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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 of 15(d) of the Securities Act of
1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission File Number: 0-28444
EPL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0990658
(State of incorporation) (I.R.S. Employer Identification No.)
2 INTERNATIONAL PLAZA, SUITE 245
PHILADELPHIA, PENNSYLVANIA 19113-1507
(address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (610) 521-4400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.001
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of February 26, 1999 was approximately $35,536,000. This excludes
3,514,414 shares of common stock held by directors, officers and stockholders
whose ownership exceeds five percent of the shares outstanding at February 26,
1999.
The number of shares of the Registrant's Common Stock outstanding as of
February 26, 1999, was 11,875,780 shares.
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EPL TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
PAGE
1. ITEM 1. BUSINESS 2
2. ITEM 2. PROPERTIES 14
3. ITEM 3. LEGAL PROCEEDINGS 14
4. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
5. ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY 15
HOLDER MATTERS
6. ITEM 6. SELECTED FINANCIAL DATA 17
7. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 18
8. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
9. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 49
10. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 49
11. ITEM 11. EXECUTIVE COMPENSATION 52
12. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 57
13. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 59
14. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 60
15. SIGNATURES 63
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT
EPL Technologies, Inc. (the "Company") is a leading developer, manufacturer and
marketer of proprietary produce processing technologies, packaging
technologies, and scientific and technical services. These products and
services are designed to maintain the quality and integrity of fresh-cut
produce. The Company designs and markets products that are components of
integrated systems solutions, to address the specific needs of a variety of
fresh-cut produce categories. The foundation of the Company's integrated system
is its proprietary produce processing aid technology, which inhibits the
natural enzymatic degradation of fruits and vegetables after they have been
processed. Fresh-cut fruits and vegetables that are treated with the Company's
proprietary processing aids better maintain their natural characteristics, such
as color, texture, taste and smell. In certain fresh-cut produce categories,
such as fresh-cut sliced apples, fresh-cut potatoes and fresh corn, the
Company's processing aids allow increased availability of these fresh-cut
produce products in retail and commercial markets. The Company has concluded
that the use of the Company's processing aids, in accordance with the Company's
recommended protocols, is "generally recognized as safe" ("GRAS") under U.S.
Food and Drug Administration ("FDA") regulations. The Company also uses a
variety of film technologies to create packaging specifically designed to
complement and enhance the effectiveness of the Company's processing aids by
allowing fruits and vegetables to "breathe" after they have been cut and
packaged. The Company markets these packaging products to produce growers and
processors. The Company also markets flexible packaging for uses in the snack
food, bakery and confectionery industries, and for other uses. In addition, the
Company's scientific and technical services, which include food safety and
microbiological testing, provide fresh produce processors with expertise in
food safety, post-harvest horticulture and processing techniques, and serve to
support cross-marketing efforts for the Company's other products.
The Company's revenues consist of (i) revenues derived from the sale of
processing technologies 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 or fruits and vegetables that have been processed using
the Company's proprietary technologies and (iv) fees received for scientific
and technical services rendered by the Company. The Company's revenues from the
sale of produce are derived primarily from the sale of fresh-cut corn and
potatoes. The Company's royalty revenues are derived from sales of various
kinds and varieties of fresh-cut fruits and vegetables, which at present are
primarily fresh-sliced apples, 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. The Company believes that the Company's
packaging technologies, coupled with appropriate 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 targeted to the needs of the
fresh-cut produce industry will increase over time and constitute a significant
portion of the Company's future revenue growth. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Prior to 1994, the Company was a development stage enterprise with limited
capital and had 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
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and support the quality and integrity of fresh-cut produce. The Company has made
the following acquisitions, seeking 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 ("BPS"), based near Runcorn, Cheshire,
England (the "Runcorn Facility"). BPS 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. BPS also provided the Company with
proprietary perforating technology to enhance the Company's
strategic position, as well as an incremental source of
packaging revenue. The U.K. packaging business was further
enhanced by the acquisition in July 1996 of a food-grade
printing facility and certain other assets located at
Gainsborough, Lincolnshire, England (the "Gainsborough
Facility"), from Printpack Europe (St. Helens) Limited. The
Company has consolidated the operations at the Runcorn
Facility and at the Gainsborough Facility into those of its
subsidiary, EPL Flexible Packaging Limited ("EPL Flexible
UK").
- 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, now known as EPL Flexible Packaging,
Inc. ("EPL Flexible US"), acquired the assets of Crystal
Plastics, Inc., located outside Chicago. This acquisition
provided the Company with a US base for both the Company's
proprietary gas flame perforation equipment and its
specialized microperforating technology and helped increase
the Company's packaging presence in the U.S. EPL Flexible US
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. EPL
Flexible US also provided the U.S. base for facilitating the
Company's fulfillment of an exclusive agreement with E.I.
duPont de Nemours & Co. Inc. ("DuPont"), whereby the Company
provided all of DuPont's gas-flame perforating requirements
for DuPont's Mylar(R) films. In addition, EPL Flexible US is
also a supplier to the Company's ANC-Respire joint venture
(see below).
- In October 1997, the Company acquired California
Microbiological Consulting, Inc., based in Walnut Creek,
California ("CMC"). Together with Pure Produce, CMC
specializes in food safety, forensic testing and
microbiological consulting, and provides the Company with
scientific and technical facilities on the East and West
Coasts.
- In December 1997, the Company acquired Fabbri Artes Graficas
Valencia S.A., ("Fabbri") a converter, printer and marketer of
specialty flexible packaging, serving principally the European
produce market, based in Valencia, Spain. The Company believes
that this acquisition complements and enhances the Company's
existing U.K.-based packaging businesses, providing
incremental capacity for more efficient production of the
combined
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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 believes that its packaging technologies complement and enhance the
effectiveness of its processing technologies, thus 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 technologies 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 supports the commercialization of the Company's products.
The Company markets its processing technologies, packaging technologies and
scientific and technical services to processors of packaged, fresh-cut produce
as part of integrated systems solutions for processing fresh-cut produce. To
this end, the Company has been developing relationships with produce processors
and other companies in an effort to penetrate further the fresh-cut produce
market.
- In July 1996, the Company formed NewCorn Co LLC ("Newcorn"), a
limited liability company in which the Company has a 51%
membership interest. Newcorn is a joint venture between the
Company, Underwood Ranches and Twin Garden Farms. These two
partners are two major regional growers and processors of
fresh-cut sweet corn. Newcorn processes, packages, markets and
sells fresh-cut corn products using the Company's processing
aids and packaging materials, with the aim of developing
year-round, nationally available branded fresh-cut corn
products.
- In September 1997, the Company executed a ten-year exclusive
trademark license agreement (subject to extension) and
strategic alliance with Potandon Produce LLC ("Potandon"), a
"Green Giant(R) Fresh" brand licensee of the Pillsbury
Company. The agreement is subject to the terms of Potandon's
license of the "Green Giant(R) Fresh" 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. No such option has yet been exercised. The
Company sells fresh-cut potato products, such as french fries,
to the food service industry under the "Green Giant(R) Fresh"
brand name, utilizing the Company's "Potato Fresh(R) System"
processing aid technologies and related protocols in
processing potatoes supplied principally by Potandon.
- 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 scientific and
technical services in connection with the production by
Farmington Fresh of certain varieties of fresh-cut sliced
apples. The
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agreement, which currently extends until December 2002, grants
Farmington Fresh production exclusivity in its local
geographic market. In addition to revenues from sales of the
Company's processing aids 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 entered into an agreement with
American National Can Company ("ANC"), a major supplier of
packaging materials and containers in the US and a subsidiary
of Pechiney SA, to create a joint venture to market flexible
packaging systems for the fresh produce market. The joint
venture, ANC-Respire LLC, develops, manufactures, markets,
promotes and sells variety-specific, proprietary and other
packaging products under the brand name "ANC-RESPIRE(TM)" ANC
and the Company have equal ownership interests in the joint
venture, which has an initial term of three years (subject to
earlier termination) and can be extended upon the agreement of
ANC and the Company. The joint venture formally commenced
operations in January 1999.
- In April, 1998, Newcorn entered into a trademark sublicense
agreement with The Sholl Group II, Inc. ("Sholl"), the
exclusive licensee of The Pillsbury Company's "Green
Giant(R) Fresh" brand name. The agreement grants Newcorn the
exclusive right in North America to use the "Green
Giant(R) Fresh" brand name on the Company's fresh-cut corn
products. Under this agreement, Freshcorn LLC, a joint
venture owned equally by the Company and Sholl, will provide
marketing support for the Company's fresh-cut corn products.
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.
- In October, 1998, the Company received formal approval from
Sholl, on behalf of Pillsbury, to use a new facility located
in Camarillo, California and operated by the Company's Newcorn
affiliate (the "Camarillo Facility") for fresh produce
processing. Shipments of fresh-cut corn under the "Green
Giant(R) Fresh" brand from the Camarillo Facility began in
late October 1998. In a coordinated development, the Company
relocated its fresh-cut potato processing activities to the
Camarillo Facility from a facility operated by an approved
co-packer.
The Company was incorporated in 1985 under the laws of the State of Colorado.
The Company's executive offices are located at 2 International Plaza, Suite 245,
Philadelphia 19113-1507, and its telephone number is (610) 521-4400.
PRODUCTS AND SERVICES
The Company's products and services fall into three major classifications:
processing technologies and related activities (which include the sale of
fresh-cut corn and potatoes), packaging technologies and scientific and
technical services, all of which are complementary components of the Company's
integrated systems solutions for fresh-cut produce.
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Processing Technologies. The Company develops, manufactures and markets
proprietary and patented processing technologies, designed to inhibit the
enzymatic degradation that causes fruits and vegetables to begin to
deteriorate immediately after processing, thereby better maintaining their
natural characteristics, such as color, texture, taste and smell. The Company
believes its processing aids provide it with competitive advantages over other
existing fresh-cut produce processing technologies.
According to FDA regulations, a processing aid is a substance used as a
manufacturing aid to enhance the appeal or utility of a food. FDA regulations do
not require packaged produce to identify certain processing aids used in
processing the products. The Company's processing aids are designed to be
applied to produce during post-harvest processing. The Company's processing aids
are then removed from the produce prior to packaging, although insignificant
amounts may remain on the produce. As a result, the Company believes that
produce treated with the Company's processing aids does not, under FDA
regulations, require labeling referring to those processing aids. Based on
advice from FDA counsel and on assessment of relevant scientific literature by
the Company and by third parties, the Company has concluded that the use of the
Company's processing aids in accordance with the Company's protocols is GRAS
under FDA regulations.
The Company formulates processing aids for certain varieties of produce in
accordance with its detailed scientific protocols. The Company believes that its
Apple Fresh(R), Corn Fresh(R) and Potato Fresh(R) processing aids have the
potential to create new markets. These new markets, ie fresh-cut apple slices,
fresh-cut sweet corn and fresh-cut potato products have historically not been
available due to the lack of an effective, non-sulfite based alternative. 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 has also obtained (i) US patent protection for a processing-aid based
technology designed to eliminate the use of ice in shipping boxes of processed
broccoli, (ii) an exclusive license for patented technology developed in
collaboration with Penn State University for use on freshly harvested mushrooms
and (iii) US patent protection for a processing-aid based technology designed to
better maintain the quality and thus enhance the economic value of whole peeled
potatoes. The Company is developing processing aids for other vegetables,
including onions, although there can be no assurance that any such product will
become available. Because several variables influence the efficacy of the
Company's processing aids, the Company must work closely with each customer and
potential customer, using its scientific and technical services for product
formulation and extensive on-site testing, as well as assisting in designing
packaging to optimize the effectiveness of the processing aid for the particular
type of produce.
Packaging. The Company's produce packaging business involves perforating,
converting and printing flexible packaging, using technologies and processes,
some of which are proprietary to the Company. The Company also designs packaging
films the structure of which allows gas and moisture transmission at different
rates, thereby maintaining a balance that enhances the effectiveness of the
Company's processing aids. As with processing aids, in marketing its packaging
technology the Company works closely with each customer and potential customer,
using its scientific and technical services in seeking to determine optimal
packaging characteristics, such as the type of film and extent of perforation,
including the size, shape and number of holes of the packaging, based on the
respiration rate of the particular type of produce.
As one of the leading perforators of packaging film, the Company is targeting
specialty and, in some instances, new markets. Although historically films used
in the produce industry have not been perforated, perforating has been shown to
be beneficial to the packaging of certain varieties of fresh-cut produce, which
by their
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nature continue to consume oxygen and produce carbon dioxide and moisture after
being cut and packaged. Precise 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. This provides control over
moisture and oxygen transmission rates. The Company believes its broad range of
capabilities to produce perforated films provides it with a competitive
advantage.
Another aspect of the Company's packaging business is the conversion of
packaging film into bags designed for a customer's food packaging needs for
applications such as produce and bakery. The Company also has food-grade
standard printing capabilities in the U.K., utilizing three six-color presses.
The Company's packaging business provides additional market presence in certain
geographic regions that the Company believes can enhance sales prospects for the
Company's processing aids and provide cross-marketing opportunities, although
there can be no assurance that such will be the case. In the U.S., the Company
subcontracts its printing and converting requirements, which the Company
believes are readily available.
In addition to its produce packaging capabilities, the Company provides
packaging to the snack food, bakery and confectionery industries, and, to a
lesser extent, for other uses, including pharmaceutical and industrial
applications.
Scientific and Technical Services. The Company provides scientific and technical
services in the areas of post-harvest horticulture, forensic analysis of food
contaminants and food safety and application development for customers. These
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 sensory characteristics 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 and reduce
post-harvest loss. The Company's forensic testing services involve the analysis
of food adulteration by foreign or unlabeled substances or contaminants. The
Company's food safety services, which are intended to reduce or eliminate
pathogens known to cause serious illness in humans, include research,
microbiological testing, production monitoring, and the implementation of Total
Quality Management and Hazard Analysis and Critical Control Point ("HACCP")
programs. The FDA has announced its intention to introduce a new rule requiring
HACCP programs, which programs are designed to prevent microbial and other
safety hazards in food products through appropriate controls during production
and processing, at certain juice processing plants. The Company believes that
HACCP programs ultimately will become standard in the produce processing
industry in response to emerging concerns about the microbial safety of fresh
fruits and vegetables.
The Company's scientific and technical services team consists of five Ph.D.'s,
five senior scientists, and additional support technicians. These areas of
expertise include microbiology, food science, post-harvest plant physiology and
plant pathology. The Company maintains two laboratories dedicated to
microbiological testing, as well as an applications laboratory used as part of
the Company's sales and marketing program. The Company also maintains a
laboratory at the U.S. Department of Agriculture's ("USDA") Eastern Regional
Research Center through a Cooperative Research and Development Agreement
("CRADA") with the USDA. As part of its sales force, the Company also employs
process engineers and a chemical engineer with expertise in applying the
Company's scientific and technical know-how to a full-scale production facility.
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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. The Company also provides microbiological services
on a contract basis for some customers, in what the Company believes is a
growing market for food safety-based testing and consulting services. In
addition to providing incremental revenue, these consulting relationships may
provide cross-marketing opportunities for the Company's products.
To increase its scientific resources and expertise, the Company has entered into
research alliances with leading institutes of produce and food research, as well
as trade associations. These include a CRADA with the USDA/Agricultural Research
Services in Philadelphia, Pennsylvania; a research grant from the Washington
Apple Commission for a study of enzymatic browning of apples; a collaborative
effort with Rutgers University for residue analysis; a collaborative agreement
with Penn State University for research on the preservation of mushrooms; a
grant from the Ben Franklin Technology Center, also for research on the
preservation of mushrooms; and a collaborative arrangement with Michigan State
University for research on interactive packaging and other produce-related
matters. As an additional technical resource, the Company maintains a Scientific
Advisory Board, consisting of experts in the field of food science, the members
of which are available for consulting on an as-needed basis.
Company-sponsored research and development expenditures for the years ended
December 31, 1996, 1997 and 1998 were approximately $939,000, $1,203,000 and
$1,573,000 respectively. See the Company's Consolidated Financial Statements.
MARKETS
The Company's focus is on products and services which 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) brand of breathable 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.
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The Company believes that demand for fresh-cut produce is being driven at the
retail level by consumer preferences for healthy foods, convenience and variety.
Similarly, demand for fresh-cut produce by food service providers is
increasingly driven by the need to be able to deliver a product which is
consistent in quality and of high food safety standards while reducing
significant processing and storage costs associated with fresh-cut produce.
Development of new fresh-cut produce applications is further supported by
produce growers and processors who are seeking to increase revenues and margins
by establishing differentiated, brand-name, fresh-cut alternatives to commodity
produce lines.
SALES AND PRODUCT COMMERCIALIZATION PROCESS
In developing its processing aid products, the Company first seeks to identify
the physiological and biochemical issues associated with a particular fresh-cut
fruit or vegetable (e.g., white blush on carrots) and to determine the cause of
any issue so identified. Then the Company seeks to develop an appropriate
solution in a laboratory setting when it perceives that a significant market
opportunity may exist.
The Company has compiled an extensive database of processors, their processing
capabilities and the varieties of fruits and vegetables they process and,
therefore, can approach potential customers from a position of extensive
knowledge and experience with a proposed produce solution. After initial
discussions, the Company initiates a detailed review and testing process to
customize the application of the Company's technologies to the potential
customer's processing system. The testing process involves both application of
the Company's processing aids and, where appropriate, other scientific and
technical support services, such as HACCP and the design of tailored packaging
solutions. Once such development is completed, the product moves through
successive steps of an increasingly sophisticated testing program, during which
the Company identifies and proposes any processing changes that may be needed
and which ultimately leads to a product decision. The Company also works with
the customer to develop specific protocols that should be applied.
With respect to its packaging business, the Company seeks to meet the growing
needs of existing customers, develop new products that can be sold to existing
customers, and sell existing and new products to new customers as such
opportunities are identified. The Company believes that the experience it has
accumulated in all aspects of the produce industry, together with its scientific
expertise, is helping to facilitate an integrated systems solution approach to
the packaging needs of the processor.
In the area of scientific and technical services, the Company has an existing
customer base that it has built up over time. Since the acquisition of CMC, the
Company has been actively marketing an increased range of available services,
with a specific emphasis on enhancing cross-marketing opportunities.
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 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
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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. 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.
Certain types of potatoes (primarily Russets) used by the Company in processing
are provided under a long-term market priced supply agreement with Potandon. The
Company acquires other types of potatoes on the open market. Corn is supplied to
Newcorn under a number of fixed-price supply agreements. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 13 to the Company's Consolidated Financial Statements.
The Company's U.S. packaging business utilizes a number of subcontractors for
film manufacturing, conversion and printing. The U.K. and European packaging
businesses source their film and other requirements from a number of suppliers,
most of which are based in the U.K. and Europe. The U.K. and European packaging
businesses also perform their 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
The Company's financial statements currently present financial information for
two industry segments in which the Company does business: (a) packaging
materials and (b) processing aids and related activities. Information relating
to sales by the Company or its subsidiaries of fresh-cut corn and potatoes and
the provision of scientific and technical services is included in the financial
information presented for the processing aids and related activities segment.
The Company markets processing aids and related products primarily in the U.S.,
with smaller amounts also sold in Canada, while packaging materials are marketed
in North America, the U.K. and Continental Europe. Since the acquisition of
Fabbri in late 1997 there has been an increase in marketing activity in Europe,
both in the Company's packaging and processing technologies. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 16 to the Company's Consolidated Financial Statements.
CUSTOMER CONCENTRATION
During the year ended December 31, 1998, one packaging customer, Walkers Snack
Foods Ltd, a division of Frito-Lay Europe, a subsidiary of Pepsico, Inc.
("Pepsico") accounted for approximately 15% of the Company's sales. During 1997
and 1996, Pepsico accounted for 32% and 13% respectively of the Company's sales
(the Company first began supplying flexible packaging to Pepsico in August
1996).
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 engaged in the business of manufacturing and marketing
flexible packaging sold primarily in the produce industry, historically has
reported relatively higher sales revenue and income in
- 10 -
<PAGE> 12
the Company's first and fourth fiscal quarters because of timing of citrus and
other crop harvests. However, Newcorn, a subsidiary of the Company engaged in
the business of processing and marketing fresh-cut corn, historically has
reported higher sales revenue in the Company's second quarter, although
fluctuations in the results of Newcorn's operations are difficult to predict due
to the developmental nature of Newcorn's business. 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 that 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 five U.S. patents issued or allowed, one U.S. patent
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)" processing aids were granted on June 26, 1990 and September 13, 1994,
respectively. During the year the Company received confirmation of patent
approval for, and is thus entitled to patent protection for, technologies
designed to (i) eliminate the use of ice in shipping boxes of processed
broccoli, (ii) inhibit the enzymatic browning of fresh peeled whole potatoes and
(iii) administer treatments to pre-packed boxes of produce, although the actual
patents have not yet been issued. A patent application for the Company's "Apple
Fresh(R)" processing technology is currently pending. In addition to the
foregoing, U.S. patent protection has been obtained during 1998 for a processing
technology developed by the Company in collaboration with Penn State University
for use on freshly harvested mushrooms. Penn State University has granted the
Company an exclusive license for this technology for the life of the patent.
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 or certain of
its subsidiaries also have thirteen registered U.S. trademarks, including
Respire(R), and its processing aid names, such as Potato Fresh(R), and three
trademark applications pending. The Company has a license to use the "Green
Giant(R) Fresh" brand on the Company's fresh-cut potato products which runs
through September 2007, unless terminated earlier. In addition, the Company's
Newcorn subsidiary has a license to use the "Green Giant(R) Fresh" brand for
fresh-cut corn products which runs through December 31, 2020, unless terminated
earlier. "Green Giant(R) Fresh" is a registered trademark of the Pillsbury
Company. The Company has and may continue to seek
- 11 -
<PAGE> 13
licenses for other trademarks which it believes will add value to a proposed
product. Furthermore, the Company has seven patents and 24 patent applications
pending outside the U.S. for its main processing aid technologies, as well as
one registered trademark and four trademark applications pending outside the
U.S., with others under review. To help protect the Company's technology and
proprietary information, the Company has confidentiality agreements with its
customers, as well as internal non-disclosure agreements and safeguards,
although there can be no assurance that these safeguards will be adequate to
fully protect the Company. The importance the Company attaches to its patent
position is reflected in the significant efforts made on research and
development (see the Company's Consolidated Financial Statements and the notes
thereto). In addition to its patent protection, the Company believes it has a
competitive advantage through its proprietary knowledge of the applications for
its technology.
Under the terms of another agreement signed as part of the acquisition of BPS,
the Company's ability to use in the U.S. certain slit perforating technology,
certain other development stage perforating technology and gas perforating
technology not previously assigned to BPS under arrangements between BPS,
Derrick Lyon and others in or about 1983 (collectively, the "Prior
Technology"), is limited until Mr. Lyon, a principal former shareholder of BPS
and a former executive officer of the Company owns or rejects the offer of 49%
of the share capital (on terms and conditions yet to be finalized) of any
Company subsidiary that the Company proposes will use the Prior Technology in
activities in the U.S. (the "Proposed JV"). The Company and Mr. Lyon expect to
form the Proposed JV by the end of the second quarter of 1999. In the unlikely
event that Mr. Lyon rejects the offer of such equity, the Company will not be
limited in its use of the Prior Technology. The Company believes the
arrangement with Mr. Lyon will not have a material effect on the Company's
business, financial condition or results of operations.
REGULATORY REQUIREMENTS
Based on advice from FDA counsel and on assessment of relevant scientific
literature by the Company and by third parties, the Company has concluded that
the use of the Company's processing aids in accordance with the Company's
recommended protocols is GRAS under FDA regulations. There is, however, a risk
that new scientific information about an ingredient could change its GRAS
status, that the FDA could revise its regulations governing the GRAS status of
the ingredients, or that the FDA might take the position that an ingredient is
not GRAS under the current regulations. Any such change could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company employs a firm of Washington-based FDA lawyers to advise
the Company on the effect of FDA regulations on the Company's operations,
together with any planned or potential changes in government attitude and
legislation. The Company also consults with advisors outside the U.S. concerning
foreign regulatory issues. Compliance with existing FDA regulations has not been
a material burden on the Company's operations to date, although there can be no
assurance that the regulatory requirements will not change and increase the
burden to the Company.
The Company's packaging operations are subject to federal, state and local U.S.,
U.K. and other European environmental laws and regulations that impose
limitations on the generation, storage, transport, disposal and emission of
various substances into the environment, including laws that restrict the
discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. The Company is
subject to U.S. and foreign laws and regulations regarding the use, storage,
transport and disposal of inks used with its packaging products. There can be no
assurance that there will not be an accidental contamination, disposal or injury
from the use, storage, transport or disposal of inks used in the Company's
packaging business. Additionally, the Company's use of plastic film in its
packaging operations may subject it, in certain jurisdictions, to laws and
regulations designed to reduce solid wastes by requiring, among other things,
plastics to be degradable in landfills, minimum levels of recycled content,
various recycling requirements, disposal fees and limits on the use of plastic
products. In addition, various consumer and special interest groups have lobbied
from time to time for the implementation of additional environmental protection
measures. The Company may be required to make capital expenditures in response
to changing compliance standards and environmental regulations. Furthermore,
unknown contamination of sites currently or formerly owned or operated by the
Company (including contamination caused by prior owners and operators of such
sites) and off-site disposal of hazardous substances and wastes may give rise to
additional compliance costs. There can be no assurance that the Company will not
incur liabilities for environmental matters in the future, including those
resulting from changes in environmental regulations, that may have a material
adverse effect on the Company's business, financial condition and results of
operations.
Specifically, during its due diligence investigation in connection with the
Fabbri Acquisition, the Company was informed that from time to time in the past
Fabbri disposed of certain hazardous waste (such as used oil
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<PAGE> 14
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 labeled as
required and stored longer than permitted under Spanish legislation. Under
Spanish law, a producer of hazardous wastes remains responsible for damages to
third parties or the environment if these wastes are collected by a
non-authorized hauler. As part of the documentation of the Fabbri Acquisition,
the Company obtained from the prior owner of Fabbri, Sidlaw Group plc, a U.K.
public-company ("Sidlaw"), an indemnification for any fines or penalties levied
against the Company from the collection of waste by unauthorized haulers,
subject to a limit of approximately $4,500,000. The Company is not aware that
these past actions resulted in any environmental damages, and therefore does not
believe that these represent possible material losses. To the extent that the
Company incurs liabilities in respect of the foregoing that are not covered by
the indemnity from Sidlaw, or Sidlaw fails to fulfill its indemnity obligations,
there could be a material adverse effect on the Company's business, financial
condition and results of operations. Nevertheless, the Company is not aware that
any claims have been made or are pending, and is not aware of any past or
current environmental conditions that it believes will result in any material
adverse effect on the Company's business, financial condition and results of
operations.
EMPLOYMENT
As of December 31, 1998, the Company had 257 employees providing services in the
U.S. and Europe, of which 24 were engaged in sales and marketing, 183 in
production, 16 in technical services and research and 34 in management and
administration. Some of the managerial employees are employed pursuant to
employment agreements, and the Company maintains key man insurance on Mr. Devine
in the amount of $1,000,000. See "Item 11. Executive Compensation". The Company
expects to recruit additional personnel as and when required.
FORWARD LOOKING STATEMENTS
Statements in the foregoing discussion that are not statements of historical
fact and reflect the intent, belief or expectations of the Company and its
management regarding the anticipated impact of events, circumstances and trends
should be considered forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not guarantees of future performance, and actual results may vary
materially from those projected in the forward-looking statements. For a
discussion of factors that may materially affect realization of these
expectations, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Forward Looking Statements."
- 13 -
<PAGE> 15
ITEM 2. PROPERTIES
The Company believes that its current facilities are adequate for its present
needs and that it would not have any difficulty in obtaining additional or
alternate space at prevailing rates if necessary. The Company's current
facilities are as follows:
<TABLE>
<CAPTION>
SQUARE OWNED/LEASED
LOCATION FEET (EXPIRATION) CHARACTER OF USE
-------- ---- ------------ ----------------
<S> <C> <C> <C>
Philadelphia, PA 6,600 Leased (1/2002) Principal administrative office
Fresno, CA 2,600 Leased (3/2000) Applications laboratory
Oswego, IL 16,400 Leased (6/1999) Packaging operations
Gainsborough, England 19,500 Leased (10/2004) Printing facility
Runcorn, England 17,478 Owned Perforating and converting
facilities
Runcorn, England 5,085 Leased (9/2007) Perforating and converting
facilities
Runcorn, England 8,500 Leased (12/2000) Perforating and converting
facilities
Camarillo, CA(a) 74,248 Leased (8/2002) Fresh-cut corn processing
facility
Darien, WI 35,200 Leased (5/2008) Fresh-cut corn processing
facility
Worcester, MA 1,400 Leased (12/1999) Food safety and microbiological
testing laboratory and office space
Valencia, Spain 142,106 Owned Packaging operations
</TABLE>
(a) Property is leased by Newcorn and the lease is guaranteed by
the Company. Newcorn occupies approximately 73% of the
facility, together with EPL Food Products, Inc., which
processes fresh-cut potato products. 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.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject. None of the Company's officers or
directors are involved in any legal proceedings relating to the Company. To the
best of the Company's knowledge, there are no proceedings being contemplated by
governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
- 14 -
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
MARKET INFORMATION
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National Market under
the symbol "EPTG" in May 1998. From July 1996 to May 1998, the Common Stock
traded on the Nasdaq SmallCap Market under the symbol "EPTG", except for a
period of approximately 30 days following March 18, 1998 when the Common Stock
was included on the Nasdaq SmallCap Market under the symbol "EPTGD" to indicate
the one-for-two reverse split that was approved by shareholders in March 1998.
From September 1995 to July 1996, the Common Stock traded on the National
Association of Securities Dealers "bulletin board." Prior to September 1995, the
Common Stock traded on the National Association of Securities Dealers "pink
sheets." The following table sets forth the quarterly range of high and low bid
quotations for 1997 and 1998 for the Company's Common Stock during the periods
indicated, adjusted for the reverse split, assuming a price that is twice the
actual pre-split price (such high and low bid quotations reflect inter-dealer
prices without retail mark-up, mark down or commissions and may not necessarily
represent actual transactions):
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First quarter $13.25 $9.75
Second quarter 13.13 8.00
Third quarter 18.13 11.25
Fourth quarter 19.25 10.00
1998
First quarter 14.50 10.00
Second quarter 14.00 6.25
Third quarter 8.00 5.13
Fourth quarter 5.88 3.81
</TABLE>
As of February 26, 1999 there were 11, 875,780 shares of the Company's Common
Stock issued and outstanding, held by 261 shareholders of record and
approximately 5,200 beneficial shareholders. During the twelve months ended
December 31, 1998, the Company did not declare any cash dividends on its Common
Stock. Other than in connection with the payment of accumulated dividends, which
have not been declared or paid, on its Series A 10% Cumulative Convertible
Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock (collectively with the Series D Convertible Preferred Stock, the
"Preferred Stock"), the Company intends to retain earnings, if any, which may be
generated from operations to finance the expansion and development of its
business. No cash dividends have ever 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 and unless the holders of
two-thirds of the Series D Preferred Stock consent. See Note 9 to the Company's
Consolidated Financial Statements. In addition, pursuant to the terms of a
credit facility with Value Management & Research (UK) Limited, the company is
subject to certain limitations with respect to the payment of dividends on
Common Stock and Preferred Stock issued by the company. See "Management
Discussion and Analysis of Financial Conditions and Results of Operations -
Liquidity and Capital Resources."
- 15 -
<PAGE> 17
RECENT SALES OF UNREGISTERED SECURITIES
On May 15, 1998 the Company completed the public offering of 2,400,000 shares of
its common stock (the "Offering"), of which 809,097 shares were sold by the
Company and 1,590,903 were sold by Trilon Dominion Partners LLC ("Trilon"). In
connection with the Offering, Trilon converted, for no additional cash
consideration, 1,933,000 shares of the Company's Series A Stock into 1,288,667
shares of common stock, leaving 90,000 shares of Series A Stock issued and
outstanding as at June 30, 1998. Such conversion was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended ("Section 4(2)")
The Offering price was $10.00 per share of common stock.
On November 23 and December 21, 1998, the Company issued a total of 48,088
shares of Common Stock in reliance on the exemption from registration provided
in Section 4(2), to an institutional investor in connection with the conversion
by such holder, for no additional cash consideration, of 200 shares of the
Company's Series D Convertible Preferred Stock ("Series D Stock"), leaving
12,300 shares of Series D Stock outstanding.
- 16 -
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected condensed consolidated statement of
operations and balance sheet data for the Company and its subsidiaries. The
selected condensed consolidated financial data for the years ended December 31,
1996, 1997 and 1998 and as of December 31, 1997 and 1998 are derived from the
audited Consolidated Financial Statements of the Company, which are included
elsewhere in this report, and are qualified by reference to such Consolidated
Financial Statements and the related Notes thereto. The selected condensed
consolidated financial data for the years ended December 31, 1994 and 1995 and
as of December 31, 1994, 1995 and 1996 are derived from audited consolidated
financial statements of the Company not included herein. The selected
consolidated financial data set forth below is qualified in its entirety by, and
should be read in conjunction with the Consolidated Financial Statements, the
related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Sales $ 578 $ 3,240 $ 11,314 $ 19,953 $ 32,977
Cost of Sales 387 2,469 9,136 18,090 29,481
Gross Profit 191 771 2,178 1,863 3,496
Total operating expenses 3,472 3,813 6,362 9,185 11,196
Loss from operations (3,281) (3,042) (4,184) (7,322) (7,700)
Net loss (3,373) (3,320) (4,296) (7,187) (7,781)
Net loss for common
shareholders (3,697) (3,634) (5,295) (8,355) (10,535)
Net loss per common share $ (1.02) $ (0.78) $ (0.71) $ (1.00) $ (0.99)
Weighted average number
of common shares 3,629,362 4,655,529 7,436,759 8,372,537 10,598,878
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) $ (378) $ 1,167 $ 2,269 $ 6,513 $ 5,131
Total assets 3,189 10,041 15,215 26,200 29,772
Long-term debt 1,812 844 1,554 1,792 3,683
Total liabilities 2,771 3,665 6,797 8,967 12,620
Series D Convertible
Preferred Stock 0 0 0 10,617 12,847
Accumulated deficit (8,043) (11,363) (16,283) (24,207) (34,652)
Total shareholders' equity $ 418 $ 6,376 $ 8,418 $ 6,615 $ 4,305
</TABLE>
- 17 -
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is a leading developer and marketer of integrated produce systems
solutions specifically designed to address the needs of the rapidly growing
market for fresh-cut produce. In this regard, the Company develops, manufactures
and markets proprietary produce processing technologies, packaging
technologies, and scientific and technical services. These are specifically
designed to maintain the quality and integrity of fresh-cut produce. The
foundation of the Company's integrated systems solutions is its proprietary
produce processing technology. This 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 technologies, in accordance with the Company's recommended
protocols, is "generally recognized as safe" ("GRAS") under FDA regulations. The
Company also uses a variety of film technologies to create packaging
specifically designed to complement and enhance the effectiveness of the
Company's processing aids by allowing fruits and vegetables to "breathe" after
they have been cut and packaged. The Company markets these packaging products to
produce growers and processors. In addition, the Company's scientific and
technical services, which include food safety and microbiological testing,
provide fresh produce processors with expertise in food safety, post-harvest
horticulture and processing techniques, and support the cross-marketing efforts
for the Company's other products. The Company believes its processing aid
technologies are safe and environmentally "friendly" and, together with its
packaging and scientific and technical services, add significant value to the
businesses of its customers. In addition to its integrated systems solutions for
fresh-cut produce, the Company also markets flexible packaging for uses in the
snack food, bakery and confectionery industries and, to a lesser extent, for
other uses, including pharmaceutical and industrial applications.
The Company's financial statements currently present financial information for
two industry segments in which the Company does business: (a) processing
technologies and related activities and (b) packaging materials. Information
relating to sales by the Company or its subsidiaries of fresh-cut corn and
potatoes and the provision of scientific and technical services is included in
the financial information presented for the processing aid technologies and
related activities segment.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Sales. Sales increased from $19,953,000 in 1997 to $32,978,000 in 1998, an
increase of $13,024,000 or 65%. Sales of processing technologies and related
activities increased from $3,035,000 in 1997 to $8,913,000 in 1998, an increase
of $5,878,000 or 194%. Sales of US packaging materials increased from
$2,716,000 in 1997 to $3,318,000 in 1998, an increase of $602,000or 22%. Sales
of UK packaging materials fell from $13,570,000 in 1997 to $11,929,000 in 1998,
a decrease of $1,641,000 or 12.1%. Sales of European packaging materials rose
from $632,000 to $8,818,000, an increase of $8,186,000 or 1,295%.
The increase in sales of processing technologies and related activities was
mainly due to the significant growth in the volume of fresh-cut corn sold
through the Company's majority-owned affiliate, Newcorn. In an effort to secure
a consistently available supply of raw material, the Company entered into supply
agreements with a number of corn growers located in various regions throughout
the US and Mexico. As a result, 1998 was the first year in which the Company had
a consistent supply of corn available for sale throughout the year. In light of
increasing sales volume and capacity constraints and in an effort to provide
- 18 -
<PAGE> 20
capacity for future growth, Newcorn relocated its West Coast operations into the
Camarillo Facility in the third quarter of 1998. In addition to significantly
increasing Newcorn's processing capacity, management expects that the Camarillo
Facility will enhance operating efficiencies. Newcorn has also constructed a new
35,000 square foot facility located in Darien, Wisconsin (the "Darien Facility")
to further increase processing capacity. Management expects that this new
facility will enable Newcorn to extend the geographic reach of its food
products, with shipments from this new facility targeted principally at the
Midwest and East Coast markets of the US.
In October 1998, Newcorn received formal approval from Sholl, the exclusive
licensee of the "Green Giant(R) Fresh" brand from the Pillsbury Company, to sell
fresh-cut corn processed at the Camarillo Facility under the "Green Giant(R)
Fresh" brand name. Sales under the "Green Giant(R) Fresh" brand began in late
October 1998. Management expects that sales of fresh-cut corn under the "Green
Giant(R) Fresh" brand will supplement sales of fresh-cut corn made under
Newcorn's "Somis Creek(R)" and "Fresh Traditions(TM)" brands. Management
believes that the capacity constraints and disruption caused by the relocation
inhibited sales growth in 1998, but it is unable to quantify the extent to which
sales were affected.
The Company also experienced significant growth in the volume of fresh-cut
potato products sold by its EPL Food Products, Inc. subsidiary under the "Green
Giant(R) Fresh" brand name, with a number of new accounts gained during 1998. In
an effort to leverage processing capabilities and operating efficiencies, the
Company relocated its fresh-cut potato processing activities to the Camarillo
Facility and received approval from Sholl to sell fresh-cut potato products
processed at this facility under the "Green Giant(R) Fresh" brand in October
1998. The Company expects to have its fresh-cut potato products available in
over 100 locations, based principally on the West Coast of the U.S., by June
1999.
The Company is continuing to focus on the sale and development of its processing
technologies, particularly with respect to corn, potatoes and apples. In
addition, the Company has obtained (i) US patent protection for a processing-aid
based technology designed to eliminate the use of ice in shipping boxes of
processed broccoli, (ii) an exclusive license for patented technology developed
in collaboration with Penn State University for use on freshly harvested
mushrooms and (iii) US patent protection for a processing-aid based technology
designed to better maintain the quality and thus enhance the economic value of
whole peeled potatoes. Product testing continues on a number of other
vegetables, and in some cases has been expanded or accelerated, and significant
costs have been incurred to date which have yet to yield material revenues.
The Company also continued to grow its capability in scientific and technical
services. The acquisition in late 1997 of CMC provided the Company with a West
Coast platform to extend its microbiological and other scientific services from
the Company's existing East Coast location. During 1998 the Company launched its
Pure Produce(TM) range of food safety services, focusing on its HACCP services.
This new range of services has been successfully introduced in a number of
locations and, with the increasing focus on food safety and hygiene in the
produce industry, the Company believes that it is well-positioned to add further
value to the operations of fresh-cut processors.
The growth in the U.S. packaging materials business was principally attributable
to growth in sales of perforated film. During 1998 the Company improved the
operational efficiency of its U.S.-based perforating equipment, leveraging the
knowledge base of the U.K. operations, and identified a number of markets and
applications to target for sales and product development. As a consequence, the
Company is in the process of increasing the capacity of both its proprietary gas
flame perforating and proprietary microperforating capabilities to take
advantage of market opportunities, which include applications in the produce,
horticultural,
- 19 -
<PAGE> 21
bakery and pharmaceutical industries. The continuing growth in sales of
perforated film is also expected to improve margins, as sales of perforated film
traditionally yield a higher margin than non-perforated film sales.
The sales of U.K. packaging materials decreased from $13,570,000 to $11,929,000,
a fall of $1,641,000 or 12.1%. This was principally attributable to a reduced
level of sales to Pepsico, which fell by almost $1,300,000. Sales were also
adversely impacted by pricing pressures in the UK, together with a reduction in
sales of film to the bakery industry. This impact, however, was offset by
increased sales in other areas, as the Company continued the execution of its
strategic objective to reduce its dependence on Pepsico and the bakery industry,
both of which are lower margin areas of activity, and focus more on utilizing
its proprietary perforating technology to move into new, higher value-added
areas. The Company believes that its efforts to change product mix will provide
a more stable foundation for sustainable and more profitable growth. During 1998
the Company's Respire(R) brand of breathable packaging for fresh produce was
launched in the UK and has been successful in gaining new business. In addition,
the Company's proprietary micro-perforating technology has enabled the Company
to win new business in the area of cooked meat pastry products. Other
applications are currently under development. This increased diversification in
the UK, together with increased sales for the Company as a whole, meant that in
1998 Pepsico accounted for approximately 15% of the Company's sales, compared
with 32% in 1997.
Sales of European packaging materials increased from $632,000 in 1997 to
$8,818,000, an increase of $8,186,000 or 1,295%. This was principally
attributable to the inclusion of a full year of revenue from Fabbri, acquired in
December 1997. Fabbri increased its sales by almost 20% over calendar 1997
levels, and the Company is targeting further expansion not only in Spain but in
other European countries. In addition, Fabbri reduced its dependency on the
citrus crop by increasing its sale of packaging materials used in fresh produce
and other areas. The diversification is planned to continue, and in 1999 will
include the launch of the Company's Respire(R) brand of breathable packaging for
fresh produce into Europe. In addition, Fabbri is seeking to expand its limited
revenue derived from South American countries through existing and new contacts.
Gross Profit. Gross profit increased from $1,863,000 in 1997 to $3,496,000 in
1998, an increase of $1,633,000 or, as a percentage of sales, from 9.3% to
10.6%. This increase was principally due to (i) the inclusion of a full year's
results of operations of Fabbri, (ii) higher margins at the Company's U.K.
packaging operation following the completion in 1997 of the reorganization of
the Company's Runcorn and Gainsborough facilities and (iii) higher margins on
the sales of U.S. packaging materials.
The gross profit was impacted adversely by the cost of market development and
sales support within both the corn and potato businesses. In addition, Newcorn
at times was unable to process and sell on a profitable basis bulk corn which it
had committed to purchase, which adversely impacted gross profit. Market
development and sales support costs are expected to be incurred in the future,
although their adverse impact on gross profit is expected to diminish as sales
volumes and operating efficiencies improve. The Company also expects that the
relocation of Newcorn's West Coast operations and the Company's fresh-cut potato
processing activities into the Camarillo Facility will both significantly
increase processing capacity and enhance operating efficiencies.
Gross profit from period to period may also be impacted by pricing pressures on
Newcorn's corn business primarily attributable to the extent to which bulk corn
is available in regions where Newcorn's fresh-cut corn products are sold, which
is largely a function of the timing of and variations in regional harvest
yields.
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<PAGE> 22
Newcorn enters into fixed price contracts for the supply of a portion of its
bulk corn requirements, the aim of which is to ensure, where possible, adequate
supplies of bulk corn of consistent quality at a known, fixed price. If market
prices for bulk corn are constant or rise, Newcorn will benefit from such
arrangement. However, if market prices fall, Newcorn may not be able to fully
pass on all of its costs if it is unable to renegotiate contract prices.
Management believes changes in prices of raw materials for its products have not
had a material effect on the Company's results of operations to date; however,
as the Company's business becomes more reliant upon sales of its processing aids
and related activities, results of operations may be more susceptible to the
effects of changing prices due to the pricing of certain kinds of produce, as
well as ingredients used in the Company's processing aids.
Furthermore, Newcorn incurred considerable start up costs relating to the
Camarillo Facility while it was still operating its old facility. Incremental
cost was also incurred in helping to bring the Darien Facility into operation.
Management believes that this facility will make meaningful contributions to
gross profit in the second half of 1999.
In addition, the Company accelerated the development of certain applications for
its proprietary micro-perforating technology. These costs have been expensed
during 1998, although the benefits of this expense in terms of incremental sales
and gross profit, is not expected to commence until 1999 and beyond.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $6,693,000 in 1997 to $7,904,000 in 1998,
an increase of $1,211,000 or 18.1%. This increase was due primarily (i) to
incremental expenses from the inclusion of a full year's results of operations
of Fabbri and CMC, both of which were acquired during the final quarter of 1997,
(ii) the continuing and accelerating development of the Company's sales and
marketing efforts, particularly in the area of sales of processing aids and
related activities for potatoes, corn and apples, together with packaging
development, and (iii) other costs, including the hiring of additional
personnel.
The Company's sales and marketing efforts with respect to processing aid
technologies and related activities are primarily focused on fresh-cut potatoes,
corn and apples and, to a lesser extent, other produce categories, together with
packaging applications. These expenses in 1998 also include certain one-time
costs, such as (i) increased costs of patent development, (ii) additional
marketing development costs and (iii) other costs. Excluding one-time costs, the
Company expects that sales and marketing expenses will continue at recent levels
and may increase.
Research and Development Costs. Research and development costs increased from
$1,203,000 in 1997 to $1,573,000 in 1998, an increase of $370,000 or 30.8%. This
reflects increased costs of internal scientific activities related to sales
efforts for large potential customers, principally related to mushrooms,
potatoes and broccoli, together with perforated films, as well as external costs
from the collaborative work undertaken with outside institutions. The Company
continues to expense all development costs, whether product, market or sales
related, in the year incurred, and thus costs are incurred prior to the
benefits, if any, that may be expected to be realized from such expense. The
Company expects that research and development costs will continue at no less
than recent levels and may increase.
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<PAGE> 23
Depreciation and Amortization. Depreciation and amortization increased from
$1,290,000 in 1997 to $1,719,000 in 1998, an increase of $429,000 or 33.3%. This
is a result of the inclusion of a full year of expenses for Fabbri since its
acquisition made in December 1997, plus capital expenditures during 1998.
Amortization expense increased due to the acquisition of CMC and the admission
into Newcorn of Twin Gardens, which occurred during the final quarter of 1997,
as well as increased amortization of costs of patents and trademarks as more
have been granted during 1998, offset in part by the completion at December 31,
1997 of the amortization of distribution rights.
Loss from Operations. Loss from operations increased from $7,322,000 in 1997 to
$7,700,000 in 1998, an increase of $378,000 or 5.2%. The increase was primarily
due to an increase in costs, many of which were one time costs as detailed
above, partially offset by the increase in gross profit. However, total
operating expenses, excluding depreciation and amortization, increased by
$1,581,000 or 20%, but rose at a lower rate than the growth in sales, as
reflected by the decrease in total operating expenses as a percentage of sales,
from 39.6% in 1997 to 28.7% in 1998. This reflects the continuing and increased
leveraging of the Company's infrastructure through the expansion of the
Company's business. Management believes that considerable commercial progress
was made in 1998 and that the foundation for future sustainable growth has been
considerably strengthened. However, because all development costs are expensed
as they are incurred, together with the fact that such expense is necessarily
incurred before the benefits of increased sales and improved margins can be
seen, the Company's financial results do not yet reflect this activity.
Accretion, Discount and Dividends on Preferred Stock. Accretion, discount and
dividends on preferred stock increased from $1,167,000 in 1997 to $2,754,000 in
1998, an increase of $1,587,000. The increase principally reflects the
amortization of the beneficial conversion features of the Series D Stock,
accretion of the fair value of warrants issued concurrently with the issuance of
the Series D Stock, and a provision representing a 4% per annum appreciation on
the stated value of the Series D Stock while the Series D Stock remains
outstanding. The amortization and accretion charges, which commenced in the
fourth quarter of 1997, were complete as at December 31, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Sales increased from $11,314,000 in 1996 to $19,953,000 in 1997, an
increase of $8,639,000 or 76%. Sales of processing aids in the US and Europe
increased from $1,327,000 in 1996 to $3,035,000 in 1997, an increase of
$1,708,000 or 129%. Sales of US packaging materials increased from $1,717,000 in
1996 to $2,716,000 in 1997, an increase of $999,000 or 58%. Sales of UK and
European packaging materials grew from $8,270,000 in 1996 to $14,202,000 in
1997, an increase of $5,932,000 or 72%.
The increase in processing aid sales was mainly due to the inclusion of a full
year of revenue from the sale of fresh-cut corn through the Company's
majority-owned affiliate, Newcorn, which commenced sales in the third quarter of
1996, as well as internal growth. The Company is continuing to focus on the sale
and development of its processing aid technologies, particularly with respect to
corn, potatoes and apples. Product testing continues, and in some cases has been
expanded or accelerated, and significant costs have been incurred to date which
have yet to yield material revenues. Some of the initial results of this work
are evidenced by the agreements with Potandon and Farmington Fresh. The Company
believes that both of these agreements have the potential to result in increased
sales in the future, although there can be no assurance that this will be the
case.
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<PAGE> 24
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, Pepsico and Geest (a leading marketer of fresh
produce), accounted for approximately 32% and 6%, respectively, of the Company's
sales.
Gross Profit. Gross profit decreased from $2,178,000 in 1996 to $1,863,000 in
1997, a decrease of $315,000 or, as a percentage of sales, from 19.2% to 9.3%.
This reduction was principally due to: (i) increased fixed costs related to
newly-acquired packaging operations at EPL Flexible's Gainsborough Facility,
(ii) costs incurred in the relocation of film printing activities, from the
Runcorn Facility to the Gainsborough Facility, (iii) initial operating
inefficiencies associated with the reorganization at the Runcorn Facility and
the Gainsborough Facility and (iv) proportionately greater sales of packaging
products, which yield lower margins than the Company's perforated products. The
reorganization of the Company's Runcorn and Gainsborough facilities, which
resulted in significant operating inefficiencies during 1997, especially in the
second half of 1997, has been completed. Operating results from period to period
may continue to be impacted by variations in product mix. Management believes
changes in prices of raw 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $4,413,000 in 1996 to $6,693,000 in 1997,
an increase of $2,280,000 or 52%. This increase was due primarily to (i)
incremental expenses from the inclusion of a full year of expenses from the
Gainsborough Facility, and the operation of Newcorn and Crystal, as well as
incremental expenses from the acquisition of Fabbri, and (ii) the continuing and
accelerating development of the Company's sales and marketing efforts, including
projects supporting prospective large customers, particularly in the processing
aid area for potatoes and corn, and (iii) other costs, including increased costs
of patent preparation and filing, as well as the appointment of additional
personnel.
The Company's sales and marketing efforts with respect to processing aids are
primarily focused on fresh-cut potatoes, corn and apples and, to a lesser
extent, other produce categories. These expenses in 1997 also include certain
one-time costs, such as (i) bonuses paid to certain executive officers in
connection with the consummation of certain transactions, including the Series D
Stock placement and the Fabbri Acquisition, and (ii) costs associated with a
line of credit obtained from Trilon Dominion Partners (the Company's largest
shareholder) in the third quarter of 1997, which was repaid and canceled in the
fourth quarter of 1997. Excluding one-time costs, the Company expects that sales
and marketing expenses will continue at recent levels and may increase.
Research and Development Costs. Research and development costs increased from
$939,000 in 1996 to $1,203,000 in 1997, an increase of $264,000 or 28%. This
reflects increased costs of the scientific activities related to sales efforts
for prospective large customers, principally related to broccoli, mushrooms and
perforated films. The Company expects that research and development costs will
continue at recent levels
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<PAGE> 25
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 due
to the increase in total operating expenses. However, total operating expenses,
excluding depreciation and amortization, rose at a lower rate than the growth in
sales revenue, as reflected in the absolute increase in total operating expenses
but a decrease as a percentage of sales, from 47.3% in 1996 to 39.6% in 1997.
This reflects the leveraging of the Company's infrastructure through the
expansion of the Company's business.
YEAR 2000 COMPLIANCE
The term "year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and the
performance of date-sensitive calculations by computers and other equipment as
the year 2000 is approached and reached.
The Company has adopted a written plan (the "EPL Y2K Plan") which outlines the
actions the Company plans to take to identify and address year 2000 issues. The
EPL Y2K Plan requires each of the Company's business units to prepare a
compliance plan (a "Unit Plan") which (i) summarizes efforts taken to identify,
prioritize and address year 2000 issues facing such business unit, (ii)
estimates the extent to which these year 2000 issues have been addressed, and
(iii) flags foreseeable problems. The EPL Y2K Plan calls for each Unit Plan to
identify, prioritize and address both "internal" year 2000 issues (those arising
from such unit's computer hardware and software, embedded chips and unit
practices with respect to date entry) and "external" year 2000 issues (those
arising by virtue of material relationships with customers and suppliers which
have year 2000 issues).
The Company has received and reviewed Unit Plans from each of its business units
and currently intends to complete (i) its identification of year 2000 issues
reasonably expected to have a material impact on the Company's operations by the
end of March 1999, (ii) its contingency plans by the end of May 1999 and (iii)
any required remediation prior to June 30, 1999. Although the Company is using
its best efforts to ensure that these dates will be achieved in a timely manner,
no assurance can be given that the Company will not experience delays in
executing the EPL Y2K Plan.
The Company is in the process of completing its identification, prioritizing and
communicating with critical suppliers, distributors and customers to determine
the extent to which the Company may be vulnerable to external year 2000 issues.
Detailed evaluations of the most critical third parties have been initiated
through questionnaires, interviews and other means. The Company anticipates that
each business unit will have identified critical third parties with year 2000
issues by the end of March 1999. Thereafter, the Company intends to monitor the
progress made by those parties and formulate appropriate contingency plans to
address any year 2000 issues of critical third parties which remain unresolved.
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<PAGE> 26
The Company requires each business unit to monitor and report on a monthly basis
the cost of identifying and addressing such unit's year 2000 issues. These costs
include any incremental out-of-pocket expenses incurred by such unit to assess
exposure, prepare and implement a remediation plan, test internal systems,
upgrade or replace non-compliant computer hardware and software and embedded
technology and contact critical suppliers and customers. The Company does not
require such units to monitor the cost of using internal resources (such as
salary and related benefit costs) in implementing the EPL Y2K Plan.
The total estimated cost of the Company's year 2000 project, excluding the cost
of using internal resources, is estimated at approximately $100,000 and is
currently being funded through operating cashflows. Of this total estimated
cost, the Company estimates that approximately $30,000 will be attributable to
the purchase of new hardware and software and will be capitalized in accordance
with the Company's current policies, with the remaining $70,000 to be expensed
as incurred. As of February 28, 1999, the Company had incurred approximately
$21,000 in costs related to its year 2000 project, all of which had been
expensed. The remaining costs are expected to be incurred over the balance of
1999. This total estimated cost is based on numerous assumptions, including the
continued availability of current employees responsible for implementing the
Company's year 2000 plan, the Company's ability to identify and remediate its
year 2000 issues in a timely manner and the severity of any year 2000 issues
identified. There can be no assurance, however, that actual costs will not
differ materially from this estimate. Factors that may cause actual costs to
vary materially from those currently anticipated include, but are not limited
to, the availability and cost of personnel capable of implementing the Company's
year 2000 plan, the ability to locate and repair or replace all non-compliant
hardware, software and embedded technology in a timely manner, the ability of
critical suppliers and customers to address their own year 2000 issues
adequately.
In addition, year 2000 issues may lead to third party claims, the impact of
which cannot yet be estimated. The Company has product and general liability
insurance policies which provide coverage in the event of certain product
failures. The Company has not purchased insurance specifically designed to cover
year 2000 issues because, in management's view, the cost is prohibitive. No
assurance can be given that the aggregate cost of defending or resolving such
claims, if any, would not have a material adverse effect on the Company.
The Company believes that the EPL Y2K Plan will allow the Company to anticipate
and resolve any year 2000 issues in a timely manner. In the event, however, that
the Company does not properly identify and resolve year 2000 issues in a timely
manner, there can be no assurance that year 2000 issues will not materially and
adversely effect the Company. In addition, disruptions in the economy generally
resulting from year 2000 issues could also materially and adversely effect the
Company. The Company currently believes that the most reasonably likely worst
case scenario is either (i) the failure of a supplier to resolve in a timely
manner its year 2000 issues, which could result in the temporary slowdown or
interruption in the Company's ability to manufacture products and/or to provide
services and increased expenses of automated functions which must be performed
manually, or (ii) the failure of a customer to resolve in a timely manner its
year 2000 issues, which could result in lost revenues if such customer is unable
to continue to purchase products and/or services from the Company. The amount of
potential liability, lost revenue and incremental expense that would be
reasonably likely to result from the failure by the Company and critical third
parties to resolve year 2000 issues in a timely manner cannot be reasonably
estimated at this time.
The Company is using its best efforts to ensure that the impact of year
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<PAGE> 27
2000 issues on its critical systems will not affect its ability to provide
products and services to its customers. The Company has not yet completed its
analysis of the most reasonably likely worst case scenario it is likely to face.
The Company expects to complete its analysis and contingency planning by the end
of May 1999 and have its contingency plan in place by the end of the third
quarter of 1999. The Company expects that its contingency plan may include
stockpiling raw materials, increasing inventory levels, securing alternate
sources of supply and other measures.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $1,831 ,000 in cash and short term
investments, compared with $3,757,000 at December 31, 1997, a decrease of
$1,926,000. During the year ended December 31, 1998, $6,658,000 was used in
operating activities. In addition, $5,108,000 was used in investing activities,
the majority of which was used to purchase fixed assets, primarily in relation
to the new Camarillo and Darien Facilities. The increase in cash used in
operating activities of $737,000 in 1998 compared to 1997 reflects the increased
loss in 1998 offset by increased depreciation and amortization, together with
increased amounts used in accounts receivable and inventories.
Total financing activities during 1998 provided $9,444,000, compared with
$16,581,000 in 1997. Of this, gross proceeds of $8,090,970 were raised in the
Company's public offering completed in the second quarter of 1998. The balance
came from a net increase in long term debt.
In 1998 the Company repaid approximately $1,171,500 of its term loan facility
with the Bank of Scotland, entered into by its subsidiary EPL Technologies
(Europe) Limited, which amount had been outstanding as of December 31, 1997. As
of December 31, 1998 and 1997, the Company had drawn $665,520 and $658,000
respectively under another line of credit, for up to approximately $665,520
which bears interest of 2% over bank base rate (6.25% as of December 31, 1998).
The Company also has a short-term line of credit with the Bank of Scotland for
up to approximately $495,000 which also bears interest of 2% over bank base
rate. At December 31, 1998 and 1997, approximately $60,000 and $26,000
respectively, was drawn under this facility. The lines of credit are
collateralized by the assets of EPL Technologies (Europe) Limited and its
subsidiaries. The debt agreements with the Bank of Scotland contain certain
covenants applicable to the results of operations of these businesses which
provide for maintenance of minimum asset levels and minimum earnings before
interest and tax to external interest ratios.
In addition, in July 1998 the Company, through its Spanish subsidiary Fabbri,
finalized with Bank Inter an unsecured line of credit for PTS275,000,000
($1,940,775 at $1.00: PTS 141.7). This facility was drawn in full as of December
31, 1998. The facility carries interest of 0.3% over Bank Inter base rate (3.28%
as at December 31, 1998). There are no covenants applicable to the facility.
At the end of the third quarter of 1998, Newcorn entered into two equipment
financing loans with General Electric Capital Corporation ("GECC") and Santa
Barbara Bank & Trust ("SBBT") secured by specifically identified capital assets.
The GECC loan is for approximately $549,000 for a term of 48 months bearing
interest at 10.25% per annum. The SBBT loan is for approximately $466,000 for a
term of 48 months payable in equal monthly installments bearing interest at
10.5% per annum. At December 31, 1998, approximately $521,000 and $434,000 were
outstanding under the GECC and SBBT loans, respectively.
In March 1999, Paul L. Devine, the Company's Chairman and Chief Executive
Officer, agreed to extend to the Company on a short term basis a revolving
credit facility in an amount of up to $500,000, of which $475,000 is outstanding
as of the date of this Annual Report. The Company's obligations under this
facility are unsecured, and amounts outstanding thereunder bear interest at a
rate of Nine percent (9%) per annum and are due on the earlier to occur of (a)
demand for payment and (b) June 30, 1999. The Company has agreed to pay all
reasonable out-of-pocket expenses incurred by Mr. Devine in connection with
advancing funds to the Company under this facility.
Also in March 1999, private investors agreed to extend to the Company on a short
term basis a revolving credit facility in an amount of up to $500,000 of
which $0 is outstanding of the date of this Annual Report. The Company's
obligations under this facility are unsecured, and amounts outstanding
thereunder bear interest at a rate of 9% per annum and are due on the earlier to
occur of (a) demand for payment and (b) June 30, 1999. The Company has agreed
not to permit any encumbrance on the assets of its Spanish subsidiary Fabbri
without the prior written consent of the lenders under such facility for so long
as any amounts remain outstanding thereunder. The Company has agreed to pay all
reasonable out-of-pocket expenses incurred by such lenders in connection with
advancing funds to the Company under such facility.
On March 30, 1999, Value Management & Research (UK) Limited ("VMR"), an
affiliate of Value Management & Research AG, a European asset management and
investment advisory firm, and the Company entered into a revolving credit
facility in an amount of up to $3,000,000 (the "VMR Facility"). The VMR Facility
expires on September 30, 2000, and is to be used for working capital purposes.
The Company's obligations under the VMR Facility are unsecured and bear interest
at a rate per annum equal to the US prime rate plus 2.25%, provided that the
applicable interest rate shall be no less than 9%. The VMR Facility prohibits
the Company from (a) encumbering any assets which are located in Spain and owned
by the Company or any of its subsidiaries or affiliates ("Spanish Assets")
without the prior written consent of VMR, (b) paying any dividend on shares of
Common Stock so long as any amounts are outstanding under the VMR Facility and
(c) paying any dividend on any preferred stock of the Company without the prior
written consent of VMR. If the Company obtains financing secured by some or all
of the Spanish Assets, then the proceeds of such financing are to be applied to
repay any amounts outstanding under the VMR Facility unless VMR otherwise
agrees. The Company has agreed to pay to VMR an arrangement fee equal to 1.5% of
the total amount available under the VMR Facility.
At December 31, 1998, the Company had warrants outstanding and exercisable to
purchase 263,857 shares of
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<PAGE> 28
common stock at a weighted average price of $17.76 per share, which, if
exercised, would provide the Company with gross proceeds of approximately
$4,687,000. In addition, at December 31, 1998, the Company had 1,996,750 options
outstanding and exercisable to purchase shares of common stock at a weighted
average price of $9.17 per share, which, if exercised, would provide the Company
with gross proceeds of up to approximately $18,316,000. See Note 11 to the
Company's Consolidated Financial Statements. At December 31, 1998, commitments
for capital expenditures totaled $230,000.
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 anticipated cash flows from consolidated operations,
existing resources and financing received subsequent to December 31, 1998 will
be sufficient to meet the Company's anticipated operating needs and growth
strategy for the next twelve months. The Company may, however, be required to
seek additional debt or equity financing in the event the Company's actual
operating needs exceed those currently anticipated by management, or the
Company's actual cash flows are less than those currently anticipated by
management, or to implement the Company's growth strategy. No assurances can be
given that the Company will be successful in raising additional capital, and
failure to raise such capital would have a material adverse effect on the
Company's business, financial condition and results of operations.
FORWARD LOOKING STATEMENTS
Statements in the foregoing discussion that are not statements of historical
fact and reflect the intent, belief or expectations of the Company and its
management regarding the anticipated impact of events, circumstances and trends
should be considered forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not guarantees of future performance, and actual results may vary
materially from those projected in the forward-looking statements. Meaningful
factors that might affect such results include, but are not limited to: a) the
Company's needs for capital, including for acquisitions, which needs have been
and are expected to continue to be substantial, and its potential inability to
obtain additional financing on satisfactory terms, b) the Company's product
development and sales process, which is lengthy and resource intensive, c) the
uncertainty of demand for, or the market acceptance of, the Company's products
and services, d) the Company's limited resources and experience in marketing and
selling its products and services, e) personnel resources and production
requirements and potential difficulties in cross-marketing and managing multiple
product lines, f) the Company's potential inability to identify and acquire
acceptable acquisition targets, to the extent necessary to fulfill its expansion
plans, and its potential inability to successfully integrate any such
acquisitions into its operations, g) potential product obsolescence and short
product life cycles, h) potential competition, particularly in the market for
produce packaging, from companies with greater financial, management and other
resources, i) the unpredictability and volatility of the market for agricultural
products, j) changes in U.S. and foreign regulation, k) difficulty with research
and development and sales and marketing activities regarding new and existing
products, including extension of necessary time periods or increase in expense
for product introduction and market penetration, l) potential difficulties in
obtaining or protecting intellectual property rights or the infringement of
proprietary or other rights of the Company by third parties, m) raw material
availability and pricing, n) loss of services of key employees of the Company
and o) delays in the Company's ability to bring into production new facilities
or equipment, as well as other information contained in the Company's other
filings with the Securities and Exchange Commission.
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<PAGE> 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses its unsecured and secured lines of credit, equipment financing
loans, notes payable and capital leases to finance a significant portion of its
operations. These on-balance sheet financial instruments, to the extent they
provide for variable rates of interest, expose the Company to interest rate risk
resulting from changes in the related banks' base rates.
To the extent that the Company's financial instruments expose the Company to
interest rate risk and market risk, they are presented in the table below. The
table presents principal cash flows and related interest rates by year of
maturity for the Company's unsecured and secured lines of credit, equipment
financing loans, notes payable and capital leases in effect at December 31,
1998. The information is presented in U.S. dollars or, where appropriate, U.S.
dollar equivalents, which is the Company's reporting currency. The instruments'
actual cash flows are denominated in U.S. dollars ($US), British pounds
sterling and Spanish pesetas, as indicated in parentheses.
<TABLE>
<CAPTION>
Principal Amount Maturing In:
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitive Liabilities:
Long Term Debt:
Fixed Rate ($US) 414,472 487,720 359,472 228,414 5,117 76,566 1,491,781 1,491,781
Average Interest Rate 9.36% 9.49% 9.78% 10.16% 9.17% 8.00% --
Variable Rate (pounds sterling) 35,637 -- 133,333 133,333 133,333 -- 435,837 435,837
Variable Rate (thousand pesetas) -- -- -- -- -- 275,000 275,000 275,000
Variable Rate ($US) 59,626 -- 221,640 221,640 221,640 1,840,775 2,685,921 2,685,921
Average Interest Rate 8.25% 8.25% 8.25% 8.25% 3.50% --
</TABLE>
-28-
<PAGE> 30
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
AND FOR THE YEARS ENDED SEPTEMBER 31, 1998, 1997 AND 1996:
CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .32
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS . . . . . . . . . .33
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . . . . . . . . . . . . . .34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . .35-48
</TABLE>
-29-
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EPL Technologies, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of EPL
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and comprehensive loss and cash flows for each of the three years in the
period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 30, 1999
- 30 -
<PAGE> 32
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,831,139 $ 3,756,956
Accounts receivable, net 6,419,712 5,382,125
Inventories 4,275,490 3,411,213
Prepaid expenses and other current assets 1,462,663 1,060,506
------------ ------------
Total current assets 13,989,004 13,610,800
------------ ------------
PROPERTY AND EQUIPMENT, Net 11,724,648 8,145,543
------------ ------------
INTANGIBLE ASSETS, Net:
Patent and distribution rights, net of accumulated amortization of $1,895,910
and $1,624,380 at December 31, 1998 and 1997 901,285 977,903
Goodwill, net of accumulated amortization of $959,212 and $633,827 at December 31, 1998 and 1997 2,921,061 3,247,229
Other intangibles, net of accumulated amortization of $155,194 and $117,989 at
December 31, 1998 and 1997 181,964 218,480
Other noncurrent assets 53,546
------------ ------------
Total other assets 4,057,856 4,443,612
------------ ------------
TOTAL ASSETS $ 29,771,508 $ 26,199,955
============ ============
CURRENT LIABILITIES:
Accounts payable $ 6,469,055 $ 4,738,369
Accrued expenses 1,210,129 1,147,597
Other liabilities 705,029 815,280
Current portion of long-term debt 474,098 396,070
------------ ------------
Total current liabilities 8,858,311 7,097,316
LONG-TERM DEBT 3,683,604 1,791,903
DEFERRED INCOME TAXES 77,964 77,964
------------ ------------
Total liabilities 12,619,879 8,967,183
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 13)
CONVERTIBLE SERIES D PREFERRED STOCK, $1,000 par value -
authorized, 12,500 shares issued and outstanding 12,300 and 12,500 shares in 1998 and 1997 12,846,586 10,617,346
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred Stock, $1.00 par value - authorized, 3,250,000 shares;
issued and outstanding 60,000 and 2,073,000 shares in 1998 and 1997 60,000 2,073,000
Convertible Series C Preferred Stock, $.001 par value -
authorized, 144,444 shares; issued and outstanding, 144,444 shares in 1997 144
Common Stock, $0.001 par value - authorized, 50,000,000 shares;
issued and outstanding, 11,510,964 and 9,047,982 shares in 1998 and 1997 11,511 9,048
Additional paid-in capital 38,442,213 28,697,761
Accumulated deficit (34,651,720) (24,206,954)
Accumulated other comprehensive income 443,039 42,427
------------ ------------
Total stockholders' equity 4,305,043 6,615,426
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,771,508 $ 26,199,955
============ ============
</TABLE>
See notes to consolidated financial statements.
-31-
<PAGE> 33
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
SALES $ 32,977,537 $ 19,953,480 $ 11,314,141
COST OF SALES 29,481,264 18,090,546 9,136,286
------------ ------------ ------------
GROSS PROFIT 3,496,273 1,862,934 2,177,855
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,903,882 6,692,727 4,413,365
RESEARCH AND DEVELOPMENT COSTS 1,572,825 1,202,645 938,719
DEPRECIATION AND AMORTIZATION 1,719,442 1,289,758 1,009,746
------------ ------------ ------------
LOSS FROM OPERATIONS (7,699,876) (7,322,196) (4,183,975)
INTEREST EXPENSE, NET 25,345 122,025 20,223
LOSS FROM UNCONSOLIDATED AFFILIATES 56,145
MINORITY INTEREST (202,120) (9,711)
------------ ------------ ------------
LOSS BEFORE INCOME TAX (BENEFIT) EXPENSE (7,781,366) (7,242,101) (4,194,487)
INCOME TAX (BENEFIT) EXPENSE (55,043) 101,432
------------ ------------ ------------
NET LOSS (7,781,366) (7,187,058) (4,295,919)
ACCRETION, DISCOUNT AND DIVIDENDS
ON PREFERRED STOCK 2,753,727 1,167,486 998,924
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(10,535,093) $ (8,354,544) $ (5,294,843)
============ ============ ============
LOSS PER COMMON SHARE $ (0.99) $ (1.00) $ (0.71)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,598,878 8,372,537 7,436,759
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-32-
<PAGE> 34
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------------------------------------------------------------
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
--------------------- ------------------------- ---------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 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
Comprehensive loss
Net loss
Other comprehensive income (loss)
Foreign currency adjustment
Comprehensive loss
---------- -------- ---------- ------------ -------- ----------
BALANCE, DECEMBER 31, 1996 7,765,600 7,765 2,490,000 2,490,000 531,915 5,319
Shares issued in private placement (net of issuance
costs) 168,750 169
Preferred shares issued for cash:
Series C preferred stock
Series D preferred stock
Accretion of Series C warrant value
Accretion of Series D warrants, discount,
increase in stated value and issuance costs
Discount on Series C preferred stock
Exercise of options (net of costs) 410,250 410
Conversion of preferred shares to common shares 543,957 544 (417,000) (417,000) (531,915) (5,319)
Exercise of warrants (net of costs) 119,425 120
Shares issued for acquisitions 40,000 40
Comprehensive loss
Net loss
Other comprehensive income (loss)
Foreign currency adjustment
Comprehensive loss
---------- -------- ---------- ------------ -------- ----------
BALANCE, DECEMBER 31, 1997 9,047,982 9,048 2,073,000 2,073,000
Shares issued in public offering (net of issuance
costs) 809,097 809
Accretion of Series C warrant value
Accretion of Series D warrants, discount,
increase in stated value and issuance costs
Exercise of options (net of costs) 158,000 158
Conversion of Series A and C preferred shares to
common shares 1,414,222 1,414 (2,013,000) (2,013,00)
Conversion of Series D preferred stock to common
shares 48,088 48
Exercise of warrants (net of costs) 33,575 34
Comprehensive (loss) income
Net loss
Other comprehensive income (loss)
Foreign currency adjustment
Comprehensive loss
---------- -------- ---------- ------------ -------- ----------
BALANCE, DECEMBER 31, 1998 11,510,964 $ 11,511 60,000 $ 60,000 $
========== ======== ========== ============ ======== ==========
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------------------------
SERIES C
PREFERRED STOCK ADDITIONAL
--------------------- PAID-IN COMPREHENSIVE ACCUMULATED
NUMBER AMOUNT CAPITAL LOSS DEFICIT
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 14,850,596 $ (11,362,545)
Preferred shares issued for cash 2,494,681
Discount on Series B preferred stock 625,000 (625,000)
Exercise of options 255,328
Shares issued to pay expenses and fees 23,929
Conversion of preferred shares to common shares 399,733
Exercise of warrants (net of costs) 3,298,177
Comprehensive loss
Net loss $(4,295,919) (4,295,919)
Other comprehensive income (loss)
Foreign currency adjustment 260,229
-----------
Comprehensive loss $ (4,035,690)
------------ ============ -------------
BALANCE, DECEMBER 31, 1996 21,947,444 (16,283,464)
Shares issued in private placement (net of issuance
costs) 1,246,672
Preferred shares issued for cash:
Series C preferred stock 144,444 $ 144 622,549
Series D preferred stock 1,943,569
Accretion of Series C warrant value 19,833 (19,833)
Accretion of Series D warrants, discount,
increase in stated value and issuance costs (644,377)
Discount on Series C preferred stock 72,222 (72,222)
Exercise of options (net of costs) 1,489,557
Conversion of preferred shares to common shares 421,775
Exercise of warrants (net of costs) 369,180
Shares issued for acquisitions 564,960
Comprehensive loss
Net loss $(7,187,058) (7,187,058)
Other comprehensive income (loss)
Foreign currency adjustment (208,986)
-----------
Comprehensive loss $(7,396,044)
--------- -------- ------------ =========== -------------
BALANCE, DECEMBER 31, 1997 144,444 144 28,697,761 (24,206,954)
Shares issued in public offering (net of issuance
costs) 6,622,813
Accretion of Series C warrant value 40,000 (40,000)
Accretion of Series D warrants, discount,
increase in stated value and issuance costs (2,623,400)
Exercise of options (net of costs) 794,949
Conversion of Series A and C preferred shares to
common shares (144,444) (144) 2,011,730
Conversion of Series D preferred stock to common
shares 208,435
Exercise of warrants (net of costs) 66,525
Comprehensive (loss) income
Net loss (7,781,366) (7,781,366)
Other comprehensive income (loss)
Foreign currency adjustment 400,612
-----------
Comprehensive loss (7,380,754)
-------- -------- ------------ =========== -------------
BALANCE, DECEMBER 31, 1998 $ $ 38,442,213 $ (34,651,720)
========= ======== ============ =============
<CAPTION>
- - - ---------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
INCOME STOCKHOLDERS'
(LOSS) EQUITY
<S> <C> <C>
BALANCE, JANUARY 1, 1996 $ (8,816) $ 6,375,839
Preferred shares issued for cash 2,500,000
Discount on Series B preferred stock
Exercise of options 255,520
Shares issued to pay expenses and fees 23,932
Conversion of preferred shares to common shares
Exercise of warrants (net of costs) 3,298,876
Comprehensive loss
Net loss (4,295,919)
Other comprehensive income (loss)
Foreign currency adjustment 260,229 260,229
Comprehensive loss
--------- ------------
BALANCE, DECEMBER 31, 1996 251,413 8,418,477
Shares issued in private placement (net of issuance
costs) 1,246,841
Preferred shares issued for cash:
Series C preferred stock 622,693
Series D preferred stock 1,943,569
Accretion of Series C warrant value
Accretion of Series D warrants, discount,
increase in stated value and issuance costs (644,377)
Discount on Series C preferred stock
Exercise of options (net of costs) 1,489,967
Conversion of preferred shares to common shares
Exercise of warrants (net of costs) 369,300
Shares issued for acquisitions 565,000
Comprehensive loss
Net loss (7,187,058)
Other comprehensive income (loss)
Foreign currency adjustment (208,986) (208,986)
Comprehensive loss
--------- ------------
BALANCE, DECEMBER 31, 1997 42,427 6,615,426
Shares issued in public offering (net of issuance
costs) 6,623,622
Accretion of Series C warrant value
Accretion of Series D warrants, discount,
increase in stated value and issuance costs (2,623,400)
Exercise of options (net of costs) 795,107
Conversion of Series A and C preferred shares to
common shares
Conversion of Series D preferred stock to common
shares 208,483
Exercise of warrants (net of costs) 66,559
Comprehensive (loss) income
Net loss (7,781,366)
Other comprehensive income (loss)
Foreign currency adjustment 400,612 400,612
Comprehensive loss
--------- ------------
BALANCE, DECEMBER 31, 1998 $ 443,039 $ 4,305,043
========= ============
</TABLE>
See notes to consolidated financial statements.
-33-
<PAGE> 35
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,781,366) $ (7,187,058) $ (4,295,919)
Adjustments to reconcile net loss to net cash
used in operating activities:
Expenses paid with common stock 23,932
Depreciation and amortization 1,719,442 1,289,758 1,009,746
Minority interest and gain on sale of fixed assets (44,835) (189,954) (10,376)
Equity loss 56,145
Changes in assets and liabilities, net of effects from
acquisitions of businesses, which (used) provided cash:
Accounts receivable (1,037,587) 218,752 (1,381,262)
Due from related parties 34,101 40,676
Inventories (864,277) 36,617 (1,136,800)
Prepaid expenses and other current assets (455,703) (274,905) (168,520)
Accounts payable 1,730,686 529,792 1,192,893
Accrued expenses 62,532 (405,749) 669,632
Other liabilities (50,625) 27,900 216,022
------------ ------------ ------------
Net cash used in operating activities (6,665,588) (5,920,746) (3,839,976)
------------ ------------ ------------
INVESTING ACTIVITIES:
Fixed assets acquired (5,062,696) (1,036,638) (1,997,071)
Proceeds from sale of fixed assets 59,546 36,822 23,033
Acquisition of businesses and contingent payments, net of cash acquired (75,000) (7,330,279) (767,869)
Cost of patent acquired (29,363) (4,157)
------------ ------------ ------------
Net cash used in investing activities (5,107,513) (8,334,252) (2,741,907)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 3,443,666 1,800,410 1,511,127
Payment of long-term debt (1,533,562) (1,429,377) (1,126,377)
Proceeds from sale of common stock/warrants/options 7,533,517 3,671,110 3,554,396
Proceeds from sale of preferred stock 12,539,230 2,500,000
------------ ------------ ------------
Net cash provided by financing activities 9,443,621 16,581,373 6,439,146
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGE ON CASH 403,663 (208,986) 260,229
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,925,817) 2,117,389 117,492
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,756,956 1,639,567 1,522,075
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,831,139 $ 3,756,956 $ 1,639,567
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Interest $ 186,084 $ 195,857 $ 107,027
Income taxes 36,173 23,951 55,635
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Accretion of warrants, discount, increase in stated value and
issuance costs related to preferred stock $ 2,663,400 $ 736,432 $ 625,000
Issuance of common stock for:
Acquisition of subsidiary 565,000
Exchange for services and other fees 23,932
Conversion of preferred shares to common shares 208,483 422,319 400,000
</TABLE>
See notes to consolidated financial statements.
-34-
<PAGE> 36
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- - - --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - EPL Technologies, Inc. and subsidiaries (the
"Company") is engaged in the development, manufacture and marketing
of proprietary food processing technologies (primarily through its
EPL Food Products, Inc., EPL Produce Technologies, Inc. and
NewCornCo LLC subsidiaries), packaging technologies (primarily
through its EPL Flexible Packaging, Inc., EPL Flexible Packaging
Ltd. and Fabbri Artes Graficas Valencia S.A. subsidiaries) and
related scientific and technical services that facilitate the
maintenance of the quality and integrity of fresh produce (primarily
through its California Microbiological Consulting, Inc. and Pure
Produce, Inc. subsidiaries).
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 $545,898 and $419,212 as of December 31,
1998 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 (see 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:
Production and laboratory equipment 5-10 years
Machinery and office equipment 3-11 years
Leasehold improvements The term of the lease and
up to two option periods or
the estimated life of the
asset, whichever is shorter.
Motor vehicles 3-6 years
Buildings 20-40 years
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) - Costs related to acquired patents are being
amortized on a straight-line basis over the life of the
patent. Costs related to internally-developed patents are
generally expensed as incurred.
-35-
<PAGE> 37
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
$549,823, $670,309 and $624,844 for the years ended December 31,
1998, 1997 and 1996, respectively.
H. INCOME TAXES - The Company has adopted the provisions of Financial
Accounting Standards Board ("FASB") Statement No. 109, Accounting
for Income Taxes (SFAS No. 109). SFAS No. 109 requires that deferred
income taxes reflect the tax consequences in future years of
differences between the tax bases of assets and liabilities and
their financial report amounts using the enacted marginal rate in
effect for the year in which the differences are expected to
reverse.
I. REVENUE RECOGNITION - Revenues are recognized either at the time of
shipment to customers or, for inventory held at customers'
facilities, at the time the product is utilized in the customers'
processing operations.
J. FOREIGN CURRENCY TRANSLATION ADJUSTMENT - The financial statements
of the Company's foreign subsidiaries have been translated into U.S.
dollars in accordance with SFAS No. 52. All balance sheet accounts
have been translated using the current exchange rate at the balance
sheet date. Income statement amounts have been translated using the
average rate for the year. The profit or loss resulting from the
change in exchange rates has been reported separately as other
comprehensive income or loss.
K. RECLASSIFICATIONS - Certain reclassifications have been made to the
1997 and 1996 consolidated financial statements in order to conform
with the 1998 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 - The Company measures 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
During the year ended December 31, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income.
-36-
<PAGE> 38
During the year ended December 31, 1998, the Company adopted SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information (see Note 17).
In April 1998, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position ("SOP") 98-5, Reporting on the
Costs of Start-up Activities. This SOP provides guidance on the
financial reporting of start-up costs and organizational costs. It
requires costs of start-up activities and organization costs to be
expensed as incurred. This SOP is effective for fiscal years
beginning after December 15, 1998. Initial application of this SOP
should be recorded as the cumulative effect of a change in
accounting principle. The company does not expect the adoption of
this SOP to have a material impact on its consolidated financial
position or result of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts collectively referred to as derivatives, and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the consolidated
balance sheet and measure those statements at fair value. This
statement is effective for fiscal years beginning after June 15,
1999, although early adoption is encouraged. The Company has not yet
determined the impact SFAS No. 133 will have on its consolidated
financial position or results of operations.
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 1998, which the
Company's management believes will improve cash flows from operations.
Management believes that such cash flows, together with existing resources
and financing received subsequent to December 31, 1998 (see Note 17) 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 meet its operating cash needs and to implement its
growth strategy.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
<S> <C> <C>
Raw materials and supplies $2,594,370 $2,285,588
Finished goods 1,681,120 1,125,625
---------- ----------
Total inventories $4,275,490 $3,411,213
========== ==========
</TABLE>
- 37 -
<PAGE> 39
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
<S> <C> <C>
Production and laboratory equipment $ 7,298,084 $ 5,352,748
Buildings 3,876,452 3,491,214
Machinery and office equipment 413,357 306,843
Leasehold improvements 2,169,413 20,077
Motor vehicles 63,855 43,776
------------ ------------
Total property and equipment 13,821,161 9,214,658
Accumulated depreciation and amortization (2,096,513) (1,069,115)
------------ ------------
Property and equipment, net $ 11,724,648 $ 8,145,543
============ ============
</TABLE>
Depreciation expense was $1,169,619, $619,449 and $384,902 for the years
ended December 31, 1998, 1997 and 1996, respectively.
5. PATENT AND DISTRIBUTION RIGHTS
In connection with an acquisition 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 $901,285 and $977,903 as of
December 31, 1998 and 1997, respectively.
6. ACQUISITIONS
In December 1997, the Company acquired all of the issued and outstanding
shares 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. 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") (see Note 9).
-38-
<PAGE> 40
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 year ended December 31, 1997 has been
presented as if the Fabbri acquisition had occurred on January 1, 1997.
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, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
<S> <C>
Sales $ 26,781,000
============
Net loss $(10,841,000)
============
Loss per common share $ (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 NewCornCo, 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, NewCornCo, LLC acquired certain assets of Twin Garden Sales
Inc. in exchange for $600,000 in cash and 15% membership interest in
NewCornCo, LLC. 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 NewCornCo, LLC's losses until such time as NewCornCo,
LLC achieves a profitable level. NewCornCo, LLC utilizes the Company's
proprietary processing aid technology.
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 operation currently provides all of the printing
services for EPL Flexible in the snack food and produce industries.
-39-
<PAGE> 41
In July 1996, the Company formed a wholly owned U.S. subsidiary, Crystal
Specialty Films, Inc., ("Crystal") 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 was payable in
quarterly installments over two years, with a final payment to be 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. On January 10, 1998, the
Company agreed to pay off the remaining installment debt and make a
further payment of $75,000 to settle the contingent purchase price
arrangement and all outstanding amounts due under the purchase agreement.
In addition, during May 1998, Crystal was merged with Respire Films, Inc.,
another subsidiary of the Company, and was renamed EPL Flexible Packaging,
Inc.
Except as noted above, the pro forma effects of these acquisitions were
not significant.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1998 and 1997
consists of deferred foreign income tax benefit of $0 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.
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>
1998 1997
<S> <C> <C>
Deferred Tax Asset:
Other assets $ 79,653 $ 59,983
Foreign assets 194,118 160,706
Operating loss carryforwards 8,450,080 6,628,944
----------- -----------
Gross deferred tax asset 8,723,851 6,849,633
Valuation allowance (8,645,197) (6,830,508)
----------- -----------
Deferred tax asset 78,654 19,125
----------- -----------
Deferred Tax Liability:
Fixed assets 60,622 19,125
Foreign liability 95,996 77,964
----------- -----------
Deferred tax liability 156,618 97,089
----------- -----------
Net deferred tax liability $ 77,964 $ 77,964
=========== ===========
</TABLE>
-40-
<PAGE> 42
For income tax reporting purposes, the Company has net operating loss
carryforwards of $24,853,177 which will expire between 2003 and 2013.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
<S> <C> <C>
Unsecured line of credit $1,940,775
Term loan facility $1,168,234
Secured lines of credit 725,146 684,344
Equipment financing loans 955,088
Notes payable 229,948 100,125
Capital leases 306,745 235,270
---------- ----------
4,157,702 2,187,973
Less current portion 474,098 396,070
---------- ----------
Long-term debt $3,683,604 $1,791,903
========== ==========
</TABLE>
In 1998 the Company repaid approximately $1,171,500 of its term loan
facility with the Bank of Scotland, entered into by its subsidiary EPL
Technologies (Europe) Limited, which had been outstanding at December 31,
1997. As of December 31, 1998 and 1997, the Company had drawn $665,520 and
$658,000, respectively, under an existing line of credit for up to
approximately $665,520, which bears interest of 2% over bank base rate
(6.25% as of December 31, 1998). The Company also has a short-term line of
credit with the Bank of Scotland for up to approximately $495,000 which
also bears interest of 2% over bank base rate. At December 31, 1998 and
1997, $59,626 and $26,183, respectively, was drawn under this facility.
The lines of credit are collateralized by the assets of EPL Technologies
(Europe) Limited and its subsidiaries. The debt agreements with the Bank
of Scotland contain certain covenants applicable to the results of
operations of these businesses which provide for maintenance of minimum
asset levels and minimum earnings before interest and tax to external
interest ratios.
In 1998, Fabbri entered into an unsecured line of credit with Bankinter,
S.A. for US $1,940,775 (275 million pesetas @ $1.00 = 141.696 pesetas) for
an indefinite period. This loan bears interest at 0.30% over bank base
rate (3.28% as of December 31, 1998). At December 31, 1998, the full
amount has been drawn on this line of credit.
In 1998, NewCornCo, LLC entered into two equipment financing loans with
General Electric Capital Corporation ("GECC") and Santa Barbara Bank &
Trust (SBB&T) secured by specifically identified capital assets. The GECC
loan is for $549,032 for a term of 48 months bearing interest at 10.25%
per annum. The SBB&T loan is for $465,977 for a term of 48 months payable
in equal monthly installments bearing interest at 10.5% per annum. At
December 31, 1998, $520,939 and $434,149 were outstanding on the GECC and
SBB&T loans, respectively.
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 eight quarterly principal
installments of $33,375 through 1998. In 1998, this note payable was
repaid in full. Notes payable at December 31, 1998 relate primarily to a
financing arrangement related to an insurance policy.
Other debt relates to capital leases that bear interest at rates from 5.9%
through 13.0%, with varying monthly principal and interest payments.
-41-
<PAGE> 43
At December 31, 1998, aggregate annual maturities of long-term debt
(including current portion) were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1999 $ 474,098
2000 407,720
2001 581,312
2002 450,254
2003 226,957
Thereafter 2,017,361
----------
$4,157,702
==========
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock, (the "Series A Stock") which has been issued
up to its authorized limit of 3,250,000, was issued at a price of $1.00
per share with each share of Series A Stock carrying the option to convert
into common shares at a rate of $1.50 per share. The Series A Stock
carries equal voting rights to the common shares, based on the underlying
number of common shares after conversion. The Series A Stock carries a
dividend rate of 10% per annum, payable in cash and/or common shares
($1.50 per share) at the Company's option (dividends in arrears at
December 31, 1998 and 1997 totaled $1,414,692 and $1,334,159,
respectively.) During 1998, shareholders holding 2,013,000 shares of
Series A Stock elected to exercise their right of conversion, leaving
60,000 shares of Series A Stock outstanding at December 31, 1998. In
addition, 20% of the common stock conversion option carries detachable
warrants at a price of $2.00 per warrant. During 1998, 1997 and 1996,
33,575, 54,200 and 12,333 warrants were exercised, respectively, leaving
no such warrants unexercised at December 31, 1998.
On July 23, 1996, the Company issued 531,915 of these shares, designated
as Series B Convertible Preferred Stock (the "Series B Stock") at an
aggregate consideration of $2,500,000 to two existing institutional
investors in the Company. 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. The extent of the beneficial conversion feature,
representing the difference between, the $9.40 conversion price and the
prevailing market price of the common stock at the date of issuance, a
total of $625,000, was immediately accreted upon issuance. During 1997,
the shareholders of the Series B 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, 1998 or 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"). 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. 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
-42-
<PAGE> 44
Series C Stock at December 31, 1998 and 1997 totaled $49,239 and $37,842,
respectively. 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 is being accreted over the estimated lives of these warrants (5
years). During 1998, the shareholders of the Series C Stock elected to
fully exercise their right of conversion into common stock and thus, there
were no shares of Series C Stock outstanding at December 31, 1998.
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 terms of the Series D Stock Agreement limit the number of shares the
Series D stock is convertible into to 19.99% of the Company's outstanding
common stock at the conversion date without obtaining the approval of the
Company's common shareholders. At such conversion date, any additional
shares presented for conversion must be redeemed by the Company.
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, was 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) was accreted over the Conversion
Period of the Series D Stock. The accretion of the warrant value and the
value ascribed to the beneficial conversion feature was complete as of
December 31, 1998. Holders of the Series D Stock have limited voting
rights and are not entitled to any dividends. During 1998, the
shareholders of 200 shares of the Series D stock elected to exercise their
right of conversion into common stock, leaving 12,300 shares of Series D
Stock outstanding at December 31, 1998.
10. COMMON STOCK
During 1998, the Company issued a total of 2,462,982 shares of common
stock. A total of 809,097 shares were issued in connection with the public
offering completed in May 1998, resulting in net proceeds to the Company
of approximately $6,624,000. A total of 1,462,310 shares were issued upon
the conversion of 2,013,000 shares of Series A Stock, all 144,444 shares
of Series C Stock and 200 shares of Series D Stock. A total of 158,000
shares were issued from the exercise of previously issued options,
-43-
<PAGE> 45
resulting in net proceeds to the Company of approximately $795,000. A
total of 33,575 shares were issued from the exercise of previously issued
warrants, resulting in net proceeds to the Company of approximately
$67,000.
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.
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.
At December 31, 1998 the Company had warrants outstanding to purchase
263,857 shares of common stock at an average price of $17.76 per share. In
addition, the Company had options outstanding for the issuance of
1,996,750 shares of common stock at an average price of $9.17 per share
(see Note 11).
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. At December 31, 1998
and 1997, 115,500 and 512,125 shares, respectively, were available for
grant.
The Company's 1998 Stock Incentive Plan, as amended and restated (the
"1998 Plan"), was adopted by the Company's shareholders on September 29,
1998. Under the 1998 Plan, 850,000 shares of common stock are reserved for
issuance. No options under the 1998 Plan had been awarded as of December
31, 1998.
The 1994 and 1998 Plans provide for options to be granted with exercise
prices at or in excess of the market value of the Company's stock at the
date of the growth. Such options are generally immediately vested and have
terms of 5 years.
-44-
<PAGE> 46
Information regarding these plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
UNDER OPTION PRICE
<S> <C> <C>
Outstanding and Exercisable at January 1, 1996 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
Activity for the Year Ended December 31, 1998:
Granted 396,625 8.61
Exercised (158,000) 5.05
---------
Outstanding and Exercisable at December 31, 1998 1,996,750 $ 9.17
=========
</TABLE>
These options expire between January 15, 1999 and November 30, 2003. No options
issued during 1998 were issued outside of the 1994 Plan.
The following table summarizes information about the Company's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE
EXERCISE AT REMAINING EXERCISE
PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE PRICE
<S> <C> <C> <C>
$2.50 - $7.00 497,250 2.4 years $ 4.21
$7.94 - $8.94 729,500 2.9 8.06
$10.25 - $13.25 197,375 3.9 11.45
$13.75 - $15.25 572,625 3.7 14.09
----------
1,996,750
==========
</TABLE>
-45-
<PAGE> 47
The estimated fair value of options granted during 1998, 1997 and 1996
ranged between $3.13 - $8.18, $2.48 - $3.21 and $5.86 - $12.62 per share,
respectively. The Company applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its stock option plans.
All options have been granted with exercise prices at or above the market
value of the Company's common stock at the date of the grant. Accordingly,
no compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the provisions of SFAS No. 123, the Company's net loss and
loss per share for the years ended December 31, 1998, 1997 and 1996 would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net loss available for common shareholders:
As reported $ 10,535,093 $ 8,354,544 $ 5,294,843
Pro forma $ 12,077,683 $ 11,550,509 $ 11,666,398
Net loss per common share (basic and diluted):
As reported $ 0.99 $ 1.00 $ 0.71
Pro forma $ 1.14 $ 1.38 $ 1.57
</TABLE>
The fair value of options granted under the Company's stock option plans
during 1998, 1997 and 1996 was estimated on the date of grant using the
Black-Scholes option-pricing mode with the following assumptions used: no
dividend yield, expected volatility of ranging from 45% to 224%, risk free
interest rate ranging from 5.25% - 7.00%, 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 1998, 1997 and 1996 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 1996. SFAS No. 123 does not apply to awards prior to 1996, 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. For the years ended December 31, 1998, 1997
and 1996, the potential common shares have an antidilutive effect on the
net loss per common share for common stockholders.
-46-
<PAGE> 48
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 was antidilutive.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997 1996
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
Potential common shares resulting from:
Stock options 1,997 1,758 1,648
Convertible preferred stock 2,907 2,724 1,926
Warrants 264 341 197
----- ----- -----
5,168 4,823 3,771
===== ===== =====
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating leases for facilities,
vehicles and equipment. At December 31, 1998, future minimum lease
payments were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
1999 $ 961,803
2000 912,596
2001 892,126
2002 705,156
2003 458,260
----------
Future Minimum Lease Payments $3,929,941
==========
</TABLE>
Rental expense for operating leases amounted to $891,118, $430,039 and
$224,461 for the years ended December 31, 1998, 1997 and 1996,
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, 1998, minimum annual payments to executive
officers under these agreements totaled approximately $913,000.
At December 31, 1998, the Company had approximately $468,000 in
noncancelable corn purchase commitments.
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 the matter will not have a material adverse effect on the
Company's consolidated financial position and results of operations.
-47-
<PAGE> 49
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, due
from related parties and accounts payable approximate fair value because
of the short maturities of these items.
Interest rates that are currently available to the Company for issuance of
long-term debt (including current maturities) with similar terms and
remaining maturities are used to estimate fair value for long-term debt.
The estimated fair value of the long-term debt approximates its carrying
value.
The fair values are based on pertinent information available to 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.
15. CUSTOMER CONCENTRATION
One customer, within the European packaging materials operations,
accounted for approximately 15% ($5,042,600), 32% ($6,313,300) and 13%
($1,481,800) of total consolidated revenues in 1998, 1997, and 1996,
respectively.
16. 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 designed to inhibit the enzymatic degradation that
causes fruits and vegetables to begin to deteriorate immediately after
processing and are sold primarily in the United States with smaller
amounts also sold in Canada. This category also includes activities of the
Company's fresh-cut corn and potato products, as well as provision of
scientific and technical services in the United States. The Company's
produce packaging business involves perforating, converting and printing
flexible packaging, using technologies and processes, some of which are
proprietary to the Company, which are marketed in North and South America,
the United Kingdom and Continental Europe.
The following table summarizes the Company's financial information by
industry segment.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
SALES
Processing aids $ 8,912,517 $ 3,034,795 $ 1,326,669
Packaging materials 24,065,020 16,918,685 9,987,472
----------- ----------- -----------
Total sales $32,977,537 $19,953,480 $11,314,141
=========== =========== ===========
NET (LOSS) INCOME FROM OPERATIONS:
Processing aids $(6,729,036) $(4,742,326) $(2,700,793)
Packaging materials (970,840) (2,579,870) (1,483,182)
----------- ----------- -----------
Total net (loss) income from operations $(7,699,876) $(7,322,196) $(4,183,975)
=========== =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE:
Processing aids $ 558,202 $ 543,960 $ 434,313
Packaging materials 1,161,240 745,798 575,433
----------- ----------- -----------
Total net (loss) income from operations $ 1,719,442 $ 1,289,758 $ 1,009,746
=========== =========== ===========
TOTAL ASSETS
Processing aids $ 9,747,366 $ 5,872,115 $ 2,876,117
Packaging materials 20,024,142 20,327,840 12,339,305
----------- ----------- -----------
Total assets $29,771,508 $26,199,955 $15,215,422
=========== =========== ===========
TOTAL CAPITAL EXPENDITURES:
Processing aids $ 3,638,067 $ 419,608 $ 92,858
Packaging materials 1,424,629 617,030 1,904,213
----------- ----------- -----------
Total capital expenditures $ 5,062,696 $ 1,036,638 $ 1,997,071
=========== =========== ===========
</TABLE>
The Company has operating facilities in the United States, the United
Kingdom and Spain. The following table summarizes the Company's financial
information based on operation location.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
SALES:
United States $12,230,514 $ 5,750,733 $ 3,043,653
United Kingdom 11,929,324 13,570,473 8,270,488
Spain 8,817,699 632,274
----------- ----------- -----------
Total $32,977,537 $19,953,480 $11,314,141
=========== =========== ===========
TOTAL LONG-LIVED ASSETS:
United States $ 5,718,498 $ 2,613,888 $ 2,403,442
United Kingdom 5,554,015 5,557,815 5,664,041
Spain 4,509,991 4,397,452 0
----------- ----------- -----------
Total $15,782,504 $12,589,155 $ 8,067,483
=========== =========== ===========
</TABLE>
17. SUBSEQUENT EVENTS
In March 1999, the Company obtained short-term revolving credit facilities
in an aggregate amount of $1,000,000 from the Company's Chairman and Chief
Executive Officer ($500,000) and private investors ($500,000). The
Company's obligations under the facilities are unsecured and amounts
outstanding there under bear interest at a rate of nine percent (9%) per
annum and are due on the earlier to occur of (a) demand for payment and (b)
June 30, 1999. As of March 30, 1999, the Company has drawn $475,000 under
these facilities.
On March 30, 1999 the Company entered into a $3.0 million credit facility
with a UK asset management and investment advisory firm, for a term of 18
months until September 30, 2000. The Company will be able to make draws
against the facility when it requires funds for working capital and other
purposes. The interest rate applicable to the facility balances will be
2.25% over the US Prime Rate with a minimum rate of 9.0% accruing daily on
the outstanding balance on the loan. The Company may repay any amounts
drawn under the facility at any time. There were no amounts drawn under the
facility as of March 30, 1999.
-48-
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to each
of the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY AND AFFILIATES
---- --- -----------------------------------------
<S> <C> <C>
Paul L. Devine 44 Chairman of the Board of Directors, President,
Chief Executive Officer
Dr. William R. Romig 52 Senior Vice President-Science and Technology
Bruce M. Crowell 44 Vice President and Chief Financial Officer
R. Brandon Asbill 32 Vice President and Secretary
Timothy B. Owen 40 Treasurer
Antony E. Kendall 55 Chief Executive Officer of EPL Flexible Packaging
Ltd.
Jose Saenz de Santa Maria 43 Managing Director of Fabbri Artes Graficas
Valencia SA
Virginia N. Finnerty 38 Chief Operating Officer of EPL Produce
Technologies, Inc.
Robert D. Mattei(1)(2) 59 Director
Adolph S. Clausi(1)(2)(3) 75 Director
W. Ward Carey(4) 61 Director
</TABLE>
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Appointed March 25, 1998
(4) Appointed January 12, 1999
- 49 -
<PAGE> 51
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.
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.
Bruce M. Crowell. Mr. Crowell joined the Company as Vice President and Chief
Financial Officer in February 1998. From 1994 until 1998, Mr. Crowell served as
Vice President and Chief Financial Officer, Secretary and Treasurer of Datron
Inc. From 1988 until 1994, Mr. Crowell worked for Miltrope Group Inc. as Vice
President, Chief Financial Officer and Treasurer. Mr. Crowell holds a BBA in
Accounting from Florida Atlantic University.
R. Brandon Asbill. Mr. Asbill joined the Company as Vice President in July 1998.
He was appointed Secretary in September 1998. From 1992 to June 1998, Mr. Asbill
was an attorney in the private practice of law, most recently with Alston & Bird
LLP in Atlanta, Georgia. Mr. Asbill received his A.B. in History from Princeton
University and his J.D. from the University of Georgia School of Law.
Timothy B. Owen. Mr. Owen was appointed Treasurer in October 1996, having served
as European Financial Controller of the Company since 1995. He was also
Secretary from October 1996 to September 1998 and is currently Assistant
Secretary. 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.
Antony E. Kendall. Mr. Kendall joined the Company in August 1996 as chief
executive officer 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.
- 50 -
<PAGE> 52
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).
Virginia N. Finnerty. Ms. Finnerty has served as Chief Operating Officer of EPL
Produce Technologies, Inc. (formerly known as IPS Produce, Inc.), the subsidiary
through which the Company conducts its activities related to fresh-cut potatoes,
since June 1997. From June 1994 to June 1997, Ms. Finnerty served as the
Company's Director of Business Development. From December 1993 to June 1994, Ms.
Finnerty worked in sales and marketing development for the Greater Philadelphia
Chamber of Commerce. From 1990 to 1993, Ms. Finnerty served as a sales and
marketing manager for Osterman Foods. Ms. Finnerty holds a BFA and an Education
Certification from Temple University and an MBA in marketing from St. Joseph's
University.
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.
Adolph 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 Brooklyn 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.
W. Ward Carey. Mr. Carey was elected to the Board of Directors in January 1999.
He is currently Senior Vice President - Investments at PaineWebber Incorporated
in New York. Prior to joining PaineWebber in 1993, he served as an Executive
Vice President and Director of Bessemer Trust Company of Florida. He previously
served as President, Chairman and Chief Executive Officer of Tucker Anthony in
New York and Chairman of the Executive Committee of Sutro and Company in San
Francisco. He has almost 40 years of senior level experience in the investment
and investment banking fields.
- 51 -
<PAGE> 53
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the
Company for the year ended December 31, 1998 for services rendered in all
capacities to the Chief Executive Officer and each of the other five most highly
compensated executive officers (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
ALL
RESTRICTED OTHER
OTHER STOCK OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine 1998 275,000 0 2,872 0 0 0 0
Chairman, President 1997 275,000 225,000 0 0 100,000 0 0
and Chief Executive 1996 225,000 210,978 0 0 250,000 0 0
Officer
Jose Saenz de Santa Maria 1998 133,600 13,360 25,593(1) 0 52,500 0 0
Managing Director 1997 0 0 32,895(1) 0 0 0 0
Fabbri Artes Graficas
Valencia S.A 1996 0 0 0 0 0 0 0
Bruce M. Crowell 1998 157,500 0 0 0 100,000 0 0
Vice President 1997 0 0 0 0 0 0 0
Chief Financial Officer 1996 0 0 0 0 0 0 0
Antony E. Kendall 1998 137,423 0 12,788(2) 0 20,000 0 0
Chief Executive Officer 1997 125,470 8,200 13,089(2) 0 25,000 0 0
EPL Flexible 1996 47,839 0 2,470(2) 0 50,000 0 0
Packaging Ltd
William R. Romig 1998 120,000 0 0 0 0 0 0
Senior Vice President 1997 105,750 14,075 1,634 0 75,000 0 0
Science and Technology 1996 94,089 5,000 0 0 87,500
Timothy B. Owen 1998 120,000 0 0 0 0 0 0
Treasurer 1997 105,000 40,000 0 0 50,000 0 0
1996 90,000 5,000 0 0 57,500 0 0
</TABLE>
(1) assumes an exchange rate of $1:PTS149.70 for 1998 and
$1:PTS152.10 for 1997.
(2) assumes an exchange rate of pound sterling 1:$1.65
COMPENSATION OF DIRECTORS
With the exception of Mr. Devine in his capacity as an officer of the Company,
no cash compensation was paid to any director of the Company during the year
ended December 31, 1998. In May 1998, in accordance with the terms of the
Company's 1994 Stock Incentive Plan, Robert D. Mattei, Adolph S Clausi and
former director Ronald W. Cantwell were each granted an option to acquire 7,500,
625 and 7,500 shares respectively of Common Stock at an exercise price of
$12.875 per share, for their services as members of the audit and compensation
committees. These options are exercisable for five-year terms and have exercise
prices equal to the fair market value of such shares on the date of grant.
Pursuant to the terms of the Company's 1998 Stock Incentive Plan, as amended and
restated, each non-employee director of the Company shall receive an automatic
grant of options to purchase 7,500 shares of Common Stock on June 25, 1999 and
on each June 25 thereafter during the term of such plan. See "Stock Incentive
Plans."
In addition, the Company from time to time has granted to certain of
its non-employee directors a number of options to purchase shares of Common
Stock upon the initial election of each such director to the Company's Board of
Directors to provide incentive for a high level of dedication in the future and
to align the interests of such directors with the interests of the Company's
shareholders. See "Certain Relationships and Related Transactions".
- 52 -
<PAGE> 54
EMPLOYMENT AND CONSULTING CONTRACTS
Mr. Devine and the Company are parties to an employment agreement dated as of
January 1, 1997 which provides that Mr. Devine is to serve as the Company's
Chairman of the Board, President and Chief Executive Officer. The agreement
provides for a rolling three year term. The Agreement provides for a base salary
to be fixed by the Board which, as of January 1, 1997, was $275,000 per year.
Pursuant to the agreement the Company will maintain life insurance on Mr.
Devine's life with a face amount equal to at least $1,000,000, for which Mr.
Devine may designate a beneficiary. Under the agreement Mr. Devine also will be
entitled to receive a retirement benefit if he remains continuously employed (as
defined) by the Company until age fifty. Generally, if Mr. Devine retires at age
65, the retirement benefit to be received annually will be equal to 50% of his
average annual base salary and bonus during the final three years of his
employment (less benefits from any other defined benefit pension plan of the
Company). The percentage of Mr. Devine's average annual base salary and bonus
will be reduced or increased by 6% for each year by which Mr. Devine elects to
have such retirement benefit commence earlier or later than his 65th birthday.
The agreement also provides that Mr. Devine is entitled to participate in all
benefit plans and arrangements of the Company and may also receive bonuses, if
any, as determined by the Board of Directors. The agreement also provides
certain disability and death benefits to Mr. Devine, as well as severance
payments approximately equal to Mr. Devine's average salary and bonus for the
previous three years, to continue for three years if Mr. Devine is terminated
under certain conditions. Additionally, Mr. Devine is entitled to receive a
payment of slightly less than three times his "base amount" (as defined in the
Internal Revenue Code of 1986) in the event of a "change of control" of the
Company (as defined in the agreement). This agreement also contains certain
customary provisions regarding confidentiality and non-competition.
The Company, through Fabbri Artes Graficas Valencia S.A. ("Fabbri"), entered
into an employment agreement with Mr. Saenz de Santa Maria commencing on May 1,
1998, which provides that Mr. Saenz de Santa Maria is to serve as managing
director of Fabbri. The agreement provides for an annual salary of PTS20,000,000
($133,000 at an exchange rate of $1:PTS150), which salary is reviewable on
January 1 annually, together with customary benefits, such as vacation and the
provision of an automobile. A bonus is also payable upon the achievement of
certain performance targets, as agreed on an annual basis. The contract may be
terminated by either side upon six months' notice. The agreement also contains
certain customary provisions regarding confidentiality and non-competition.
The Company entered into an employment agreement with Mr. Crowell effective
February 18, 1998, under which Mr. Crowell will serve as Vice President and
Chief Financial Officer. The contract has an initial term of two years with
annual renewal terms thereafter. Either party may terminate the agreement upon
four weeks notice. If the Company terminates Mr. Crowell's employment without
cause, or the initial or any renewal term expires without being renewed, Mr.
Crowell will receive an amount paid in monthly installments, equal to his annual
base salary (and bonus, if any) earned in the previous twelve months. The
initial annual salary is $180,000, with a bonus of up to 35% of the salary based
upon the achievement of agreed-upon objectives. In addition to customary
provisions on vacation and healthcare coverage, the agreement also provides for
relocation expenses. The agreement further provides that, in the event of a
termination of employment by either party due to a change in control (as defined
in the agreement), Mr. Crowell would receive a total payment equal to twice his
annual salary plus a bonus equal to his average bonus earned over the previous
twelve months. The agreement also contains certain customary provisions
regarding confidentiality and non-competition. Mr. Crowell was also awarded
options to purchase 100,000 shares of Common Stock, which vested on the date of
the agreement.
- 53 -
<PAGE> 55
The Company, through Bakery Packaging Services Limited (now known as EPL
Flexible Packaging Limited ("EPL Flexible")), entered into an employment
agreement with Mr. Kendall commencing on August 1, 1996, which provides that Mr.
Kendall is to serve as Chief Executive Officer of EPL Flexible. The agreement
originally provided for an annual salary of pound sterling 70,000 ($115,000 at
an exchange rate of pound sterling 1:$1.65), WHICH SALARY is reviewable on
January 1 annually and has been increased to pound sterling 83,000 ($137,000 at
an exchange rate of pound sterling 1:$1.65) as of July 1, 1997, together with
customary benefits, such as vacation, the provision of an automobile, healthcare
coverage and contributions into a defined contribution pension scheme. A bonus
is also payable upon the achievement of certain performance targets, as agreed
on an annual basis. The contract may be terminated by either side upon six
months' notice. The agreement also contains certain customary provisions
regarding confidentiality and non-competition.
Effective January 1, 1998, the Company entered into a new employment 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.
STOCK INCENTIVE PLANS
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 (as so modified, the "1994 Plan"). The Company's 1998 Stock Incentive
Plan, as amended and restated ( the "1998 Plan"), was adopted by the Company's
shareholders on September 29, 1998. The 1994 Plan and the 1998 Plan are intended
to provide additional incentive to certain employees, certain consultants or
advisors and non-employee members of the Board of Directors to enter into or
remain in the employ of the Company or to serve on the Board of Directors by
providing them with an additional opportunity to increase their proprietary
interest in the Company and to align their interests with those of the Company's
shareholders generally through the receipt of options to purchase Common Stock
that have 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 1994 Plan and the 1998 Plan provide 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 1994 Plan and the 1998 Plan are administered by the administration
committees appointed by the Board of Directors, which are currently comprised of
Robert D. Mattei and Adolph S. Clausi. The committees generally have 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 granted under the 1994 Plan may not be more than five years from
the grant date and options generally terminate three months after an optionee
ceases to be employed by the Company (twelve months in the case of death or
disability). The 1994 Plan provides that no option may be granted under it after
May 4, 1999.
Under the 1998 Plan, 850,000 shares of Common Stock are reserved for issuance.
No options under the 1998 Plan had been awarded as of December 31, 1998. The
terms of the 1998 Plan are substantially similar to those of the 1994 Plan,
except that (i) the minimum exercise price for options granted under the
- 54 -
<PAGE> 56
1998 Plan to executives, officers and employee directors of the Company that
were serving as of September 29, 1998, is $14.00 per share, (ii) all options
granted under the 1998 Plan must be granted at a premium to the market price of
the Common Stock at the time of grant, (iii) options granted under the 1998 Plan
cannot be repriced without shareholder approval and (iv) the term of an option
may not be more than ten years from the grant date. In addition, the 1998 Plan
provides for the automatic grant to each non-employee director of the Company of
options to purchase 7,500 shares of Common Stock on June 25, 1999 and on each
June 25 thereafter during the term of the 1998 Plan. The 1998 Plan provides that
no option may be granted under it after June 25, 2008.
The following table sets forth certain information concerning grants of options
to purchase Common Stock made during the year ended December 31, 1998 to Named
Executive Officers.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
% OF ASSUMED ANNUAL RATES OF
SHARES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(5 YEARS)(1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -------------------------------
NAME GRANTED FISCAL YEAR PRICE($) DATE 0% 5% 10%
---- ------- ----------- -------- ---- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Paul L. Devine -- -- -- -- -- -- --
Jose Saenz de Santa Maria 17,500 4.41 14.00 01/09/2003 0 0 0
Jose Saenz de Santa Maria 27,500 8.82 5.625 01/09/2003 0 0 0
Bruce Crowell 100,000 25.21 11.125 03/10/2003 0 0 0
Antony E. Kendall 20,000 5.04 5.625 09/29/2003 0 0 0
William R. Romig -- -- -- -- -- -- --
Timothy B. Owen -- -- -- -- -- -- --
</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
by Named Executive Officers of options to purchase Common Stock during the year
ended December 31, 1998 and the value as of December 31, 1998 of unexercised
stock options held by Named Executive Officers as of such date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS OPTIONS AT
AT DECEMBER 31, 1998 DECEMBER 31, 1998(2)
SHARES ------------------------ ------------------------
ACQUIRED VALUE UNEXER- UNEXER-
NAME ON EXERCISE REALIZED($) EXERCISABLE CISABLE EXERCISABLE CISABLE
- - - ---- ----------- ---------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Paul L. Devine 0 0 400,000 0 $37,500 0
Jose Saenz de Santa Maria 0 0 45,000 0 0 0
Bruce M. Crowell 5,000(1) 5,625 95,000 0 0 0
Antony E. Kendall 0 0 95,000 0 0 0
William R. Romig 0 0 180,000 0 21,875 0
Timothy B. Owen 0 0 170,000 0 65,625 0
</TABLE>
(1) None of the shares underlying the exercised options had been sold as at
December 31, 1998.
- 55 -
<PAGE> 57
(2) At December 31, 1998, the closing price of a share of Common
Stock on the Nasdaq National Market was $4.75.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee during fiscal 1998 were Mr.
Mattei, who served for the entire year, Mr. Cantwell, who served until his
resignation in May 1998, and Mr. Clausi who was elected to the committee in
March 1998. Mr. Cantwell, a former director of the Company, is the President of
Trilon, a major shareholder of the Company, and President of VC Holdings, the
sole managing member of Trilon. None of Mr. Mattei, Mr. Cantwell or Mr. Clausi
were officers or employees of the Company or any of its subsidiaries during
1998. Mr. Mattei was Secretary of the Company from February 1988 to March 1993.
Except as disclosed under "Item 13 - Certain Transactions," none of the members
of the Compensation Committee nor any of their affiliates entered into any
transactions with the Company during 1998.
- 56 -
<PAGE> 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 31,
1998, regarding the beneficial ownership of (i) each director, (ii) each of the
Named Executive Officers, (iii) all executive officers and directors of the
Company as a group and (iv) each person known to the Company to be a beneficial
owner of more than 5% of the Company's outstanding Common Stock. The table also
sets forth certain information as of December 31, 1998, regarding beneficial
ownership of the Company's Series A Preferred Stock, each share of which is
convertible into Common Stock and is entitled to the number of votes equal to
the number of whole shares of Common Stock into which each such share is
convertible. The Series D Preferred Stock is not a class of voting securities.
Except as set forth below, the shareholders named below have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED (1) COMMON STOCK
- - - ------------------------ --------- ------------
<S> <C> <C>
Lancer Partners, L.P. 1,788,505(2) 15.54%
Trilon Dominion Partners, LLC 1,120,000(3) 9.73%
Paul L. Devine 770,416(4) 6.47%
Robert D. Mattei 221,983(5) 1.93%
Al Clausi 625(6) *
W. Ward Carey 15,300(7) *
Bruce Crowell 101,500(8) *
William R. Romig 180,000(6) 1.54%
Antony E. Kendall 96,000(8) *
Jose Saenz de Santa Maria 45,000(6) *
Timothy B Owen 188,500(9) 1.61%
Directors and executive officers
as a group (11 persons) 1,859,074(10) 14.56%
Total number of shares outstanding - 11,510,964 100.00%
common
Shares of common stock issuable upon
conversion of Series A Preferred 40,000(11) *
</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 shares of Common Stock held by funds other than Lancer
Partners, L.P., but which are commonly
- 57 -
<PAGE> 59
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
10152.
(3) The address for Trilon Dominion Partners, L.L.C. is Two Greenwich
Plaza, Suite 100, Greenwich, CT 06830.
(4) Includes 400,000 shares of Common Stock that may be acquired by
exercising options. The address for Mr. Devine is c/o the Company, 2
International Plaza, Suite 245, Philadelphia, PA 19113-1507.
(5) Includes 30,000 shares of Common Stock that may be acquired by
exercising options to acquire 30,000 shares of Common Stock and 10,000
shares of Common Stock owned by Mr. Mattei's wife, as to which he
disclaims beneficial ownership.
(6) Amount shown represents shares of Common Stock issuable upon exercise
of options.
(7) Includes 5,000 shares of Common Stock owned by Mr. Carey's wife, as
to which he disclaims beneficial ownership.
(8) Includes 95,000 shares of Common Stock that may be acquired by
exercising options
(9) Includes 170,000 shares of Common Stock that may be acquired by
exercising options.
(10) Includes 1,260,625 shares of Common Stock that may be acquired by
exercising options.
(11) As of December 31, 1998 there were a total of 60,000 shares of Series A
Preferred Stock outstanding, beneficially held as follows: 50,000 or
83.34% held Dr. Joe H. Cherry, whose address is 320 Cardinal Heights,
Dadeville, AL; 5,000 or 8.33% held by J. Matthew Dalton, whose address
is 1232 W. George Street, Chicago, IL 60657; and 5,000 or 8.33% held by
Verne Scazzero, whose address is 1414 South Prairie Av., Chicago, IL
60605.
- 58 -
<PAGE> 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 15, 1998 the Company completed the public offering of 2,400,000 shares of
its common stock (the "Offering"), of which 809,097 shares were sold by the
Company and 1,590,903 were sold by Trilon Dominion Partners LLC ("Trilon"). In
connection with the Offering, Trilon converted 1,933,000 shares of the Company's
Series A Stock into 1,288,667 shares of common stock, leaving 90,000 shares of
Series A Stock issued and outstanding as at June 30, 1998. The Offering price
was $10.00 per share of common stock. The Company and Trilon agreed to apportion
the expenses of the Offering, Trilon paying $1,011,000 and the Company paying
$1,420,000. 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.
Mr. Cantwell, a former director of the Company, is the President of Trilon and
President of VC Holdings, the sole managing member of Trilon.
In March 1999, Paul L. Devine, the Company's Chairman and Chief Executive
Officer, agreed to extend to the Company on a short term basis a revolving
credit facility in an amount of up to $500,000, of which $475,000 is outstanding
as of the date of this Annual Report. The Company's obligations under this
facility are unsecured, and amounts outstanding thereunder bear interest at a
rate of nine percent (9%) per annum and are due on the earlier to occur of (a)
demand for payment and (b) June 30, 1999. The Company has agreed to pay all
reasonable out-of-pocket expenses incurred by Mr. Devine in connection with
advancing funds to the Company under this facility.
The Company from time to time has granted to certain of its non-employee
directors a number of options to purchase shares of Common Stock upon the
initial election of each such director to the Company's Board of Directors to
provide incentive for a high level of dedication in the future and to align the
interests of such directors with the interests of the Company's shareholders.
On March 26, 1999, the Company granted under the 1998 Plan to each of Al S.
Clausi and W. Ward Carey options to purchase 50,000 shares of Common Stock at
$4.6063 an exercise price which represents 110% of the closing price of the
Common Stock on the date of grant. Such options were fully vested as of the
date of grant.
- 59 -
<PAGE> 61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
See index to Financial Statements at page 27
REPORTS ON FORM 8-K
On October 13, 1998 the Company filed an 8-K under Item 5 thereof relating to a
press release issued by the Company on October 1, 1998. This press release
reported the Company's discussion at its Annual Meeting of Shareholders held on
September 29, 1998 of strategies for continued growth in the US and Western
European markets by using its proprietary technologies and expertise in food
science to package and market fresh produce.
On December 31, 1998 the Company filed an 8-K under Item 5 thereof relating to a
press release issued by the Company on December 16, 1998. This press release
announced the granting by the U.S. patent office of two new U.S. patents for
food processing aid-based technologies designed to improve the quality and
economic value of broccoli and mushrooms as they are brought to the consumer.
On December 31, 1998 the Company filed an 8-K under Item 5 thereof relating to a
press release issued by the Company on October 22, 1998. This press release was
issued in relation to receipt of approval for Newcorn's Camarillo Facility for
processing of fresh-cut corn and potato products under the "Green Giant(R)
Fresh" brand name.
EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on Form
10-K. Where so indicated, exhibits which were previously filed are incorporated
by reference.
EXHIBIT
NUMBER DESCRIPTION
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
stockholders 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.)
10.1 1994 Stock Incentive Plan, as amended (Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-8
(File No 333-42047) on file with the SEC).
10.2 Agreement for the sale and purchase of the entire issued share
capital of Bakery Packaging Services
- 60 -
<PAGE> 62
EXHIBIT
NUMBER DESCRIPTION
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.)
10.3 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.)
10.4 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 Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 on file with the SEC.)
10.5 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.)
10.6 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.)
10.7 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.)
10.8 Operating Agreement of NewCornCo, LLC, dated July 19, 1996, as
amended, between the Company and Agricultural Innovation & Trade,
Inc. (Incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-3 (File No. 333-42185) on file
with the SEC.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 Agreement for the Sale and Purchase of the entire issued share
capital of Fabbri Artes Graficas Valencia S.A., dated December 11,
1997. (Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on December 24, 1997.)
10.14 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.)
10.15 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
- 61 -
<PAGE> 63
EXHIBIT
NUMBER DESCRIPTION
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.)
10.16 Trademark License Agreement between IPS Produce, Inc. (now known
as EPL Food Products, 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.)
10.17 Employment Agreement dated as of February 18, 1998, by and between
EPL Technologies, Inc. and Bruce M. Crowell. (Incorporated by
reference to Exhibit 10.22 to the Company's Registration Statement
on Form S-1 (File No. 333-46397) on file with the SEC.)
10.18 Employment Agreement dated as of October 1, 1997, by and between
EPL Technologies, SRL. and Jose Saenz de Santa Maria.
(Incorporated by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (File No. 333-46397) on file
with the SEC.)
10.19 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.)
10.20 Operating Agreement of the new joint venture between the Company
and American National Can Company. (Incorporated by reference to
Exhibit 99.3 to the Company's Current Report on Form 8-K filed on
March 30, 1998.)
10.21 Employment Agreement dated as of May 1, 1998 by and between Fabbri
Artes Graficas Valencia SA and Jose Saenz de Santa Maria.
(Incorporated by reference to Exhibit 10.24 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998)
10.22 Employment Agreement dated as of July 1, 1998 by and between EPL
Technologies, Inc. And R. Brandon Asbill. (Incorporated by
reference to Exhibit 10.25 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998)
10.23 1998 Stock Incentive Plan, as amended and restated (Incorporated
by reference to the Company's Proxy Statement on Form 14A filed
with the SEC on August 25, 1998.)
11.0 Computation of Earnings per Common Share and Fully Diluted
Earnings per Common Share.
21 Subsidiaries of the Company (Incorporated by reference to Exhibit
21 to the Company's Registration Statement on Form S-1 (File No
333-46397) on file with the SEC).
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedules (for SEC use only)
- 62 -
<PAGE> 64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date: March 30, 1999 /S/ Paul L. Devine
--------------------------------
Paul L. Devine
Chairman and President
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities on the dates indicated.
Date: March 30, 1999 /S/ Paul L. Devine
--------------------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: March 30, 1999 /S/ Bruce M. Crowell
---------------------------------
Bruce M. Crowell
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 30, 1999 /S/ Robert D. Mattei
--------------------------------
Robert D. Mattei
Director
Date: March 30, 1999 /S/ Adolph S. Clausi
------------------------------
Adolph S. Clausi
Director
Date: March 30, 1999 /S/ W. Ward Carey
------------------------------
W. Ward Carey
Director
- 63 -
<PAGE> 1
EPL Technologies, Inc.
EXHIBIT 11.0
Computation of Basic Earnings per Common Share
and Diluted Earnings per Common Share
<PAGE> 2
EXHIBIT 11.0
EPL TECHNOLOGIES, INC.
COMPUTATION OF BASIC LOSS PER COMMON SHARE AND
DILUTED LOSS PER COMMON SHARE
(in thousands except per share data)
- - - --------------------------------------------------------
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss $ (7,781) $ (7,187) $ (4,296)
Deduct:
Accretion, discount and dividends
on preferred stock 2,754 1,168 999
-------- -------- --------
Net loss for common shareholders $(10,535) $ (8,355) $ (5,295)
======== ======== ========
Weighted average number
of common shares outstanding 10,599 8,373 7,437
======== ======== ========
Basic loss per share $ (0.99) $ (1.00) $ (0.71)
======== ======== ========
Net loss for diluted loss
per share computation $ (7,781) $ (7,187) $ (4,296)
Weighted average number
of common shares outstanding 10,599 8,373 7,437
Common share equivalent applicable to:
Series A convertible preferred stock 531 1,540 1,751
Series B convertible preferred stock 169 118
Series C convertible preferred stock 13 49
Series D convertible preferred stock 1,238 178
Series A warrants 15 100 128
Series D warrants 202 28
Other warrants 75 96 243
Stock options 1,831 1,574 1,196
Less common stock acquired
with net proceeds 2,534 982 597
Weighted average number of common shares
and common share equivalent used to compute -------- -------- --------
diluted loss per share 11,970 11,125 10,276
======== ======== ========
Diluted loss per share $ (0.65) $ (0.65) $ (0.42)
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
EPL Technologies, Inc. on Forms S-3 (Nos. 333-42185 and 333-09719) and on Forms
S-8 (Nos. 333-4306, 333-9795 and 333-4207) of our report March 30, 1999
appearing in the Annual Report on Form 10-K of EPL Technologies, Inc. for the
year ended December 31, 1998.
Deloitte & Touche LLP
Philadelphia, PA
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE AUDITED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 TOGETHER
WITH ALL NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,831,139
<SECURITIES> 0
<RECEIVABLES> 6,419,712
<ALLOWANCES> 0
<INVENTORY> 4,275,490
<CURRENT-ASSETS> 13,989,004
<PP&E> 13,821,161
<DEPRECIATION> (2,096,513)
<TOTAL-ASSETS> 29,771,508
<CURRENT-LIABILITIES> 8,858,311
<BONDS> 3,683,604
12,846,586
60,000
<COMMON> 11,511
<OTHER-SE> 4,233,532
<TOTAL-LIABILITY-AND-EQUITY> 29,771,508
<SALES> 32,977,537
<TOTAL-REVENUES> 32,977,537
<CGS> 29,481,264
<TOTAL-COSTS> 7,903,882
<OTHER-EXPENSES> 3,292,267
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,345
<INCOME-PRETAX> (7,781,366)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,781,366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,781,366)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> (0.65)
</TABLE>
