,
items of Income for such year (and, if necessary, subsequent years)
in proportion to, and to the extent of, an amount equal to that
Member's share of the net decrease in Partnership Minimum Gain
(within the meaning of Treasury Regulations Section 1.704-2(g)(2).
This provision is meant to satisfy the minimum gain chargeback
requirement contained in Treasury Regulations Section 1.704-2(f),
and shall be interpreted consistently therewith.
(b) Qualified Income Offset. Notwithstanding any other provision of this
Agreement to the contrary:
(1) A Member shall not be allocated Losses (or items thereof) if
such allocation would cause or increase a deficit balance in
such member's Capital Account as of the end of the calendar
year to which such allocation relates in excess of such
Member's share of Partnership Minimum Gain as of the close of
such year (determined pursuant to Treasury Regulations
1.704-2(g) and such Member's Restoration Amount). Such excess
deficit balance in a Member's Capital Account shall be
referred to as the "Excess Deficit Balance". Any such Excess
Deficit Balance that otherwise would have been allocated to
such Member but for this Section 5.02(b)(1) shall be
reallocated to the other Members.
(2) In determining the extent to which a loss allocation under the
terms of this Agreement causes or increases an Excess Deficit
Balance, such Member's Capital Account shall be reduced for
(i) adjustments that, as of the end of such calendar year,
reasonably are expected to be made under Treasury Regulations
Section 1.704-1(b)(2)(iv)(k) for depletion allowances, (ii)
allocation of loss or deduction that, as of the end of such
calendar year, reasonably are expected to be made to such
Member pursuant to Sections 704(c)(2) and 706(d) of the Code
or Treasury Regulations Section 1.751-1(b)(2)(ii) and (iii)
distributions that, as of the end of such calendar year,
reasonably are expected to be made to such Member to the
extent they exceed offsetting increases to such Member's
Capital Account that are expected to occur during (or prior
to) the calendar year in which such distributions reasonably
are expected to be made (other than increase pursuant to
Section 5.04 (a).
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(3) Notwithstanding (1) above, in the event that any Member
unexpectedly receives an adjustment, allocation or
distribution described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4),(5) or (6), such member will be
subsequently allocated items of income in an amount and manner
sufficient to eliminate any Excess Deficit Balance of such
Member as quickly as possible.
(c) Other Special Allocations. The Members shall make such other special
allocations of items of Income and Loss as are required to comply with the rules
set forth in Treasury Regulations Section 1.704-2.
(d) Offsetting Allocations. In the event that Income or Loss is allocated
to one or more Members pursuant to subsections (a), (b) or (c) above, subsequent
Income or Loss will first be allocated (subject to the provisions of subsections
(a), (b) and (c)) to the Members in a manner designed to result in each Member
having a Capital Account balance equal to what it would have been had the
original allocation of Income or loss pursuant to subsections (a), (b) or (c)
not occured.
5.3 Tax Allocations. Allocations of taxable income and loss shall
generally be made in accordance with allocations of Income and Loss as described
above, with allocations of items reflecting book-tax disparities being made in a
manner consistent with the principles of Section 704(c) of the Code.
5.4 Distributions to Members. Subject to any restrictions imposed by the
Act (including but not limited to Section 18-607(a) thereof), within one hundred
and twenty (120) days after the end of the Company's fiscal year (or at such
other times as may be approved by the Board of Governors), the Company shall
distribute all of the Free Cash Flow of the Company, except as the Board of
Governors shall otherwise determine, to each of the Members holding Interests in
accordance with their respective Percentage Interest.
Article VI.
Management and Operation of Company Business
6.1. Authority of the Members. Except as otherwise expressly provided
herein, no Member shall have any authority to act for, or to assume any
obligations or responsibility on behalf of, or bind any other Member or the
Company. Each of the Members represents, warrants and agrees that it shall
disclose in writing to all third parties with whom such Member is in contact
concerning the affairs or the business of the Company that such Member does not
have any authority to act for, or to assume any obligations or responsibilities
on behalf of, the Company unless expressly authorized by the Managers.
6.2. Managers
(a) Day to Day Operations. The Company shall be managed by two (2)
Managers, who oversee and supervise the operation of the Company's business and
to make decisions on
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behalf of the Company, subject to the authority of the Board of Governors.
Except as may be limited by Section 7.20 and as may be delegated pursuant to
Section 6.2(b), the Managers shall have sole and exclusive control of the
business of the Company and shall be authorized and empowered to determine all
questions relating to the day-to-day conduct, operation and management of the
business of the Company, and the determinations of the Managers shall be binding
upon all Members and all other persons for all purposes. The Manager shall
submit a reasonably prepared and detailed operating plan and capital budget to
the Board of Governors for their review, for each fiscal year of the Company not
later than 60 days prior to the beginning of each fiscal year.
(b) General. The Managers shall be entitled to delegate such part of their
duties as they may deem reasonable or necessary in the conduct of the business
of the Company to one or more entities or individuals, who shall each have such
duties and authority as shall be determined from time to time by the Managers or
as may be set forth in this Agreement or any agreement between such entity or
individual and the Company. The Managers need not be employees of the Company.
6.3. Compensation. The Managers shall receive no compensation for their
services except such compensation as may be determined from time to time by
resolution of the Board of Governors. Any officers or other employees of the
Company shall receive such compensation as shall be prescribed from time to time
by the Managers.
6.4. Liabilities. Neither a Member, the Managers, any Affiliate of a
Member or the Company, nor any officer, director, governor, employee or agent of
any of the foregoing shall be liable, responsible or accountable in damages or
otherwise to the Company or any Member for any failure to act or for any acts
performed, where such failure to act or such action was in good faith and within
the scope of this Agreement or within the scope of any agreement between such
party and the Company.
6.5. Indemnification.
(a) To the fullest extent permitted by law, the Managers, each Affiliate
of the Managers and each Person that is an officer, director, governor,
employees or agent of any of the foregoing Persons or the Company (individually,
an "Indemnitee"), shall be indemnified, held harmless and defended by the
Company from and against any and all losses, claims, damages, liabilities,
whether joint or several, expense (including legal fees and expenses),
judgments, fines and other amounts paid in settlement, incurred or suffered by
such Indemnitee, as a party or otherwise, in connection with any threatened,
pending or completed claim, demand, action, suit or proceeding, whether civil,
criminal, administrative or investigative, and whether formal or informal,
arising out of or in connection with the business or the operation of the
Company and by reason of the Indemnitee's status with respect to the Company
regardless of whether the Indemnitee continues to be a Manager or an Affiliate
of a Manager or an officer, director, governor, employee or agent of any of such
Persons or the Company at the time any such loss, claim, damage, liability or
other expense is paid or incurred if (i) the Indemnitee acted in good faith and
in a manner it reasonably
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believed to be in the best interests of the Company and, with respect to any
criminal proceeding, had no reasonable cause to believe that their conduct was
unlawful, (ii) the Indemnitee's conduct did not constitute gross negligence,
willful misconduct or a material breach of the terms of this Agreement and (iii)
the Indemnitee's conduct did not constitute fraud or breach of their fiduciary
duty, if any, to the Company. The termination of any action, suit or proceeding
by judgment, order, settlement or upon a plea of nolo contendere, or its
equivalent, shall not, of itself, create a presumption that the Indemnitee acted
in a manner contrary to the standards specified in clauses (i), (ii) or (iii) of
this section 6.5(a).
(b) To the fullest extent permitted by law, expenses incurred by an
Indemnitee in defending any claim, demand, action, suit or proceeding subject to
this Section 6.5 shall, from time to time, be advanced by the Company prior to
the final disposition of such claim, demand, action, suit or proceeding upon
receipt by the Company of an undertaking by or on behalf of the Indemnitee to
repay such amount unless it is determined that such Indemnitee is entitled to be
indemnified therefor pursuant to this Section 6.5
(c) The indemnification provided by this Section 6.5 shall be in addition
to any other rights to which any Indemnitee may be entitled under any other
agreement pursuant to any vote of the Members, as a matter of law or otherwise,
and shall inure to the benefit of the heirs, legal representatives, successors,
assigns and administrators of the Indemnitee.
(d) Any indemnification under this Section 6.5 shall be satisfied solely
out of the assets of the Company and no Indemnitee shall have any recourse
against any Member with respect to such indemnification.
(e) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.5 merely because the Indemnitee had an interest in the
transaction with respect to which indemnification applies, if the transaction
was not otherwise prohibited by the terms of this Agreement and the conduct of
the Indemnitee satisfied the conditions set forth in Section 6.5(a) hereof.
(f) The indemnification provided in this Section 6.5 is for the benefit of
the specified Persons only and shall not be deemed to create any right to
indemnification for any other Person.
(g) The Company may, but shall have no obligation to, purchase and
maintain insurance covering any potential liability of the
Indemnitee for any actions or omissions for which indemnification is
permitted hereunder including such types of insurance (including
extended coverage liability and casualty and worker's compensation)
as would be customary for any person engaged in a similar business
and may name the Indemnitee as additional insured parties
thereunder.
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6.6 Indemnification Procedures, Survival.
(a) Promptly after receipt by an Indemnitee of notice of the commencement
of any action that may result in a claim for indemnification pursuant to Section
6.5, the Indemnitee must notify the Company in writing within a reasonable time
thereafter, provided, however, that any omission so to notify the Company will
not relieve it of any liability for indemnification hereunder as to the
particular item for which indemnification may then be sought (except to the
extent that the failure to give notice shall have been materially prejudicial to
the Company) nor from any other liability that it may have to any Indemnitee.
(b) An Indemnitee shall have the right to employ separate counsel in any
action as to which indemnification may be sought under any provision of this
Agreement and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnitee unless (i) the
Company has agreed in writing to pay such fees and expenses, (ii) the Company
has failed to assume the defense thereof and employ counsel within a reasonable
period of time after being given the notice required above or (iii) the named
parties to any such action (including any impleaded parties) include both such
Indemnitee and the Company and the Indemnitee shall have been advised by its
counsel that representation of such Indemnitee and the Company by the same
counsel would be inappropriate under applicable standards of professional
conduct (whether or not such representation by the same counsel has been
proposed) due to actual or potential differing interests between them. It is
understood, however, that the Company shall, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys at any time for all such Indemnitee having actual or potential
differing interests with the Company.
(c) The Company shall not be liable for any settlement of any such action
effected without its written consent, but if settled with such written consent,
or if there is a final judgement against the Indemnitee in any such action, the
Company agrees to indemnify and hold harmless the Indemnitee to the extent
provided above from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
(c) The indemnification obligations set forth in Section 6.5 and this Section
6.6 shall survive the termination of this Agreement.
Article VII.
Board of Governors
7.1. Board of Governors. The business and affairs of the Company shall be
managed by or under the authority of the Board of Governors, except as otherwise
required by the Act or this Agreement.
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7.2. Number, Qualification and Term of Office. Newcornco shall be entitled
to appoint two members of the Board of Governors and TSG shall be entitled to
appoint two members of the Board of Governors. Members of the Board of Governors
need not be Members. Each of the members of the Board of Governors shall hold
office until such member's successor shall have been appointed, or until the
earlier death, resignation, removal or disqualification or such member.
7.3. Initial Board. The initial Board of Governors shall be comprised of
the following individuals
on behalf of Newcornco
on behalf of TSG
Jeffrey J. Sholl
Thomas R. Remick
7.4. Place of Meetings. Meetings of the Board of Governors shall be held
at the principal executive office of the Company or at such other place as may
be designated by the Board of Governors from time to time.
7.5. Special Meetings. A special meeting of the Board of Governors may be
called for any purpose or purposes at any time by either of the Managers or by
any Member who holds at least fifteen percent (15%) of the Units and who shall
demand such special meeting by written notice given to the Manager specifying
the purposes of such meeting.
7.6. Meetings Held Upon Member Demand. Within 30 days after the Managers
receives a valid demand for a meeting of the Board of Governors from a Member,
it shall be the duty of the Manager to cause a special or regular meeting of
Board of Governors, as the case may be, to be duly called and held on notice no
later than 90 days after receipt of such demand. If the Managers fail to cause
such meeting to be called and held as required by this Section 7.6, the Member
or Members making the demand may call the meeting by giving notice as provided
in Section 7.8 at the expense of the Company.
7.7. Adjournments. Any meeting of the Board of Governors may be adjourned
from time to time to another date, time and place. If any meeting of the Board
of Governors is so adjourned, no notice as to such adjourned meeting need be
given if the date, time and place at which the meeting will be reconvened are
announced at the time of adjournment.
7.8. Notice of Meetings. Unless otherwise required by law, written notice
of each meeting of the Board of Governors, stating the date, time and place and,
in the case of a special meeting, the purpose or purposes, shall be given at
least ten days and not more than 60 days prior
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to the meeting to every owner of Interests entitled to vote at such meeting. The
business transacted at a special meeting of Board of Governors is limited to the
purposes stated in the notice of the meeting. A member of the Board of Governors
may waive notice of the date, time, place and purpose or purposes of a meeting
of the Board of Governors. A waiver of notice is effective whether given before,
at or after the meeting, and whether given in writing, orally or by attendance.
Attendance by a member of the Board of Governors at a meeting is a waiver of
notice of that meeting, unless the member objects at the beginning of the
meeting to the transaction of business because the meeting is not lawfully
called or convened, or objects before a vote on an item of business because the
item may not lawfully be considered at that meeting and does not participate in
the consideration of the item at that meeting.
7.9. Quorum. Members of the Board of Governors in person or by proxy
representing the Members holding 60% of the Units shall constitute a quorum for
the transaction of business at each meeting of the Board of Governors.
7.10. Absent Members. A member of the Board of Governors may give advance
written consent or opposition to a proposal to be acted on at a meeting of the
Board of Governors. If such member is not present at the meeting, consent or
opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the minutes or other record of action at the meeting, if the proposal acted on
at the meeting is substantially the same or has substantially the same effect
as the proposal to which the member has consented or objected.
7.11. Conference Communications. Any or all of the members of the Board of
Governors may participate in any meeting of the Board of Governors, or of any
duly constituted committee thereof, by any means of communication through which
such members may simultaneously hear each other during such meeting. For the
purposes of establishing a quorum and taking any action at the meeting, members
of the Board of Governors participating pursuant to this Section 7.11 shall be
deemed present in person at the meeting; and the place of the meeting shall be
the place of origination of the conference telephone conversation or other
comparable communication technique.
7.12. Removal. Any member of the Board of Governors may be removed from
office at any time, with or without cause, by the action of the Member who
appointed such member of the Board of Governors.
7.13. Committees. (a) A resolution approved by the Board of Governors may
establish committees having the authority of the Board of Governors in the
management of the business of the Company to the extent provided in the
resolution. A committee shall consist of one or more Persons, who need not be
members of the Board of Governors. Committees are subject to the direction and
control of, and vacancies in the membership thereof shall be filled by, the
Board of Governors. Any committee shall always include a representative of each
Initial Member.
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(b) A majority of the members of a committee present in person or by proxy
at a meeting is a quorum for the transaction of business, unless a larger or
smaller proportion or number is provided in the resolution of the Board of
Governors creating the committee.
7.14. Written Action. Any action which might be taken at a meeting of the
Board of Governors, or any duly constituted committee thereof, may be taken
without a meeting if done in writing and signed by a number of the members of
the Board of Governors, or committee members, whose approval would be sufficient
to approve, the action at a meeting at which all of the members of the Board of
Governors (or such committee) were present.
7.15. Compensation. Members of the Board of Governors shall not be
compensated by the Company. The Members shall each bear the expenses, if any,
incurred by their respective representatives in attending meetings of the Board
of Governors.
7.16. Voting Rights. A member of the Board of Governors shall have voting
power in proportion to the Percentage Interest of the Member(s) represented by
such board member. Except as otherwise required by law, A member of the Board of
Governors may vote any portion of any such Percentage Interest in any way he or
she chooses. If a member of the Board of Governors votes without designating the
proportion of his or her Interest to be voted in a particular way, the member
shall be deemed to have voted all of his or her Interest in accordance with the
vote stated by such Member. If two members of the Board are appointed by a
Member each such member of the Board shall vote 50% of the Percentage Interest
of the Member. If only one member is present at a meeting such member shall vote
100% of the Percentage Interest.
7.17. Proxies. A member of the Board of Governors may cast or authorize
the casting of a vote by filing a written appointment of a proxy with the
Managers at or before the meeting at which the appointment is to be effective.
The member may sign or authorize the written appointment by telegram, cablegram
or other means of electronic transmission setting forth or submitted with
information sufficient to determine that the member authorized such
transmission. Any copy, facsimile, telecommunication or other reproduction of
the original of either the writing or transmission may be used in lieu of the
original, provided that it is a complete and legible reproduction of the entire
original.
7.18. Acts of Members. Except as otherwise provided herein (including but
not limited to Section 11.1(c) and (d) hereof), the Board of Governors shall
take action by the affirmative vote of the representatives of Members holding
not less than 60% of the Units, and any such act shall be deemed to be the
action of the Members for all purposes of this Agreement and the Act.
7.19. Fiduciary Duty. Persons serving on the Board of Governors shall
constitute only the agent of the Member(s) they represent, and not a fiduciary
for such Member(s), any other Member or the Company. No Person serving on the
Board of Governors shall incur any personal liability in such capacity to the
Members or the Creditors of the Company.
7.20. Restricted Transactions. Notwithstanding anything contained in
Section 6.2, the following actions require the approval of the Board of
Governors of the Company:
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(a) The approval of any Reorganization or any other merger or
consolidation involving the Company or the acquisition of another business by
the Company;
(b) Any amendment to this Agreement or any waiver of any right or
privilege by the Company hereunder;
(c) The authorization or issuance of any additional Interests;
(d) The redemption of any Interest;
(e) Any material change in the scope of the business of the Company as set
forth in Article III;
(f) The granting of any liens, charges or encumbrances upon any of the
Company Assets which in the aggregate exceed $100,000;
(g) The commencement of any proceedings or the filing of any petition
seeking relief under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other federal or state bankruptcy, insolvency or
similar law;
(h) The granting of registration rights under Securities Act of 1933, as
amended, or any state securities law to any Person with respect to their
Interests;
(i) The commencement of any material litigation in which the Company is to
be the plaintiff or other initiating party;
(j) Distributions in amounts less than the amounts prescribed by Section
5.4 hereof;
(k) The acquisition, either through purchase or lease, of any fixed assets
in any fiscal year which exceed $75,000 in the aggregate or $5,000 individually;
(l) The sale, lease, exchange or disposition of all, or substantially all
of the assets of the Company; and
(o) Incurring any debt or entering into any agreement to borrow money
which in the aggregate exceeds $100,000.
Article VIII.
Books of Account: Reports and Fiscal Matters
8.1. Books; Place; Access. Newcornco shall maintain books of account on
behalf of the Company at the principal executive offices of the Company. All
Members shall at all reasonable
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times, as determined by the Managers, have access to and the right to inspect
the same (including the information specified in Section 18-305 of the Act or
any amended or successor section) at any time during ordinary business hours,
subject to the Manager's right to keep confidential from the Members (for such
period of time as the Managers deems reasonable) the types of information
described in Section 18-305(c) of the Act (or any amended or successor Section
thereto).
8.2. Fiscal Year. The fiscal year of the Company shall end on December 31
of each year.
8.3. Attorneys and Accountants. The attorneys for the Company shall be
appointed by the Managers. The Certified Public Accountants shall be recommended
by the Managers and approved by the Board of Governors. Any certified public
accountants engaged by the Managers to audit the Company's annual financial
statements shall be "independent," as that term is defined under generally
accepted accounting principles. The Managers, in their discretion, may cause the
Company to engage an accounting firm that also audits the annual financial
statements of any Affiliate of either of its Managers.
8.4. Financial Information. The Managers shall cause to be prepared and
delivered to each of the Members summary unaudited financial information with
respect to the first three quarters of each fiscal year. Such quarterly
financial information shall be provided to the Members not later than thirty
(30) days following the end of each fiscal quarter. The Treasurer of the Company
also shall cause to be prepared and delivered to each of the Members an annual
financial report that shall describe in reasonable detail the financial and
business activities of the Company and include the financial statements of the
Company for the previous fiscal year. Such annual financial report shall be
provided to the Members not later than sixty (60) days following each fiscal
year end.
8.5. Tax Information. Within ninety (90) days after the close of each
fiscal year, all necessary tax information shall be transmitted to all Members.
8.6. Tax Elections. All elections required or permitted to be made by the
Company under the Code, shall be made by the Managers in consultation with the
Company's accountants and attorneys. In the event of a transfer of all or part
of the Interest of any Member, the Company may, in the sole discretion of the
Managers, elect pursuant to Section 754 of the Code to adjust the basis of the
Company Assets.
8.7. Tax Matters Partner. Newcornco shall act as the tax matters partner
(the "TMP"), as such term is defined in Section 6231(a)(7) of the Code, and is
hereby authorized to and shall represent the Company in connection with all
examinations of the Company's affairs by tax authorities, including resulting
administrative and judicial proceedings. The Members and the TMP shall use all
reasonable efforts to comply with the responsibilities outlined in this Section
8.7 and in Sections 6222 through 6231 of the Code (including any Treasury
Regulations thereunder and any successor or amendatory provisions thereto for
which a tax matters partner is designated).
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(a) TMP Notices. Each Member shall furnish the TMP with such information
(including information specified in Section 6230(e) of the Code) as the TMP may
reasonably request to permit the TMP to provide the Internal Revenue Service
with sufficient information to allow proper notice to the Members in accordance
with Section 6223 of the Code. The TMP shall keep each Member informed of those
administrative and judicial proceedings for the adjustment at the Company level
of Company items required by Section 6223(g) of the Code and the Treasury
Regulations thereunder, and such other matters as the TMP, in its sole
discretion, deems appropriate.
(b) Inconsistent Tax Treatment. Each Member shall notify the TMP in the
event its treatment of any Company item on its federal income tax return is
inconsistent with the treatment of that item on any return filed by or in any
records of the Company within thirty (30) days of the date such Member's return
is filed.
(c) Requests for Tax Adjustments. No Member shall file, pursuant to
section 6227 of the Code, a request for an administrative adjustment of limited
liability company items for any Company taxable year without first notifying
each Member. If each Member agrees with the requested adjustment, the TMP shall
file the request for administrative adjustment on behalf of the Company. If
unanimous consent of the Members is not obtained within thirty (30) days, or
within the period required to file timely the request for administrative
adjustment, if shorter, any Member, including the TMP (on behalf of the
Company), may file a request for administrative adjustment on its own behalf.
(d) Tax Proceedings. The TMP, in its sole discretion, shall negotiate with
the Internal Revenue Service on behalf of the Company during all aspects of the
tax proceeding, including without limitation the examination, appeals, and
litigation process. Any Member who intends to file a petition under Sections
6226, 6228, or other Sections of the Code with respect to any Company item, or
other tax matters involving the Company, shall give reasonable notice to each of
the Members of such intention and the nature of the contemplated proceeding. In
the case where the TMP is the Member intending to file such petition, the TMP,
in its sole discretion, shall choose the forum in which such petition will be
filed. If any Member intends to seek review of any court decision rendered as a
result of a proceeding instituted under the preceding part of this paragraph (d)
of Section 8.7, such Member shall notify each of the Members of such intended
action. In accordance with its duty to act in good faith, the TMP may choose to
pursue or forego settlement, litigation, or any other proceedings.
(e) Tax Settlements. The TMP shall have the authority to bind any other
Member to a settlement agreement without obtaining the written concurrence of
any such Member who would be bound by such agreement. Any other Member who
enters into a settlement agreement with respect to any partnership items, as
defined by Section 6231(a)(3) of the Code, shall notify the Members of such
settlement agreement and its terms within ninety (90) days from the date of
settlement.
(f) TMP Expenditures, Fees and Indemnification. The TMP may engage such
legal counsel, certified public accountants, or others (including, without
limitation, experts) on behalf
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of the Company as it may determine to be necessary and appropriate. Any other
Member may engage other legal counsel, certified public accountants, or others
on such other Member's own behalf and at such other Member's sole cost and
expense. Any reasonable item of expense, including but not limited to fees and
expenses for legal counsel, certified public accountants, and others (including,
without limitation, experts) that the TMP incurs on behalf of the Company in
connection with any audit, assessment, litigation, or other proceeding regarding
any partnership item, shall constitute expenses of the Company. In the event
that the Company does not have adequate cash or other assets to pay such items
of expense, the TMP shall not be obligated to make capital contributions or
loans to fund such expenses, and the TMP shall be free to resign as the tax
matters partner of the Company pursuant to Section 8.7(g) hereof. The company
shall indemnify the TMP pursuant to Section 6.5 hereof.
(g) Resignation of TMP. The TMP may resign as tax matters partner at any
time upon the filing of a signed statement with the Internal Revenue Service in
accordance with the Code.
(h) Survival of TMP Provisions. The provisions of this Section 8.7,
including without limitation the obligation to pay fees and expenses and the
indemnification obligations described in Section 8.7(f) hereof, shall survive
the termination of the Company or the termination of any Member's interest in
the Company and shall remain binding on the Company for a period of time
necessary to resolve with the Internal Revenue Service, the Department of the
Treasury or any state taxing authority any and all matters regarding the federal
or state income taxation of the Company for the applicable tax year(s).
Article IX.
Assignment by any Member of its Membership Interest
9.1. Interests. In addition to any restrictions imposed by the federal
securities laws and any applicable state securities or "blue-sky" laws, no
Member may sell, assign, pledge, transfer, convey or otherwise dispose of
(including through any merger, share exchange or consolidation) (collectively,
"Transfer") all or any part of any Interest, whether for consideration or not,
and no purchaser or other transferee thereof for value or otherwise shall have
any rights in the Company or be or have any rights as a Member with respect to
all or any part of any such Interest attempted to be Transferred, and any such
attempted Transfer of all or any part of an Interest shall be entirely null and
void, unless such Transfer is approved in advance by the Members holding 60% of
the Units. The appropriate Company records and any certificates representing the
Interests shall be noted to prevent any Transfers in violation of this Section
9.1.
9.2. Transfer by Legal Process; Change in Control.
(a) Involuntary Transfers. Upon any involuntary Transfer of all or any
portion of any Interests of a Member pursuant to a levy of execution,
foreclosure of pledge, garnishment, attachment, divorce decree, bankruptcy or
other legal process (or by operation of law resulting
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from the death, disability, liquidation, dissolution or winding-up of, Member),
the Transferee or Transferees of, or any successor in title to, the Transferred
Interests (hereinafter, collectively with the Interests described in Section
9.2(b), (the "Transferred Units"), shall, within 30 days after such Transfer,
offer the Transferred Units first to the Company (at the price specified in
Section 9.2 (c)) and second to the Members under this Section 9.2 by delivering
notice of such offer (the "Transfer Notice") in writing to the Company and to
the Members.
(b) Change in Control. Upon any Change in Control of a Member, such Member
which is subject to such Change of Control shall, within 30 days after written
notice of the occurrence of the Change in Control, offer at the price set forth
an Section 9.2 (c) all of its Interests first to the Company and second to the
other Members under this Section 9.2 by delivering a Transfer Notice in writing
to the Company and to the other Members. For this purpose, "Change in Control"
shall mean a change in the direct beneficial ownership of greater than 50% of
the equity interest in a Member from the ownership of such interests on the date
the Person became a Member. The Members hereby covenant and agree to provide
written notice to the other Members promptly upon a Change in Control but in no
event later than 10 days after the occurrence of the Change of Control. If a
Member wishes it may notify the other Members in writing prior to the completion
of the Change an Control. Any such notification shall disclose the name of the
acquiring party or proposed acquiring party.
(c) Company Option. The Company shall, subject to Section 7.20(e) hereof,
have the right to purchase any or all of any Transferred Units at a price (the
"Company Transfer Price") equal to the Fair Market Value of the Transferred
Units by giving written notice to the Transferee or Transferees thereof, or
successor in title thereto or, in the case of a Change in Control, to the Member
delivering the Transfer Notice (any such Transferee, Transferees, successor or
Member being hereinafter collectively referred to as the "Recipient") within 90
days after receipt of the Transfer Notice. Any vote required in connection with
this provision shall be taken as if the Interests of the transferring Member
were voted proportionately with the remaining members.
(d) Transfer Option. If the Company does not elect to purchase all of
the Transferred Units, the Members (other than any Member whose Interests were
subject to the Transfer by legal process or who underwent the Change in Control)
shall have the option (the "Transfer Option") to purchase the remaining
Transferred Units at a price equal to the Fair Market Value thereof by giving
written notice to the Recipient within 120 days after their receipt of the
Transfer Notice. If the other Members elect to purchase more Transferred Units
than are available, the available Transferred Units shall be allocated among the
participating Members, up to their respective pro rata shares, based on the
respective Percentage Interests of the participating Members, of the remaining
Transferred Units. Each participating Member may exercise the Transfer Option by
delivering to the Recipient written notice of its election to exercise the
Transfer Option within 45 days after the date of the expiration of the option of
the Company to purchase pursuant to 9.2 (c).
(e) Transfer Price. The Company shall be entitled to pay the Company
Transfer Price in three equal annual installments, with Interest at the
Reference Rate (as determined on the date of the closing of the purchase of the
Transferred Units). The first such installment shall be paid on the date of such
closing and the remaining installments shall be paid on the four succeeding
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anniversaries of such date. Interest on the unpaid balance of the Company
Transfer Price shall be payable with each such installment. Members who exercise
the Transfer Option shall tender payment in cash for the Transferred Units to be
purchased by them on the date of closing of such purchase.
(f) Absence of Transfer Notice. If no Transfer Notice shall be given and
the Company or any Member becomes aware of the Transfer of an Interest by legal
process or otherwise that is subject to this Section 9.2 or any Change in
Control of any Member, then the Company or such Member shall give written notice
to the Members, in the case of the Company, and to the Company and the Members,
in the case of any Member, of much of the facts and circumstances of such
Transfer or Change in Control as are known by the Company or such Member and
such notice shall be considered the Transfer Notice for the purposes of this
Section 9.2. Any Transferred Units shall nevertheless remain subject to this
Section 9.2 until a Transfer Notice shall have been properly delivered by the
Recipient and the Company and the Members shall have been given the opportunity
to exercise their respective options. If after a Transfer Notice shall have been
properly delivered, the Company and the Members shall fail to purchase all of
the Transferred Units as provided above, the Transferred Units not so purchased
will no longer be subject to this Section 9.2 (unless and until there shall
occur a subsequent event with respect to the Recipient that is subject to this
Section 9.2), provided, however, that (i) the Recipient (if such Person is not
already a party to this Agreement) shall, as a condition to the effectiveness of
any Transfer to such Person be required to become a party to this Agreement and
no distributions will be made pursuant to Section 5.4 or Article XI to such
Person prior to such effectiveness and (ii) if a Change in Control shall occur
with respect to a Member, no distributions will be made pursuant to Section 5.4
or Article XI to such Member until such Member shall have properly delivered a
Transfer Notice pursuant to this Section 9.2(f).
Article X.
Amendment
This Agreement may only be amended in writing signed by an authorized
representative of all the Members.
Article XI.
Dissolution and Liquidation
11.1. Events Causing Dissolution. The Company shall be dissolved only upon
the occurrence of any of the following events:
(a) The expiration of the term set forth in the Certificate of Formation;
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(b) The sale, exchange or any other disposition of all or substantially
all of the Company Assets;
(c) The unanimous consent of the Members;
(d) The death, insanity, expulsion, bankruptcy, retirement, resignation
dissolution of a Member or the occurrence of any other event (including any
redemption or forfeiture of all of the Interests of such Member) which
terminates the continued membership of a Member in the Company unless the
business of the Company is continued by the consent of such of the remaining
Members who hold at least 51% of the total voting power of the Units held by all
of the remaining Members within ninety (90) days following the date the
occurrence of any such event; or
(e) The entry of a decree of judicial dissolution under Section 18-802 of
the Act.
11.2. Continuation of Business. If, upon dissolution of the Company for
any reason described in Section 11.1(d), the business of the Company is
continued without liquidation and without the winding up of the affairs of the
Company pursuant to the terms thereof, title to the property of the Company
shall be vested in the company continuing the business and the allocation and
distribution rules set forth herein shall continue us set forth herein. Upon
such dissolution, no Member, nor any legal representative of any Member, shall
have the right to an account of its Interest or its Capital Account as against
the Company continuing the business, and no Member, nor any legal representative
of any Member, shall have the right to have the value of its Interest or Capital
Account as of the date of dissolution ascertained or have any right as a
creditor or otherwise with respect to the value of its Interest.
11.3. Liquidation and Winding Up. If dissolution of the Company should be
caused by reason of (i) any of the events set forth in paragraphs (a), (b), (c),
or (e) of Section 11.1 hereof or (ii) any of the events set forth in paragraph
(d) of Section 11.1 hereof and the business of the Company is not continued
pursuant to the terms of such paragraph (d), the Company shall be liquidated and
the Managers (or other Person or Persons designated by a decree of court) shall
wind up the affairs of the Company. The Managers or other Persons winding up the
affairs of the Company shall promptly proceed to the liquidation of the Company
and, in settling the accounts of the Company, the Company Assets shall be
distributed in the following order of priority;
(a) To creditors (excluding any Member and the Managers if they are
creditors), to the extent otherwise permitted by law, in satisfaction of
liabilities of the Company (whether by payment or the making of reasonable
provision for payment thereof), other than liabilities for which reasonable
provision for payment has been made and liabilities for distributions to Members
under Section 5.7 hereof;
(b) To the repayment of outstanding loans from a Member to the Company;
(c) To the payment of any obligations of the Company under Section 9.2(c);
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(d) To Members, to the extent of indebtedness to the Members; and
(e) Subject to Section 9.2(e) and 9.3(f), the balance, if any, to the
Members pro rata in accordance with their Capital Account balances, after giving
effect to all allocations of gain or loss in accordance with Article V.
11.4. Compliance with Timing Requirements of Regulations. In the event the
Company is liquidated within the meaning of Treas. Reg. Section
1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article XI to
the Members who have positive Capital Account balances in compliance with Treas.
Reg. Section 1.704-1(b)(2)(ii)(b)(Z).
Article XII.
Membership Interests
12.1 Registration, Transfer and Exchange.
(a) The Company shall keep at its principal office a register in which
shall be entered the names and addresses of the owners of the outstanding
Interests and all transfers of outstanding Interests. References to the holder
of an Interest shall mean the Person shown as the owner thereof in such
register, and the ownership of an Interest shall be proved by such register.
Except as otherwise specifically provided in this Agreement the registered owner
of an Interest shall be deemed to be the owner of such Interest for all purposes
of this Agreement.
(b) Certificates evidencing the Interests owned by a Member may, but need
not, be issued by the Company.
(c) Subject to Article IX hereof, each Interest issued hereunder, whether
originally or in substitution for, or upon Transfer, exchange or other issuance
of any Interest shall be registered on the effective date of the Transfer,
exchange or other issuance as determined in good faith by the Managers on behalf
of the Company; provided, however, that no registration of any Transfer not made
in compliance with Article IX shall be made in the register.
12.2. Resignation. No Member shall be entitled to resign or retire from
the Company prior to the dissolution and winding up the Company pursuant to
Article XI hereof without the unanimous consent of the other Members of the
Company.
Article XIII.
Representations and Warranties of the Members
13.1. Representations and Warranties. Each of the Member represents and
warrants as of the date of this Agreement to each of the other Members as
follows:
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(a) Such Member has the requisite power and authority to enter into, and
to carry out its obligations under, this Agreement.
(b) The execution and delivery by such Member of this Agreement and the
consummation by such Member of the transactions contemplated hereby have been
duly authorized prior to the date of this Agreement by all necessary action on
the part of such Member.
(c) This Agreement has been duly executed and delivered by such Member and
constitutes a valid and binding obligation enforceable against such Member in
accordance with its terms.
(d) Such Member is not subject to, or obligated under, any provision of
(i) any agreement, arrangement or understanding, (ii) any license, franchise or
permit or (in) any law, regulation, order, judgment or decree that would be
breached or violated, or in respect of which a right of termination or
acceleration or any encumbrance on any of such Member's assets would be created,
by such Member's execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby.
(e) No authorization, consent or approval of, waiver or exemption by, or
filing or registration with, any public body, court, third party or authority is
necessary on such Member's part for the consummation of the transactions
contemplated by this Agreement
(f) No person or entity has or will have, as a result of any act or
omission by such Member any right, interest or valid claim against the Company
or say other Member for any commission, fee or other compensation as a finder
orbroker, or in any similar capacity, an connection with the transactions
contemplated by this Agreement
(Article XIV intentionally omitted)
Article XV
Miscellaneous Provisions
15.1. Additional Actions and Documents. Each of the Members hereby agrees
to take or cause to be taken such farther actions, to execute, acknowledge,
deliver and file, or cause to be executed, acknowledged, delivered and filed
such further documents and instruments, and to use all reasonable efforts to
obtain such consents, as may be necessary or as may be reasonably requested in
order to fully effectuate the purposes, terms and conditions of this Agreement.
15.2 Notice. Any notice, demand, consent, authorization or other
communication which any Member is required or may desire to give to or make upon
the other Members pursuant to this Agreement shall be in writing and shall be
effective, valid and duly given if mailed by regular mail, postage prepaid; if
to the Company, to the principal office of the Company set forth in Section 1.2
hereof or to such other address as the Company shall notify the Members in
writing; if to the Manager, to the principal office of the Company set forth in
Section 1.2 hereof, or to such
24
<PAGE> 25
other address as the Manager shall notify the Company and the Members in
writing; and if to the Members, to their respective addresses set forth in
Schedule I hereof or in the register maintained by the Company pursuant to
Section 12.1(a) hereof, or to such other address as any such Member may
hereafter designate by notice in writing to the Manager and Company. Each
notice, demand, request or communication which shall be delivered, mailed or
transmitted in the manner described above shall be deemed sufficiently given,
served, sent or received for all purposes at such time as it is delivered to the
addressee or at such time as delivery is refused by the addressee upon
presentation.
15.3. Severability. The invalidity of any one or more provisions hereof or
of any other agreement or instrument given pursuant to or in connection with
this Agreement shall not affect the remaining portions of this Agreement or any
such other agreement or instrument or any part thereof; and in the event that
one or more of the provisions contained herein or therein should be invalid, or
should operate to render this Agreement or any such other agreement or
instrument invalid, this Agreement and such other agreements and instruments
shall be construed as if such invalid provisions had not been inserted.
15.4 Survival. It is the express intention and agreement of the Members
that all covenants, agreements, statements, representations, warranties and
indemnities made in this Agreement shall survive the execution and delivery of
this Agreement.
15.5. Waivers. Neither the waiver by a Member of a breach of or a default
under any of the provisions of this Agreement, nor the failure of a Member, on
one or more occasions, to enforce any of the provisions of this Agreement or to
exercise any right, remedy or privilege hereunder shall thereafter be construed
as a waiver of any such provisions, rights, remedies or privileges hereunder.
15.6. Exercise of Rights. No failure or delay on the part of a Member or
the Company in exercising any right, power or privilege hereunder and no course
of dealing between the Members or between a Member and the Company shall operate
as a waiver thereof, nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
herein expressly provided are cumulative and not exclusive of any other rights
or remedies which a Member or the Company would otherwise have at law or in
equity or otherwise.
15.7. Binding Effect. Subject to any provisions hereof restricting
assignment, this Agreement shall be binding upon and shall inure to the benefit
of the Members and their respective successors and permitted assigns.
15.8. Limitation on Benefits of this Agreement. It is the explicit
intention of the Members that no person or entity other than the Members and the
Company is or shall be entitled to bring any action to enforce any provision of
this Agreement against any Member or the Company, and that the covenants,
undertakings and agreements set forth in this Agreement shall be solely for the
benefit of, and shall be enforceable only by, the Members (or their respective
heirs, legal representatives, successors and assigns as permitted hereunder) and
the Company; provided,
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<PAGE> 26
however, that the Indemnitees shall, as intended third-party beneficiaries
thereof, be entitled to the enforcement of Sections 6.7 and 6.8 hereof, but only
as insofar as the obligations sought to be enforced thereunder are those of the
Company.
15.9. Waiver of Partition. The Members agree that the Company Assets are
not and will not be suitable for partition. The Members hereby waive any right
of partition or any right to take any action that otherwise might be available
to them for the purpose of severing their relationship with the Company or
interest in assets held by the Company from the interest of the other Members.
15.10. Entire Agreement. This Agreement contains the entire agreement
among the Members with respect to the matters contained herein, and supersedes
a11 prior oral or written agreements, commitments or understandings with respect
to the matters provided for herein.
15.11. Pronouns. All pronouns and any variations thereof shall bdeemed to
refer to the masculine, feminine, neuter, singular or plural, as the identity of
the person or entity may require.
15.12. Headings. Article and Section headings contained in this Agreement
are inserted for convenience of reference only, shall not be deemed to be a part
of this Agreement for any purpose, and shall not in any way define or affect the
meaning, construction or scope of any of the provisions hereof.
15.13. Governing Law. This Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating hereto, shall be governed by
and construed in accordance with the laws of the State of Delaware (but not
including the choice of law rules thereof.)
15.14. Execution in Counterparts. To facilitate execution, this Agreement
may be executed in as many counterparts as may be required; and it shall not be
necessary that the signatures of, or on behalf of, each party, or that the
signatures of all Persons required to bind any party, appear on each
counterpart; but it shall be sufficient that the signature of, or on behalf of,
each party, or that the signatures of the Persons required to bind any party,
appear on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of this
Agreement to produce or account for more than a number of counterparts
containing the respective signatures of, or on behalf of, all of the parties
hereto.
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<PAGE> 27
15.15. No third Party Beneficiaries.
It is the intention of the parties that only the Members shall be
the beneficiary of any rights contained herein and no third party is intended to
be a third party beneficiary other than the Company which is intended to be a
third party beneficiary hereunder.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
Newcornco LLC
By:/s/ [ILLEGIBLE]
-----------------------------
The Sholl Group II, Inc.
By /s/ [ILLEGIBLE]
-----------------------------
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<PAGE> 28
Schedule I
Names and Addresses of Members:
Newcornco LLC
P.O. Box 1090
3040 Somis Road
Somis, California 93066
The Sholl Group II, Inc
3514 County Rd 101
Minnetonka, Mn. 55345
Capital Contributions:
Newcornco LLC The Sholl Group II, Inc.
$1.00 $1.00
Units Total 1000
Unit Ownership
Newcornco LLC The Sholl Group II, Inc.
500 500
- --------------------------------------------------------------------------------
28
<PAGE> 1
THIS AGREEMENT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED
MATERIAL HAS BEEN BRACKETED ON PAGE 3 AND HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
TRADEMARK SUBLICENSE AGREEMENT
THIS TRADEMARK SUBLICENSE AGREEMENT is entered into this 15th day of
April, 1998 (the "Effective Date"), between FRESHCORN LLC (hereinafter referred
to as the "Joint Venture"), NEWCORNCO LLC (hereinafter referred to as
"LICENSEE") and THE SHOLL GROUP II, INC., a Minnesota corporation (hereinafter
referred to as "LICENSOR").
WITNESETH:
WHEREAS, LICENSOR entered into a Trademark License Agreement with The
Pillsbury Company ("TPC") with effect as of January 10, 1995 (hereinafter
referred to as the "LICENSE AGREEMENT");
WHEREAS, LICENSOR has been granted the right to use certain trademarks and
trade names including those listed in Exhibit A and the trade dress used in
connection therewith (hereinafter such trademarks and tradenames listed on
Exhibit A are referred to as the "LICENSED MARKS"), which LICENSED MARKS have
been used in commerce and extensively advertised and promoted by various means.
The LICENSED MARKS are well known and recognized by the general public and have
gained a high reputation with the general public, which high reputation and
goodwill has been and continues to be a unique benefit to TPC and LICENSOR;
WHEREAS, LICENSOR and LICENSEE have formed and jointly own the Joint
Venture;
WHEREAS, LICENSEE recognizes the benefits to be derived from utilizing the
LICENSED MARKS and desires to utilize said LICENSED MARKS solely upon and in
connection with the growing, processing, harvesting, advertising, marketing,
sale and distribution of fresh and perishable corn as defined in Exhibit B (the
"Licensed Products"); and
WHEREAS, LICENSOR and the Joint Venture desire that LICENSEE have the
rights to use the LICENSED MARKS in connection with the growing, harvesting,
advertising, marketing and distribution of the Licensed Products.
NOW, THEREFORE, in consideration of mutual promises contained herein, and
for other good and valuable consideration, the receipt and adequacy of which is
expressly acknowledged, the parties agree as follows:
1. GRANT OF LICENSE
(a) Licensed Products. Upon the terms and conditions set forth in
this Agreement, as of Effective Date, LICENSOR grants to the Joint Venture and
LICENSEE the right, license and privilege to utilize the LICENSED MARKS solely
upon and in connection with the growing, harvesting, advertising, marketing,
sale and distribution of Licensed Products (hereinafter the "Sublicense"). In
consideration of the payment to be received by the Joint Venture hereunder
(which payment shall only be paid for the period of time the Sublicense shall
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<PAGE> 2
be in effect), the Joint Venture waives its rights to the use of the LICENSED
MARKS. LICENSEE shall not use any of the LICENSED MARKS or any variation,
abbreviation or derivation of, or any words confusingly similar to, any of the
LICENSED MARKS in its corporate name.
(b) Limited License. This Sublicense is limited to Licensed Products
which meet or exceed the quality standards set forth in a quality assurance
manual to be developed by LICENSEE which shall include product specifications
and which shall be submitted to LICENSOR for its approval prior to producing any
Licensed Product (such Quality Assurance Manual, with such changes thereto as
LICENSOR may reasonably determine are required in response to technological,
legal, regulatory or other industry developments, hereinafter referred to as
"LICENSOR'S Quality Assurance Manual"). It is agreed that customary industry
standards shall be applied in determining if the Licensed Products are of
sufficient quality including, but not limited to, applicable laws and
regulations covering product safety and the regulation of food and drugs. NO
LICENSE IS GRANTED HEREUNDER FOR ANY USE OTHER THAN SOLELY IN CONNECTION WITH
THE LICENSED PRODUCTS, AND NO LICENSE IS GRANTED FOR ANY USE IN COMBINATION WITH
PRODUCTS THAT ARE NOT LICENSED PRODUCTS, AS DEFINED, WITHOUT PRIOR WRITTEN
CONSENT OF LICENSOR. Except as otherwise consented to by LICENSOR in writing,
the Licensed Products shall be sold to the public only in the manner in which
other similar articles are customarily merchandised. In no event shall the
Licensed Products be used or sold as premiums or giveaways or for advertising or
joint merchandising purposes without the prior written consent of LICENSOR.
LICENSEE shall be free to set the prices at which it sells or distributes
Licensed Products, and LICENSOR shall have no right to dictate such price(s),
provided, however, that the Licensed Products shall at all times be sold and
marketed as high quality products consistent with LICENSOR's and TPC's image and
reputation for overall high quality.
(c) Territory. The Sublicense hereby granted shall be exclusive with
respect to the United States of America, Mexico and Canada and non-exclusive in
the rest of the world (hereinafter the "Territory").
(d) Term. The initial term of this Sublicense shall commence as of
the Effective Date and, subject to the termination provisions of Sections 10, 11
and 12 below, shall continue until December 31, 2020 and shall thereafter be
renewed for successive periods of one (1) year each, unless either party gives
the other party written notice prior to the expiration of the initial term or
any renewal term of its election not to renew the Sublicense. Such notice of
non-renewal may be given at any time commencing three (3) years prior to the
expiration of the initial term of the Sublicense. In the event the LICENSOR
provides written notice electing not to renew the Sublicense under this section
1(d), the Sublicense shall continue for a period of three (3) years after the
date of notice at which time the Sublicense shall terminate.
2. PAYMENT TO JOINT VENTURE AND LICENSOR
(a) Fee to Joint Venture. In consideration of the Joint Venture
waiving its rights to the LICENSED MARKS, LICENSEE shall pay the Joint Venture a
fee in an amount equal to a
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<PAGE> 3
percentage of all revenues of LICENSEE for each calendar year derived from the
sale of all corn products by LICENSEE, including, but not limited to, Licensed
Products and products sold under trademarks other than the LICENSED MARKS and
whether sold at retail or to foodservice. The percentage shall be determined
based upon the "Average Price" of each "Case" of corn sold by LICENSEE during
each calendar year. If the Average Price is less than $[ ] per Case, the
percentage shall be [ ]%. If the Average Price per Case is:
<TABLE>
<CAPTION>
Equal to or greater than but less than the percentage shall be
- ------------------------ ------------- -----------------------
<S> <C> <C>
$[ ] $[ ] [ ]%
$[ ] $[ ] [ ]%
$[ ] $[ ] [ ]%
$[ ] $[ ] [ ]%
$[ ] $[ ] [ ]%
</TABLE>
If the average sale price is greater than $[ ] per case, the percentage will
be [ ]%.
Notwithstanding anything contained herein to the contrary, the payment due
hereunder for each calendar year shall not (i) exceed the total pre-tax earnings
of LICENSEE for such calendar year nor (ii) be less than [ ]% of the total
pre-tax earnings of LICENSEE for such calendar year. The pre-tax earnings of the
LICENSEE shall be determined from the books and records of LICENSEE which shall
be maintained in accordance with generally accepted accounting principles,
consistently applied. The total due the Joint Venture shall be reduced by the
amount of royalty paid to LICENSOR pursuant to 2(b). The fee due for the first
calendar year (1998) shall be calculated in the manner above described but shall
be reduced by multiplying the fee by a fraction, the numerator of which is the
number of days from the Effective Date until December 31, 1998 and the
denominator is 365.
By way of illustration, if LICENSEE's pre-tax earnings are $1,000,000 for
the year in question, the Average Price per Case for such year is $[ ] and the
total revenues of LICENSEE are $10,000,000 resulting in a fee of $[ ]
($10,000,000 x [ ]%), the fee to be paid to the Joint Ventures would be $[ ]
([ ]% of pre-tax earnings). On the other hand, if LICENSEE's pre-tax earnings
are $100,000 for the year in question, the Average Price per Case for such year
is $[ ] and the total revenues of LICENSEE are $10,000,000 resulting in a fee
of $[ ] ($10,000,000 x [ ]%), the fee to be paid to the Joint Ventures would
be $[ ]. In either of the above two scenarios the fee would be reduced by the
amount paid to LICENSOR pursuant to 2(b).
(b) Royalty to LICENSOR. LICENSEE shall pay LICENSOR a royalty of
$[ ] per Case of Licensed Product "Sold" during the term of the Sublicense.
3
<PAGE> 4
Licensed Product shall be considered "Sold" upon the date such Licensed Product
is billed, invoiced, or paid for, whichever event occurs first. A "Case" shall
mean 48 ear equivalents.
"Average Price" shall mean the total revenues of LICENSEE during each calendar
year from the sale of all fresh and perishable corn products of LICENSEE divided
by the number of Cases sold by LICENSEE which were included in the calculation
of the revenues for the sale of fresh and perishable corn products.
(c) Commercially Reasonable Efforts. LICENSEE shall use all
commercially reasonable efforts to maximize its revenues and profitability and
shall at all times be actively engaged in all material respects in the
development and prosecution of the business of marketing and selling of fresh
and perishable sweet corn. LICENSEE shall use all commercially reasonable
efforts to fully exploit the LICENSED MARKS through the sale of Licensed
Products.
(d) No Deduction. There shall be no deduction from the royalties
owed to LICENSOR for taxes, fees, assessments, allowances, advertising or other
expenses of any kind which may be incurred or paid by LICENSEE in connection
with the growing, harvesting, sale, distribution or exploitation of the Licensed
Products in the Territory.
(e) Periodic Statements. On or before the fifteenth (15th) day of
each month, LICENSEE shall furnish to LICENSOR complete and accurate statements
showing (i) the number of cases, description, gross sales price and applicable
royalty rate of each of the Licensed Products covered by this Sublicense sold by
LICENSEE during the preceding month, and (ii) the royalties due hereunder. Such
statement shall be furnished to LICENSOR whether or not any Licensed Product was
Sold during the preceding month or whether or not any royalty is due hereunder
and shall be certified by an officer of LICENSEE as being accurate. LICENSEE
shall provide LICENSOR with weekly sales information by facsimile in a form
reasonably acceptable to LICENSOR. LICENSEE acknowledges that LICENSOR intends
to establish a system for conveyance of information of the type above described
by electronic transmission and agrees that it will cooperate with LICENSOR in
its reasonable requests to establish the system, provided the LICENSEE will not
be required to purchase software or other equipment to establish such a system.
(f) Royalty and Fee Payments. (i) LICENSEE shall pay all royalties
owing to LICENSOR hereunder for any month within fifteen (15) days following the
end of such month and (ii) LICENSEE shall pay all fees owing to the Joint
Venture hereunder for each calendar year within one hundred and twenty (120)
days following the end of such year. All royalty amounts in this Agreement are
stated in United States Dollars, and all royalty payments shall be made in
United States Dollars. The receipt or acceptance by LICENSOR or the Joint
Venture of any of the statements furnished pursuant to this Agreement or of any
royalties or fees paid hereunder (or the cashing of any checks paid hereunder)
shall not preclude LICENSOR or the Joint Venture from questioning the
correctness thereof at any time, and in the event that any inconsistencies or
mistakes are discovered in such statements or payments, they shall immediately
be rectified and the appropriate payment made by LICENSEE.
4
<PAGE> 5
(g) Records. LICENSEE agrees to keep accurate books of account
covering all transactions. LICENSOR, the Joint Venture or TPC and their
authorized representatives shall have the right once quarterly at all reasonable
hours of the day at LICENSEE's usual place of business, upon forty-eight (48)
hours prior notice, to examine and copy said books of account and records and
all other documents and materiel in the possession or under the control of
LICENSEE insofar as they relate to the calculation of royalty or fees payable
hereunder. If any such examination shall reveal a deficiency in royalties or
fees paid or payable hereunder of more than five percent (5%) of the correct
royalty or fees for the period audited or if examination is made because of the
LICENSEE's failure to pay any amounts due hereunder, then LICENSEE shall bear
all reasonable costs incurred by LICENSOR, the Joint Venture or TPC in
connection with the examination. All books of account and records shall be kept
available for at least four (4) years after the end of the month to which such
books and records relate.
(h) Marketing Efforts. The Joint Venture shall retain 25% of the
fees paid to it each calendar year pursuant to section 2(a) (the "Marketing
Fund") and shall spend the Marketing Fund in the next succeeding calendar year
for the marketing of fresh and perishable corn products. The manner in which the
Marketing Fund is utilized shall be determined by the Managers of the Joint
Venture.
3. EXCLUSIVITY
(a) Exclusivity. The Sublicense granted herein shall be exclusive in
the United States, Canada and Mexico, provided, however, LICENSOR reserves to
itself, and may sublicense others to use, all or any of the Licensed Products as
ingredients in other products which may bear any of the LICENSED MARKS anywhere
in the world including the United States, Canada and Mexico, provided that the
Licensed Products shall not comprise more than 10% by weight of such other
product. LICENSEE will be the exclusive vehicle for the sale of sweet corn and
it will not, directly or indirectly, sell sweet corn through any entity other
than LICENSEE.
(b) Reservation. Notwithstanding anything contained herein to the
contrary, TPC may utilize, and grant others the right and license to utilize,
the LICENSED MARKS in connection with the sale of (i) any product outside the
United States, Canada and Mexico, (ii) any product other than Licensed Products
and (iii) Licensed Products as ingredient(s) in other products. THIS LICENSE
DOES NOT RESTRICT OR LIMIT TPC's RIGHTS TO UTILIZE THE LICENSED MARKS IN ANY
MANNER WHATSOEVER EXCEPT SOLELY WITH RESPECT TO SALES IN THE TERRITORY OF
LICENSED PRODUCTS.
4. GOODWILL, ETC.
(a) Acknowledgment. LICENSEE recognizes the great value of the
goodwill associated with the LICENSED MARKS and acknowledges that the LICENSED
MARKS and all rights therein and goodwill pertaining thereto belong exclusively
to TPC, and that the LICENSED MARKS have a secondary meaning in the minds of the
public. Upon expiration or termination of the right to use the LICENSED MARKS
pursuant to this Sublicense, except for LICENSEE's
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<PAGE> 6
rights to sell out its inventory pursuant to Section 12(d) below, LICENSEE shall
cease all use of the LICENSED MARKS promptly and will not use any of the
LICENSED MARKS thereafter.
(b) No Impairment. LICENSEE agrees that during the term of this
Sublicense or thereafter it will not attack the title or any rights of TPC or
LICENSOR in and to the LICENSED MARKS, attack the validity of this Sublicense,
or do anything either by an act of omission or commission which might impair,
violate or infringe the LICENSED MARKS. LICENSEE will not claim adversely to TPC
or LICENSOR or anyone claiming through TPC or LICENSOR with respect to any
right, title or interest in or to said LICENSED MARKS and will not misuse or
harm or bring the LICENSED MARKS into public disrepute; provided, however, that
misuse, harm or public disrepute may not be inferred from packaging, labels,
advertising or promotional materials with respect to which LICENSOR has given it
prior approval unless there has been a material change in applicable laws or
governmental regulations or LICENSOR has otherwise given reasonable notice to
LICENSEE withdrawing such approval. If at any time LICENSOR reasonably
determines that any such packaging, labels, advertising or promotional material
with respect to which LICENSOR has given its prior approval does constitute
misuse, or could cause harm or public disrepute, LICENSEE will modify such
packaging, labels, advertising or promotional material upon LICENSOR's request.
LICENSEE agrees that it has not and will not for its benefit, directly or
indirectly, register(ed) or apply(ied) for registration of the LICENSED MARKS or
any mark which is the same as or confusingly similar to the LICENSED MARKS.
(c) Other Trademarks. Except as required by state law marketing
mandates, LICENSEE may not, without LICENSOR's prior written consent, use other
trademarks that are not LICENSED MARKS in connection with any Licensed Products
bearing a LICENSED MARK (or any associated packaging, labeling or advertising);
provided that if such consent is granted, the LICENSED MARKS shall be the
primary trademark and other trademarks shall be secondary to the LICENSED MARKS.
Nothing contained herein shall be construed in a manner which would limit
LICENSEE's right to use other trademarks to market, advertise and sell sweet
corn products, provided such other trademarks are not used on the same package
as a Licensed Product.
(d) Cooperation. LICENSEE agrees to cooperate fully and in good
faith with TPC, at TPC's expense, for the purpose of securing and preserving
TPC's rights in and to the LICENSED MARKS.
(e) Registration. If any of the trademarks, service marks, trade
names or logos licensed hereunder shall not be registered in the applicable
class of products hereunder, LICENSEE acknowledges that TPC may register the
LICENSED MARKS for the Licensed Products in its own name and that LICENSEE's use
thereof shall inure to the benefit of TPC for such purpose, as well as for all
other purposes. LICENSEE shall cooperate with TPC in any such registration or
application, excluding incurring or payment of any expenses of TPC.
5. MARKING
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<PAGE> 7
(a) Marking. LICENSEE agrees that it will mark each Licensed Product
in the same manner as the samples submitted to LICENSOR for approval or in such
manner as is specified by LICENSOR so as to indicate TPC's trademark and/or
copyright rights. Where the Licensed Product bears the LICENSED MARKS of TPC,
there shall be displayed an (R) adjacent to the mark for registered marks or a
(TM) for unregistered marks (or registered marks when used in a manner not
covered by registration) as indicated from time to time by TPC. In addition to
the proper marking of the Licensed Products outlined above, LICENSEE agrees to
affix permanently, or to cause other authorized manufacturing sources to imprint
or affix permanently to the Licensed Products a legend substantially as follows
(or such other legend as LICENSOR may from time to time reasonably require by
given written notice to LICENSEE):
"[LICENSED MARK]" is a registered trademark of The Pillsbury Company
and is used under license.
Any approval by LICENSOR hereunder shall not constitute a waiver of LICENSOR's
rights or LICENSEE's duties under any other provision of this Agreement.
(b) Copyright Notice. LICENSEE does hereby agree to place on all
Licensed Products and packaging and labels for such Licensed Products and on
all advertising material a copyright notice or notices sufficient in size,
legibility, form, location, number and permanency to comply with the United
States copyright laws, and the laws of the countries in which the Licensed
Products are sold, in effect at the time of public distribution of the Licensed
Products or advertising material, and also to comply with the copyright notice
requirements of the Universal Copyright Convention then in effect. All such
copyright notices shall be in the following form:
(c) [year] THE PILLSBURY COMPANY. All Rights Reserved.
(c) Notice. LICENSEE acknowledges that proper copyright and
trademark notices must be permanently imprinted or affixed to all Licensed
Products and advertising material and to any separate portions of Licensed
Products or advertising material which contain any LICENSED MARK or any material
subject to copyright protection and which are intended to be used separately by
the purchaser or ultimate user. LICENSEE agrees that it will not, without the
prior written consent of LICENSOR, affix to the Licensed Products or the
advertising material, as it relates to the LICENSED MARKS, a trademark or
copyright notice in its name or the names of any other person, firm or
corporation. LICENSEE agrees it will not distribute or sell any Licensed
Products or advertising materials in their possession, custody or control which
do not carry trademark and copyright notices meeting the requirements of this
Section 5.
(d) Copyright Ownership. LICENSEE hereby sells, assigns and
transfers to TPC its entire, worldwide right, title and interest in and to all
"new works" or "derivative works" heretofore or hereafter created utilizing any
of the LICENSED MARKS, including but not limited to the copyrights and renewal
copyrights thereon. If third parties who are not employees of LICENSEE make or
have made any contribution to the creation of a new work, so that they might be
deemed to be "authors" of the same as that term is used in present or future
United States copyright statutes, LICENSEE agrees to obtain from such parties a
comparable full
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<PAGE> 8
assignment of rights so that the foregoing assignment by LICENSEE shall vest in
TPC full rights in the new work, free of any claims, interest or rights of third
parties. Likewise, LICENSEE agrees not to permit any of its employees or agents
to obtain or reserve by oral or written employment agreements or by any other
agreements any rights as "authors" of such new works. At the request of
LICENSOR, LICENSEE agrees to furnish TPC with full information concerning the
creation of new works and with copies of assignments of rights obtained from
third parties.
(e) Notice of Infringement. LICENSEE and LICENSOR shall each notify
the other in writing of any infringements, misappropriations or imitations by
others of the LICENSED MARKS which may come to their attention, and LICENSOR and
TPC shall have the right to reasonably determine whether any action shall be
taken on account of any such infringements or misappropriations of the LICENSED
MARKS. TPC, if it so desires, may at its own expense commence or prosecute any
claims or suits in its own name or in the name of LICENSOR and/or LICENSEE or
join LICENSOR and/or LICENSEE as a party thereto, but it is understood and
agreed that neither LICENSOR or TPC is under any obligation whatsoever to
institute any suit or take any other action on account of such infringements,
misappropriations, or imitations. LICENSEE shall not institute any suit or take
any action on account of any such infringement, misappropriation, or imitation
of the LICENSED MARKS.
(f) Irreparable Harm. LICENSEE expressly recognizes that the LICENSED
MARKS possess a special, unique and extraordinary character which makes
difficult the assessment of monetary damages which LICENSOR or TPC would sustain
by unauthorized use. LICENSEE expressly recognizes and agrees that an
irreparable injury would be caused to LICENSOR and TPC by unauthorized or
improper use or any use in breach of this Sublicense, and agrees that
preliminary and permanent injunctive and other equitable relief (including but
not limited to attorneys' fees) would be appropriate in the event of a breach of
this Sublicense by LICENSEE, provided that such remedy shall not be exclusive of
legal remedies otherwise available.
6. LICENSED PRODUCT AND PACKAGING APPROVAL
(a) Quality. LICENSEE acknowledges that if the Licensed Products
sold or distributed by it fail to meet or exceed the quality standards set forth
in LICENSOR's Quality Assurance Manual, are not consistent with the agreed upon
product design and specifications, or otherwise are not consistent with
LICENSOR's or TPC's image and reputation for overall high quality products, then
the substantial goodwill which TPC has built up and now possesses in the
LICENSED MARKS would be impaired. Accordingly, it is an essential condition of
this Sublicense and LICENSEE hereby covenants and agrees that the Licensed
Products (including all packaging, labeling and advertising) covered by this
Sublicense shall meet or exceed the quality standards set forth in LICENSOR's
Quality Assurance Manual, comply with approved specifications, and be of such
quality, style and appearance as shall be reasonably adequate and suited to
their exploitation to the best advantage and to the protection and enhancement
of the LICENSED MARKS and goodwill pertaining thereto; that such Licensed
Products shall be
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<PAGE> 9
grown, processed, harvested, sold and distributed in accordance with all
applicable laws; and that the policy of sale, distribution and/or exploitation
by LICENSEE shall be of high standards and to the best advantage of the LICENSED
MARKS and that the same shall in no manner reflect adversely upon the good name
of LICENSOR or TPC, or any of their programs or of the LICENSED MARKS. LICENSEE
agrees that it shall not sell or distribute any Licensed Product which was
returned to it or otherwise rejected due to quality reasons without the prior
consent of LICENSOR. The rejection of Licensed Product by a customer shall not,
in and of itself, be determinative of the quality of the product. Any product
which fails a USDA inspection shall be deemed to have been rejected for quality
reasons.
(b) Product Design Approval. All product packaging and shipping
cartons shall be developed in conjunction with LICENSOR and will be coordinated
with LICENSOR throughout the process of such development. The quality and style
of the Licensed Products, product packaging, and shipping cartons shall be
subject to LICENSOR's prior written approval, which approval shall not be
unreasonably withheld. LICENSEE agrees to comply with all reasonable approval
procedure requirements of LICENSOR including without limitation the submission
of specifications and the furnishing of such additional information as may be
deemed necessary by LICENSOR or TPC to evaluate a proposed Licensed Product.
Before offering to sell the Licensed Products, LICENSEE shall furnish to
LICENSOR free of cost, for its written approval, preliminary concept with rough
art work, keylines, finished illustration and product specifications, plus at
least six (6) representative samples of each Licensed Product together with its
packaging, shipping cartons and any proposed advertising or promotional
materials. No Licensed Products shall be released, marketed or distributed
without LICENSOR's prior written approval of the Licensed Product, its
specifications and advertising or promotional materials. LICENSEE acknowledges
that the purpose of the approvals by LICENSOR is solely for the purpose of
ensuring that the LICENSED MARKS are being properly used and that the style and
quality of the Licensed Products are acceptable to LICENSOR and TPC. Upon
approval by LICENSOR of a Licensed Product, LICENSEE shall have the right to
distribute such approved Licensed Product as long as the product does not
materially deviate from the approved specifications. LICENSEE shall be
responsible for compliance with all laws, rules and regulations of the
applicable governments and agencies thereof, if any, with respect to said
Licensed Products, and neither LICENSOR nor TPC shall have any responsibility in
connection therewith. LICENSEE shall not depart in any respect from the style,
quality of material or packaging of Licensed Products so approved without
LICENSOR's prior written consent. LICENSEE shall continue to furnish to LICENSOR
for its approval samples of the Licensed Product and packaging upon LICENSOR's
request. If LICENSOR disapproves of LICENSEE's submission for approval, LICENSOR
will suggest to LICENSEE, if reasonably possible, how the submission could be
modified to obtain LICENSOR's approval.
(c) Production Facility Approval. LICENSEE agrees to produce
Licensed Products only in facilities which have been reviewed on site by
LICENSOR or a designated agent of LICENSOR and found through inspection and
review to meet or exceed the standards set forth in LICENSOR's Quality Assurance
Manual for "Approval." LICENSOR may elect to rely upon LICENSEE's representation
that a facility meets or exceeds the standards set forth in LICENSOR's Quality
Assurance Manual for "Approval" instead of itself reviewing such facility. In
the event LICENSOR elects to review the facility itself, it shall do so at its
own cost and shall
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do so promptly so as not to delay production at the facility.
LICENSEE also agrees that authorized representatives of LICENSOR and
TPC will be permitted to inspect and audit any and all facilities from time to
time to determine the facility's degree of compliance to LICENSOR's Quality
Assurance Manual. LICENSEE shall bear the costs for third party outside facility
reviews.
In the event that LICENSOR or TPC reasonably determines through
inspection, audit or other reasonable means that a facility supplying LICENSEE
has not been approved by LICENSOR or fails to meet the standards defined in
LICENSOR's Quality Assurance Manual in the reasonable judgment of LICENSOR's or
TPC's authorized representative, LICENSOR reserves the right to take one of the
following actions:
(1) Place the facility in a "conditionally approved" status for
minor non-compliances from LICENSOR's Quality Assurance Manual and/or
agreed upon specifications and request a written corrective action plan
from LICENSEE within ten days of LICENSOR's conditional approval. In the
event a corrective action plan is submitted by LICENSEE and approved by
LICENSOR, which approval shall not be unreasonably withheld and in any
case such approval shall be granted or withheld within 48 hours of
submission of the corrective action to LICENSOR or, if LICENSOR is
required to submit the corrective action plan to TPC, within 48 hours of
submission of the corrective action plan to TPC (if LICENSOR does not
respond within such time period, LICENSEE's plan as submitted shall be
deemed to have been approved), it is LICENSEE's responsibility to verify
that corrective actions are completed as prescribed and in a timely
manner. Any costs of corrective action shall be the responsibility of
LICENSEE or the facility, and not LICENSOR or TPC. LICENSEE may restore
the "conditionally approved" facility to "Approved" status once LICENSOR
is reasonably satisfied that corrective actions are complete. LICENSOR and
TPC reserve the right to re-inspect any facility which has been restored
to "Approved" status. In the absence of an approved corrective action
plan, LICENSOR or TPC may require discontinuance of production at the
conditionally approved facility. This will result in a rating change to
"Unapproved" for the facility of concern. LICENSEE shall be responsible
for any and all costs of discontinuation.
(2) Place the facility in an "Unapproved" status for major
non-compliances from LICENSOR's Quality Assurance Manual and/or agreed
upon specifications, require LICENSEE to discontinue production
immediately and request a written corrective action plan from LICENSEE.
LICENSOR shall either grant or withhold its approval within 48 hours of
the submission of the plan to LICENSOR or, if LICENSOR is required to
submit the corrective action plan to TPC, within 48 hours of submission of
the corrective action plan to TPC. LICENSOR shall not unreasonably
withhold its approval. LICENSEE shall be responsible for any and all costs
of discontinuation of production and LICENSEE or facility shall bear any
costs of corrective action.
Once LICENSOR is reasonably satisfied with the corrective action, LICENSEE
may request LICENSOR to re-inspect the unapproved facility and restore it to a
"Conditionally
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Approved" or "Approved" status. The costs reasonably incurred by LICENSOR or TPC
of this reinspection shall be the responsibility of LICENSEE.
(d) Quality Assurance Manual. LICENSEE agrees to comply in all
respects with LICENSOR's Quality Assurance Manual. If LICENSOR makes changes to
LICENSOR's Quality Assurance Manual, LICENSEE will be allowed a reasonable
period of time in which to come into compliance with the changed requirement. To
the extent the standards and requirements set forth in LICENSOR's Quality
Assurance Manual are judged to be non-applicable or disadvantageous to the
LICENSEE, it is the obligation of LICENSEE to propose changes in LICENSOR's
Quality Assurance Manual which are suitable to LICENSEE while protecting
LICENSOR's interests. If industry standards are changed by government regulation
or state law marketing mandate having the force of law, specifications will be
deemed to have been immediately changed to allow LICENSEE to be in compliance.
LICENSEE will immediately notify LICENSOR of such change in specifications and
LICENSEE shall comply with such new specifications.
(e) Specifications. All Licensed Products to be sold by LICENSEE
shall have product specifications that meet usual industry standards including,
without limitation, formulation, ingredients, packaging requirements, and
defining characteristics such as: USDA grade equivalents and food safety design
requirements. The specifications shall be presented to LICENSOR at the time of
design approval and resubmitted for reapproval in the event of any significant
design change by LICENSEE.
(f) Customer Complaints. LICENSEE shall use TPC's toll-free
telephone number (or such other toll-free number LICENSOR may designate) for
consumer responses and to place such number on all packaging of the Licensed
Product. If LICENSOR requests, LICENSEE shall either (i) reimburse a pro rata
portion of the costs of such toll-free line or (ii) maintain its own toll-free
number. The party maintaining such toll-free line shall give the other party a
monthly report summarizing the contents of any consumer complaint regarding the
Licensed Product. To the extent available to it, LICENSOR shall disclose to
LICENSEE other information reasonably relevant to LICENSEE with respect to
consumer communications. LICENSOR shall endeavor to provide LICENSEE with all
such information as soon as it is available to it and to the extent such
information is in the possession of TPC, LICENSOR shall endeavor to obtain all
such information as soon as possible. LICENSOR shall be entitled to request that
LICENSEE investigate any complaint. LICENSEE shall be solely responsible for
handling all consumer complaints; provided, however, that LICENSEE hereby
authorizes LICENSOR or TPC to provide consumers with free Licensed Product or
cash equivalent when TPC or LICENSOR reasonably deems such response appropriate.
Such Licensed Product shall be provided at LICENSEE's sole expense. LICENSEE
shall disclose to LICENSOR copies of all information LICENSEE receives with
respect to consumer communications.
(g) Excessive Complaints and Defective Products. In the event that
LICENSOR reasonably determines that Licensed Products contain serious defects
and/or are causing increased levels of consumer dissatisfaction, LICENSOR
reserves the right to request reasonable corrective action by LICENSEE to
minimize the negative impact on consumers and protect the LICENSED MARKS. The
corrective action will be conducted within a timeframe reasonably acceptable to
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LICENSOR and the costs of corrective action shall be for the sole account of
LICENSEE.
(h) Compliance with Laws. LICENSEE warrants and represents that all
Licensed Products produced, sold and distributed by it shall not be adulterated,
contaminated or misbranded within the meaning of any applicable law or
regulation. LICENSEE agrees to comply with all applicable laws and regulations
in connection with the growing, harvesting, processing, distribution or sale of
Licensed Products.
7. ADVERTISING, PROMOTION AND MERCHANDISING
(a) Submission for Approval. LICENSEE shall submit all advertising
and promotional copy pertaining to the Licensed Products to LICENSOR for written
approval before release for publication. LICENSOR reserves the right to
disapprove any proposed release without the necessity of stating a reason,
provided that LICENSOR does suggest how the submitted material will obtain
LICENSOR's approval. LICENSEE acknowledges that it is in the best interest of
the overall brand development efforts for all licensees of the Licensed Marks
that advertising and trade events be coordinated to the benefit of all such
licensees. LICENSEE agrees that it shall review all proposed advertising and
promotional activities with LICENSOR and LICENSEE will cooperate with LICENSOR
in the development of joint programs.
(b) TPC or LICENSOR Advertising. If TPC believes it is desirable to
produce or place catalogs, promotional brochures or inserts, point of sale
displays or other advertising matter displaying the Licensed Products in
conjunction with other products of TPC and/or others, TPC shall each have the
right to do so without payment or obligation to LICENSEE.
(c) Use of LICENSEE's Name. LICENSOR and TPC shall have the right,
but not the obligation, to use the name of LICENSEE in LICENSOR's or TPC's
programs without any payment or obligation to LICENSEE whatsoever. LICENSOR
agrees that such publicity will be in good taste in accordance with accepted
industry standards. Any and each use of any trademark or trade name of LICENSEE
must have the prior written approval of LICENSEE, which approval shall not be
unreasonably withheld.
8. INDEMNIFICATION AND INSURANCE
(a) By LICENSEE. LICENSEE hereby agrees to indemnify LICENSOR and
TPC and their respective directors, officers, agents and employees and to hold
each of them harmless in all respects, including reasonable attorneys' fees,
from and against any and all claims, demands, suits or causes of action of
whatever kind or nature and resulting settlements, awards of judgments arising
directly or indirectly out of any act or omission or alleged activity of
LICENSEE in connection with the Licensed Products and/or the Sublicense,
including any defects or alleged defects in the Licensed Products but excluding
(i) the use of the LICENSED MARKS in any manner permitted hereunder, and (ii)
any act carried out by LICENSEE at the specific written request of LICENSOR so
long as carried out with due care and in compliance with applicable laws and
regulations; provided LICENSEE is given prompt notice of such claim, demand,
suit, or cause of action, and the opportunity to defend, with LICENSOR's and/or
TPC's
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cooperation. This indemnity shall survive the termination of this Agreement.
(b) Insurance. LICENSEE shall, at its own expense, obtain and
maintain throughout the term of this Sublicense, Commercial General Liability
Insurance, on an "occurrence" form, with minimum limits of $2,000,000 combined
single limit per occurrence, $4,000,000 general aggregate, and $2,000,000
products/completed operations aggregate. If requested by LICENSOR, the foregoing
minimum policy limits shall be increased by a percentage equal to the percentage
increase in the Consumer Price Index for all Urban Consumers as published by the
U.S. Department of Labor Statistics since the Effective Date. Such insurance
shall be provided by insurance carrier(s) with a financial condition comparable
to, or better than, Best's "A" rating, and shall not contain any endorsement or
policy provision which in any way limits or restricts coverage for contractual
liability provided in the policy. Each policy shall be endorsed to name LICENSOR
and TPC as additional insureds and to provide that it cannot be canceled without
thirty (30) days prior written notice to LICENSOR. As proof of insurance,
LICENSEE shall furnish to LICENSOR a Certificate of Insurance at least ten (10)
days before any Licensed Products are distributed and/or sold, and thereafter
prior to the expiration of any policy. Compliance with this Section concerning
insurance shall in no way limit or restrict LICENSEE'S indemnification
obligations.
(c) By LICENSOR. LICENSOR hereby agrees to indemnify LICENSEE, and
its directors, officers, agents and employees and to hold each of them harmless
in all respects, including reasonable attorney's fees, from and against any and
all claims, demands, suits or causes of action of whatever kind or nature and
resulting settlements, awards or judgments arising directly or indirectly out of
the use of the LICENSED MARKS in any manner permitted hereunder; provided
LICENSOR is given prompt notice of such claim, demand, suit, or cause of action,
and the opportunity to defend, with LICENSEE's cooperation. This indemnity shall
survive the termination of this Agreement.
9. COST OF PROMOTIONAL MATERIAL; TITLE TO ARTWORK
If LICENSEE wishes to use artwork or other materials of LICENSOR or
TPC in the production of the Licensed Products, the reasonable cost of such
artwork and other materials and the reasonable time for the production thereof
shall be borne by LICENSEE. LICENSEE will deliver to LICENSOR all artwork for
the Licensed Products at the termination of this Sublicense without cost. All
artwork and designs involving the LICENSED MARKS or any reproductions thereof
shall, notwithstanding the development or use by LICENSEE, belong to TPC free
from any claim whatsoever by LICENSEE or any persons claiming any rights from or
through LICENSEE, and LICENSOR and TPC shall be entitled to use the same and to
license the use of the same by others. Any modification of such materials by
LICENSEE shall inure to the sole benefit and become the property of LICENSOR and
TPC. LICENSEE shall reimburse LICENSOR for LICENSOR's reasonable costs of
producing point of sale materials and sell sheets. LICENSOR shall only produce
such materials after obtaining LICENSEE's prior approval.
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10. RIGHT OF TERMINATION BY LICENSOR; AUTOMATIC TERMINATION
A. Without prejudice to any other rights that LICENSOR may have,
LICENSOR shall have the right to terminate this Sublicense (which termination
shall be with effect as to both LICENSEE and the Joint Venture) upon five (5)
days written notice sent by registered or certified mail:
(a) If LICENSEE does not comply with the requirements of Section
2(c);
(b) If LICENSEE shall be unable to pay its liabilities when due or
shall become subject to any bankruptcy, insolvency or receivership
proceeding of any nature (other than an involuntary proceeding of which
LICENSEE obtains a dismissal within 60 days after filing), or if its
business is placed in the hands of a receiver or trustee by the exercise
of any judicial power of a court of competent jurisdiction;
(c) If LICENSEE assigns, except as otherwise permitted pursuant to
Section 16, or sublicenses this Sublicense or any of its rights hereunder;
(d) If LICENSEE fails to abide by any of the material requirements
of the Sublicense or breaches any material representation, warranty or
covenant made by it herein and LICENSEE fails to cure such breach or
failure within thirty (30) days after notice from LICENSOR; or
(e) If LICENSEE fails to abide by any of the material requirements
of the limited liability agreement entered into by and between the
LICENSEE and LICENSOR as of the date hereof (the "LLC Agreement") or
breaches any material representation, warranty or covenant made by it
therein and LICENSEE fails to cure such breach or failure within thirty
(30) days after notice from LICENSOR
B. This Sublicense shall terminate automatically if the LICENSE AGREEMENT
is terminated for any reason whatsoever other than an election by TPC to
terminate the LICENSE AGREEMENT pursuant to Section 11 of the LICENSE AGREEMENT.
In the event of termination by TPC pursuant to Section 11 of the LICENSE
AGREEMENT, TPC shall elect to either allow this Sublicense to continue in effect
as between LICENSEE and TPC or terminate the Sublicense in the manner prescribed
in Section 11 below. Without regard to the manner in which the LICENSE AGREEMENT
may be terminated, including termination by TPC for cause, LICENSOR shall have
no liability to LICENSEE arising from such termination, except as set forth in
Section 11(d).
11. TERMINATION OPTION
(a) In addition to LICENSOR's rights to terminate this Sublicense pursuant
to Section 10 above, and whether or not any of the events described in Section
10 above has occurred or
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exists, TPC shall have the irrevocable right and option (the "Termination
Option") to terminate LICENSEE's rights hereunder, whether or not it elects to
terminate the LICENSE AGREEMENT, in consideration of the payment by TPC of a
cancellation fee equal to the fair market value, as of the date the Termination
Option is exercised, of LICENSEE's rights under this Sublicense as determined
pursuant to (c) below.
(b) To exercise the Termination Option, TPC shall deliver to LICENSEE a
written notice (the "Termination Notice") indicating TPC's election to exercise
the Termination Option pursuant to this Section. For a period of 30 days after
exercise of the Termination Option, LICENSEE shall afford TPC full access to all
of LICENSEE's documents and information which TPC may request. TPC may rescind
the Termination Notice at any time within 15 days after such 30-day due
diligence period or after the final determination of the appraisers pursuant to
(c) below. Such rescission shall be by written notice and be without liability
to either party; provided that TPC may not exercise the Termination Option more
than once in any calendar year. If the Termination Option is exercised and the
Termination Notice is not rescinded, TPC shall pay the Termination Payment in
cash and LICENSEE's sublicense rights hereunder shall thereupon terminate.
(c) The fair market value of LICENSEE's rights under this Sublicense as of
the date of exercise of the Termination Option (i.e. the Termination Option
exercise price) shall be determined by appraisal by one mutually acceptable
appraiser; provided that, if TPC and LICENSEE are unable to agree on a single
appraiser within ten days after exercise of the Termination Option, each party
shall designate one appraiser and the two appraisers so designated shall, within
ten days after their designation, jointly designate a third appraiser or, if
they are unable to agree, such third appraiser shall, upon the petition of
either party, be designated by the Senior Judge of the District Court for
Hennepin County, State of Minnesota. All appraisers shall be experienced in
business appraisal. The appraisers shall accomplish their appraisal under such
rules and procedures as they may reasonably establish to determine the fair
value of LICENSEE's right to use the LICENSED MARKS in its operations
(independent of the value of any other tangible or intangible assets or business
operations of LICENSEE) as of the date of exercise of the Termination Option
based on the success of LICENSEE'S exploitation of the LICENSED MARKS to such
date and after deducting royalties due hereunder. Each party will cooperate with
such appraisers to the fullest extent. The decision of the appraisers shall be
rendered in writing by a majority within thirty (30) days after the selection of
the third appraiser, which decision shall be final and binding upon all parties.
The fees and expenses of the appraisers shall be divided equally between the
parties.
(d) LICENSOR shall have no liability to LICENSEE arising from a
termination pursuant to this Section 11. Notwithstanding the foregoing, in the
event TPC does not pay the cancellation fee and it is required to do so in
accordance with terms specified in this Section 11, then LICENSOR shall pay such
cancellation fee to LICENSEE.
12. EFFECT OF TERMINATION
(a) Cessation of Rights. Subject to the limited right to dispose of
inventory pursuant to Section 12(d), upon expiration or termination of this
Sublicense, all rights granted to
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LICENSEE hereunder shall cease and LICENSEE will refrain from further use of the
LICENSED MARKS or anything confusingly similar to the LICENSED MARKS in
connection with the growing, harvesting, sale or distribution of LICENSEE's
products.
(b) LICENSOR'S and TPC's Remedies. LICENSEE acknowledges that its
failure (except as otherwise provided herein) to cease use of the LICENSED MARKS
at the termination or expiration of this Sublicense will result in immediate and
irreparable damage to TPC and LICENSOR and to the rights of any subsequent
licensee. LICENSEE acknowledges and admits that there is no adequate remedy at
law for such failure, and LICENSEE agrees that in the event of such failure TPC
and/or LICENSOR shall be entitled to equitable relief by way of temporary and
permanent injunctions and such other further relief as any court with
jurisdiction may deem just and proper. Resort to any remedies referred to herein
shall not be construed as a waiver of any other rights and remedies to which TPC
and/or LICENSOR is entitled under this Agreement or otherwise.
(c) Final Statement. Thirty (30) days after the expiration or
termination of this Sublicense, a statement showing the number and description
of Licensed Product on hand or in process shall be furnished by LICENSEE to
LICENSOR. LICENSOR shall have the right to take a physical inventory count to
ascertain or verify such inventory and statement, and failure of LICENSEE to
furnish such statement or refusal by LICENSEE to submit to such physical
inventory count by LICENSOR shall forfeit LICENSEE's right to dispose of such
inventory, TPC and LICENSOR retaining all other legal and equitable rights they
may have under such circumstances.
(d) Disposal of Inventory. LICENSEE may sell on a non-exclusive
basis, for a period of six (6) months after expiration or termination of this
Sublicense, Licensed Products that utilized the LICENSED MARKS covered by this
Sublicense which are on hand or in processing at the time of expiration or
termination, provided that royalties with respect to such period are paid and
statements are furnished for that period in accordance with Section 2 of this
Agreement and such Licensed Products otherwise comply in all respects with the
terms of this Sublicense. During such period, LICENSEE may also use up its
remaining inventory of LICENSOR approved packaging, boxes, and labels using the
LICENSED MARKS.
(e) Compliance With Other Terms. Notwithstanding anything to the
contrary herein, LICENSEE shall not manufacture, sell or dispose of any Licensed
Product utilizing the LICENSED MARKS after termination caused by the failure of
LICENSEE to affix notice of copyright, trademark or service mark registration to
the Licensed Products, cartons, containers, or packing or wrapping material or
advertising, promotional or display material, or because of the departure by
LICENSEE from the quality or style requirements of Sections 1, 5 and 6 herein
unless such Licensed Product complies in every respect with all such provisions
of this Agreement.
13. NOTICES
All notices and requests and statements to be given and all payments
to be made
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hereunder shall be given or made at the respective addresses of LICENSOR and
LICENSEE set forth below unless notification of a change of address is given in
writing. Such notices and requests and statements shall be deemed to have been
duly given if in writing and delivered personally or sent by certified mail,
return receipt requested, with postage prepaid or sent by prepaid telegram,
facsimile or reputable overnight courier.
As to LICENSEE:
Newcornco LLC
P.O. Box 1090
3040 Somis Rd
Somis, California 93066
Attention: Minos Athanassiadis and James Roberts
Facsimile (805) 386-4389
As to LICENSOR:
The Sholl Group II, Inc.
35l4 County Road 101
Minnetonka, Mn. 55345
Attention: Jeffrey J. Sholl, President
Facsimile (612) 475-9604
14. CONFIDENTIALITY
LICENSOR and LICENSEE acknowledge that a confidential relationship exists
between them by virtue of the relationship contemplated by this Agreement and,
accordingly, the parties acknowledge and agree that:
A. Any confidential information will be disclosed by one party to
the other solely for purposes incidental to the business relationship
contemplated by this Agreement, and, except as expressly provided herein,
neither party will acquire any ownership right or interest in such
confidential information by virtue of such disclosure pursuant to this
Agreement.
B. Each party will treat all confidential information disclosed to
it by the other party as secret and confidential and shall strictly
protect and safeguard confidential information from disclosure to third
parties.
C. Neither party will use any confidential information of the other
party or TPC for any purpose not incidental to the purposes contemplated
by this Agreement and neither party will disclose any such information to
anyone other than its employees, agents, or representatives having a need
to know such information for purposes incidental to this
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Agreement and who have executed a confidentiality agreement in a form that
is acceptable to the other party.
D. Each party acknowledges that irreparable injury may be caused to
the other party and TPC in the event of any disclosure of confidential
information in violation of this Agreement and each party agrees that, if
it should make or attempt to make any such disclosure in violation of the
provisions hereof, the other party and TPC shall be entitled, in addition
to such other remedies, damages and relief as may be available under
applicable law, to an injunction prohibiting such a disclosure or
specifically enforcing the provisions of this article, as the case may be.
The obligations of the parties as set forth in this Section 14 shall
survive termination of this Agreement.
E. For purposes of this Section, "confidential information" shall
mean any trade secrets or other unpublished information which has value by
virtue of not being generally known and which has been disclosed by one of
the parties hereto to the other in writing and which has been clearly
marked as confidential. Both parties agree that they shall not submit
confidential information to the other party unless it first notifies the
other party in writing of its intention of doing so and describing in such
communication the general nature of what it intends to disclose. If the
recipient of such communication requests in writing within 10 days of
receipt of such communication that such information not be disclosed to it
and the other party nevertheless sends such information, such information
shall not be confidential information. LICENSOR and LICENSEE agree that
confidential information shall not include, and that the obligations of
secrecy, confidence and non-use set forth herein shall not apply to any
information that (i) is or becomes publicly known without the fault of the
recipient; (ii) was known by the recipient prior so its disclosure by the
other party as evidenced by written and dated records kept in the ordinary
course of business by the other party; or (iii) is independently disclosed
to the recipient by a third party source without breach of a confidential
relationship to the other party with regard to such information.
15. NO JOINT VENTURE
Nothing herein contained shall be construed to place LICENSOR and
LICENSEE in the relationship of partners or joint venturers, except as otherwise
provided for in the LLC Agreement and neither shall have any power to obligate
or bind the other in any manner whatsoever.
16. CONSENT TO ASSIGNMENT OR SUBLICENSE
This Agreement and any rights granted herein may not be assigned,
transferred, mortgaged, sublicensed or otherwise encumbered by LICENSEE without
the prior written consent of LICENSOR. No transfer by operation of law shall be
effective against LICENSOR or TPC. LICENSEE shall be deemed to have made an
assignment if LICENSEE merges with another entity or if the current or future
shareholders, or any of them, sell their shares of
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LICENSEE. Notwithstanding the foregoing, to protect the valuable proprietary
nature of the LICENSED MARKS, the current or future shareholders, or any of
them, may sell all, or any, of their shares of LICENSEE to any third party
provided such third party is not any of those entities listed on Schedule A
attached hereto nor is such third party a licensee or owner of any of the brands
listed on Schedule A.
17. NO WAIVER; MODIFICATION; SEVERABILITY
None of the terms of this Agreement can be waived or modified except
expressly in writing signed by both parties. The failure of either party to
insist on compliance with any provision hereof shall not constitute a waiver or
modification of such provision. If any provision hereof is held to be invalid or
unenforceable by any court of competent jurisdiction or any other authority
vested with jurisdiction, such holding shall not affect the validity or
enforceability of any other provision hereof.
18. WHOLE AGREEMENT; GOVERNING LAW; CONSTRUCTION; BENEFIT
(a) Whole Agreement. Upon execution, this Agreement cancels,
terminates and supersedes any prior agreement or understanding relating to the
subject matter hereof between the parties and there are no representations,
promises, warranties, covenants, projections, or undertakings other than those
contained herein and in the Limited Liability Company Agreement of the Joint
Venture.
(b) Governing Laws and Arbitration. This Agreement shall be governed
by, and interpreted in accordance with the laws of the State of Minnesota
including all matters of construction, validity, enforcement and performance,
without giving effect to principles of conflict of laws. Any dispute,
controversy or claim arising out of or relating to this Agreement or the alleged
breach, termination or validity hereof, including alleged fraud in the
inducement, shall be settled by arbitration in accordance with the rules of the
American Arbitration Association. The proceedings shall be conducted in
Minneapolis, Minnesota. In any such proceedings, questions of substantive law
shall be determined under the laws of the State of Minnesota. The decision of
the arbitrator shall be final and shall be accorded full faith and credit and
entitled to recognition and enforcement by the courts of the United States and
in the courts of all states. The prevailing party in any such proceeding shall
be entitled to recover reasonable attorneys' fees and costs related to such
proceeding from the nonprevailing party.
(c) Titles and Headings; Construction. This Agreement shall be
construed without regard to any presumption or other rule requiring construction
hereof against the party causing this Agreement to be drafted.
19
<PAGE> 20
(d) Benefit. Nothing in this Agreement or the agreements referred to
herein, expressed or implied, shall confer on any person other than the parties
hereto or thereto, or their respective permitted successors or assigns, any
rights remedies, obligations or liabilities under or by reason of this
Agreement, the agreements referred to herein, or the transactions contemplated
herein or therein. Notwithstanding the foregoing, the parties acknowledge that
there are numerous provisions in this Agreement which refer to TPC. The parties
agree that TPC is intended to be a third party beneficiary of all such
provisions which refer to any rights of TPC and TPC is entitled to the rights
conferred upon it herein all as if it were a party hereto. LICENSEE acknowledges
that LICENSOR has various obligations to TPC pursuant to the License including
certain obligations to obtain TPC's approval or consent. LICENSEE agrees that if
TPC refuses to grant any approval or consent to LICENSOR with respect to which
LICENSEE is seeking LICENSOR's approval or consent, LICENSOR's subsequent
refusal to grant approval or consent to LICENSEE shall not be deemed to be
unreasonable.
(e) Public Announcement. No press releases, announcements or other
disclosure related to this Sublicense or the transactions contemplated herein
will be issued or made without the written approval of each of TPC, LICENSOR and
LICENSEE, except for any public disclosure which TPC, LICENSOR or LICENSEE in
good faith believes is required by law (in which case the disclosing party will
consult with the other parties prior to making such disclosure).
IN WITNESS WHEREOF, the parties hereto have executed this Trademark
Sublicense Agreement as of the day and year first above written.
THE SHOLL GROUP II, INC.
By: /s/ Jeffrey J. Sholl
-------------------------------
Jeffrey J. Sholl, President
NEWCORNCO LLC
By /s/ [ILLEGIBLE]
-------------------------------
FRESHCORN LLC
By /s/ [ILLEGIBLE]
-------------------------------
A Manager
20
<PAGE> 21
Exhibit A
Licensed Marks
The following LICENSED MARKS (and any modifications thereto made by
LICENSOR or TPC or its successor in interest during the term of this Agreement)
may be used by LICENSEE only in connection with the Licensed Products and in
accordance with the terms and conditions of the Sublicense:
(l) "Green Giant" (name and logo).
(2) "Green Giant Fresh"
(3) "Nibblers"
(4) "Little Sprout" (logo)
(5) "Kounty Kist"
(6) "Sweet Select"
21
<PAGE> 22
Exhibit B
Licensed Products
1) Definition
Sweet Corn shall be "Licensed Products" hereunder if and only to the
extent that (1) such corn is "fresh and perishable", and (2) any of the LICENSED
MARKS are used in connection with the advertising, marketing, sale or
distribution thereof.
For purposes of this Sublicense, "fresh and perishable" shall mean that
(i) such corn is marketed to food services or in the produce section of the
retail outlet and have a shelf life (measured from the date such corn is
distributed into the food service or retail distribution channels) not longer
than specified below, (ii) no chemicals or preservatives (except in the growing
and harvesting thereof, except for coatings, processing aids and other current
customary practices used in the marketing of vegetables have been added or
applied to such vegetables or the packaging thereof) which have the effect of
extending the shelf life thereof, (iii) such corn has not been cooked, frozen,
dehydrated, refrigerated (except the refrigeration in the produce or deli
section of the retail outlet or refrigeration used in delivery to the retail
outlet), irradiated (except as may become customary in the produce section), and
(iv) such corn has not been placed in a can, jar, or bottle, nor in any other
container or packaging intended to prolong the shelf life in excess of the
respective shelf life set forth below from the date distributed into the food
service or retail distribution channels.
2) Shelf Life
42 days
<PAGE> 23
Schedule A
<TABLE>
<CAPTION>
Brands Entities
- ------ --------
<S> <C>
Dole Dole
Del Monte Del Monte
Fresh Express Fresh Express
Birdseye Dean Foods
FreshLike
T&A Tanimura & Antle
Healthy Choice
Mann Mann Packing
Fresh 1 C.H. Robinson
Weight Watchers Heinz
River Ranch Albert Fisher
Foxy Nunnes
S&W S&W Fine Foods
C&W California & Washington Co.
Hanover Hanover
Libby Nestle
Pictsweet
</TABLE>
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 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
April 17, 1998
<PAGE> 1
EXHIBIT 23.2
[COOPERS & LYBRAND LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 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), April 17, 1998
