ITEM 1. BUSINESS
GENERAL DEVELOPMENT
EPL Technologies, Inc. (the "Company" or "EPL") is a leading designer, developer, manufacturer and marketer of packaging technologies, which include a range of proprietary perforated products, as well as proprietary produce processing technologies and scientific and technical services. These products and services are designed to maintain the quality and integrity of various types of fresh-cut produce, as well as and address a number of other markets. The Company designs and markets products to address the specific needs of a variety of fresh-cut produce categories. The foundation of the Company's 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 mushrooms, 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 address the particular post harvest needs of specific vegetables. The Company markets these packaging products to produce growers and processors. The Company has launched major initiatives to seek to maximise the opportunities for its range of perforated products. These products are marketed for use in pharmaceutical, bakery, snackfood, consumer goods, healthcare, confectionery and industrial markets.
The Company currently operates in two main business segments, proprietary processing technologies, and proprietary perforated packaging products. The Company's revenues consist of (i) revenues derived from the sale of flexible packaging and processing technologies, (ii) revenues derived from the sale of certain fresh-cut fruits and vegetables, (iii) royalties from the sale of certain fresh-cut fruits and vegetables 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 in 2000 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 mushrooms and fresh-cut apples, that use the Company's proprietary technologies.
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 provide a platform to increase its sales of packaging, processing technologies 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 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 U.S. 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
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 ntegrated 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 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 packaging technologies, processing technologies and scientific and technical services to processors of packaged, fresh-cut produce as well as to our broadening range of new markets. To this end, the Company has developed 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 latter 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. At the end of 2000, the management decided that it was appropriate to discontinue its corn operations under its previous format, which had consumed much of the Company's financial and management resources. The management agreement with the Company's partner in Newcorn had come to an end, which made it a suitable point for the Company to refocus its resources on those opportunities that offer higher margins and a shorter, less demanding route to market. As a result of this, the Company has agreed with Green Giant to discontinue the use of the brand for corn and with them pursue a different entry into the market that places little, if any, demands on the Company's resources.(See Note 3 to the Company's consolidated financial statements).
- 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 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 and now by Reser's Fine Foods, Inc. (See below).
- 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 technology to Farmington Fresh and provides scientific and technical services in connection with the production by Farmington Fresh of certain varieties of fresh-cut sliced apples. The agreement, which currently extends until December 2002, grants Farmington Fresh production exclusivity in its local geographic market. In addition to revenues from sales of the Company's processing aids 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 U.S. 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. As part of the Company's desire to better exploit its perforation technologies in the U.S., the Company and ANC have agreed to unwind their joint venture and are discussing various alternative relationships going forward.
- 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 (with regard to proposed changes relating to the license to use the "Green Giant(R) Fresh" brand name in connection with fresh-cut corn products - As discussed above and in Item 7 below, at the end of 2000 management decided that it was appropriate to discontinue its corn operations under its previous format).
- 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.
- In October 1999, EPL announced the creation of a strategic alliance with Reser's Fine Foods ("Reser's"), which is one of North America's largest potato product manufacturers. It provides EPL with access to world-class manufacturing and distribution capability across the U.S. (Reser's currently has distribution centers in 14 states). Reser's has recently completed a new 100,000 square feet state of the art processing facility in Pasco, Washington, and will provide EPL with significant economies of scale. Reser's will be responsible for all aspects of raw material sourcing, production and distribution to EPL of its range of fresh-cut potato products. The Reser's/EPL alliance will meet all of EPL's potato volume requirements for the near term, and EPL believes that it will only need relatively small amounts of incremental expenditure to increase future capacity.
- In addition, through the Reser's/EPL alliance, EPL gained the sourcing of an additional range of blanched potato products. These part-cooked products broaden EPL's product range and are expected to make its product proposition more attractive to potential distributors. The blanched potato products will be marketed under the "Fresh Alternatives" brand name, also licensed from Pillsbury.
- In March 2000, EPL announced the signing of a long-term worldwide exclusive marketing and licensing agreement with The Biotech Group, an affiliate of Monterey Mushrooms. Under this agreement, EPL has licensed its Mushroom Fresh(R) processing technology to The Biotech Group and will receive a royalty on the sale of mushroom products that use EPL's technology.
- In May 2000, EPL announced it had signed a two year manufacturing and supply agreement with Procter & Gamble to provide a key component for a new consumer product. This component, to be manufactured at a U.S. facility of the Company's U.S. packaging business, involves the use of proprietary technology.
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 two major classifications: proprietary perforating packaging technologies and processing technologies (which include the sale of fresh-cut corn and potatoes).
Perforated Packaging Products. 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 technologies. As with processing technologies, 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 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 technology 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 capability 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. The Company has an exclusive agreement with duPont, whereby duPont purchases its entire requirement for flame perforation services for its Mylar(R) film from the Company. In addition, the Company is increasingly being approached to work on new applications, many outside of the produce industry, utilizing its perforating knowledge and capabilities.
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 and eight-color press. 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 technologies 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, cooked meat pastry products, bakery and confectionery industries, and, to a lesser extent, for other uses, including pharmaceutical and industrial applications.
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) and Mushroom Fresh(R) processing aids have the potential to create new markets. These new markets, i.e. fresh-cut apple slices, fresh-cut potato products and freshly washed mushrooms, have historically not been available due to the lack of an effective, non-sulfite based alternative. For example, Apple Fresh(R) (for which the Company has recently been granted U.S. patent protection), 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. Potato Fresh(R) is designed to provide similar pre-packaged distribution capability for and fresh-cut potato products. In addition to Apple Fresh(R), Potato Fresh(R) and Mushroom Fresh(R), the Company currently markets its Carrot Fresh(R) processing aid for carrots.
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 services 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, nutritional value and microbiological populations 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 four Ph.D.s, as well as senior scientists and additional support technicians. These areas of expertise include microbiology, food science, post-harvest physiology, plant physiology and plant pathology. The Company maintains three laboratories dedicated to microbiological testing, as well as applications work to support the Company's sales thrust.
The Company believes its scientific and technical expertise enhances its credibility in marketing its processing technologies 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. 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, 1998, 1999 and 2000 were approximately $1,573,000, $1,870,000 and $1,341,000 respectively. See the Company's Consolidated Financial Statements.
MARKETS
The Company's focus is on products and services that 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. 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 Company's processing technologies generally help to facilitate either new products, in the case of fresh-cut potato products, or a superior product proposition, in the case of the mushrooms. 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.
Increasingly, the Company is able to leverage its perforating expertise and exploit opportunities in non produce related industries. This area is expected to contribute significantly to the Company's future growth in sales revenue.
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, principally in produce in Europe. The Company has been developing relationships with processors and other companies in connection with the use of the Company's processing aid technology and related protocols in various fruit and vegetable categories.
The Company believes that demand for fresh-cut produce is being driven at the retail level by consumer preferences for healthy foods, convenience and variety. Similarly, demand for fresh-cut produce by food service providers is increasingly driven by the need to be able to deliver a product that 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
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 a systems solution approach to the packaging needs of the processor.
In developing its processing technologies, 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. In this connection, the Company has extensive experience of testing and operating in a number of processing facilities and working on a number of different fruits and vegetables, and can thus 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 that ultimately leads to a product decision. The Company also works with the customer to develop specific protocols that should be applied.
In the area of scientific and technical services, the Company has an existing customer base that it has built up over time. 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 technologies, 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 technologies and packaging.
Due to the extended nature of the development, testing and sales process for processing technologies, the Company has experienced no significant backlog of orders to date for these products and, based on the relatively small incremental cost and time frame required to increase product output, the Company does not believe that any backlog measurement is material. Similarly, the Company has not experienced a significant backlog of orders for its packaging materials.
SOURCES OF SUPPLY
The Company'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.
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.
Previously, certain types of potatoes (primarily Russets) used by the Company in processing were provided under a long-term market priced supply agreement with Potandon. The Company also previously acquired other types of potatoes on the open market. Since the alliance with Reser's announced in late 1999, Reser's is responsible for acquiring all of the Company's potato requirements for processing.
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 technologies 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 technologies and related activities segment. The Company markets processing technologies 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. 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, 1999 and 2000, no one customer accounted for more than 10% of the Company's sales. During 1998, Pepsico accounted for 15% of the Company's sales.
SEASONALITY
Although, historically, the management of the Company has not discerned a seasonal pattern in the Company's business on a consolidated basis, certain aspects of the Company's business are seasonal. For example, Fabbri, one of the Company's subsidiaries 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 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 have been 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 six U.S. patents issued or allowed, one U.S. patent pending and numerous other patents 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, with the U.S. patent for the Company's "Apple Fresh(R)" processing technology being granted on April 25, 2000. The Company also has U.S. 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. In addition to the foregoing, U.S. patent protection has been obtained 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 (the "License"). During the last few months the Company has been discussing the nature of its relationship with Penn State University. These discussions were precipitated by Penn State's claim that the Company had breached certain of its obligations under the License (a claim the Company believes is without merit). In any event, the Company has agreed to consider Penn State's proposal to terminate the license and enter into a new non-exclusive license covering the same technology, which modified license the Company believes will not have a material adverse effect on its ability to penetrate the fresh mushroom market. As of the date hereof, no final decision with Penn State has been reached. 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 twelve registered U.S. trademarks, including Respire(R), and its processing aid names, such as Potato Fresh(R), and two 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. The Company also has a license to use "Fresh Alternatives" brand name on potato products, also licensed from Pillsbury. 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 licenses for other trademarks that it believes will add value to a proposed product. Furthermore, the Company has eight patents and 19 patent applications pending outside the U.S. for its main processing aid technologies, as well as one registered trademark and two 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.
REGULATORY REQUIREMENTS
Based on advice from FDA counsel and on assessment of relevant scientific literature by the Company and by third parties, the Company has concluded that the use of the Company's processing aids in accordance with the Company's recommended protocols is GRAS under FDA regulations. There is, however, a risk that new scientific information about an ingredient could change its GRAS status, that the FDA could revise its regulations governing the GRAS status of the ingredients, or that the FDA might take the position that an ingredient is not GRAS under the current regulations. Any such change could have a material adverse effect on the Company's business, financial condition and results of operations. The Company employs a firm of Washington-based FDA lawyers to advise the Company on the effect of FDA regulations on the Company's
operations, together with any planned or potential changes in government attitude and legislation. The Company also consults with advisors outside the U.S. concerning foreign regulatory issues. Compliance with existing FDA regulations has not been a material burden on the Company's operations to date, although there can be no assurance that the regulatory requirements will not change and increase the burden to the Company.
The Company's packaging operations are subject to federal, state and local U.S., U.K. and other European environmental laws and regulations that impose limitations on the generation, storage, transport, disposal and emission of various substances into the environment, including laws that restrict the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company is subject to U.S. and foreign laws and regulations regarding the use, storage, transport and disposal of inks used with its packaging products. There can be no assurance that there will not be an accidental contamination, disposal or injury from the use, storage, transport or disposal of inks used in the Company's packaging business. Additionally, the Company's use of plastic film in its packaging operations may subject it, in certain jurisdictions, to laws and regulations designed to reduce solid wastes by requiring, among other things, plastics to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees and limits on the use of plastic products. In addition, various consumer and special interest groups have lobbied from time-to-time for the implementation of additional environmental protection measures. The Company may be required to make capital expenditures in response to changing compliance standards and environmental regulations. Furthermore, unknown contamination of sites currently or formerly owned or operated by the Company (including contamination caused by prior owners and operators of such sites) and off-site disposal of hazardous substances and wastes may give rise to additional compliance costs. There can be no assurance that the Company will not incur liabilities for environmental matters in the future, including those resulting from changes in environmental regulations, that may have a material adverse effect on the Company's business, financial condition and results of operations.
Specifically, during its due diligence investigation in connection with the Fabbri acquisition, the Company was informed that from time-to-time in the past, Fabbri disposed of certain hazardous waste (such as used oil cans, empty dye cans and electrolytic salts residue) using some waste 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 actions 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, 2000, the Company had 221 employees providing services in the U.S. and Europe, of which 21 were engaged in sales and marketing, 165 in production, 9 in technical services and research and 26 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, the Company's Chief Executive Officer, 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 Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward Looking Statements."
ITEM 2.
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:
(a) Property is leased by Newcorn and the lease is guaranteed by the Company. Newcorn occupies approximately 73% of the facility.
(b) As discussed more fully in Note 3 to the Company's consolidated financial statements, the Company has ceased operations in these facilities and is seeking to exit its obligations under these ` leases.
The Company also occupies additional space under agreements with third parties, primarily in connection with research and development arrangements and processing activities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party or to which any of its subsidiaries or 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 against it or its subsidiaries by governmental authorities.
ITEM 4.
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, 2000.
PART II
ITEM 5.
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 is traded on the Nasdaq SmallCap Market under the symbol "EPTG", and has done so since September 1999, having previously traded on the Nasdaq National Market under the same symbol since May 1998. From January 4, 2000 to February 11, 2000 the Common Stock traded under the symbol "EPTGC", as the Company was granted an exemption from the minimum $1.00 per share stock price Nasdaq SmallCap Market listing requirements. 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. The following table sets forth the quarterly range of high and low bid quotations for 1999 and 2000 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):
In February 2001, the Company announced that it had received Nasdaq Staff determinations indicating that (A) the Company fails to comply with the $1.00 minimum bid price and net tangible assets, market capitalization and net income requirements for continued listing set forth in Marketplace Rules 4310(c)(04) and 4310(c)(2)(B), (B) the Company's Form 10-K for the fiscal year ended December 31, 1999 contained a 'going concern' qualification in the audit opinion and (C) the Company's securities are, therefore, subject to delisting from The Nasdaq SmallCap Market. The Company requested, and on March 22, 2001 was heard, at a hearing before a Nasdaq Listing Qualifications Panel ("Panel") to review the Staff determinations. There can be no assurance the Panel will grant the Company's request for continued listing.
As of February 28, 2001 there were 37,425,814 shares of the Company's Common Stock issued and outstanding, held by 248 shareholders of record and approximately 3,400 beneficial shareholders. In addition,
there were 210,610 shares held in treasury as of the same date. During the twelve months ended December 31, 2000, 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 the "Preferred Stock"), the Company intends to retain earnings, if any, that 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. See Note 9 to the Company's Consolidated Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
A total of 6,715,333 shares of Common Stock were issued, in transactions not involving a public offering under the Securities Act of 1933, as amended, during the year ended December 31, 2000. 3,672,000 shares were issued to a number of institutional investors in a private placement, raising gross proceeds of $3,962,000. In addition, in connection with the restructuring of the credit facility with the Lenders detailed in Note 8 to the Consolidated Financial Statements, a further 2,200,000 shares of Common Stock were issued to the Lenders and 310,000 shares of Common Stock to a third party which participated in the negotiation of the restructuring. The value of these shares were amortized as interest expense over the then remaining period of the facility. A further 33,333 shares of Common Stock were issued upon conversion of the 50,000 shares of Series A Stock detailed in Note 10 to the Consolidated Financial Statements, 240,000 shares of Common Stock were issued in settlement of liabilities totaling $233,500, 100,000 shares of Common Stock were issued upon the exercise of warrants, raising gross proceeds of $52,000 and 160,000 shares (valued at $160,000) were issued in relation to the raising of new equity.
ITEM 6.
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, 1998, 1999 and 2000 and as of December 31, 1999 and 2000 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, 1996 and 1997 and as of December 31, 1996, 1997 and 1998 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 Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a leading developer, manufacturer and marketer of packaging technologies, which include a range of proprietary perforated products, as well as proprietary produce processing technologies and scientific and technical services. These products and services are designed to maintain the quality and integrity of fresh-cut produce, as well as address a number of other markets. The Company designs and markets products to address the specific needs of a variety of fresh-cut produce categories. The foundation of the Company's systems is its proprietary produce processing 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 technologies better maintain their natural characteristics such as color, texture, taste and smell. The use of the Company's processing technologies 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 address the particular post harvest needs of specific vegetables The Company markets these packaging products to produce growers and processors. The Company has launched major initiatives to seek to maximise the opportunities for its range of perforated products. These products are marketed for use in pharmaceutical, bakery, snackfood, consumer goods, healthcare, confectionery and industrial markets.
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 technologies and related activities segment.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Sales. Sales decreased from $30,307,000 in 1999 to $27,814,000 in 2000, a decrease of $2,493,000 or 8.2%. Sales of processing technologies and related activities decreased from $7,539,000 in 1999 to $4,408,000 in 2000, a decrease of $3,131,000 or 41%. Sales of U.S. packaging materials increased from $2,666,000 in 1999 to $3,204,000 in 2000, an increase of $538,000 or 20%. Sales of U.K. packaging materials increased from $11,486,000 in 1999 to $14,194,000 in 2000, an increase of $2,708,000 or 24%. Sales of European packaging materials decreased from $8,616,000 in 1999 to $6,008,000 in 2000, a decrease of $2,608,000 or 30%.
The decrease in sales of processing technologies and related activities was mainly due to the lower sales revenue from fresh-cut corn sold through the Company's majority-owned affiliate, Newcorn, which accounted for 89% of the decline. During 1999 and early 2000 the Company restructured the corn operations and withdrew from the market. This withdrawl also involved not only a reduction in overheads, thus reducing the breakeven level of sales, but also a complete reappraisal of the sales and purchasing model. In addition, the Company largely withdrew from the corn market during November and December 2000. Given the previous experience of the business, the Company did not previously contract for corn growing during this period in order to maintain a favorable risk profile. At the end of 2000, the management decided that it was appropriate to discontinue its corn operations under its previous format, which had consumed much of the Company's financial and management resources. The management agreement with the Company's
partner in Newcorn had come to an end, which made it a suitable point for the Company to refocus its resources on those opportunities that offer higher margins and a shorter, less demanding route to market. As a result of this, the Company has agreed with Green Giant to discontinue the use of the brand for corn and with them pursue a different entry into the market that places little, if any, demands on the Company's resources. The Company's strategic objectives remain undiminished in terms of the provision of processing technologies and the Company believes that it will be able to supply technology to the corn industry, without incurring the capital expenditures and expenses required to manufacture and distribute corn products using such technology. This withdrawal from the day to day activity of supplying finished corn product will help facilitate the Company's move to profitability, which remains the Company's goal. However, there can be no assurance that such will be the case.
During the first quarter of 2000, the Company completed the relocation of its potato processing equipment from Somis, California to Pasco, Washington. The production and shipment of fresh-cut potato products commenced in March from the Pasco, Washington facility of Reser's. During this relocation period the Company withdrew a number of products from the market and thus, there was a fall in revenue while the processing line was relocated. These products were put back into production during the second and third quarters of 2000. This transition has taken longer than expected and the Company is only just getting back into production after several distribution tests and studies. This relocation followed the signing in October 1999 of a strategic five-year manufacturing and co-pack agreement with Reser's, under which Reser's will process and supply EPL Food with all of EPL Food's fresh-cut potato product requirements. As stated earlier, this relocation caused some disruption to shipments and also caused the Company to restrict its sales and marketing activities until such time as the relocation was completed, which accounted for the balance of the decline in this segment.
In addition to the above mentioned co-pack agreement, Reser's will process and supply EPL Food with a new range of blanched (partially cooked) potato products to be sold by EPL Food under the Fresh Alternatives (TM) brand. The Fresh Alternatives (TM) brand has been made available to EPL Food by the Sholl Group II, Inc., the exclusive licensee of The Pillsbury Company's Green Giant (R) Fresh brand name. The Company has already commenced sales of these blanched potato products, although such sales did not have a material impact on sales revenue during 2000. In addition, the Company and Reser's agreed to enter into a related five-year non-exclusive license agreement for the Company's proprietary processing technology for potatoes. The Company currently believes these arrangements for both fresh and blanched potato products will have a material positive impact on the sales revenue of EPL Food in 2001 and beyond, although there can be no assurance such will be the case.
During the first quarter of 2000, the Company announced an exclusive licensing arrangement with Monterey Mushrooms for its Mushroom Fresh (R) processing technology, and began generating revenue during the second and third quarters of 2000. During the last few months, the Company has been discussing the nature of its relationship with Penn State University. These discussions were precipitated by Penn State's claim that the Company had breached certain of its obligations under the License (a claim the Company believes is without merit). However, the Company has agreed to consider Penn State's proposal to terminate the license and enter into a new non-exclusive license covering the same technology, which modified license the Company believes will not have a material adverse effect on its ability to penetrate the fresh mushroom market. As of the date hereof, no final decision with Penn State has been reached. In addition, during December the license granted to Monterey Mushrooms was changed to become non-exclusive. Although such revenue is currently not material, the Company believes that these arrangements will have a material contribution to processing technology revenue in 2001 and beyond, although there can be no assurance that this will in fact be the case. The Company is also following up on potential opportunities for processing technologies and scientific and technical services in Europe.
In line with the Company's stated objective of achieving group profitability, and as its Pure Produce subsidiary was forecasting continued losses, it was agreed with the management of this subsidiary that it
would be more appropriate for it to function outside of the Company. Thus, subsequent to the year end, certain assets of the subsidiary were sold at approximately net book value to management. Total proceeds were not material to the Company.
The 20% increase in U.S. packaging material sales was principally attributable to increasing sales of perforated products, as well as timing differences in shipments to large customers compared to the same period of 1999. In May 2000 the Company signed a two year manufacturing and supply agreement with Procter & Gamble to provide a key component for a new consumer product. This component, to be manufactured at a U.S. facility of the Company's U.S. packaging business, involves the use of proprietary technology. The product and its expected volume have not been identified for competitive reasons. The U.S. packaging facility has been expanded to better manage the increased volume and production demands of this new agreement. The Company continues to be engaged in discussions with a number of potential customers for new product applications and markets, especially in relation to the Company's proprietary perforating capabilities. These products are marketed for use in pharmaceutical, bakery, snackfood, consumer goods, healthcare, confectionery and industrial markets Some initial orders have been received to date. Should further such orders be forthcoming, the Company expects that such new orders would make a material contribution to sales revenue in 2001 and onwards. There can be no assurance, however, that the Company will obtain these orders The 24% increase in U.K. packaging material sales was principally attributable to an increase in the sales of packaging to the produce industry. The Company is now one of the leading suppliers of produce packaging to processors supplying most of the main food retailers in the U.K., and this market segment now represents the largest single segment of the U.K. business. The Company believes that its efforts to change product mix represent a more stable foundation for sustainable and more profitable growth, although there can be no assurance that the Company will be successful in these efforts. The year 2000 has seen a full year's benefit of some of the increased orders, which is expected to generate a material increase in revenue during 2001 and beyond, although there can be no assurance that such additional revenue will be obtained. In addition, the Company's proprietary micro-perforating technology has enabled the Company to win new orders in the area of cooked meat pastry products and the Company believes it is the market leader in this industry segment. New orders continue to be gained in the area of "breathable" packaging and the Company has increased its production capacity in this area to handle the forecast volume increase. During the first quarter of 2000, the U.K. operation installed an 8 color press to further enhance its tactical abilities. Other applications are currently under development, which, if successful, could have a material impact on sales revenues in 2001 and beyond, although there can be no assurance that this development will result in new orders. The 30% decline in sales of European packaging materials was due mainly to (i) an adverse movement in exchange rates when converting sales into US dollars, which moved approximately 15% in 2000 as compared with the same period of 1999 and (ii) the impact of flood damage that occurred at the Fabbri factory in late October. It is anticipated that adverse currency conversion rates are expected at least in the short term to affect Spanish sales as reported in US dollars as compared to the prior year period. The flood damage restricted Fabbri's sales revenues in the final two months of 2000. With a delay in the receipt of insurance proceeds, and with limited availaility of capital, this restriction on sales revenue has continued into 2001 and is expected to adversely impact Fabbri's sales revenues at least through the first half of 2001. Once these issues have been resolved, Fabbri will look to integrate its activities more with the U.K. subsidiary, not only to leverage its scientific and technical knowledge base, but also to be able to offer customers a pan European service offering. This will also take advantage of the U.K.'s expertise in perforating.
Gross Profit. Gross profit increased from $108,000 in 1999 to $2,394,000 in 2000, an increase of $2,286,000 or, as a percentage of sales, from 0.4% to 8.6%. Following management's decision to exit its corn operations (see Note 3 to the Company's consolidated financial statements), a one time write down of
$235,000 of inventory at Newcorn was made to reduce the inventory to its estimated market value. Without this charge, the gross profit would have been 9.5%, despite incurring operational losses within the corn business during the year The reported increase reflected the considerably reduced losses in the corn operations, following the restructuring that occurred at the end of 1999. In addition, there was also a significant improvement in the results of the potato operations, following the completion at the end of the first quarter of the relocation of the potato processing facility to Reser's Pasco, Washington facility. The gross margin in the US packaging business also improved, as a result of improved volumes and a more beneficial sales mix. There was also a further gain in the UK packaging margin, reflecting significant volume increases, resulting in improved economies of scale, as well as a continuing improvement in product mix. These gains were offset by a fall in the gross profit in European packaging, caused principally by the lower sales volumes, as well as additional impact of the floods which limited revenue generation, but where costs continue to be incurred. These costs have not yet been reimbursed under business interruption claims (see Note 13 to the Company's consolidated financial statements).
In addition, the Company continues to accelerate the development of certain applications for its proprietary micro-perforating technology. These costs are primarily expensed as incurred. Although the benefits of this expense have started to contribute to incremental sales revenue and gross profits, it is expected to increase significantly in the U.K. and other areas moves forward with various projects, although there can be no assurance that such will be the case.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased from $9,898,000 in 1999 to $9,316,000 in 2000, a decrease of $582,000 or 6%. This decrease was despite incurring (i) over $377,000 of non-cash charges relating to the amortization of the fair value of warrants issued, (ii) the continuing and accelerating development of the Company's sales and marketing efforts, particularly in the area of packaging and perforation development, and (iii) other costs, including additional professional fees. The Company's sales and marketing efforts with respect to processing technologies and related activities are primarily focused on fresh-cut potatoes, apples and mushrooms, together with packaging and perforation applications. This decrease in expenses also reflects the change in the nature of development costs incurred, as some products move from the product development stage to market development. This is evidenced by a significant fall in research and development costs as outlined below.
Research and Development Costs. Research and development costs decreased from $1,870,000 in 1999 to $1,341,000 in 2000, a decrease of $529,000 or 28%. The reduction reflects the reallocation of resources from development to application and execution. The Company continues to expense all development costs, whether product, market or sales related, as 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.
Gain on sale of fixed assets. As noted in the Company's consolidated financial statements, in 1999 the Company completed a sale and leaseback of the land and building at its Spanish trading subsidiary, Fabbri, with an unrelated third party. The Company raised gross proceeds, before costs and taxes, of PTS800,000,000 (approximately $5,100,000). The Company expects to realize a total pretax profit of approximately $2,303,000 on this transaction. For financial reporting purposes, $374,000 (1999:$285,000) of this total profit has been recognized in the year 2000. The remaining balance will be recognized over the eight year life of the associated leaseback. The tax on this profit can be deferred for up to 10 years under Spanish tax rules.
Restructuring Costs. As explained more fully in Note 3 to the Company's consolidated financial statements, management took the decision to cease the operations of Newcorn and to exit the fresh corn products market. As a result, a charge was made for various exit costs of $947,000, including rent, salary and utilities through the estimated date the related facilities would be closed or leased. In addition, further impairment provisions were made against inventory (recorded within cost of sales), goodwill and fixed assets (recorded within depreciation and amortization).
Depreciation and Amortization. Depreciation and amortization increased from $2,141,000 in 1999 to $5,218,000 in 2000, an increase of $3,077,000 or 144%. Of this increase, $348,000 related to the write down of goodwill and $2,747,000 to the writedown to fixed assets, both in relation to the Company's corn business, following the decision to discontinue corn operations in its previous format (See Note 3 to the Company's consolidated financial statements). Excluding these one time items, depreciation and amortization would have decreased by $18,000 (0.8%) to $2,123,000.
Loss from Operations. Loss from operations increased from $13,517,000 in 1999 to $14,054,000 in 2000, an increase of $537,000 or 4%. Of the total, $4,277,000 related to various one time charges related to the closure of its fresh cut corn operations. Excluding these charges, loss from operations would have decreased from $13,517,000 in 1999 to $9,777,000 in 2000, a decrease of $3,740,000, after incurring operational losses incurred in the corn business. The decrease in the loss was primarily due to the significant improvement in gross margins, despite the lower sales revenue and the impact of the floods in Spain. In addition, there was a net reduction in total operating expenses, excluding depreciation and amortization and the amortization of the fair value of the warrants mentioned above, of over $1,427,000. Further improvements are expected in this regard, and management believes that the infrastructure costs can be further leveraged as sales continue to develop. 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.
Interest Expense. The increase in interest charges from the charge of $820,000 in 1999 to $10,135,000 in 2000 principally reflects the non-cash cost amortization of deferred finance costs incurred in 1999, together with additional finance charges arising from the additional shares of Common Stock granted upon the restructuring of the facility with the Lenders as described in Note 7 to the Company's consolidated financial statements. In addition, there is a fair value provision for warrants granted in the first quarter of 2000 in connection with the first quarter financing described in Note 7 to the Company's consolidated financial statements. Of the total charge in the current year of $10,135,000, $8,966,000 (88%) represents the aforementioned non-cash costs. In addition, the level of debt for the year ended December 31, 2000 was considerably higher than the same period in 1999.
Accretion, Discount and Dividends on Preferred Stock. Accretion, discount and dividends on Preferred Stock increased from $1,203,000 in 1999 to $1,548,000 in 2000, an increase of $345,000. This non-cash increase was due to an adjustment reflecting the fair value of warrants issued during the year 2000, which totaled $1,508,000 (97%) of the total charge in the period. Most of the expense in 1999 related to a fair value charge for warrants granted in connection with the conversion of the remaining Series D Stock in 1999, plus an appreciation provision on the Series D Stock, all of which Stock was converted by December 31, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Sales. Sales decreased from $32,978,000 in 1998 to $30,307,000 in 1999, a decrease of $2,671,000 or 8.1%. Sales of processing technologies and related activities decreased from $8,913,000 in 1999 to $7,539,000 in 1999, a decrease of $1,374,000 or 15.4%. Sales of U.S. packaging materials decreased from $3,318,000 in 1998 to $2,666,000 in 1999, a decrease of $652,000 or 20%. Sales of U.K. packaging materials fell from $11,929,000 in 1998 to $11,486,000 in 1999, a decrease of $443,000 or 3.7%. Sales of European packaging materials decreased marginally from $8,818,000 in 1998 to $8,616,000 in 1999, a decrease of $202,000 or 2.2%.
The decrease in sales of processing technologies and related activities was mainly due to the lower sales revenue from fresh-cut corn sold through the Company's majority-owned affiliate, Newcorn. During the second quarter of 1999 the Company completed the work on its facility in Darien, Wisconsin (the "Darien Facility"). However, this was just prior to the short period of the year when local corn is generally available. The Company decided not to incur significant ongoing costs to compete against low value corn at uneconomic prices and thus limited its sales activities, principally during the third quarter but which also adversely impacted the fourth quarter. During this market withdrawl in the fourth quarter, the Company restructured Newcorn. This withdrawl involved not only a reduction in overheads, thus reducing the breakeven level of sales, but also a complete reappraisal of the sales model. The Company has identified the need for changes in the way it promotes its corn to major customers, to help support the year round model, and has been implementing such changes accordingly. In addition, the Company is focusing its sales efforts on food service, as well as to develop its traditional retail market. In relation to this market extension, the Company is also extending the range of corn products available, and plans to introduce further new products during 2000 onwards. During part of the year, Newcorn had at times been unable to process and sell on a profitable basis bulk corn that it had committed to purchase. This situation impacted gross profit and since then, the Company has limited its corn commitments under contract.
Offsetting the decrease in corn revenue described above, the Company experienced significant growth in the volume of fresh-cut potato products sold by its EPL Food Products, Inc. ("EPL Food") subsidiary under the "Green Giant(R) Fresh" brand name. The Company has continued to expand both the geographical coverage of its sales effort and the product range, and now offers a number of different fresh-cut potato products in addition to its original "Fresh Fries". However, as the Company continued to seek to expand its product range and geographic coverage, the Company sought to find a strategic partner to help in this process. As mentioned above, in October 1999 the Company announced that it had signed a strategic five-year manufacturing and co-pack agreement with Reser's Fine Foods, Inc. ("Reser's"). Under the agreement, Reser's will process and supply EPL Food with all of EPL Food's fresh-cut potato product requirements. Subsequent to the year end, the Company completed the relocation of its potato processing equipment and production and shipment of fresh-cut potato products commenced from Reser's Pasco, Washington facility.
In addition, Reser's will process and supply EPL Food with a new range of blanched (partially cooked) potato products to be sold by EPL Food under the Fresh Alternatives (TM) brand. The Fresh Alternatives (TM) brand has been made available to EPL Food by the Sholl Group II, Inc., the exclusive licensee of The Pillsbury Company's Green Giant (R) Fresh brand name. The Company has already commenced sales of these blanched potato products, although such sales did not have a material impact on sales revenue in 1999. In addition, the Company and Reser's agreed to enter into a related five-year non-exclusive license agreement for the Company's proprietary processing technology for potatoes. The Company currently believes these arrangements for both fresh and blanched potato products will have a material positive impact on the sales
revenue of EPL Food in 2000 and beyond, although there can be no assurance such will be the case.
The Company is continuing to focus on the sale and development of its processing technologies, particularly with respect to corn, potatoes and apples. Furthermore, development work continues to seek to exploit the new technologies for use on freshly harvested mushrooms and whole peeled potatoes. In this regard, subsequent to the year end, the Company announced an exclusive licensing arrangement with Monterey Mushrooms for its Mushroom Fresh (R) processing technology. The Company currently believes that these arrangements will have a material contribution to processing technology revenue in 2000 and beyond, although there can be no assurance that this will in fact be the case. In addition, product testing continues on other vegetables, and in some cases has been expanded or accelerated, and significant costs have been incurred to date that are yet to yield material revenues. The Company also continues to grow its capability in scientific and technical services, opening a new West Coast laboratory in 1999, and is seeing an increasing demand for food safety and hygiene advice in the produce industry. Revenue from this area rose by 34% over the same period in 1998 and the Company expects further increases in this figure in 2000 and beyond, although there can be no assurance such will be the case. The Company believes it is well-positioned to add further value to the operations of fresh-cut processors. Furthermore, the Company is receiving an increasing number of inquiries for its processing technologies from potential U.K. and European customers.
The reduction in U.S. packaging material sales was principally attributable to timing differences in shipments to large customers compared to the same period of 1998 and the Company currently expects to recover some of this volume going forward, in addition to what was recovered in the fourth quarter. The Company is currently engaged in discussions with a number of potential customers for new product applications and markets, especially in relation to the Company's proprietary perforating capabilities, leveraging the knowledge base of the U.K. operations. These include applications in the consumer goods, produce, horticultural, bakery and pharmaceutical industries, amongst others. Some initial orders have been received in 2000. Should further such orders be forthcoming, the Company expects that such new business would make a material contribution to sales revenue in 2000 and onwards. There can be no assurance, however, that the Company will in fact obtain this business. As noted above, as part of the Company's desire to better exploit its perforation technologies in the U.S., the Company and ANC have agreed to unwind their joint venture and are discussing various alternative relationships going forward.
The small decrease in U.K. packaging material sales was principally attributable to a reduced level of sales to Pepsico, historically the Company's largest single customer, as well as the adverse impact of pricing pressures in the U.K., together with a reduction in sales of film to the bakery industry. The 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 effort on utilizing its proprietary perforating technology to move into new, higher value-added areas. This strategy began to have an impact in the final quarter of 1999, as evidenced by the fact that sales revenue in the fourth quarter of 1999 was 32% higher than in same period in 1998. Raw material prices have generally fallen by some 10-15% compared with the same period in 1998, which accounts for most of the reduction in revenue, as sales prices were adjusted downwards to reflect the lower raw material prices. The Company believes that its efforts to change product mix represents a more stable foundation for sustainable and more profitable growth, although there can be no assurance that the Company will be successful in these efforts. During 1998 the Company's Respire(R) brand of breathable packaging for fresh produce was launched in the U.K. and has been successful in gaining new business in 1999. In this regard, the Company has recently gained new business from the suppliers to the main supermarkets in the U.K., and these began to come through in increased shipments, as indicated by the revenue increase in the
fourth quarter of 1999. The year 2000 is expected to see a full year benefit of the increased new business, which is expected to generate a material increase in revenue during 2000 and beyond, although there can be no assurance that such additional revenue will be obtained. 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, although the volume of this business has not been significant to date. New business continues to be gained in the area of "breathable" packaging and the Company has recently increased its production capacity in this area to handle the forecast volume increase. Other applications are currently under development, which, if successful, could have a material impact on sales revenues in 2000, although there can be no assurance that this development will result in new business.
Sales of European packaging materials decreased marginally, principally as a result of timing differences in shipments. The 1999 citrus harvest was delayed slightly, resulting in some shipments of packaging materials being delayed. The Company, through Fabbri, is targeting further expansion not only in Spain but in other European countries and this is beginning to show results. In addition, Fabbri is reducing its dependency on the citrus crop by increasing its sales of packaging materials used in fresh produce and other areas. Fabbri is also seeking to expand its limited revenue derived from South American countries through existing and new contacts. Furthermore, Fabbri is working increasingly closely with the U.K. business not only to leverage the scientific and technical knowledge base, but to be able to offer customers a pan-European service offering. In support of this, a new sales office was opened in France in late 1999, where Fabbri already generates significant sales revenue, and a further sales office is expected to open in the second quarter of 2000 in Amsterdam, Netherlands. These are expected to contribute to sales revenue in 2000 and beyond, although there can be no assurance that this will in fact be the case. The increased technical base is reflected in the launch of the Company's Respire(R) brand of "breathable" packaging for fresh produce into Europe, from which Fabbri has already begun to gain new business, although it did not have a material impact on sales revenue in 1999.
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.
Gross Profit. Gross profit decreased from $3,496,000 in 1998 to $108,000 in 1999, a decrease of $3,388,000 or, as a percentage of sales, from 10.6% to 0.4%. This decrease was principally due to the adverse impact of the cost of market development and sales support within 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 continue 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 in late 1998, together with the recent completion of the Darien Facility, which have significantly increased processing capacity, will help enhance operating efficiencies in the future as sales volumes increase. As outlined above, the Company withdrew from the corn market to a degree during the third and fourth quarters of 1999. Although the cost base of the business has been reduced during this period, the significantly lower level of corn sales during this period had a significant adverse effect on gross profit. However, the Company believes that these changes will provide
Newcorn with a significantly improved operating base in 2000 and beyond.
The various agreements with Reser's, in relation to the Company's Green Giant potato activity, is expected to make a significant improvement to the profitability of this business from 2000 onwards as the business benefits from the economies of scale of Reser's existing production volumes. The relocation of the potato processing facility was completed subsequent to the year end and production and shipments have already commenced from Reser's Pasco, Washington facility.
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. 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. As the Company's business becomes more reliant upon sales of its processing technologies 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 technologies.
In addition, the Company continues to accelerate the development of certain applications for its proprietary micro-perforating technology. These costs are primarily expensed as incurred. Although the benefits of this expense started to contribute to incremental sales revenue and gross profit in the 1999 fourth quarter in the U.K. packaging business, it is expected to increase significantly in the U.K. and other areas in 2000 and beyond, although there can be no assurance that such will be the case.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from $7,904,000 in 1998 to $9,898,000 in 1999, an increase of $1,994,000 or 25%. This increase was due primarily to (i) the continuing development of the Company's sales and marketing efforts, particularly in the area of sales of processing technologies and related activites for potatoes and corn, (ii) the non-cash expense of options granted to non-employees and the fair value of warrants granted to certain consultants and advisers to the Company and (iii) other costs, including the hiring of additional personnel in some businesses and costs to reduce the future level of overheads in other businesses. The Company's sales and marketing efforts with respect to processing 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. As indicated above, the corn business was restructured during the fourth quarter of 1999 and the overhead base reduced. The Company continues to evaluate ways to reduce its overhead base in all areas of its business and believes that a number of the actions taken in 1999, although increasing short term costs, will help improve profitability in 2000 and beyond.
Research and Development Costs. Research and development costs increased from $1,573,000 in 1998 to $1,870,000 in 1999, an increase of $297,000 or 18.8%. This reflects increased costs of internal scientific activities related to sales efforts for large potential customers, principally related to mushrooms and potatoes, 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. Some of the initial results from the work on mushrooms
can be seen from the recently announced licensing agreement with Monterey Mushrooms. The Company expects that research and development costs will continue at no less than recent levels and may increase.
Gain on sale of fixed assets. As noted in the Company's consolidated financial statements, the Company completed a sale and leaseback of the land and building at its Spanish trading subsidiary, Fabbri, with an unrelated third party. The Company raised gross proceeds, before costs and taxes, of PTS800,000,000 (approximately $5,100,000). The Company expects to realize a total pretax profit of approximately $2,303,000 on this transaction. For financial reporting purposes, $279,000 of this total profit has been recognized in the current period. The remaining balance will be recognized over the eight year life of the associated leaseback. The tax on this profit can be deferred for up to 10 years under Spanish tax rules.
Depreciation and Amortization. Depreciation and amortization increased from $1,719,000 in 1998 to $2,141,000 in 1999, an increase of $422,000 or 25%. This is mainly due to the increased fixed asset base which arose as a result of the capital expenditure on the new corn processing facilities at Camarillo, CA and Darien, WI, together with capital expenditures in the U.K.
Loss from Operations. Loss from operations increased from $7,700,000 in 1998 to $13,517,000 in 1999, an increase of $5,817,000 or 76%. The increase was primarily due to an increase in costs in 1999 as compared with 1998 (mainly reflected in the fall in gross profit). As the Company moves to the next stage of development of its respective markets, it incurs a number of unique costs, including the market development costs of potatoes and corn, the latter including the expensing of the start-up costs of the new Darien Facility which was approved during the second quarter of 1999 for shipment of fresh produce under the "Green Giant(R) Fresh" brand name. The various costs associated with the development of the corn and potato businesses accounted for the majority of the losses incurred. The Company continues to look for ways to leverage the Company's infrastructure through the expansion of the Company's business, and management believes this leverage should increase further as sales continue to develop. Management believes that considerable commercial progress continues to be made and that the foundation for future sustainable growth has been considerably strengthened. The Company believes that this progress is evidenced by (i) the restructuring of the corn business, (ii) the alliance with Reser's in relation to the Company's potato business, (iii) the new business gained in the fourth quarter of 1999 in the U.K. for perforated produce packaging and (iv) the ongoing discussions related to, and development of, new products. 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 decreased from $2,754,000 in 1998 to $1,203,000 in 1999, a decrease of $1,551,000. The decrease principally reflects the completion of the amortization of the beneficial conversion features of the Series D Stock and accretion of the fair value of warrants issued concurrently with the issuance of the Series D Stock. The 1999 charge principally reflects (i) the fair value of warrants granted in connection with the conversion of the remaining Series D Stock in 1999, and (ii) a provision representing a 4% per annum appreciation on the stated value of the Series D Stock then outstanding. All of the remaining Series D Stock was converted or redeemed during 1999.
LIQUIDITY AND CAPITAL RESOURCES
The consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the continuation of operations, realization of assets and liquidation of liabilities in the ordinary course of business, and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has incurred net losses, exclusive of accretion, discount and dividends on preferred stock, of $7,781,366, $14,415,788 and $24,261,514 in 1998, 1999 and 2000, respectively, incurred cash losses from operations of $7,151,732, $6,045,420 and $8,192,543 in 1998, 1999, and 2000, respectively, has an accumulated deficit of $76,079,646 and has negative working capital of $14,764,121 as of December 31, 2000. Within this negative working capital is approximately $6,675,000 of short term debt that is repayable during the first 6 months of 2001. As explained more fully in Note 7 to the Company's consolidated financial statements, the Company has reached agreement to defer some of this for a period of up to 90 days, and is in discussions to defer repayment of the balance. Additionally the Company's $1.0 million convertible debt is currently due for repayment at the end of May 2001. In addition, the Company was not in compliance with one of the asset covenants with the Bank of Scotland during the final quarter of 2000, and consequently the loans may be called for repayment at any time. 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 factors described above have caused the Company's independent public auditors to include a going concern uncertainty paragraph in their audit report accompanying the Company's 2000 Consolidated Financial Statements. The paragraph states that the Company's recurring losses from operations, negative working capital and accumulated deficit raise substantial doubt about its ability to continue as a going concern and cautions that the financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
To address the current financial situation, 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 technology businesses and packaging businesses in 2000, which the Company's management believes will improve cash flows from operations. The Company expects that the following, amongst others, should contribute to an improvement in the financial performance of the Company in the year 2001 and beyond, although there can be no assurance that such will in fact be the case: (i) the decision by the Company's management at the end of 2000 to discontinue corn operations under its previous format, resulting in a provision for the impairment of assets used in the business of $4,277,000 (see Note 3 to the Company's consolidated financial statements), (ii) the agreement with Reser's for Reser's to process and supply EPL Food with all of EPL Food's fresh-cut potato requirements and the relocation during 2000 of its potato processing to Reser's Pasco, Washington facility, (iii) further exploitation of the Company's processing technologies, especially focusing on the licensing arrangement with Monterey Mushrooms for fresh mushrooms, and (iv) further exploitation of the Company's perforating technologies, as evidenced by the new orders gained in produce packaging in the U.K. during 2000, together with the various applications development projects currently in progress.
The Company will be required to seek additional and longer-term debt or equity financing to fund operating requirements in 2001 and repay and/or refinance existing short term debt. In this regard, the Company is currently exploring a number of options to raise additional capital over and above that mentioned above. This includes seeking additional equity, as well as long term debt. Subsequent to the year end, the Company has entered into an agreement with an institutional investor to raise $5.0 million in new convertible preferred stock, which is expected to close in the second quarter of 2001. Additionally, the Company has engaged an outside adviser to assist in its attempt to obtain long-term financing. The cost of such additional financing arrangements may not be acceptable to the Company and could result in significant dilution to the Company's existing shareholders. No assurances can be given that the Company will be successful in raising additional capital and failure to raise such capital, if needed, could have a material adverse effect on the Company's business, financial condition and results of operations.
At December 31, 2000, the Company had $166,000 in unrestricted cash and short term investments, compared with $588,000 at December 31, 1999, a decrease of $422,000. In addition, the Company has $383,000 of restricted cash - current and $444,000 of restricted cash - noncurrent. During the year ended December 31, 2000, $8,193,000 was used in operating activities. In addition, $1,353,000 was used in investing activities to purchase fixed assets. The increase in cash used in operating activities of $2,187,000 in 2000 compared to 1999 reflects the increased net loss in 2000 offset by increased non cash adjustments and an increase in working capital as suppliers' outstanding balances were reduced (as opposed to 1999 when supplier accounts were increased).
Total financing activities during 2000 provided net cash of $9,026,000, compared with net cash provided of $3,175,000 in 1999. The generation in 2000 was primarily from the proceeds of short term debt ($5,190,000) and net proceeds from the issuance of common stock ($3,870,000), offset by repayment of long term debt.
As of December 31, 2000 and 1999, the Company had drawn $597,500 and $644,700 respectively under its long term line of credit with the Bank of Scotland, entered into by its subsidiary, EPL Technologies (Europe) Limited, for up to $597,500 (Pound Sterling 400,000 at an exchange rate of Pound Sterling 1:$1.4938), which bears interest of 2% over bank base rate (6.00% as of December 31, 2000). The Company also had a short-term line of credit with the Bank of Scotland in the amount of $1,611,700, which also bears interest of 2% over bank base rate. At December 31, 1999, approximately $1,040,300 had been drawn under this facility. During 2000, the Company agreed with the Bank of Scotland to convert the short term line of credit into a similar facility based more closely on the level of outstanding receivables of its UK operations. Under this new facility, the Company's new limit is approximately $2,241,000, subject to the level of receivables, and carries interest of 1.75% over bank base rate. At December 31, 2000 approximately $2,051,000 had been drawn under this facility. In conjunction with this new facility, the Company also has an additional short-term line of credit with the Bank of Scotland, carrying interest at 1.75% over bank base rate, under which the Company had drawn approximately $297,000 as of December 31, 2000. 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 that provide for maintenance of minimum asset levels and minimum earnings before interest and tax to external interest ratios. During the final quarter of 2000 the Company was not in compliance with one of the asset covenants. Consequently, the loans may be called for repayment at any time. To date, the Bank of Scotland has not imposed any financial penalties for this non-compliance.
The Company, through its subsidiary, EPL Flexible Packaging, Inc., has a short term credit facility of $100,000 with Old Second National Bank of Aurora, which facility was fully drawn at December 31, 2000 ($50,000 at December 31, 1999). This facility is secured upon the inventory of EPL Flexible Packaging, Inc. and carries interest at a rate of 1.5% over the banks prime rate (8.25% as at December 31, 2000).
Newcorn has two equipment financing loans with General Electric Capital Corporation ("GECC") and Santa Barbara Bank & Trust ("SBBT") secured by specifically identified capital assets. At December 31, 2000, approximately $302,700 and $202,800 were outstanding under the GECC and SBBT loans, respectively.
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. At December 31, 2000, $100,100 was outstanding, excluding interest. The Company's obligations under this facility are unsecured and amounts outstanding thereunder bear interest at a rate of nine percent (9%) per annum. The Company's Chairman has agreed to defer
repayment of the remaining balance owed to him until the Company is able to do so. See Item 13 - "Certain Relationships and Related Transactions."
In December 1999 two investment funds affiliated with the Company granted the Company a credit facility of $3,500,000, which amount was fully drawn as at December 31, 2000 and 1999. The facility carries a stated interest at the rate of 12% per annum and is secured by a pledge of certain assets of the Company. In connection with this facility, the Company issued two million shares of Common Stock and issued a warrant to acquire 350,000 shares of Common Stock at an exercise price of $0.50 per share. In May 2000, the Lenders agreed to defer the repayment date until September 2000, as well as agree to other changes in the terms of the facility. In connection with this restructuring, the Company issued an aggregate of one million shares of Common Stock to the Lenders and 150,000 shares of Common Stock to a third party which participated in the negotiation of the restructuring. Based on the market value at the date of issuance, the shares had a value of $1,725,000. Such value was recorded as deferred debt costs on the balance sheet under prepaid expenses and other current assets and was amortized into interest expense over the life of the initial debt agreement. This amortization was complete as at September 30, 2000. In August 2000, the lenders agreed to further restucture the facility, including to defer repayment until December 2000. Under this agreement, the Company issued an aggregate of 1,200,000 shares of Common Stock to the Lenders and 160,000 shares of Common Stock to a third party which participated in the negotiation of the restructuring. The value of the shares ($1,186,250) was amortized into interest expense over the life of the agreed restructuring. In November 2000, the facility was again restructured, including to defer repayment until March 2001. Under this latest agreement, 600,000 shares of Common Stock ($412,500, based on the market value as at December 1, 2000) will be issuable and were charged into interest expense in December 2000. In addition, further shares will be issuable in January 2001 and February 2001 (600,000 shares and 650,000 shares respectively). These will be charged into interest expense in those periods, based on the market value at those times. Subsequent to the year end, repayment has been deferred again to May 2001. As of December 31, 2000, the effective interest rate of this facility, after including all of the debt issue costs, including the value of the stock and warrants issued, is approximately 145%.
In February and March 2000, the Company, in a series of transactions, borrowed from individual investors $3,175,000 for a period of 12 months. The loans, which are unsecured, carry interest at the rate of 10% per annum. In connection with these loans, the Company issued warrants to acquire a total of 1,637,500 shares of Common Stock at an exercise price of $1.00 per share. The fair value of the warrants ($4,711,000) is being amortized into interest expense over the life of the debt. Subsequent to December 31, 2000, the Company has commenced negotiations with the investors to restructure the notes payable to allow for the extension of the initial terms, which require repayment in February and March 2001. Agreement has been reached to extend the repayment date on the majority of this balance for a period up to 90 days, and discussions are continuing with the balance. Interest will continue to accrue at a rate of 10% per annum. In consideration for this extension (and for each month thereof), warrants to purchase 6,000 shares of Common Stock per $100,000 will be issued. The fair value attributable to these warrants will be amortized into interest expense over the extension period.
In November 2000 the Company obtained a loan from an institutional investor totaling $1,000,000. The loan, which is secured on the assets of EPL Flexible Packaging, Inc., excluding inventory, is for a period of 6 months and bears interest at 10% per annum. The loan is convertible into shares of Preferred Stock upon request. These shares of Preferred Stock would have a coupon of 10% per annum and are in turn convertible into shares of Common Stock at a conversion price of $1.00 per share. The loan agreement provides for the conversion terms to be amended if the Company undertakes a major financing (as defined by the loan
agreement) on more favorable terms. To date no such financing has been completed. In connection with this loan the Company issued warrants to acquire a total of 400,000 shares of Common Stock at an exercise price of $1.00 per share. Since this loan can be converted immediately, the fair value of the warrants ($204,000) has been charged into interest expense upon issuance. The effective interest rate of this facility, assuming the loan is not converted and after including the value of the warrants issued, is approximately 51%.
At December 31, 2000, the Company had warrants outstanding and exercisable to purchase 9,974,114 shares of Common Stock at a weighted average price of $1.35 per share. In addition, at December 31, 2000, the Company had 2,032,125 options outstanding and exercisable to purchase shares of Common Stock at a weighted average price of $7.60 per share (with prices ranging from $0.69 to $15.25 per share). See Note 11 to the Company's Consolidated Financial Statements. At December 31, 2000, there were no material commitments for capital expenditures.
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, particularly in the short term, are expected to continue to be substantial, and its potential inability to obtain additional financing on satisfactory terms or in satisfactory amounts, 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)financial, 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.
ITEM 7A.
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. The majority of the Company's indebtedness, which is denominated in U.S. dollars, is currently at fixed rates of interest, and thus the Company believes it does not have any material interest rate risk.
The Company derives its revenues from its subsidiaries which account in US dollars, British pounds and Spanish pesetas. In 2000 the revenue generated from these sources amounted to $7,612,000 (27.4%), $14,194,000 (51%) and $6,008,000 (21.6%) respectively. The total long-lived assets denominated in these currencies as at December 31, 2000 amounted to $2,319,000 (25.9%), $5,941,000 (66.4%) and $695,000 (7.7%) respectively. The exchange rate between the US dollar and the British pound was relatively stable during most of 2000, with the pound/dollar 2000 monthly average rate rising by approximately 6.5% in 2000 over 1999, and has also been very stable over the last few years. The Company does not believe that this is a significant exchange rate risk for the Company. The exchange rate between the US dollar and the Spanish peseta has fallen by an average of approximately 15% during 2000. Although it has risen slightly in December and since December 31, 2000, any future movements are difficult to predict.
To the extent that the Company's financial instruments expose the Company to interest rate risk and market risk, they are presented in the table below. The table presents principal cash flows and related interest rates by year and maturity for the Company's unsecured and secured lines of credit, equipment financing loans, notes payable and capital leases in effect at December 31, 2000. The information is presented in U.S. dollars, or where appropriate, U.S. dollar equivalents, which is the Company's reporting currency. The instruments' actual cash flows are denominated in U.S. dollars ($US) and British pounds sterling, as indicated in parentheses.
ITEM 8
ITEM 8 : CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of EPL Technologies, Inc. Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of EPL Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recurring losses from operations, cash flow deficiencies, negative working capital, and debt refinancing requirements raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Deloitte & Touche LLP
Philadelphia, Pennsylvania March 29, 2001
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 - - ------------------------------------------------------------------------------
See notes to consolidated financial statements.
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - - ------------------------------------------------------------------------------
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 - - --------------------------------------------------------------------------------
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - - ---------------------------------------------------------------------------
EPL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - - --------------------------------------------------------------------------------
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 aid technologies (primarily through its EPL Food Products Inc., EPL Pure Produce, Inc. and NewCornCo, LLC ("Newcorn") subsidiaries), packaging technologies (primarily through its EPL Flexible Packaging, Inc., EPL Flexible Packaging Ltd. and Fabbri Artes Graficas Valencia, S.A. ("Fabbri") 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 EPL 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. The consolidated financial statements include the operations of NewCorn, an entity 51% owned by the Company. Since the equity of the minority owners has been reduced to zero, the Company is recording 100% of NewCorn's losses.
C. CASH AND CASH EQUIVALENTS - The Company considers all short-term investments with original maturities of three months or less to be cash equivalents.
D. ACCOUNTS RECEIVABLE - Accounts receivable are shown net of allowance for doubtful accounts of $771,064 and $1,217,477 as of December 31, 2000 and 1999, 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 4).
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:
G. RESTRICTED CASH - Restricted cash is primarily invested in certificates of deposit which mature within one year and are principally used as security for equipment financing
and escrow requirements (see Note 13). The classification of these securities is determined based on the expected term of the collateral requirements and not necessarily the maturity date of the underlying securities.
H. OTHER ASSETS -
Goodwill - Goodwill related to the acquisition of certain subsidiaries is being amortized on a straight-line basis over 10 years.
Patents - 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.
Other Intangibles - 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 $916,778, $610,378 and $549,823 for the years ended December 31, 2000, 1999 and 1998 respectively. The amortization expense for 2000 includes an impairment provision against the goodwill related to Newcorn of $348,236.
I. 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.
J. 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.
K. 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, Foreign Currency Translation. 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.
L. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY - The Company holds a 50% interest in its unconsolidated subsidiary, Freshcorn LLC ("Freshcorn"). This investment is accounted for under the equity method as the Company does not maintain control of Freshcorn. The Company's share of Freshcorn's losses for the years ended December 31, 2000, 1999 and 1998, was $663, $61,708 and $56,145 respectively. The Company's equity in the accumulated deficit of Freshcorn, $118,516, is included in other liabilities on the Company's balance sheet.
M. RECLASSIFICATIONS - Certain reclassifications have been made to the 1999 and 1998 consolidated financial statements in order to conform with the 2000 presentation.
N. 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.
O. 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. Impairment is recognized when the net carrying value of the long-lived asset exceeds the estimated future undiscounted cash flows related to such asset. Measurement of the amount of impairment, if any, is based upon the difference between the carrying value and estimated fair value.
P. 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, Accounting for Stock-Based Compensation, had been applied in measuring compensation expense.
Q. NEW ACCOUNTING PRONOUNCEMENTS - 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, as amended, will be adopted by the Company effective January 1, 2001. The Company has had no material adjustments to its consolidated financial position or results from operations as a result of adopting SFAS No. 133.
In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB No. 101"). SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC, and was adopted by the Company in the fourth quarter of 2000. The adoption of SAB No. 101 had no material impact on the company's consolidated financial position or results from operations.
2. OPERATIONS
The consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the continuation of operations, realization of assets and liquidation of liabilities in the ordinary course of business, and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has incurred net losses, exclusive of accretion, discount and dividends on preferred stock, of $7,781,366, $14,415,788 and $24,261,514 in 1998, 1999 and 2000, respectively, incurred cash losses from operations of $7,151,732, $6,045,420 and $8,192,543 in 1998, 1999 and 2000, respectively, has an accumulated deficit of $76,079,646 and has negative working capital of $14,764,121 as of December 31, 2000. Within this negative working capital is approximately $6,675,000 of short term debt that is repayable during the first 6 months of
2001. As explained more fully in Note 7, the Company has reached agreement to defer repayment of the majority of this amount for a period up to 90 days, and is in negotiations with some of the lenders to defer repayment of the balance. Additionally, the Company's $1.0 million convertible debt is currently due for repayment at the end of May 2001. In addition, the Company was not in compliance with one of the asset covenants during the final quarter of 2000, and consequently the loans may be called for repayment at any time. 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 will be required to seek additional and longer-term debt or equity financing to fund operating requirements in 2001 and repay and/or refinance existing short term debt. In this regard, the Company is currently exploring a number of options to raise additional capital over and above that mentioned above. This includes selling additional equity, as well as long term debt. Subsequent to the year end, the Company entered into an agreement with an institutional investor to raise $5.0 million in new convertible preferred stock, which is expected to close in the second quarter of 2001. Additionally, the Company has engaged an outside adviser to assist in its attempt to obtain long term financing. The cost of such additional financing arrangements may not be acceptable to the Company and could result in significant dilution to the Company's existing shareholders. No assurances can be given that the Company will be successful in raising additional capital and failure to raise such capital, if needed, could have material adverse effect on the Company's business, financial condition and results of operations.
These factors indicate that there is substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
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 technology businesses and packaging businesses in 2000, which the Company's management believes will improve cash flows from operations. The Company expects that the following, amongst others, should contribute to an improvement in the financial performance of the Company in the year 2001 and beyond, although there can be no assurance that such will in fact be the case : (i) The decision by the Company's management at the end of 2000 to discontinue corn operations under its previous format (see Note 3), (ii) the agreement with Reser's for Reser's to process and supply EPL Food with all of EPL Food's fresh-cut potato requirements and the relocation during 2000 of its potato processing to Reser's Pasco, Washington facility, (iii) further exploitation of the Company's processing technologies, especially focusing on the licensing arrangement with Monterey Mushrooms for fresh mushrooms, and (iv) further exploitation of the Company's perforating technologies, as evidenced by the new orders gained in produce packaging in the U.K. during 2000, together with the various applications development projects currently in progress. The Company's ability to operate beyond the immediate future is dependent upon its ability to achieve levels of revenues to support the Company's cost structure, maintain adequate financing and generate sufficient cash flows from operations to meet its operating needs. However, no assurance can be given that the Company will be successful in its efforts to implement its plans and achieve a level of profitability.
3. CLOSURE OF CORN OPERATIONS
During 1999 and 2000, the Company had undertaken a number of changes in its corn operations (Newcorn) in an effort to reduce the significant operating losses that had been incurred. Although such losses were reduced as a result of these measures, Newcorn continued to operate at a loss and was projected to continue incurring losses, prompting management to consider alternative actions. Management concluded that any attempt to bring Newcorn to profitability would require additional management and financial resources. Additionally, the management agreement with the Company's partner in
Newcorn was due to expire. Accordingly, in December 2000, management decided to cease the operations of Newcorn and to exit the fresh corn products market. The results of such operations were previously included within the processing aids and other activities segment of the Company's business.
Management's plan to exit this operation included the termination of substantially all (6) of its employees during December 2000 and January 2001 and the commencement of efforts to seek a third party willing to buy Newcorn's existing assets and assume Newcorn's current operating leases. In relation to this plan, the Company has recorded charges totaling $4,277,000 at December 31, 2000. These charges include the following:(i) an impairment provision against goodwill of $348,000 recorded within depreciation and amortization expense; (ii) a $235,000 writedown of inventory to its estimated market value, recorded within cost of sales; (iii) an impairment provision of $2,747,000 to reduce fixed assets to their net realizable value, recorded within depreciation and amortization expense; and (iv) a charge for various exit costs totaling $947,000, including rent, utilities and associated taxes of $689,000, salaries of $182,000 and other facility closure costs of $76,000 through the estimated date the related facilities would be closed or leased. Exclusive of the write down provisions, Newcorn's operations resulted in revenues of $3,007,000 and $5,807,000 in 2000 and 1999 respectively, and operating losses of $2,867,000 and $4,767,000 in the same periods.
4. INVENTORIES
Inventories consisted of the following:
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Depreciation expense was $4,301,171, $1,530,969 and $1,169,619 for the years ended December 31, 2000, 1999 and 1998, respectively. The depreciation expense for 2000
includes an impairment provision against the fixed assets related to Newcorn of $2,747,000 (see Note 3)
During 1999, the Company completed a sale and leaseback of the land and building at its Spanish trading subsidiary, Fabbri, with an unrelated third party. The Company raised gross proceeds, before costs and taxes, of PTS 800,000,000 (approximately $5,100,000). The Company expects to recognize a total pretax profit of approximately $2,303,000 on this transaction. For financial reporting purposes, $374,000 and $285,000 of this total profit has been recognized for the years ended December 31, 2000 and 1999 respectively. The remaining balance will be recognized over the eight year life of the associated leaseback. Future lease payments under the sale leaseback transaction are approximately $412,000 per year for the lease term of eight years. The tax on this profit can be deferred for up to 10 years under Spanish tax rules.
6. INCOME TAXES
The components of loss before income taxes for the year 2000, 1999 and 1998 were taxed under the following jurisdictions:
The provision (benefit) for income taxes for the years ended December 31, 2000, 1999 and 1998 consists of the following:
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.
Income tax expense (benefit) was different from the amounts computed by applying the statutory federal income tax rate to the loss before income taxes due to the following:
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:
For income tax reporting purposes, the Company has net operating loss carryforwards of approximately $52,100,000, which will expire between 2003 and 2020.
7. DEBT
As of December 31, 2000 and 1999, debt includes the following:
As of December 31, 2000 and 1999, the Company had outstanding approximately $597,500 and $644,700, respectively, under its long term line of credit with the Bank of Scotland, entered into by its subsidiary, EPL Technologies (Europe) Limited, for up to $597,500, which bears interest of 2% over bank base rate (6.00% as of December 31, 2000). The Company also had a short-term line of credit with the Bank of Scotland, in the amount of $1,611,700, which also bears interest of 2% over bank base rate. At December 31, 1999 $1,040,304 was outstanding under this facility. During the year, the Company agreed with the Bank of Scotland to convert the short-term line of credit into a similar facility based more closely on the level of outstanding receivables of its UK operations. Under this new facility, the Company's new limit is approximately $2,241,000, subject to the level of receivables, and carries interest of 1.75% over bank base rate. At December 31, 2000, approximately $2,051,000 had been drawn under this facility. In conjunction with this new facility, the Company also has an additional short-term line of credit with the Bank of Scotland, carrying interest at 1.75% over bank base rate, under which the Company had drawn approximately $297,000 as of December 31, 2000. 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 that provide for maintenance of minimum asset levels and minimum earnings before interest and tax to external interest ratios. During the final quarter of 2000, the Company was not in compliance with one of the asset covenants, consequently the loans may be called for repayment at any time. To date, the Bank of Scotland has not levied any financial penalties for this non-compliance.
During 1999 the Company, through its Spanish subsidiary Fabbri, finalized with BankInter an unsecured line of credit for up to PTS100,000,000 ($602,400 at $1.00:PTS 166 at December 31, 1999). The remaining balance drawn under the facility was repaid during the second quarter of 2000 after which the facility was canceled. Thus no amount was outstanding thereunder as of December 31, 2000 ((PTS55,000,000 ($331,300 at $1.00:PTS166 at December 31, 1999)).
During the final quarter of 1999, the Company, through its subsidiary, EPL Flexible Packaging, Inc., was granted a short term credit facility of $100,000 with Old Second National Bank of Aurora, which facility was fully drawn at December 31, 2000 ($50,000 at December 31, 1999). This facility is secured upon the inventory of EPL Flexible Packaging, Inc. and carries interest at a rate of 1.5% over the bank's prime rate (8.5% as at December 31, 2000). There are no covenants applicable to this facility.
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 10.34% 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, 2000, $302,680 and $202,787 were outstanding on the GECC and SBB&T loans, respectively.
In February and March 2000, the Company, in a series of transactions, borrowed from individual investors $3,175,000 for a period of 12 months. The loans, which are unsecured and included under notes payable, carry interest at the rate of 10% per annum. In connection with these loans, the Company issued warrants to acquire a total of 1,637,500 shares of Common Stock at an exercise price of $1.00 per share. The effective interest rate of this facility, after including the value of the warrants issued, is approximately 158%. The fair value of the warrants ($4,711,000) was recorded as deferred debt costs on the balance sheet under prepaid expenses and other current assets and is being amortized into interest expense over the life of the debt. Subsequent to December 31, 2000, the Company has commenced negotiations with the investors to restructure the notes payable to allow for the extension of the initial terms, which require repayment in February and March 2001. Agreement has been reached to extend the repayment date on the majority of this balance for a period of up to 90 days, and discussions are continuing with the balance. Interest will continue to accrue at a rate of 10% per annum payable upon repayment of debt. In consideration for this extension (and for each month thereof), warrants to purchase 6,000 shares of Common Stock per $100,000 will be issued. The fair value attributable to these warrants will be amortized into interest expense over the extension period.
In November 2000 the Company obtained a loan from an institutional investor totaling $1,000,000. The loan, which is secured on the assets of EPL Flexible Packaging, Inc., excluding inventory, is for a period of 6 months and carries interest at the rate of 10% per annum (which interest is to be paid upon repayment of debt or conversion). The loan is convertible into shares of preferred stock upon request. These shares of preferred stock would have a coupon of 10% per annum and are in turn convertible into shares of common stock at a conversion price of $1.00 per share. The loan agreement provides for the conversion terms to be amended if the Company undertakes a major financing (as defined in the loan agreement) on more favorable terms. To date no such financing has been completed. In connection with this loan the Company issued warrants to acquire a total of 400,000 shares of Common Stock at an exercise price of $1.00 per share. Since this loan can be converted immediately, the fair value of the warrants ($204,000) has been charged into interest expense upon issuance. The effective interest rate of this facility, assuming the loan is not converted and after including the value of the warrants issued, is approximately 51%.
Other debt relates to capital leases that bear interest at rates from 7.0% through 10.5%, with varying monthly principal and interest payments. At December 31, 1999 notes payable related primarily to a financing arrangement related to an insurance policy.
At December 31, 2000, aggregate annual maturities of debt (including short term lines of credit) were as follows:
YEAR ENDING DECEMBER 31,
8. CREDIT FACILITIES WITH RELATED PARTIES
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, which was increased to $1,000,000 in June 1999. At December 31, 2000, $100,000 was outstanding. The Company's obligations under this facility are unsecured and amounts outstanding thereunder bear interest at a rate of nine percent (9%) per annum. The Company's Chairman has agreed to defer repayment of the remaining balance owed to him until such time as the Company is able to do so. 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.
In December 1999, two investment funds affiliated with an existing affiliated investor of the Company (the Lenders), granted the Company a credit facility of $3,500,000, which amount was fully drawn at December 31, 2000. The facility carries interest at the rate of 12% per annum and is secured by a pledge of certain assets of the Company. In connection with this facility, the Company issued two million shares of Common Stock (valued at $1,188,000) and issued a warrant to acquire 350,000 shares of Common Stock at an exercise price of $0.50 per share (such warrant having a fair value of $161,000). The facility was repayable in June 2000, however, in May 2000, the lenders agreed to defer the repayment date until September 2000, as well as agree to other changes in the terms of the facility. In connection with this restructuring, the Company issued an aggregate of one million shares of Common Stock to the Lenders and 150,000 shares of Common Stock to a third party which participated in the negotiation of the restructuring. Based on the market value at the date of
issuance, the shares had a value of $1,725,000. Such value was amortized into interest expense over the extended life of the debt agreement (September 2000). In August 2000, the lenders agreed to further restructure the facility, including to defer repayment until December 2000. Under this agreement, the Company issued an aggregate of one million, two hundred thousand shares of Common Stock to the Lenders and 160,000 shares of Common Stock to a third party which participated in the negotiation of the restructuring. The value of the shares ($1,186,250) was amortized into interest expense over the life of the agreed restructuring. In November 2000, the facility was again restructured, including to defer repayment until March 2001. Under this latest agreement, 600,000 shares (valued at $412,500, based on the market value as at December 1, 2000) will be issuable and were charged into interest expense in December 2000. In addition, further shares of Common Stock will be issuable in January 2001 and February 2001 (600,000 shares and 650,000 shares respectively). These will be charged into interest expense in those periods based on the market value at those times. Subsequent to the year end, repayment has been deferred again until May 2001. In addition, interest continues to be accrued and will be paid upon repayment of the debt balance. As of December 31, 2000, the effective interest rate of this facility, after including all of the debt issue costs, including the value of the stock and warrants issued, is approximately 145%.
Interest charged in relation to related party loans totaled $451,000 for the year ended December 31, 2000. The interest payable as of December 31, 2000 was $250,000 and is included within accrued interest on the Company's balance sheet.
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, 2000 and 1999 totaled $1,424,518 and $1,420,692, respectively.) Fifty thousand shares of Series A Stock were converted during 2000, leaving ten thousand shares outstanding at December 31, 2000.
The Company also had a Series B and Series C Preferred Stock, all of which were converted during 1997 and 1998 respectively. The Series B Stock carried a dividend of 10% per annum, payable in cash and/or shares ($9.40 per share) at the Company's option. The outstanding dividends on the Series B Stock at December 31, 2000 totaled $270,092. The outstanding dividends on the Series C Stock at December 31, 2000 totaled $49,239.
At the Annual Meeting of the Company held on July 21, 1997, the shareholders 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 shares. During 1997, the Company issued a further 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"). In connection with the issuance of the Series D Stock, the Company issued warrants to purchase 201,614 shares of 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).
During 1999, shareholders of 10,800 shares of the Series D stock elected to exercise their right of conversion into common stock. In connection with the conversion of 1,324 of these shares of the Series D Stock, the Company granted certain Series D shareholders warrants to purchase 1,571,429 shares of common stock at exercise prices of $0.52 and $0.66 per share
to induce conversion. These warrants are immediately vested and expire in 2004. The value of these warrants, $795,247, was recorded as a return to the Series D shareholders in 1999. In connection with these conversions, the shareholders received common stock based only on the stated value of the Series D Stock held. The 210,610 shares of common stock issuable as a result of the appreciated value of the Series D Stock (the "Premium Shares") were contributed back to the Company and have been accounted for as Treasury Stock at the market value of the Company's stock at the date of the conversion. Further warrants in relation to the conversion of the Series D Stock were issued during 2000 (see Note 10).
Also in 1999, holders of the remaining 1,500 shares of Series D Stock redeemed their shares to the Company for a cash payment of $1,500,000, the stated value of the shares redeemed. The additional value of the redeemed shares based on the 4% appreciation factor, $124,767, has been recorded as additional paid-in capital. There were no shares of Series D Stock outstanding at December 31, 1999.
10. COMMON STOCK
During 2000, the Company issued a total of 6,715,333 shares of common stock, in transactions not involving a public offering under the Securities Act of 1933, as amended. 3,672,000 shares were issued to a number of institutional investors in various private placements, raising gross proceeds of $3,962,000. In addition, in connection with the restructuring of the credit facility with the Lenders detailed in Note 8 above, a further 2,200,000 shares of common stock were issued to the Lenders and 310,000 shares of common stock to a third party which participated in the negotiation of the restructuring. The value of these shares were amortized as interest expense over the then remaining period of the facility. A further 33,333 shares of common stock were issued upon conversion of the 50,000 shares of Series A Stock detailed in Note 9, 240,000 shares of common stock were issued in settlement of liabilities totaling $233,500, 100,000 shares of common stock were issued upon the exercise of warrants, raising gross proceeds of $52,000 and 160,000 shares (valued at $160,000) were issued in relation to the raising of new equity.
During 1999, the Company issued a total of 19,265,264 shares of common stock. A total of 13,630,314 shares were issued upon the conversion of 10,800 shares of Series D Stock, of which 210,610 shares, with a market value of $138,130 were subsequently contributed back to the Company to be held as treasury stock. A total of 2,901,354 shares were issued in private placements to raise gross proceeds of $1,500,000, which were used in full to redeem the remaining 1,500 shares of Series D Stock (see Note 9). An additional 52,500 shares were issued in connection with the exercise of previously issued options, resulting in net proceeds to the Company of approximately $158,750. A total of 2,000,000 shares, valued at $1,188,000, were issued in connection with a loan received from two institutional investors. A further 681,096 shares were issued in connection with a private placement, resulting in net proceeds to the Company of approximately $330,000. Total issuance costs related to these issuances of stock amounted to approximately $12,000.
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, 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 2000, warrants to acquire a total of 5,962,500 shares of Common Stock were issued. Warrants to acquire a total of 1,637,500 shares of Common Stock were issued in connection with new loans totaling $3,175,000, as detailed in Note 7 above. The value ascribed to these warrants ($4,711,000) has been recorded as deferred debt costs and is being amortized into interest expense over the 12 month life of the loans, commencing in March 2000. Warrants to acquire 400,000 shares of Common Stock were also issued in connection with a new loan drawn down in the final quarter of 2000, as detailed in Note 7. Since this loan can be converted immediately, the fair value of these warrants ($204,000) has been charged into interest expense upon issuance. The Company also issued warrants to acquire 450,000 shares of Common Stock to consultants in lieu of cash compensation for advisory services provided in the second and third quarters and over the next nine months. The value of these warrants ($469,000) is being recorded as selling, general and administrative expenses in the Company's statement of operations over the expected service period of 12 months. The Company also issued a further warrant to acquire 100,000 shares of Common Stock to an employee of the Company, together with a warrant to acquire 100,000 shares of Common Stock to a former director of the Company. These were granted with an exercise price based on the market value at the date of the agreement. Other warrants to acquire 65,000 shares of Common Stock were issued, with an ascribed value of $98,900. Of this $13,800 was expensed to selling, general and administrative expenses, and $85,100 was expensed to interest expense. A total of 2,210,000 warrants were issued in relation to the raising of new equity. The value ascribed to this ($1,302,850) has been recorded as a reduction to the related additional paid in capital.
Finally, the Company also issued warrants to acquire 1,000,000 shares of Common Stock in relation to the conversion of the Series D Stock, which conversion was completed in December 1999, as provided in the Series D Stock conversion agreements. After the expiration of each 30 day period, warrants to purchase a further 100,000 shares of Common Stock will be due to be issued, at an exercise price of $0.52 per share, until such time as the shares of Common Stock issued upon conversion of the Series D Stock are registered. The value ascribed to these warrants $1,508,100 was amortized immediately upon issuance to accretion, discount and dividends during 2000.
At December 31, 2000, the Company had warrants outstanding to purchase 9,974,114 shares of common stock at an average price of $1.35 per share. In addition, the Company had options outstanding for the issuance of 2,032,125 shares of common stock at prices ranging from $0.69 to $15.25 per share (weighted average price of $7.60 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 1994 Plan to 2,250,000. The 1994 Plan provided that no options could be granted under it after May 4, 1999, and thus no options were available for grant under the 1994 Plan as of December 31, 1999. As at December 31, 2000, options to acquire 1,395,625 shares of Common Stock were outstanding and exercisable under 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. Under the 1998 Plan, 850,000 shares of common stock are reserved for issuance.
The 1998 Plan provides 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 grant. Such options are generally immediately vested and have terms of 5 years.
Combined information regarding these plans is as follows:
These options expire between March, 2001 and September 2005.
The following table summarizes information about the Company's stock options outstanding at December 31, 2000:
The estimated fair value of options granted during 2000, 1999 and 1998 ranged between $0.53 - $1.89, $0.42 - $2.87, and $3.13 - $8.18 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 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, 2000, 1999 and 1998 would have been increased to the pro forma amounts indicated below:
The fair value of options granted under the Company's stock option plans during 2000, 1999 and 1998 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 from 94% - 124%, 81%, and 65% for the years ended December 31, 2000, 1999 and 1998, respectively, risk free interest rates of from 6.1% - 6.75%, 6% and from 5.34% - 5.75%, for the years ended December 31, 2000, 1999 and 1998, respectively, and expected lives of 5 years.
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, 2000, 1999 and 1998, the potential common shares have an antidilutive effect on the net loss per common share for common stockholders.
The following table summarizes those securities that could potentially dilute loss 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.
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating leases for facilities, vehicles and equipment. At December 31, 2000, future minimum lease payments were as follows:
Rental expense for operating leases amounted to $1,101,456, $1,071,530 and $891,118 for the years ended December 31, 2000, 1999 and 1998, 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, 2000, minimum payments to executive officers under these agreements totaled approximately $1,360,000.
In connection with the Fabbri acquisition, the Company was informed that from time to time in the past Fabbri disposed of certain hazardous waste using some waste management companies that were not authorized handlers of hazardous waste under applicable Spanish legislation. The Company obtained from the prior owner of Fabbri an indemnification for any fines or penalties levied against the Company from such actions. Management believes that the matter will not have a material adverse effect on the Company's consolidated financial position or results of operations.
In connection with the sale and leaseback of the premises at Fabbri, the Company became aware of certain planning and compliance issues with the local authorities that remain unresolved. The Company does not believe that it will incur any material liability related to
these matters, however, if any costs are incurred, the Company believes it can recover these costs from the prior owner of Fabbri under a warranty in the sale and purchase agreement. As a result of this uncertainty, the Company has placed approximately $383,000 into escrow pending the resolution of this matter. Such amount has been recorded as restricted cash - current on the balance sheet.
At the end of October 2000, the Valencia region and surrounding area in Spain was hit by catastrophic thunderstorms and flash floods. These severe weather conditions caused material damage to the equipment, premises and inventory located at the Valencia plant of the Company's Spanish subsidiary Fabbri. In connection with this event, the Company has filed insurance claims totaling $841,000, including reimbursement for damages incurred of $330,000 and costs of business interruption of $511,000. At December 31, 2000, a damage claim of approximately $330,000 has been made and has been recorded in the Company's consolidated financial statements within prepaid expenses, and cost of sales, where the costs of the damage were initially recorded. As of December 31, 2000, no amounts have been recorded in connection with the business interruption claim, since such amounts were not realized prior to December 31, 2000. The recovery of this claim will be recorded as other income when the claims are settled and received in 2001. Subsequent to December 31, 2000, the Company has received approximately $200,000 of this claim.
In February 2001, the Company announced that it had received Nasdaq Staff determinations indicating that (A) the Company fails to comply with the $1.00 minimum bid price and net tangible assets, market capitalization and net income requirements for continued listing set forth in Marketplace Rules 4310(c)(04) and 4310(c)(2)(B), (B) the Company's Form 10-K for the fiscal year ended December 31, 1999 contained a 'going concern' qualification in the audit opinion and (C) the Company's securities are, therefore, subject to delisting from The Nasdaq SmallCap Market. The Company requested, and on March 22, 2001 was heard, at a hearing before a Nasdaq Listing Qualifications Panel ("Panel") to review the Staff determinations. There can be no assurance the Panel will grant the Company's request for continued listing.
During the last few months the Company has been discussing the nature of its relationship with Penn State University, and has agreed to consider entering into a new non-exclusive license in relation to Mushroom Fresh Technology. The Company believes this change, if agreed, will not have a material adverse effect on its ability to penetrate the fresh mushroom market.
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
During the years ended December 31, 2000 and 1999, no single customer accounted for more than 10% of total consolidated revenues. In 1998, one customer accounted for approximately 15% ($5,054,000) of total consolidated revenues.
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: packaging materials and processing aids. 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. 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 following table summarizes the Company's financial information by industry segment.
(1) Total Assets includes various corporate assets, including patents and deferred debt costs.
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.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(i)The fourth quarter 2000 figures include charges totaling $4,277,000 in relation to the cessation of operations of Newcorn. They also include the effect of significant flood damage incurred at the Company's operation in Spain. The compensation under the business interruption insurance will be recognized as the proceeds are received (see Note 13).
18. SUBSEQUENT EVENTS
Subsequent to the year end, the Company entered into an agreement with an institutional investor to raise $5 million in new convertible preferred stock, which is expected to close in the second quarter of 2001. Additionally, the Company has engaged an outside adviser to assist in its attempts to obtain long term financing.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10.
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.
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 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.
Michael S. Leo. Mr. Leo was appointed Secretary of the Company in February 2000. He is a partner in the law firm of Gibbons, Del Deo, Dolan, Griffinger & Vecchione, where he has worked since January 1997. Prior to this he was a partner with Day, Barry & Howard from November 1994 to December 1996. In industry, Mr. Leo has held positions as Senior Vice President, General Counsel and a director of Rhone-Poulenc, Inc., Assistant General Counsel of International Paper Company and Associate General Counsel of Standard & Poor's/Intercapital, Inc. He has also held a position in enforcement and compliance with the U.S. Securities and Exchange Commission. Mr. Leo received his B.A. degree at Brooklyn College, his M.A. degree in Business Policy at Columbia University and his J.D. at George Washington University.
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.
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.
Richard M. Harris. Mr. Harris was appointed to the Board of Directors in July 2000. For over eight years, Mr Harris has worked as a business consultant to various public and private companies. Prior to his early retirement he was Senior Vice President and Chief Financial Officer of Axel Johnson, Inc. He previously served for 18 years with the International Paper Company as Senior Vice President for all packaging operations. He was Group Chief Executive of the industrial packaging business and Executive Vice President and Chief Financial Officer of the parent company.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and Nasdaq, copies of which are required by regulation to be furnished to the Company.
Based solely on review of the copies of such forms furnished to the Company, the Company believes that during fiscal year 2000 its officers, directors and ten percent (10%) beneficial owners complied with all Section 16(a) filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the Company for the year ended December 31, 2000 for services rendered in all capacities to the Chief Executive Officer and each of the other four most highly compensated executive officers (the "Named Executive Officers").
(1) Assumes an exchange rate of $1:PTS177 for 2000, $1:PTS162 for 1999 and $1: PTS149.70 for 1998.
(2) Assumes an exchange rate of Pound Sterling 1:$1.514 for 2000, Pound Sterling 1:$1.652 for 1999 and Pound Sterling 1:$1.65 for 1998.
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, 2000.
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, 2000 and on each June 25 thereafter during the term of such plan. In accordance with these terms, warrants to purchase 7,500 shares, at an exercise price of $1.25 per share, were granted to W. Ward Carey and Adolph S. Clausi on July 6, 2000 for their services as members of the audit and compensation committees. These options are exercisable for ten year terms. See "Stock Incentive Plans" below.
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 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 Item 13 - "Certain Relationships and Related Transactions."
EMPLOYMENT AND CONSULTING CONTRACTS
Mr. Devine and the Company are parties to an employment agreement dated as of January 1, 1997 that 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. On March 28, 2000, the Board increased Mr. Devine's annual salary to $375,000. 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 50. 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, 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. The annual salary was increased to Pound Sterling 100,000 ($165,000 at an exchange rate of Pound Sterling 1:$1.65), effective January 1, 2000.
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. The salary was increased to $140,000 effective July 1, 1999. 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 W. Ward Carey, Adolph S. Clausi and Richard M. Harris. 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 could 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 provided 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. 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 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 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.
No grants of options to purchase Common Stock were made during the year ended December 31, 2000 to Named Executive Officers.
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, 2000 and the value as of December 31, 2000 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)
(1) At December 31, 2000, the closing price of a share of Common Stock on the Nasdaq Small Cap Market was $0.50.
In April 2000 Antony Kendall was awarded a warrant to puchase 100,000 shares of Common Stock, with an exercise price of $0.75 per share. These warrants were unexercised as at December 31, 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee during fiscal 2000 were Mr. Carey and Mr. Clausi, who served for the entire year and Mr. Harris who was elected to the committee in July 2000. None of Mr. Carey, Mr. Clausi or Mr. Harris were officers or employees of the Company or any of its subsidiaries during 2000. Except as disclosed under "Item 13 - Certain Relationships and Related Transactions," none of the members of the Compensation Committee nor any of their affiliates entered into any transactions with the Company during 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 31, 2000, 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, 2000, 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. 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.
* 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. The calculation also excludes 210,610 shares held in treasury at December 31, 1999.
(2) Includes shares of Common Stock held by funds other than Lancer Partners, L.P., but which are commonly managed in a group that includes Lancer Partners, L.P. The address for Lancer Partners, L.P. is 375 Park Avenue, Suite 2006, New York, NY 10152.
(3) Includes 1,500,000 shares of Common Stock that may be acquired by exercising warrants. The address for GHM, Inc. is 74 Trinity Place, New York, NY 10006
(4) Includes 1,500,000 shares of Common Stock that may be acquired by exercising warrants. Mr Giamanco is a controlling shareholder in GHM, Inc. The address for Mr Giamanco is c/o GHM, Inc., 74 Trinity Place, New York, NY 10006.
(5) Includes 40,000 shares of Common Stock held jointly by two family members. Also includes 278,571 shares of Common Stock that may be acquired by exercising warrants. The address for Mrs. Close is c/o Marcus J. Williams Esq., Davis Wright Tremaine, LLP, Suite 2300, 1300 SW Fifth Avenue, Portland, OR 97201-5682.
(6) Includes 350,000 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.
(7) Includes 109,375 shares of Common Stock issuable upon exercise of options. Also includes 5,000 shares of Common Stock owned by Mr. Carey's wife, as to which he disclaims beneficial ownership.
(8) Includes 115,625 shares of Common Stock issuable upon exercise of options.
(9) Amount shown represents shares of Common Stock that may be acquired by exercising options
(10) Includes 95,000 shares of Common Stock that may be acquired by exercising options and 100,000 shares of Common Stock that may be acquired by exercising warrants.
(11) Includes 882,500 shares of Common Stock that may be acquired by exercising options and 100,000 shares of Common Stock that may be acquired by exercising warrants.
(12) As of December 31, 2000 there were a total of 10,000 shares of Series A Preferred Stock outstanding, beneficially held as follows: 5,000 or 50% held by J. Matthew Dalton, whose address is 1232 W. George Street, Chicago, IL 60657; and 5,000 or 50% held by Verne Scazzero, whose address is 1414 South Prairie Ave., Chicago, IL 60605.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 $100,000, excluding unpaid interest, 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. The Company's Chairman has agreed to defer repayment of the remaining balance owed to him until such time as the Company is able to do so.. 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 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 28, 2000, the Company granted, under the 1998 Plan, to each of Adolph S. Clausi and W. Ward Carey options to purchase 50,000 shares of Common Stock at $2.475, an exercise price which represented 110% of the closing price of the Common Stock on the date of grant. On September 8, 2000, the Company granted Richard M. Harris, under the 1998 Plan,options to purchase 50,000 shares of Common Stock at $1.0312, an exercise price which represented 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.
In December 1999 two investment funds affiliated with the Company granted the Company a credit facility of $3,500,000, which amount was fully drawn as at December 31, 2000 and 1999. The facility carries a stated interest at the rate of 12% per annum and is secured by a pledge of certain assets of the Company. In connection with this facility, the Company issued two million shares of Common Stock (valued at $1,188,000) and issued a warrant to acquire 350,000 shares of Common Stock at an exercise price of $0.50 per share (such warrant having a fair value of $161,000). In May 2000, the Lenders agreed to defer the repayment date until September 2000, as well as agree to other changes in the terms of the facility. In connection with this restructuring, the Company issued an aggregate of one million shares of Common Stock to the Lenders and 150,000 shares of Common Stock to a third party which participated in the negotiation of the restructuring. Based on the market value at the date of issuance, the shares had a value of $1,725,000. Such value was recorded as deferred debt costs on the balance sheet under prepaid expenses and other current assets and was amortized into interest expense over the life of the initial debt agreement. This amortization was complete as at September 30, 2000. In August 2000, the lenders agreed to further restucture the facility, including to defer repayment until December 2000. Under this agreement, the Company issued an aggregate of 1,200,000 shares of Common Stock to the Lenders and 160,000 shares of Common Stock to a third party which participated in the negotiation of the restructuring. The value of the shares ($1,186,250) was amortized into interest expense over the life of the agreed restructuring. In November 2000, the facility was again restructured, including to defer repayment until March 2001. Under this latest agreement, 600,000 shares of Common Stock ($412,500, based on the market value as at December 1, 2000) will be issuable and were charged into interest expense in December 2000. In addition, further shares will be issuable in January 2001 and February 2001 (600,000 shares and 650,000 shares respectively). These will be charged into interest expense in those periods, based on the market value at those times. Subsequent to the year end, repayment has been deferred again to May 2001. As of December 31, 2000, the effective interest rate of this facility, after including all of the debt issue costs, including the value of the stock and warrants issued, is approximately 145%.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
See index to Financial Statements at page 34.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended December 31, 2000.
EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where so indicated, exhibits that 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
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 Agreement between EPL Technologies (Europe) Limited and DWL Associates for the services of D.W. Lyon as Chief Operating Officer of Bakery Packaging Services Limited. (Incorporated by reference to Exhibit 2.3 to the Company's Report on Form 8-K dated October 3, 1995 on file with the SEC.)
10.5 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.)
10.6 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.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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
EXHIBIT NUMBER DESCRIPTION - - ------ -----------
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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)
10.23 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)
10.24 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.
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, 2001 /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, 2001 /S/ Paul L. Devine -------------------------------- Paul L. Devine Chairman and President (Principal Executive Officer)
Date: March 30, 2001 /S/Timothy B. Owen ---------------------------- Timothy B. Owen (Principal Financial and Accounting Officer)
Date: March 30, 2001 /S/ Adolph S. Clausi ------------------------------ Adolph S. Clausi Director
Date: March 30, 2001 /S/ W. Ward Carey ------------------------------ W. Ward Carey Director
Date: March 30, 2001 /S/ Richard M. Harris ------------------------------- Richard M. Harris Director