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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-12177
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BIONOVA HOLDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 75-2632242
(State of incorporation) (I.R.S. Employer
Identification No.)
6701 SAN PABLO AVENUE
OAKLAND, CALIFORNIA 94608
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 547-2395
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes / / No /X/
Aggregate market value of Common Stock held by non affiliates as of March 13,
2000: $15,845,540
Number of shares of Common Stock outstanding as of March 13, 2000: 23,588,031
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's definitive
proxy statement filed for its 2000 annual meeting of stockholders.
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TABLE OF CONTENTS
PAGE
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PART I...................................................... 3
ITEM 1. BUSINESS......................................... 3
Overview................................................ 3
Background.............................................. 3
Production.............................................. 4
Marketing and Distribution.............................. 4
Research and Development................................ 5
Technology Alliances and Acquisitions................... 6
Fresh Produce Proprietary Product Development........... 7
Proprietary Protection.................................. 7
Governmental Regulation................................. 8
Competition............................................. 9
Employees............................................... 9
Controlling Stockholder; Conflicts of Interest.......... 10
ITEM 2. PROPERTIES..................................... 10
ITEM 3. LEGAL PROCEEDINGS.............................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 13
EXECUTIVE OFFICERS OF THE COMPANY....................... 13
PART II..................................................... 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................... 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............. 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 17
Overview................................................ 17
Results of Operations................................... 17
Capital Expenditures.................................... 21
Liquidity and Capital Resources......................... 21
Year 2000 Update........................................ 23
New Accounting Pronouncements........................... 23
Disclosure Regarding Forward Looking Statements......... 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................. 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...... 29
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................... 61
PART III.................................................... 61
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY................................................. 61
ITEM 11. EXECUTIVE COMPENSATION.......................... 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................... 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS............................................ 61
PART IV..................................................... 61
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K..................................... 61
FreshWorld Farms-Registered Trademark-, Endless Summer-Registered
Trademark-, and Transwitch-Registered Trademark- are registered trademarks of
DNAP or its subsidiaries. Master's Touch-Registered Trademark- and
Showcase-Registered Trademark- are registered trademarks of certain affiliates
of Bionova Holding. Premier Seleccion-Registered Trademark- is a registered
trademark that has been licensed to certain subsidiaries by an affiliate.
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Bionova Holding Corporation, a Delaware corporation (together with its
subsidiaries, unless the context requires otherwise, "Bionova Holding" or the
"Company"), which changed its name on April 28, 1999 from DNAP Holding
Corporation, was formed in January 1996, and acts as a holding company for (i)
Agrobionova, S.A. de C.V., a corporation organized under the laws of the United
Mexican States, of which the Company owns 80% ("ABSA"), (ii) International
Produce Holding Company, a Delaware corporation, of which the Company owns 100%
("IPHC"), (iii) DNA Plant Technology Corporation, a Delaware corporation, of
which the Company owns 100% ("DNAP"), and (iv) VPP Corporation, a Delaware
corporation, of which the Company owns 100% ("VPP"). The Company acquired
majority interests in ABSA and IPHC on July 1, 1996, by means of a capital
contribution from Bionova, S.A. de C.V. ("Bionova Mexico"), and on October 7,
1997, acquired all of the minority interests in IPHC and increased its ownership
interest in ABSA to 80%. DNAP became a wholly-owned subsidiary of the Company on
September 26, 1996, as a result of the merger (the "Merger") of Bionova
Acquisition, Inc., a Delaware corporation that was a wholly-owned subsidiary of
the Company, with and into DNAP. VPP was formed as a wholly-owned subsidiary of
the Company on August 18, 1997. Approximately 76.6% of the outstanding common
stock of the Company is indirectly owned by Savia, S.A. de C.V. ("Savia").
ABSA engages in the business of growing fresh fruits and vegetables,
primarily tomatoes and peppers, in Mexico and exporting fresh produce to the
United States and other markets. ABSA owns a 50.01% interest in Interfruver de
Mexico, S.A. de C.V., a corporation organized under the laws of the United
Mexican States ("Interfruver"), which engages in the business of marketing and
distributing fresh produce in Mexico, including fruits and vegetables produced
by ABSA. ABSA also owns 98.0% of Siembra Cultivo y Cosecha del Noroeste,
S.A. de C.V., a corporation organized under the laws of the United Mexican
States ("Siembra"), which provides labor and administrative services to ABSA.
IPHC is a holding company whose subsidiaries are in the business of marketing
and distributing fresh produce primarily in the United States and Canada,
including fruits and vegetables produced by ABSA. DNAP and VPP are agribusiness
biotechnology companies focused on the development and application of genetic
engineering and transformation technologies in plants.
Financial information relating to each of the Company's industry segments is
set forth in Note 16 to the Company's financial statements contained in this
report. Financial information relating to foreign and domestic operations and
export sales is set forth in Note 16 to the Company's financial statements.
The corporate headquarters of the Company are located at 6701 San Pablo
Avenue, Oakland, California 94608, and the telephone number is (510) 547-2395.
BACKGROUND
Savia, the Company's indirect 76.6% owner, is a holding company. Savia owns
68% of Seminis, Inc. ("Seminis"), the leading vegetable seed company in the
world. Savia's subsidiary, Empaques Ponderosa, S.A. de C.V., is the leading
producer of folding boxboard and folding and flexible packaging in Mexico. Savia
also owns a majority interest in Seguros Comercial America, S.A. de C.V., the
largest insurance company in Mexico.
Through its Bionova Mexico subsidiary, Savia entered the fresh produce
industry in 1993 by agreeing to a series of business relationships with Raul
Batiz Echavarria and members of his family (the "Batiz Family"). In February
1993, Bionova Mexico and the Batiz Family established ABSA, to which the Batiz
Family transferred land and other assets used for growing and packing fresh
produce. Bionova Mexico and the Batiz Family then negotiated the structure of
their joint ownership of the Batiz Family's fresh produce distribution business.
In December 1994, this relationship was formalized with the organization of
IPHC.
3
In 1997, DNAP Holding purchased all of the minority interests held by the Batiz
family in IPHC, and together with Bionova Mexico, acquired the Batiz family
interests in ABSA.
The most significant market development over the past five years was the
Suspension Agreement, which was first adopted in 1996 and revised in August
1999, that sets a floor price on tomatoes entering the United States at $5.17
per box (20.68 cents per pound) for the months of November through June and
$4.61 per box for the months of July through October. The Company believes there
is potential for growth in the U.S. market both for commodity fresh produce and
for branded produce that can command a premium price on a sustained basis,
provided it consistently meets consumer expectations for taste, appearance,
texture, freshness and quality. Product and regional diversification have
enabled the Company to establish a strong commercial offering of quality
year-round supply under the "Master's Touch" and "Premier Seleccion" trademarks.
PRODUCTION
ABSA is a leading grower of fresh produce in Mexico, primarily tomatoes and
peppers, and, to a lesser extent, cucumbers, grapes and other fruits and
vegetables. Most of ABSA's farming operations are located in the Mexican states
of Sinaloa, Sonora and Baja California. Advanced technology is used to ensure
consistent quality and yields, including special hybrid varieties, integrated
pest management control, and computerized drip irrigation. ABSA's produce is
distributed in the United States, Mexico and Canada under the "Master's Touch"
and "Premier Seleccion" brands as well as other labels, depending on produce
grades.
ABSA's supply derives from (i) produce grown on land owned or leased by
ABSA, (ii) produce grown by producers with whom ABSA enters into a distribution
contract and (iii) produce grown by producers with whom ABSA enters into both a
production association agreement and a distribution contract. When ABSA enters
into a distribution contract only, it agrees to provide the grower limited
financial assistance for harvesting and packing in exchange for exclusive
distribution rights. ABSA does not share any of the growing risk under these
distribution contracts. When ABSA enters into a production association
agreement, ABSA finances up to 100% of the production cost in a joint venture
with the grower. ABSA provides technical support and agrees to handle the
distribution. Net proceeds are shared according to the terms of the association
agreement after ABSA recoups its investment.
In 1999, approximately 44% of ABSA's supply was sourced from production
associations with growers. The majority of these growers are located in the
states of Baja California Norte and Sonora. Almost 56% of ABSA's supply in 1999
came from land owned or leased by ABSA. ABSA owns approximately 3,183 acres in
Sinaloa, Sonora and Baja California Sur, and ABSA leases approximately 2,641
acres in Sinaloa and Baja California Sur. During 1999, a very limited amount of
produce was sourced through distribution contracts.
In 1999, approximately 68% of ABSA's sales was tomatoes, 13% was peppers, 4%
was cucumbers, 5% was grapes and the remaining 10% was mixed vegetables. In 1998
and 1997, respectively, ABSA's sales were allocated approximately as follows:
tomatoes--54% and 47%, peppers--30% and 32%, cucumbers--6% and 11%, and grapes,
melons and mixed vegetables (including eggplant and squash)--10% and 10%.
MARKETING AND DISTRIBUTION
The Company's marketing and distribution activities are carried out by a
network of national and regional distributors. The Company's national
distributors in the United States are Bionova Produce, Inc., R.B. Packing of
California, Inc. and Bionova Produce of Texas, Inc., each of which is a
wholly-owned subsidiary of IPHC, and referred to collectively as "Bionova
Produce", and Interfruver in Mexico. The Company's regional distributors are
Tanimura Distributing, Inc. in Los Angeles, California ("TDI") and Premier
Fruits and Vegetables BBL Inc. in Montreal, Quebec ("Premier") and Premier
Fruits and Vegetables (USA), Inc. in Philadelphia, Pennsylvania.
4
NATIONAL DISTRIBUTORS. Bionova Produce, Inc and R.B. Packing of California,
Inc. had revenues of $82 million in 1999. The majority of these sales were made
by Bionova Produce, Inc. which is located in Nogales, Arizona, a major point of
entry for Mexican produce into the United States. Approximately 36% of the
produce distributed by Bionova Produce, Inc. is provided by ABSA (including
produce grown by ABSA and produce grown by growers with whom ABSA enters into
distribution contracts and/or production arrangements). No single customer
accounted for more than 10% of Bionova Produce, Inc.'s sales in 1999. In 1999,
its sales were 45% to supermarkets, 25% to wholesalers and 30% to brokers. Its
main selling season is December through May.
R.B. Packing of California, Inc. is located in San Diego, California and
distributes produce grown in California and the Mexican states of Baja
California Norte and Baja California Sur. In 1999, its sales were 36% to
supermarkets, 43% to wholesalers, and 21% to brokers. Its main selling season is
July through November. R.B. Packing of Texas, Inc. is a distributor located in
McAllen, Texas that began operations in the Fall of 1995. Bionova Produce of
Texas, Inc. distributes produce grown in Mexico and currently is concentrating
on the importation and distribution of mango, papaya, and melons.
Interfruver is one of Mexico's largest fresh produce distributors. Based in
Guadalajara, Interfruver distributes produce from ABSA and other Mexican
producers. Interfruver also imports produce from the United States and other
countries. Approximately 68% of its sales is to wholesalers and other
intermediaries and 32% is to supermarkets. Interfruver's sales totaled $90
million in 1999.
REGIONAL DISTRIBUTORS. TDI is a 75%-owned subsidiary of IPHC. In 1999,
TDI's sales of $33 million were 49% to supermarkets, 17% to food service, 26% to
wholesalers, and 8% to brokers.
Premier is an 80%-owned subsidiary of IPHC. Premier distributes produce
throughout eastern Canada and its sales were approximately 58% to supermarkets,
27% to independent retailers, and 15% to wholesalers in 1999. Sales in 1999 were
approximately U.S. $37 million.
FreshWorld Farms ("FWF"), a wholly-owned subsidiary of DNAP, ceased its
fresh produce sourcing and distribution operations on January 31, 2000. In 1999,
the revenues of FWF were $5 million. A new company, Premier Fruits and
Vegetables (USA), Inc., an 80%-owned subsidiary of IPHC, was formed in
February 2000 to continue the marketing of tomatoes and other vegetables,
including the Company's branded line of cherry tomatoes and peppers, in the
eastern United States. Premier Fruits and Vegetables (USA), Inc. will source its
products through and operate under the direction of Premier in Canada.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are carried out by DNAP, a
wholly owned subsidiary acquired in September 1996 as a result of the Merger.
DNAP was incorporated in Delaware in 1981 and is an agribusiness biotechnology
company focused on the development and application of genetic engineering in
fruits and vegetables. Since the Merger, the Company's research and development
activities have undergone significant realignment that reflects the investment
being made in new business initiatives. In 1999, the Company spent approximately
$4.8 million on Company-sponsored research and development activities and
approximately $3.1 million on customer-sponsored research and development
activities. DNAP's major research activities are as follows:
- Under a Long Term Funded Research Agreement between Seminis and DNAP,
dated January 1, 1997, DNAP is conducting a series of research programs in
support of product development at Seminis. The research program for
Seminis includes plant genetic engineering developments in fungal disease,
viral disease, nematode, insect and herbicide resistance, hybrid breeding,
and product quality. Revenues for DNAP under this research program amount
to at least $0.625 million payable at the beginning of each calendar
quarter. DNAP will receive royalties of up to 3% on sales of products by
Seminis which are developed under the agreement. The percentage royalty to
be paid is dependent on the specific technologies contributed to or
developed in the research, the
5
patentability of any advances made in the research, and the contribution
these technologies made to the delivery of new product attributes.
- The Company is implementing a proprietary business based on biotechnology
developments in certain vegetatively propagated crops. Through its
subsidiary, VPP, the objective is to build a global, value added and
proprietary business based on the sale of starter plants of vegetatively
propagated, commercial horticultural species differentiated through
breeding and biotechnology inputs, including genetic engineering, advanced
tissue culture and diagnostic methods. The current business focus is on
strawberries and bananas. Research and product development being conducted
for VPP includes the development of fungal disease, nematode, and
herbicide resistance for strawberries and the eradication of black
sigatoka in bananas.
- DNAP maintains research and development activities in support of the
Company's fresh produce business. Research includes the development of
fruits and vegetables which retain freshness longer through genetic
engineering focused on ripening or softening control.
- DNAP continues to pursue research contracts with third party companies,
particularly when the knowledge gained from these activities will create
opportunities in internal strategic research and development programs.
DNAPs research and development facility is located in Oakland, California.
The research team of 48 full-time scientists, including 22 with Ph.D. degrees,
and support staff includes scientists in the fields of cell biology, plant
genetic engineering, plant genetics, biochemistry, agronomy, plant pathology and
food science. DNAP's scientists have published over 300 articles in
peer-reviewed scientific literature and are named inventors on more than fifty
United States patents owned by DNAP or FWF.
TECHNOLOGY ALLIANCES AND ACQUISITIONS
To meet the technical challenges of new product development in these areas,
DNAP has benefited from certain collaborative and licensing arrangements, both
at the DNAP and the Savia level. A collaborative agreement between Savia and
Monsanto Company provides the Company with access to enabling technology
important in the genetic transformation of plants and "trait" technology in the
areas of viral and fungal disease resistance, herbicide resistance and insect
resistance. The acquisition of the technology assets of United Agricorp, Inc.
("UAC") has provided VPP with rights to certain University of California
strawberry germplasm and trait technology. An agreement between Savia and the
John Innes Center in the United Kingdom provides DNAP with access to broad
testing rights to a range of trait technologies, including disease resistance
and flowering manipulation, and a range of enabling technologies. The Company,
through its subsidiaries, has entered into research and licensing arrangements
with other research organizations to broaden its technical strength in the areas
of disease resistance, nematode resistance, and certain aspects of fruit
quality.
Consistent with the Company's strategy to build a global business in the
development and sale of vegetatively propagated fruit species, including berries
differentiated through transgenic technology, on December 30, 1998, Bionova
Holding, through its subsidiary, VPP, acquired Monsanto Company's strawberry
development program. The program includes exclusive rights to certain of
Monsanto's genetic and gene technology for berry development, and a
non-exclusive right to future Monsanto berry technology, including strawberries,
cranberries, raspberries, blackberries, boysenberries, and blueberries. The
package includes a breeding program with two strawberry varieties in commercial
fruit production in the United States in 1999, as well as multiple strawberry
varieties planned for commercial introduction over the next few years. This
acquisition complements the research that DNAP had been conducting since 1995 in
the area of genetic modifications of strawberries to improve various traits. The
purchase price for Monsanto's technology assets was $5.0 million paid in
January, 1999. These technology assets will be amortized over a period of twelve
years. In consideration for certain additional licenses the Company could be
obligated to make payments of an additional $7.0 million, which will be recorded
as additions to the purchase price if and when they occur.
6
FRESH PRODUCE PROPRIETARY PRODUCT DEVELOPMENT
The Company's strategy in the fresh produce area is to focus its research
and development efforts on products which meet identified consumer needs not
satisfied by existing products. The Company will seek to deliver consistently
superior products, thereby building brand name awareness, and which are expected
to sell at premium prices.
The Company is currently marketing two products it developed through
traditional or advanced breeding techniques to distributors, supermarkets and
food service outlets. These two products are marketed under the FreshWorld Farms
and Master's Touch brand names. The Master's Touch and FreshWorld Farms cherry
tomato is a proprietary hybrid with a deep red color, sweet flavor and an
extended shelf life of up to fifteen days. The FreshWorld Farms sweet
mini-pepper has a novel sweet taste, deep red color and a low number of seeds.
This new variety of pepper was developed through anther culture, an advanced
breeding technique that captures and genetically stabilizes preferred
characteristics such as taste, texture and low seed count. The Company is
testing in supermarkets a number of varieties of its proprietary peppers in
various shapes and colors in the United States.
DNAP's scientists are using genetic engineering to enhance the Company's
existing product line and develop new products. Plant genetic engineering
involves either the suppression of specific genes, for example those that
control ripening, or the over-expression of certain genes controlling
characteristics such as sweetness. One of DNAP's most significant technological
developments in this area is Transwitch gene suppression technology. Using
Transwitch technology, DNAP has grown tomatoes with a shelf life of up to 90
days in the laboratory, while preserving desirable characteristics such as
taste, color and texture. In 1995, DNAP received approval from the U.S.
Department of Agriculture (the "USDA") and the Food and Drug Administration (the
"FDA") to grow and ship initial varieties of its delayed-ripening tomatoes
anywhere in the United States. DNAP has also received the requisite government
approvals in Canada and Mexico. Also in 1995, DNAP conducted a test market of
delayed ripening tomatoes developed by using the Transwitch gene suppression
technology to switch off the ACC synthase gene. These tomatoes were sold under
the Endless Summer tomato brand name and labeled as "farm grown from
genetically-modified seed." The market test demonstrated that there was consumer
acceptance of these genetically-modified fresh market tomatoes and validated the
use of this technology for extending tomato shelf life both on the vine and
after harvest. In 1997, DNAP completed an operations test to evaluate shipping
characteristics of the Endless Summer tomato. This test validated the long shelf
life and reduced spoilage of these tomatoes under commercial shipping and
handling conditions. DNAP is continuing to collect data on the performance of
the tomato under commercial production and distribution conditions. Transwitch
technology has also been used to turn off ethylene biosynthesis and extend shelf
life to 8 to 9 weeks in DNAP's cherry tomato varieties.
The texture of DNAP's mini-pepper is being further enhanced through the use
of Transwitch technology to inhibit the gene responsible for hemicellulase.
Hemicellulase causes the breakdown of the cell walls in peppers, a process which
triggers softening when peppers reach their maximum sweetness. The hemicellulase
trait is being evaluated in a wide range of pepper varieties.
PROPRIETARY PROTECTION
In order to develop and maintain its competitive position, DNAP seeks to
protect its intellectual property through patent filings in the United States
and abroad, maintenance of trade secrets and ongoing technological innovation.
DNAP and FWF have over fifty issued patents in the United States.
DNAP and FWF have obtained United States patent protection for key plant
genetic engineering technologies in the areas of gene isolation through
transposon tagging; transformation/regeneration methods for pepper, pea, corn,
and pineapple; promoter systems; and selectable marker systems. DNAP and FWF
have also established a patent position for important gene systems developed by
DNAP, including issued U.S. patents directed to genes for control of disease,
softening, sweetness, color and acidity.
7
One of DNAP's most significant technological developments in the area of
plant genetic engineering is the Company's proprietary Transwitch gene
suppression technology. DNAP has received three United States patents and a
European patent directed to methods of using this technology for suppressing
plant genes.
DNAP has pursued patents and plant variety protection ("PVP") certificates
specific to certain DNAP products. DNAP has filed patent applications in the
United States claiming certain FWF parent and hybrid tomato lines, resulting in
two issued U.S. patents. In addition, DNAP has granted United States patents
directed to a ripening controlled cherry tomato line and a ripening controlled
tomato line, and pending patent applications directed to ripening controlled
cherry tomato lines. DNAP also has a granted United States patent directed to
the method of somaclonal variation in tomato. DNAP has been granted a United
States patent covering a broad class of low seed peppers, including the FWF
sweet mini-pepper. FWF additionally has four issued United States patents
directed to the method of processing carrots. PVP certificates, which are issued
by the USDA, have also been pursued for specific fruit and vegetable varieties.
DNAP was issued two PVP certificates for tomato varieties and two for pepper
varieties. FWF has an issued and a pending PVP application for watermelon
varieties developed by DNAP. In addition, DNAP's affiliate, VPP, has two pending
United States patent applications directed to strawberry varieties.
DNAP has strengthened its proprietary position by obtaining license rights
from third parties, either to secure freedom to operate via non-exclusive
licenses or to create additional areas of exclusivity through exclusive
licenses. DNAP has obtained license rights from several third parties under
patent filings related to plant molecular biology methods. These license rights
include non-exclusive rights from the Max Planck Institute under patent filings
directed to certain methods of plant transformation using Agrobacterium
(although the rights of the Max Planck Institute under certain of these patent
filings are in dispute), and from Mogen International N.V. under filings also
directed to certain methods of plant transformation using Agrobacterium. DNAP
also has license rights from the USDA under patent filings directed to the ACC
synthase gene. Suppression of this gene, e.g. with Transwitch technology, has
been shown by DNAP to permit control of the ripening process. DNAP's license
from the USDA is co-exclusive for tomato, and exclusive for 25 other crops
including peppers, bananas, peas, strawberries, grapes, pineapples and
watermelons. As a result of the agreement between Savia and Monsanto Company
dated January 31, 1997, DNAP also has access to key enabling technologies,
including promoters, marker genes and transformation methods, as well as genes
for agronomic and quality traits, held by Monsanto Company.
The Company uses trade secret protection for certain of IPHC's distribution
companies which market produce under the Master's Touch, Premier Seleccion,
FreshWorld Farms and Endless Summer brand names. ABSA and R.B. Packing, Inc.
have registered the Master's Touch name as a trademark in Mexico and the United
States, respectively. Bionova Mexico has registered the Master's Touch name as a
trademark in the Benelux countries, the European Community, Canada, Hong Kong,
Indonesia, South Korea, Japan, Sweden and the United Kingdom. Savia has
registered the Premier Seleccion name in Mexico and has licensed rights to such
name on a royalty-free basis to various of IPHC's subsidiaries. In addition,
trademark registrations of the name "Master's Touch" are pending in Malaysia and
Singapore. FWF has registered the Endless Summer and FreshWorld Farms names in
the United States.
GOVERNMENTAL REGULATION
Regulation by federal, state and local government authorities in the United
States and foreign countries will be a factor in the future production and
marketing of the Company's genetically-engineered plants and plant products. The
process of obtaining government approvals can be costly and time consuming, and
there can be no assurance that necessary approvals will be granted in a timely
manner, if at all. The extent of government regulation of biotechnology that
might arise from future legislative or administrative actions and the potential
consequences to the Company are not known and cannot be predicted with
certainty.
8
The U.S. federal government has implemented a coordinated policy for
regulating biotechnology research and products in the United States. The USDA
has jurisdiction over specific research and pre-commercial activities involving
genetically engineered plants, in particular the growing and interstate shipment
of genetically engineered plants and plant products. The FDA has jurisdiction
over plant products that are used for human or animal food. The EPA has asserted
jurisdiction over the field testing and commercial use of plants genetically
engineered to resist pests and diseases, so-called plant pesticides, as well as
administering various federal environmental quality statutes. Failure to comply
with applicable regulatory requirements could result in enforcement action,
including withdrawal of marketing approval, seizure or recall of product,
injunction or criminal prosecution.
Public debate surrounding food and fiber crops enhanced through
biotechnology intensified in the United States and internationally in 1999.
Technology critics urged U.S. regulatory agencies to tighten their regulation of
biotechnology crops, including withdrawal of certain product registrations,
implementation of product labeling, and stricter pre-market approval procedures.
Internationally, agricultural biotechnology issues were debated within the World
Trade Organization, the United Nations Convention on Biological Diversity, the
Codex Alimentarius, and on other regional fronts. The Company believes that
progress has been made to ensure that science-based rules form the basis for
international trade of agricultural biotechnology products. However, the extent
of government regulation that might arise from future legislative or
administrative actions and the potential consequences to the Company is not
known and cannot be predicted with certainty.
COMPETITION
Though the fresh produce industry in general, and the tomato industry in
particular, are characterized by numerous competitors and low barriers to entry
at the production level, Bionova Holding believes that a small group of
participants distributes over one-third of the tomatoes sold in the United
States. In the United States, the Company competes directly with the larger
tomato and pepper growers in Florida during the winter, and in California in the
summer and fall. Both the Mexican and the U.S. tomato industries are
characterized by numerous competitors. Major Florida growers include Six L's,
DiMare and NTGargiulo. The major growers in California include DiMare,
NTGargiulo, Live Oak, and Central Tomato Growers.
ABSA believes it has advantages over its competitors because, among other
things, (i) the vine ripe tomato ABSA farms has different and generally more
desirable attributes than the gas-green tomato typically produced by most U.S.
growers and (ii) ABSA's production occurs in Mexico where labor costs are lower
than in the United States.
There are also many companies engaged in research and product development
activities based on agricultural biotechnology. Competitors include specialized
biotechnology firms, as well as major pharmaceutical, food and chemical
companies that have biotechnology divisions, many of which have considerably
greater financial, technical, and marketing resources than Bionova Holding.
Competition may intensify as technological developments occur at a rapid rate in
the agricultural biotechnology industry.
EMPLOYEES
The Company and its subsidiaries have a total of 588 employees.
ABSA has no employees. Siembra provides labor and administrative services to
ABSA pursuant to a contractual agreement, and ABSA pays a fee to Siembra based
on Siembra's costs incurred in connection with providing such services. The
number of persons providing such services through Siembra to ABSA ranges from a
minimum of 1,100 to a maximum during the harvesting season (January-April) of
approximately 7,300. The 259 employees of Siembra that are full-time are not
unionized. All of the other Siembra employees are temporary workers, and they
are represented by a labor union. No other employees in Bionova Holding are
represented by a union.
9
The labor union contracts for the temporary employees are reviewed on an
annual basis. Both the union and ABSA may terminate the contract at any time
upon 60 days notice to the other party.
CONTROLLING STOCKHOLDER; CONFLICTS OF INTEREST
Approximately 76.6% of the outstanding shares of common stock of the Company
are owned of record by Bionova International, Inc., an indirect, wholly-owned
subsidiary of Savia. Savia has the power to elect a majority of the Company's
board of directors and to determine the outcome of any action requiring the
approval of the holders of the Company's common stock. This ownership and
management structure will inhibit the taking of any action by the Company which
is not acceptable to the controlling stockholder.
Certain of the Company's directors and executive officers are also currently
serving as board members or executive officers of Savia or companies related to
Savia, and it is expected that each will continue to do so. Such management
interrelationships and intercorporate relationships may lead to possible
conflicts of interest.
The Company and other entities that may be deemed to be controlled by or
affiliated with Savia sometimes engage in (i) intercorporate transactions such
as guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties and (ii) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties. The
Company continuously considers, reviews and evaluates, and understands that
Savia and related entities consider, review and evaluate transactions of the
type described above. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more of
such transactions in the future in addition to those currently in force, such as
the Long Term Funded Research Agreement dated January 1, 1997, between Seminis
and DNAP. In connection with these activities the Company might consider issuing
additional equity securities or incurring additional indebtedness. The Company's
acquisition activities may in the future include participation in the
acquisition or restructuring activities conducted by other companies that may be
deemed to be controlled by Savia.
ITEM 2. PROPERTIES
ABSA owns approximately 3,183 acres of agricultural land in Sinaloa, Sonora,
and Baja California Sur. ABSA leases approximately 2,641 acres of land in
Sinaloa and Baja California Sur. See "Legal Proceedings."
Bionova Produce, Inc. and Bionova Properties, Inc. own warehouse and office
space in Nogales, Arizona. The other subsidiaries of IPHC lease office and
warehouse space. Interfruver leases office and warehouse space in Jalisco.
Interfruver also leases warehouse space in Mexico City, Sinaloa, Sonora,
Chihuahua and Nuevo Leon.
DNAP leases 46,000 square feet of laboratory and office space and 7,500
square feet of greenhouse space in Oakland, California. DNAP also owns 12,700
square feet of greenhouse and warehouse space, including farm land for field
trials, in Brentwood, California. DNAP also has arrangements in various
locations throughout the United States for field evaluations of improved plant
varieties which DNAP is developing. DNAP's current facilities are not adequate
for large scale growing, processing operations or distribution. Depending on the
needs for its products, DNAP contracts for the requisite facilities with third
parties.
10
ITEM 3. LEGAL PROCEEDINGS
On January 21, 1997, a class action lawsuit styled Gordon K. Aaron
et al. v. Empresas la Moderna, S.A. de C.V., et al. was filed in the U.S.
federal district court for the Northern District of California. The plaintiffs
allege that, prior to the merger (the "Merger") of DNAP with a subsidiary of
Bionova Holding on September 26, 1996, they owned shares of DNAP's $2.25
Convertible, Exchangeable Preferred Stock ("Preferred Stock"). In connection
with the Merger, all of the shares of common stock and Preferred Stock of DNAP
were converted into the number of shares of common stock of Bionova Holding
specified in the Merger Agreement. The plaintiffs allege that they were denied
the right to vote and certain other rights they allegedly had under the terms of
the Preferred Stock and that certain individuals (the "Individual Defendants"),
each of whom was a director of DNAP prior to the Merger and in some cases later
served as a director of Bionova Holding, breached fiduciary duties of loyalty,
candor and care allegedly owed to DNAP and its stockholders. The plaintiffs
claim to have been damaged by the alleged actions of the defendants and
therefore the plaintiffs seek unspecified actual and punitive damages as well as
reimbursement of their litigation costs and expenses. On August 27, 1997, the
court granted motions to dismiss all of the claims pending against all of the
defendants, except the claims of breach of the fiduciary duty of loyalty against
the Individual Defendants. The court also gave the plaintiffs leave to amend the
complaint against certain other named defendants, including Bionova Holding, as
to a claim for aiding and abetting the alleged breach of fiduciary duty of
loyalty. On January 14, 1999, the court reinstated the plaintiffs' claims that
the preferred stockholders were denied their contractual right to vote on the
Merger, then on March 13, 2000, the court dismissed these claims with prejudice.
Bionova Holding and DNAP deny any wrongdoing or liability in this matter and
intend to vigorously contest this lawsuit.
On August 13, 1997, a lawsuit styled Grace Brothers, Ltd. v. DNAP Holding
Corporation, DNA Plant Technology Corporation and Does 1 through 20 Inclusive
was filed in the United States District Court for the Northern District of
California. This claim arose out of the private placement of common stock and
warrants made by DNAP in August of 1995. The plaintiff alleged that DNAP failed
to disclose material non-public information relating to DNAP's efforts to enter
into a strategic relationship with a third party in violation of federal and
state securities laws and the terms of the contract relating to the private
placement. On November 17, 1997, the plaintiff dismissed Bionova Holding from
the lawsuit. Subsequently, the Court dismissed the plaintiff's claim for federal
securities fraud and, in February, 1999, the Court granted DNAP's Motion for
Summary Judgment and dismissed all of the remaining claims. The plaintiff has
filed an appeal to the dismissal of this case. DNAP denies any wrongdoing or
liability in this matter and intends to vigorously contest this lawsuit.
On August 29, 1997, a lawsuit styled Grace Brothers, Ltd. v. DNAP Holding
Corporation, DNA Plant Technology Corporation and Does 1 through 20 Inclusive
was filed in the Superior Court of the State of California, County of Alameda.
This claim arose out of the Merger on September 26, 1996 of DNAP with a
wholly-owned subsidiary of Bionova Holding. In the Merger, shares of DNAP's
Preferred Stock were converted into the right to receive shares of common stock
of Bionova Holding. The plaintiff alleged that it owned shares of Preferred
Stock and that DNAP breached its contractual obligations to the plaintiff by,
among other things, not providing special conversion privileges to the preferred
stockholders. The plaintiff also alleged that the former holders of DNAP common
stock were unjustly enriched by DNAP's alleged breach of the Certificate of
Designation. On February 17, 1999, the Court granted Bionova Holding's and
DNAP's Motion for Summary Judgment and dismissed all of the plaintiff's claims.
The plaintiff has filed an appeal to the dismissal of this case. DNAP denies any
wrongdoing or liability in this matter and intends to vigorously contest this
lawsuit.
On January 7, 1999, a class action lawsuit styled Gordon K. Aaron
et al. v. Empresas la Moderna, S.A. de C.V., et al. was filed in the U.S.
federal district court for the Northern District of California. The plaintiffs
allege that, prior to the Merger of DNAP with a subsidiary of Bionova Holding on
September 26, 1996, they owned shares of DNAP's Preferred Stock. In connection
with the Merger, all of the shares of common stock and Preferred Stock of DNAP
were converted into the number of shares of common stock
11
of Bionova Holding specified in the Merger Agreement. The plaintiffs allege that
the Proxy Statement/ Prospectus distributed to DNAP's stockholders in connection
with the merger contained material misrepresentations and omitted to state
material facts. Both DNAP and Bionova Holding, as well as certain former and
current directors of DNAP and Bionova Holding, have been named as defendants in
this matter. The plaintiffs claim to have been damaged by the alleged actions of
the defendants and therefore the plaintiffs seek unspecified actual damages,
reimbursement of their litigation costs and expenses, and equitable relief,
including rescission of the Merger. The plaintiffs also allege that they were
entitled to receive, and seek specific performance of, special conversion
privileges under the terms of the Certificate of Designation that established
the Preferred Stock. On March 8, 2000, the court dismissed nearly all of the
plaintiffs' claims, though the plaintiffs were given the opportunity to file by
March 27, 2000 an amended complaint with respect to some of the dismissed
claims. Bionova Holding and DNAP deny any wrongdoing and liability in this
matter and intend to vigorously contest this lawsuit.
On January 28, 1999, a class action lawsuit styled Robert Kaczak
v. Empresas la Moderna, S.A. de C.V., et al. was filed in the U.S. federal
district court for the Northern District of California. The complaint is
substantially identical to the above-described complaint filed on January 7,
1999 by the Aaron plaintiffs. This case has been consolidated with the lawsuit
filed by the Aaron plaintiffs on January 7, 1999. Bionova Holding and DNAP deny
any wrongdoing and liability in this matter and intend to vigorously contest
this lawsuit.
DNAP has been named as a defendant in several lawsuits asserting claims
against DNAP relating to research DNAP performed from 1983 through 1994 for
Brown & Williamson Tobacco Company ("B&W"). In general, the cases allege that
DNAP engaged in unfair business practices under California law and/or
participated in an alleged conspiracy among cigarette manufacturers to deceive
the public regarding the hazards of smoking. All of the pending cases are in
California state courts (but DNAP was also sued, and later dismissed from a case
in the Nevada state courts, and DNAP was sued in a case in the West Virginia
state courts which case has been dismissed). In December, 1999, B&W agreed to
indemnify DNAP against all costs (including costs of defense and of costs of any
judgment or settlement) incurred by DNAP in connection with these cases and any
similar cases in the future. Therefore, management no longer believes that these
cases could have a material adverse effect on the Company's financial condition
or results of operations. DNAP denies any wrongdoing or liability in these
matters and intends to vigorously contest these lawsuits.
ABSA owns one hundred hectares (approximately 247 acres) of rural land in
the State of Sinaloa, Mexico, which is the subject of a judicial proceeding
pending in Mexico initiated by a group of campesinos. The petitioners asserted
that a previous owner of the subject land, Miguel Angel Suarez, owned rural land
in excess of the maximum that was then allowed by law and that therefore the
land rightfully belonged to them. On September 25, 1996, the court upheld the
petition and ordered the land turned over to the petitioners. The court also
ruled that the transfer of the property to Olga Elena Batiz Esquer on June 2,
1990 was null and void, which would mean that the transfer of the land by
Ms. Batiz to ABSA in 1993 was ineffective. On October 23, 1996, Ms. Batiz, who
was a party to the trial court proceeding, filed a challenge to the judicial
determination based on alleged violations of her constitutional rights and
procedural and substantive errors in the trial court proceedings. If ABSA is
ultimately required to transfer the subject land, which constitutes
approximately 8% of the total agricultural land owned by ABSA, Mexican law gives
ABSA indemnification rights against the State of Sinaloa and Ms. Batiz.
ABSA owns two hundred seventy-four hectares (approximately 677 acres) of
rural land in the State of Sinaloa, Mexico, which is the subject of a judicial
proceeding pending in Mexico initiated by a group of campesinos. The petitioners
asserted that a previous owner of the subject land owned rural land in excess of
the maximum that was then allowed by law and that therefore the land rightfully
belonged to them. On August 27, 1997, the court denied the petition and ruled in
favor of ABSA. On May 25, 1998, the petitioners filed a challenge to the
judicial determination based on alleged violations of their constitutional
rights. If ABSA is ultimately required to transfer the subject land, which
constitutes approximately 22% of
12
the total agricultural land owned by ABSA, Mexican law gives ABSA limited
indemnification rights against the State of Sinaloa.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Information regarding Bionova Holding's executive officers including their
respective ages at March 1, 1999, is set forth below.
NAME AGE POSITION WITH COMPANY
- ---- -------- ------------------------------------
Mr. Bernardo Jimenez................ 46 Chief Executive Officer and Director
Mr. Jorge Fenyvesi.................. 49 Executive Vice President
Mr. Arthur H. Finnel................ 49 Executive Vice President, Treasurer,
and Chief Financial Officer
Mr. Bernardo Jimenez was appointed Chief Executive Officer of Bionova
Holding in October 1997. He has been Chairman of the Board of Bionova Holding
since September, 1996. Mr. Jimenez also serves as the Chief Operating Officer of
the agrobiotechnology division of Savia, which includes Bionova Holding and
several other smaller Mexican companies. From 1993 to 1996, Mr. Jimenez served
as the head of the Industrial Banking Division at the Vector Group, a financial
services company in Mexico which is affiliated with Savia, the Vice President of
New Business Development for Pulsar Internacional, S.A. de C.V., and the Chief
Financial Officer of Savia. Mr. Jimenez is a director of Savia.
Mr. Jorge Fenyvesi joined the Company in July 1997, and was appointed
Executive Vice President of the Company responsible for planning and business
development in October 1997. He also served as President of DNAP. During 1999,
Mr. Fenyvesi also assumed responsibility for the Company's agricultural
operations in Mexico. From 1994 to 1997, Mr. Fenyvesi was Commercial Director
for Dow Elanco, Latin America and from 1992 to 1994 he was Research and
Development Director for Dow Elanco, Latin America.
Mr. Arthur H. Finnel has been an Executive Vice President since
October, 1997, and has been the Treasurer and Chief Financial Officer of the
Company since 1996. From 1995 to 1996, he was a financial planning consultant to
Savia and Bionova Mexico. From 1982 to 1995 he was an executive with Mars,
Incorporated, where he held positions of General Manager and President of its
Canadian pet food division and Vice President of Finance of Uncle Ben's, Inc.
All executive officers of Bionova Holding are elected annually by the Board
of Directors to serve until the next annual meeting of the Board and until their
respective successors are chosen and qualified.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock currently is quoted on the American Stock
Exchange under the symbol "BVA."
Public trading of the Company's Common Stock commenced on September 27,
1996, the date after the Company acquired DNAP and from that date through
November 3, 1999 was listed on the Nasdaq National Market. Prior to that date,
there was no public market for the Common Stock. On November 4, 1999 Bionova
Holding Corporation's common stock began trading on the American Stock Exchange.
The following table sets forth the high and low closing sales prices per
share for the Common Stock as reported on the American Stock Exchange or the
Nasdaq National Market for the periods indicated.
HIGH LOW
-------- --------
1999
First Quarter............................................... 3 7/8 3 1/8
Second Quarter.............................................. 3 3/4 3
Third Quarter............................................... 4 7/16 2 5/32
Fourth Quarter.............................................. 3 1 1/4
1998
First Quarter............................................... 4 1/2 3 7/8
Second Quarter.............................................. 4 5/8 3 3/4
Third Quarter............................................... 4 3/8 3 1/8
Fourth Quarter.............................................. 3 7/8 3 1/8
1997
First Quarter............................................... 6 3 5/8
Second Quarter.............................................. 4 3/4 3 1/2
Third Quarter............................................... 5 3/8 3 5/8
Fourth Quarter.............................................. 5 4
On March 13, 2000 the last reported sale price of the Common Stock on the
American Stock Exchange was $2.875 per share. As of March 13, 1999 there were
1,565 record holders of the Common Stock.
The Company has never paid cash dividends. Management intends to retain any
future earnings for payment of outstanding indebtedness and for the operation
and expansion of the Company's business and does not anticipate paying any cash
dividends in the foreseeable future.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for each of the
years in the five year period ended December 31, 1999, are derived from the
consolidated financial statements of Bionova Holding. The consolidated financial
statements and related notes as of December 31, 1999 and 1998, and the three
years in the period ended December 31, 1999, are included elsewhere in this Form
10-K, and the selected consolidated financial information set forth below should
be read in conjunction with such financial statements and notes. The selected
consolidated financial data of Bionova Holding include financial data for ABSA,
IPHC, Interfruver, DNAP, VPP, and Royal Van Namen as from their respective dates
of acquisition, as follows:
- In 1995, Bionova Holding consisted of a 50.004% interest in ABSA and a
50.1% interest in IPHC. ABSA acquired a 50.1% interest in Interfruver in
January 1995. IPHC was formed as a U.S. holding company in December 1994.
Its interests during 1995 included Bionova Produce, Inc. and R.B. Packing
of California, Inc. (both 100% owned) by IPHC, TDI (75% owned by IPHC),
and Premier (80% owned by IPHC).
- In 1996, Bionova Holding consisted of a 50.004% interest in ABSA, a 50.1%
interest in IPHC, and from September 27, 1996 following the Merger, a
100.0% interest in DNAP. A 50.1% interest in Royal Van Namen was acquired
by IPHC and its results were included in IPHC's results beginning on
December 1, 1996.
- In 1997, Bionova Holding consisted of a 50.004% interest in ABSA, a 50.1%
interest in IPHC, a 100.0% interest in DNAP, and a 100.0% interest in VPP,
which was created as a new subsidiary in July 1997. Bionova Holding
increased its ownership of ABSA to 80.0% and of IPHC to 100.0% in
October 1997, (though by agreement among the parties the effective date of
the transaction for purposes of allocating minority income and losses was
established as July 31, 1997).
- In 1998 and 1999, Bionova Holding consisted of an 80.0% interest in ABSA,
a 100.0% interest in IPHC, a 100.0% interest in DNAP, and a 100.0%
interest in VPP. The 50.1% interest in Royal Van Namen held by IPHC was
divested in December 1997 and therefore was not a part of the 1998
operating results of Bionova Holding.
15
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues....................... $ 242,359 $ 262,111 $ 281,198 $ 192,985 $ 197,586
Gross profit......................... 10,139 26,509 18,485 16,632 19,703
Selling and administrative
expenses........................... (27,430) (25,151) (26,660) (16,195) (14,608)
Write-off of purchased research and
development........................ -- -- (2,815) (12,900) --
Research and development expenses.... (6,442) (5,846) (5,072) (1,244) --
Amortization of goodwill, patents and
trademarks......................... (3,345) (2,940) (2,407) (1,008) (538)
Operating (loss) income.............. (27,078) (7,428) (18,469) (14,715) 4,557
Interest expense, net................ (14,183) (6,697) (3,740) (3,482) (5,031)
Exchange (loss) gain, net............ 905 (1,762) (481) 569 (4,748)
Other non-operating (expense)
income............................. -- 137 (182) 2,058 --
Loss before income taxes............. (40,356) (15,750) (22,872) (15,570) (5,222)
Income tax (expense) benefit......... (978) (456) (1,426) (2,738) (2,132)
Minority interests................... 2,685 601 3,986 1,274 3,510
Net loss............................. (38,649) (15,605) (20,312) (17,034) (3,844)
Net loss per common share--basic and
diluted............................ $ (1.64) $ (0.80) $ (1.11) $ (1.19) $ (0.35)
Weighted average number of common
shares outstanding................. 23,588,031 19,603,320 18,370,640 14,286,318 10,967,299
DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 4,510 $ 15,405 $ 6,600 $ 10,735 $ 1,580
Accounts receivable and advances to
grower, net........................ 33,650 40,406 38,088 36,322 32,526
Inventories, net..................... 17,218 16,478 17,779 20,139 14,730
Total current assets................. 57,149 74,052 63,085 68,354 48,978
Total assets......................... 161,953 167,686 147,249 141,137 88,108
Bank loans and current portion of
long-term debt..................... 25,903 81,309 53,805 41,214 33,103
Total current liabilities............ 56,728 120,095 109,384 80,939 54,725
Long-term debt....................... 100,252 4,225 7,215 2,423 10,515
Stockholders' equity................. 3,384 42,117 28,356 48,690 14,725
16
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the selected
financial information of Bionova Holding and the financial statements and
related notes of Bionova Holding included elsewhere in this Form 10-K.
OVERVIEW
Bionova Holding engages in the production, distribution, and sale of fresh
produce to wholesalers and retailers primarily in Mexico, the United States, and
Canada. The business strategy of the Company consists of (i) vertical
integration within the produce/agronomics industry, (ii) growth by acquisition
of complementary businesses and (iii) access to basic technology to separate
itself from others in the fresh produce business, as exemplified by the Merger
with DNAP.
DNAP, which was incorporated in Delaware in 1981, is an agribusiness
biotechnology company focused on the development and application of genetic
engineering and transformation technologies in plants, as well as development
and marketing of premium, differentiated, fresh and processed, branded fruits
and vegetables. DNAP uses advanced breeding, genetic engineering, and other
biotechniques to achieve improvements in the taste, texture, product form,
color, and shelf life of produce and to improve production characteristics, such
as disease resistance and production or processing yields.
Bionova Holding expects to capitalize on the combination of production,
distribution, and technology strengths by focusing its longer-term business
strategy on the development and commercialization of value-added, proprietary
differentiated products that are developed with DNAP's technology.
The Company classifies its business into three fundamental areas: FARMING,
which consists principally of interests in 100% Company-owned fresh produce
production facilities and joint ventures with other growers; DISTRIBUTION,
consisting principally of interests in sales and distribution companies in
Mexico, the United States, and Canada; and RESEARCH AND DEVELOPMENT, consisting
of business units focused on the development of fruits and vegetables and
intellectual properties associated with these development efforts.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Consolidated total revenues declined to $242.4 million for the year ended
December 31, 1999 from $262.1 million in 1998, consolidated gross profit (sales
less cost of sales) decreased from $26.5 million in 1998 to $10.1 million in
1999, and the Company's consolidated operating loss increased from $7.4 million
in 1998 to $27.1 million in 1999.
FARMING segment revenues, the majority of which are eliminated in
consolidation, for the year ended December 31, 1999 were $59.0 million as
compared with $72.3 million during 1998. Farming segment loss at the gross
profit line increased to $11.0 million in 1999 from a $0.4 million loss in 1998.
The operating loss in this segment increased from $5.6 million in 1998 to
$16.8 million in 1999. Weather-related factors, including abnormally cold
weather impacted 1999 first half production in Culiacan and in the Company's
joint venture in Chihuahua, and plant disease and insect infestation damaged
crops in the Company's Santa Cruz joint venture in northern Baja California
during the second half of the year. Product pricing during the 1999 Culiacan and
Santa Cruz growing seasons also were lower than in 1998. Florida and California,
two of the major tomato growing areas in the United States, which compete
directly with Culiacan and Santa Cruz during these periods, experienced one of
their best growing seasons in years, which in turn caused an oversupply of
product in the marketplace. This very high level of supply led to a significant
deterioration in average prices of many of the Company's products, and during
the last quarter of 1999 prices were almost 50% lower than the same quarter in
1998.
17
The decline in gross margin and the higher operating loss stemmed from
(i) the poor production output and pricing conditions which increased average
unit production costs, (ii) the write down of receivables associated with the
termination of five of ABSA's joint ventures, and (iii) higher administrative
expenses in 1999 as compared with 1998 due to higher salary and wage costs,
which were consistent with the rate of inflation and the impact in dollar terms
of the appreciation in the Mexican peso over the past year. Corporate overhead
allocated to this segment of the business declined by $1.5 million in 1999 as
compared with 1998.
The Company continues to believe it can achieve 10-15% operating margins
before corporate overhead allocation in its wholly-owned and joint venture
growing operations in Baja California and Culiacan in the future with a return
of more normal weather conditions. However, the Company has determined that a
better pricing environment and/or a significant lowering of costs will be
required to achieve these margins.
Revenues of the DISTRIBUTION segment declined from $253.1 million for the
year ended December 31, 1998 to $236.1 million for the year ended December 31,
1999. Distribution segment gross profit declined from $18.0 million in 1998 to
$14.8 million in 1999, and operating income for the segment fell from
$0.5 million in 1998 to a loss of $1.7 million in 1999. Revenues in the Canadian
and Mexican distribution operations increased by $9.0 million from 1998 to 1999
due to a higher volume of shipments. The U.S. distributing companies reflected a
significant decrease in revenues totaling $26.0 million due primarily to
(i) the discontinuation of a FreshWorld Farms Florida grower, which generated
very little income for the company and (ii) product prices during the second
half of the year that were lower than the prior year. The distribution segment
reflected a 0.2% increase in gross profit in 1999 as compared with 1998 before
one-time charges of $2.9 million for writeoffs of growers and accounts
receivables. Operating income of the distribution segment decreased by
$2.3 million, reflecting the impact of the gross margin decline, offset in part
by a reduction in corporate overhead allocated to this segment of the business.
While the 1999 results reflected a 0.5% operating margin on sales before
writeoffs of grower receivables, the Company believes it can achieve at least a
2% operating margin in this segment of the business in the year 2000 by
increasing volumes and thereby leveraging its existing infrastructure.
RESEARCH AND DEVELOPMENT revenues declined from $8.0 million for the year
ended December 31, 1998 to $5.5 million for the year ended December 31, 1999.
Research and development segment gross profit declined to $5.5 million in 1999
from $7.7 million in 1998, and the operating loss in this segment increased from
$2.4 million in 1998 to $5.7 million in 1999. The decline in revenues was due to
lower third party licensing and contract revenues, offset in part by additional
contract revenues stemming from the long-term funded research agreement with
Savia signed at the time of the Merger in 1996. Savia was obligated to fund DNAP
at least $9 million over the three year period that ended on September 30, 1999,
and Savia paid an incremental $0.9 million in 1999 to meet this obligation. The
segment's lower gross margin in 1999 as compared with 1998 was a direct
consequence of the lower revenues. The higher operating loss in this segment in
1999 as compared with 1998 reflects the lower gross margin and the higher
research and development expenses associated with the start up of activities
during 1999 in VPP Corporation, Bionova Holding's subsidiary that is working on
the development of the strawberry program following the acquisition of Monsanto
Company's strawberry assets. The Company expects to achieve a similar level of
revenues in the research and development segment of its business in 2000 as it
achieved in 1999. However, gross margins are expected to be lower due to a shift
in the mix of revenues from licensing to contract research. The Company also
anticipates spending more on research and development in 2000 as it expands its
efforts to develop new products.
Consolidated selling and administrative expenses increased from
$25.2 million in 1998 to $27.4 million in 1999 due to higher corporate overhead
expenses. This increase in expenses emanated from the legal costs incurred in
connection with the Company's defense against shareholder suits and other
general corporate expenses.
18
The non-cash charge for amortization of goodwill, patents and trademarks
increased by $0.4 million in 1999 as compared with 1998 due to the recognition
of a complete year of patents and trademarks amortization related to VPP's
acquisition of Monsanto Company's strawberry assets.
Interest expense increased by $8.0 million in 1999 as compared with 1998 due
to the higher rates of interest that prevailed on the Company's debt obligations
during most of the year and an increase in the average level of debt outstanding
that was required to fund working capital and fixed asset investments in 1999.
Interest income increased by $0.5 million in 1999 as compared with 1998 due
primarily to higher short-term investments associated with the restricted cash
related to the long-term floating rate notes.
In 1998, Bionova Holding experienced a net foreign exchange gain of
$0.9 million as compared to a loss of $1.8 million in 1998. The effect of a
strong Mexican peso and Canadian dollar in 1999 accounted for this reversal.
Another factor affecting year-on-year comparisons of foreign exchange gains and
losses is that effective January 1, 1999, Mexico ceased to be considered a
highly inflationary economy. Interfruver, whose functional currency is the peso,
now accounts for foreign exchange impacts on non-monetary balance sheet accounts
as changes to the cumulative translation account under stockholders' equity
rather than as foreign exchange gains and losses on the consolidated statement
of operations. ABSA's functional currency has been and continues to be the U.S.
dollar; therefore, its results are not affected by this change.
Income tax expense increased from $0.5 million in 1998 to $1.0 million in
1999. This variance was primarily attributable to higher tax expense associated
with the Company's Mexican distribution operations.
For 1999, the share of losses allocable to minority interests was
$2.7 million as compared with minority interest losses of $0.6 million in 1998.
These allocations of losses for the years of 1999 and 1998, respectively, were
consistent with the minority positions held across the operating subsidiaries of
the Company.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Consolidated total revenues declined to $262.1 million for the year ended
December 31, 1998 from $281.2 million in 1997. Despite the decline in total
revenues, which was a direct consequence of the divestiture of Royal Van Namen
("RVN") during the first quarter of 1998, consolidated gross profit (sales less
cost of sales) increased from $18.5 million in 1997 to $26.5 million in 1998 and
the Company's consolidated operating loss declined from $18.5 million in 1997 to
$7.4 million in 1998.
FARMING segment revenues, the majority of which are eliminated in
consolidation, for the year ended December 31, 1998 were $72.3 million as
compared with $72.4 million during 1997. Farming segment gross profit improved
by $2.3 million from 1997 to 1998 and the operating loss for the segment was
reduced from $8.0 million in 1997 to $5.6 million in 1998. Despite this
improvement in gross margin, the Company continued to struggle to get the
10-15% operating margins it has believed it should obtain in the farming segment
of its business. Weather-related factors impacted first half production in
Culiacan in 1997, and abnormally cold weather in December 1998 damaged the last
stage of the crop in the Company's Santa Cruz joint venture in northern Baja
California and caused damage to crops in process in Culiacan. Product pricing
during the Culiacan growing season also has been lower than the Company expected
during the past several years.
Revenues of the DISTRIBUTION companies declined from $275.7 million for the
year ended December 31, 1997 to $253.1 million for the year ended December 31,
1998. This decline in revenues was due to the divestiture of RVN during the
first quarter of 1998, which contributed full year revenues of $55.0 million in
1997. Revenues in the U.S., Canadian, and Mexican distribution operations
increased by $32.4 million from 1997 to 1998 due to a higher volume of shipments
and the better pricing environment that prevailed, particularly during the
fourth quarter of 1998. The U.S. and Canadian distribution companies reflected
an
19
improvement of $3.1 million in gross profit from 1997 to 1998 due to the higher
volumes and prices, which offset entirely the loss of RVN's gross margin of
$3.1 million recorded in 1997. Operating income of the distribution companies
improved by $3.3 million from a loss of $2.8 million in 1997 to a profit of
$0.5 million in 1998 due to a reduction in selling and administrative expenses
associated with the divestiture of RVN.
RESEARCH AND DEVELOPMENT revenues and gross margins increased from 1997 to
1998 by $3.3 million due to higher licensing and contract revenues. The higher
licensing and contract revenues were due largely to the granting of a license to
Novartis for the Company's Transwitch technology in the fourth quarter of 1998.
The operating loss in the research and development segment was impacted in 1997
by a charge of $2.8 million for purchased research and development in connection
with the acquisition of the intellectual property assets of UAC. The absence of
this type of charge in 1998 along with the improvement in gross margins
contributed to the $5.4 million improvement in the operating loss of this
segment of the Company's business from 1997 to 1998. Research and development
expenses increased from $5.1 million in 1997 to $5.8 million in 1998 due to the
increased level of activity at DNAP.
The write off in 1997 of $2.8 million of purchased research and development
occurred in connection with the acquisition of the intellectual property assets
of United Agricorp, Inc. ("UAC"), which included rights to genetically engineer
traits in University of California strawberry varieties and rights to genes for
fruit quality and disease resistance. DNA Plant Technology Corporation had been
performing research for UAC since 1995 in the area of genetic modification of
strawberries to improve various traits. The acquisition price was $2.8 million ,
which consisted of $2.5 million in cash and 100,000 stock options granted to one
of the principals of UAC that expired in August 1999. At the time of the
acquisition a zero value was assigned on the books of UAC to the various rights
that were acquired.
A valuation was completed to arrive at a value for in-process research and
development. This valuation employed an income approach to determine the
potential income the Company would generate by completing the necessary
development activity to incorporate quality and disease resistance traits in
strawberries and susbsequently selling the transformed plants to strawberry
growers over a fifteen year time horizon, discounted at a rate of 30%. The value
derived from this analysis was significantly greater than $2.8 million. As the
technologies that were being acquired from UAC were not considered to have any
alternative uses other than their application in the transgenic transformation
of strawberry plants and additional research and development was required to
demonstrate the technological feasibility of commercializing products from the
assets being acquired, the entire $2.8 million purchase price for the UAC assets
was determined to be in-process research and development. Accordingly,
consistent with generally accepted accounting principles, this purchased
research and development was charged off immediately to current income.
Consolidated selling and administrative expenses declined from
$26.7 million in 1997 to $25.2 million in 1998. The reduction in selling and
administrative expenses associated with the divestiture of RVN was offset in
part by higher corporate overhead expenses. The higher corporate expenses in
1998 emanated from the legal costs incurred in connection with the Company's
defense against shareholder suits, employee termination costs, and other general
corporate expenses. The employee termination costs in 1998 of $0.5 million
related to an agreement reached between the Company and an executive officer who
was in charge of the Company's fresh produce business on his departure.
The non-cash charge for amortization of goodwill, patents and trademarks
increased by $0.5 million in 1998 as compared with 1997 due to the recognition
of a complete year of goodwill amortization related to Bionova Holding's
purchase of the minority interests in ABSA and IPHC.
Interest expense increased by $2.3 million in 1998 as compared with 1997 due
to the higher rates of interest that prevailed on the Company's debt obligations
during the second half of 1998 and an increase in the average level of debt
outstanding that was required to fund working capital and fixed asset
investments in 1998.
20
Interest income decreased by $0.7 million in 1998 as compared with 1997 due
primarily to certain reclassifications.
In 1998, Bionova Holding experienced a net foreign exchange loss of
$1.8 million as compared to a loss of $0.5 million in 1997. The very high level
of volatility that affected worldwide financial and currency markets in the
third and fourth quarters of 1998 impacted significantly the peso/dollar
exchange rate. As a consequence, both ABSA and Interfruver experienced large
exchange losses during the fourth quarter of 1998 due to their net peso monetary
positions, reversing a small gain through the first three quarters of the year.
Income tax expense decreased from $1.4 million in 1997 to $0.5 million in
1998. This variance was primarily attributable to the elimination of Bionova
Produce, Inc.'s tax liability due to its consolidation for tax purposes into
Bionova Holding beginning in the third quarter of 1997, which followed the
Company's acquisition of the minority interests in IPHC.
For 1998, the share of losses allocable to minority interests was
$0.6 million as compared with minority interest losses of $4.0 million in 1997.
These allocations of losses for the years of 1998 and 1997, respectively, were
consistent with the minority positions held across the operating subsidiaries of
the Company. These allocations were affected significantly by the increase in
the Company's interests in ABSA and IPHC (effective August 1, 1997), and the
divestiture of its entire interest in RVN, and profit distributions made by
Interfruver to its owners during 1998.
CAPITAL EXPENDITURES
During 1999, the Company made capital investments of $5.7 million in
property, plant and equipment, of which $4.3 million was spent in the FARMING
segment of the Company's business, $1.2 million in the DISTRIBUTION segment, and
$0.2 million in RESEARCH AND DEVELOPMENT. Major investment projects in 1999
included (i) the installation of new irrigation systems on agricultural land
owned ABSA, (ii) additional cooling room capacity required for product quality,
and (iii) and the completion of the new packaging facility at ABSA's production
site in Culiacan, Mexico.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, the Company used $31.9 million of cash
in operating activities. The great majority of this cash usage in operations was
associated with the losses sustained by the Company ($38.6 million), offset to
some extent by non-cash items ($10.0 million). The negative cash flow impact of
changes in accounts receivable and advances to growers was $0.5 million as a
$2.5 million decrease in accounts receivable due to stronger collection efforts
was more than offset by related party receivables due from Savia and the
minority owners of Interfruver. Inventories increased by $1.9 million reflecting
the investment in the Farming segment for the new harvesting season. Accounts
payable and accrued expenses decreased by $0.2 million reflecting similar levels
of operations at year end 1998 and 1999.
In addition to the capital investments discussed above, investment
requirements reflected in the cash flows included the last earn-out payment to
Interfruver in the amount of $1.1 million associated with the Company's purchase
of its majority interest in 1995. During 1999, the Company paid $5.0 million to
Monsanto Company for the strawberry assets that were acquired in December 1998.
On March 22, 1999, the Company completed a refinancing of its $85 million in
consolidated debt. This refinancing culminated in a three year $100 million
credit facility enabling the Company to correct the significant working capital
imbalance that had persisted for several years and to relieve the risk
associated with the need to continuously refinance large short-term lines of
credit. The key provisions of this credit arrangement consist of (i) a payment
of the entire principal amount on the third anniversary following closing,
(ii) prepayments at the option of the Company with no penalties, (iii) an
interest rate of LIBOR
21
plus 7%, (iv) up front fees of $3 million to the lead banks which arranged the
financing, and (v) requirements that the Company must keep one year's worth of
interest in an interest bearing reserve account and that all existing short-term
financing had to be paid off with the proceeds of this loan. The contract also
provides that the Company is permitted to obtain up to $30 million in new
financing for working capital purposes. This credit facility is fully guaranteed
by Savia. In the loan agreement with respect to Bionova Holding there are no
financial covenants. However, Bionova Holding is subject to the following
restrictions -- (i) Bionova Holding and its subsidiaries are only permitted to
make new investments in assets and businesses in the field of agrobiotechnology,
(ii) the proceeds of any new debt beyond this $100 million credit facility and
the $30 million for working capital must be used to pay down the $100 million
credit facility and the new debt must have a final maturity date that is no
earlier than March 23, 2003, and (iii) Bionova Holding and its subsidiaries are
not permitted to merge with any other company unless Bionova Holding (or its
subsidiaries) is the surviving corporate entity. Savia has similar restrictions
pertaining to its three year, $450 million floating rate notes -- (i) Savia and
its subsidiaries are only permitted to make investments in business arenas in
which they are currently involved, (ii) Savia will not incur additional debt
exceeding $70 million unless the proceeds of any new debt are used to pay down
the floating rate notes it issued and the new debt must have a final maturity
date that is no earlier than March 23, 2003, and (iii) Savia and its
subsidiaries are not permitted to merge with any other company unless Savia (or
its subsidiaries) is the surviving corporate entity. Savia's Mexican packaging
company, Empaques, S.A. de C.V., and its worldwide seed company, Seminis, Inc.
have debt to EBITDA requirements they must maintain on a rolling four quarter
basis, and Savia's Mexican insurance company, Seguros Comercial America, S.A. de
C.V., is required to be in compliance with minimum paid-in capital and technical
reserve requirements and any other financial ratios or covenants as prescribed
and applicable under the Ministry of Finance in Mexico. If Savia or Bionova
Holding is in default on any of its obligations under the loan agreement, then
the lenders have the right to declare default and accelerate all of the notes.
Both Bionova Holding and Savia are currently in compliance with these
restrictions and covenants.
In achieving this longer-term financing, Bionova Holding's interest rate
increased from an average of 8.5% in 1998 to between 13% and 14% in 1999. The
Company obtained $30.0 million of additional working capital financing at rates
between 9.0% and 10.0% in 1999.
Net cash provided by financing activities in 1999 was $32.8 million. As
described above, the Company used the majority of the proceeds from its issuance
of the three year floating rate notes to pay down existing short-term debt.
Since that time the Company has borrowed additional funds on a short-term basis
for working capital purposes. As of year-end 1999, the Company had on deposit
$9.5 million in a restricted cash account associated with the issuance of these
three year notes.
The Company incurred a net loss of $38.6 million and an operating cash flow
deficiency of $31.9 million for the year ended December 31, 1999. Management
anticipates that it may also incur a net loss and an operating cash flow
deficiency for the year ending December 31, 2000. The losses are a result of
unfavorable results of operations, primarily in the Company's farming business
segment, but also are due to significant research and development expenditures
and substantial financing expenses associated with the Company's highly
leveraged financial position.
Management of the Company is in the process of evaluating a variety of
alternatives to help sustain the Company's operations and improve operating
results. Savia, the indirect parent company of Bionova Holding, has committed at
least through December 31, 2000 to financially support the Company and its
subsidiaries so that they can continue with their business plans and the
fulfillment of their financial obligations. In addition, Savia has committed to
continue to guarantee the short-term bank loans of the Company, which in the
aggregate will not exceed $30 million. There can be no assurance that any of the
alternatives being considered by management will result in sufficient working
capital to significantly improve the Company's current financial position or its
results of operations.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
22
ABSA currently has two lawsuits pending that challenge their rights of
ownership to 374 hectares of land in Mexico, which represents approximately 30%
of the land owned by ABSA. ABSA was indemnified fully by the former owners of
this land, "the Batiz Family," when it completed the acquisition of their
minority interest ownership in ABSA in 1997. If ABSA were to lose both of these
lawsuits, ABSA expects to recover the full value of this land. ABSA then could
either purchase new land, rent land, or contract with other growers to replace
any production lost from a transfer of these specific lands.
YEAR 2000 ("Y2K") UPDATE
Background
The Company completed its Year 2000 project in December 1999. This Y2K
project included both information technology ("IT") and non-IT systems and was
divided into four principal sections. These sections were (1) hardware,
(2) software, (3) non-IT systems, and (4) third parties (suppliers, customers,
and other). Sections 1, 2, and 3 went through seven phases, as follows: (i) an
inventory of all items relevant to Y2K, (ii) assignment of priorities regarding
each of these items for the Company's activities in the Y2K,
(iii) determination of the Company's Y2K capability and compliance with regard
to each of these items, (iv) preliminary testing of Y2K capability,
(v) maintenance and or replacement of items that failed to meet Y2K
requirements, (vi) validation that maintenance and replacement changes met Y2K
requirements, and (vii) design of contingency plans.
To date the Company and its subsidiaries have operated without any
disruptions associated with the changeover to the year 2000. Costs incurred by
the Company to date with respect to the Y2K activities it performed amounted to
$0.280 million, and the entire amount of this was expensed in 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. FAS 133, as amended by Statement of
Financial Accounting Standards No. 137, is effective for all fiscal years
beginning after June 15, 2000. FAS 133 requires that all derivatives be recorded
on the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedged transaction
and the type of hedge transaction. The ineffective portion of all hedges will be
recognized in earnings. The Company will adopt FAS 133 January 1, 2001 as
required.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K includes "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. All statements, including without limitation
statements contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" other than statements of historical facts
included in this Form 10-K, including statements regarding our financial
position, business strategy, prospects, plans and objectives of our management
for future operations, and industry conditions, are forward-looking statements.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we can give you no assurance that these expectations
will prove to be correct. In addition to important factors described elsewhere
in this report, the following "Risk Factors," sometimes have affected, and in
the future could affect, our actual results and could cause these results during
2000, and beyond, to differ materially from those expressed in any
forward-looking statements made by us or on our behalf. When we use the terms
"Bionova," "we," "us," and "our," these terms refer to the Company and its
subsidiaries.
23
RISKS RELATING TO OUR FINANCIAL CONDITION
WE MAY CONTINUE TO SUSTAIN LOSSES AND ACCUMULATE DEFICITS IN THE FUTURE
We have sustained losses in 1996, 1997, 1998, and 1999. As of December 31,
1999 our accumulated deficit was $104.5 million. For the year ended
December 31, 1999, we had a net loss of $38.6 million. The factors that caused
these losses, including factors described in this section, may continue to limit
our ability to make a profit in the future.
WE MAY NEED ADDITIONAL FINANCING TO ACHIEVE OUR GROWTH AND TECHNOLOGY
OBJECTIVES, WHICH COULD HURT OUR FINANCIAL CONDITION
We may need additional capital to meet our growth objectives, working
capital requirements, and to fund the purchase and development of new
technologies. Our projected cash flows from operations and existing capital
resources, including our existing credit lines, may not be sufficient.
Therefore, our ability to pursue these objectives may depend on our ability to
obtain additional capital, which could cause us to incur additional debt or
issue additional equity securities. We cannot assure you that additional capital
will be available on satisfactory terms, if at all, and, as a result, we may be
restricted in our pursuit of future growth and technology strategies.
OUR LEVERAGED POSITION COULD CAUSE US TO BE UNABLE TO MEET OUR CAPITAL NEEDS,
WHICH COULD HURT OUR FINANCIAL CONDITION
At December 31, 1999 we had $126.2 million of indebtedness and stockholders
equity of $3.4 million. This level of indebtedness may pose substantial risks to
our company and to our stockholders, including the possibility that we may not
generate sufficient cash flow to pay our outstanding debts. Our level of
indebtedness may also adversely affect our ability to incur additional
indebtedness and finance our future operations and capital needs, and may limit
our ability to pursue other business opportunities.
RISKS RELATING TO OUR FARMING AND DISTRIBUTION BUSINESS
BAD WEATHER AND CROP DISEASE CAN AFFECT THE AMOUNT OF PRODUCE WE CAN GROW, WHICH
CAN DECREASE OUR REVENUES AND PROFITABILITY
Weather conditions greatly affect the amount of fresh produce we bring to
market, and, accordingly, the prices we receive for our produce. Storms, frosts,
droughts, and particularly floods, can destroy a crop and less severe weather
conditions, such as excess precipitation, cold weather and heat, can kill or
damage significant portions of a crop. Crop disease and pestilence can be
unpredictable and can have a devastating effect on our crops, rendering them
unsalable and resulting in the loss of all or a portion of the crop for that
harvest season. Even when only a portion of our crops are damaged, the profits
we could have made on the crop will be severely affected because the costs to
plant and cultivate the entire crop will have been incurred although we may
experience low yields or may only be able to sell a portion of our crop. In 1998
and 1999, ABSA's significant losses were in large measure due to very cold
weather and diseases that severely affected outputs in its Culiacan operations
and in its joint venture in Baja California Norte.
A CHANGE IN ABSA'S RELATIONSHIP WITH ITS JOINT VENTURE IN BAJA CALIFORNIA NORTE
CAN AFFECT THE AMOUNT OF PRODUCE WE GROW, WHICH CAN DECREASE REVENUES AND
PROFITS
One grower in Baja California, Santa Cruz Empacadora, S. de R.L. de C.V.,
accounted in 1999 for approximately 11% of our consolidated sales. Due to losses
incurred during the 1999 growing season, ABSA recently negotiated an agreement
with this grower whereby the grower has pledged certain assets as collateral to
secure its outstanding receivable. ABSA and the grower currently are in
negotiations as to whether they will continue their association agreement in
2000 and the terms and conditions of this agreement. If an agreement is reached
to continue to grow during this next growing season, we expect we will reduce
our financial commitment significantly with a corresponding reduction in the
amount of hectares that will be planted and harvested as compared with 1999. In
turn, a reduction in the output of
24
Santa Cruz would likely result in lower overall sales of the Company and lower
total operating profit as compared with what previously had been projected for
future years.
LABOR SHORTAGES AND UNION ACTIVITY CAN AFFECT OUR ABILITY TO HIRE WORKERS TO
HARVEST AND DISTRIBUTE OUR CROPS, WHICH CAN HURT OUR FINANCIAL CONDITION
The production of fresh produce is heavily dependent upon the availability
of a large labor force to harvest crops. The turnover rate among the labor force
is high due to the strenuous work, long hours, necessary relocation and
relatively low pay. If it becomes necessary to pay more to attract labor to farm
work, our labor costs will increase.
The Mexican farm work force retained by ABSA is unionized. If the union
attempts to disrupt production and is successful on a large scale, labor costs
will likely increase and work stoppages may be encountered, which would be
particularly damaging in our industry where harvesting crops at peak times and
getting them to market on a timely basis is critical. The majority of fresh
produce is shipped by truck. In the United States and in Mexico, the trucking
industry is largely unionized and therefore susceptible to labor disturbances.
As a result, delivery delays caused by labor disturbances in the trucking
industry or any other reason could limit our ability to get fresh produce to
market before it spoils.
ABSA'S RELIANCE ON LEASES AND PRODUCTION ASSOCIATIONS COULD RESULT IN INCREASED
COSTS, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
ABSA relies on agricultural land leased from others and production
associations with other growers for a large part of its supply. The average term
of these land leases is two years and we expect to renew 100% of these land
leases as they expire. If the other parties to these leases and other
arrangements were to choose not to renew their agreements with ABSA, ABSA would
be required to locate alternate sources of supply and/or land or, in some cases,
to pay increased rents for land. In addition to increased rental rates,
increases in land costs could result from increases in water charges, property
taxes and related expenses.
RISKS RELATING TO OUR SCIENTIFIC RESEARCH AND DEVELOPMENT BUSINESS
GOVERNMENT REGULATION CAN CAUSE DELAYS AND INCREASED COSTS, WHICH DECREASE OUR
REVENUES AND PROFITABILITY
Our subsidiaries' activities in the United States are extensively regulated
by the Food and Drug Administration, the United States Department of
Agriculture, the Environmental Protection Agency, and other federal and state
regulatory agencies in the United States. Similarly, our subsidiaries'
activities in Mexico are extensively regulated by the Secretaria de Agricultura,
Ganaderia y Desarrollo Rural, the Secretaria de Salud, and other federal and
state regulatory agencies in Mexico. Also, our products may require regulatory
approval or notification in the United States or in other countries in which
they are tested, used or sold. The regulatory process may delay research,
development, production, or marketing and require more costly and time-consuming
procedures, and there can be no assurance that requisite regulatory approvals or
registration of our current or future genetically engineered products will be
granted on a timely basis.
IF THE PRODUCTS WE DEVELOP AND MARKET ARE NOT COMMERCIAL SUCCESSES, WE WILL NOT
RECOUP OUR DEVELOPMENT AND PRODUCTION COSTS, WHICH WILL HURT OUR FINANCIAL
CONDITION
We are currently in the early stages of marketing several of our new
products, and there can be no assurance that any of these products will be
successful or will produce significant revenues or profits. In addition, a
number of our product development projects are in the early stages, and these
projects may not be successful. The success of these and future products depends
on many variables, including the ability to produce and make available to the
market consistent, premium quality fruits and vegetables on a year-round basis,
consumers' willingness to pay higher prices for premium quality fruits and
vegetables, and retailers' willingness to carry such fruits and vegetables.
25
IF THE PUBLIC IS UNWILLING TO ACCEPT GENETICALLY ENGINEERED PRODUCTS, WE WILL
NOT RECOUP OUR DEVELOPMENT AND PRODUCTION COSTS, WHICH WILL HURT OUR FINANCIAL
CONDITION
Our second generation products are being developed through the use of
genetic engineering. The commercial success of these products will depend in
part on public acceptance of the cultivation and consumption of genetically
engineered products. We cannot assure you that these products will gain
sufficient public acceptance to be profitable, even if these products obtain the
required regulatory approvals.
WE MAY NOT BE SUCCESSFUL IN OBTAINING PATENTS, PROTECTING OUR TRADE SECRETS AND
CONDUCTING OUR BUSINESS WITHOUT INFRINGING ON THE RIGHTS OF OTHERS, WHICH
COULD ADVERSELY AFFECT OUR BUSINESS
Our success depends, in part, on our ability to obtain and enforce patents,
maintain trade secret protection, and conduct our business without infringing
the proprietary rights of others. If others develop competing technologies and
market competing products, our sales could be adversely affected. If we are not
able to maintain our trade secrets or to enforce our patents, our competitive
position could be adversely affected. In addition, we license technology from
third parties. If we cannot maintain these licenses, or if we cannot obtain
licenses to other useful technology on commercially reasonable terms, our
research efforts could be adversely affected.
RISKS RELATING TO OUR INTERNATIONAL OPERATIONS
LEGAL LIMITATIONS COULD AFFECT OUR OWNERSHIP OF RURAL LAND IN MEXICO, WHICH
COULD DECREASE OUR SUPPLY OF PRODUCE CAUSING A DECREASE IN OUR REVENUES AND
PROFITABILITY
ABSA owns a substantial amount of rural land in Mexico, which it uses to
grow fresh fruits and vegetables. Historically, the ownership of rural land in
Mexico has been subject to legal limitations and claims by residents of rural
communities, which in some cases could lead to the owner being forced to
surrender its land. ABSA has been, and continues to be, involved in land dispute
proceedings as part of its ordinary course of business. If ABSA is required to
surrender any of its land, the volume of fresh fruits and vegetables it produces
would decline and adversely affect our profitability. There are currently
pending in Mexico two lawsuits challenging the ownership rights of ABSA to rural
land it owns in Mexico. If both of these lawsuits were decided against ABSA,
ABSA could lose a total of 30% of all the rural land it owns in Mexico.
CURRENCY FLUCTUATIONS AND INFLATION CAN INCREASE THE COST OF OUR PRODUCTS IN THE
UNITED STATES AND ABROAD, WHICH DECREASES OUR REVENUES AND PROFITABILITY
The currency exchange rates in Mexico have historically been volatile. For
example, in December 1994, the Mexican government announced its intention to
float the Mexican peso against the United States dollar and, as a result, the
peso devalued over 40% relative to the dollar during that month. Since January
1995, the value of the peso has decreased approximately 90%. These exchange rate
fluctuations impact our subsidiaries' business. If the value of the peso
decreases relative to the value of the dollar, then:
(1) imports of produce into Mexico for distribution by our Mexican subsidiary
become more expensive in peso terms and therefore more difficult to sell in
the Mexican market; and
(2) inflation that generally accompanies reductions in the value of the peso
reduces the purchasing power of Mexican consumers, which reduces the demand
for all products including produce and, in particular, imported, branded or
other premium-quality produce.
Conversely, if the value of the peso increases relative to the value of the
dollar, Mexican production costs increase in dollar terms, which results in
lower margins or higher prices with respect to produce grown in Mexico and sold
in the United States and Canada.
26
VOLATILE INTEREST RATES IN MEXICO CAN INCREASE OUR CAPITAL COSTS
Historically, interest rates in Mexico have been volatile, particularly in
times of economic unrest and uncertainty. High interest rates restrict the
availability and raise the cost of capital for our Mexican subsidiaries and for
growers and other Mexican parties with whom we do business, both for borrowings
denominated in pesos and for borrowings denominated in dollars. Costs of
operations for our Mexican subsidiaries are higher as a result.
TRADE DISPUTES BETWEEN THE UNITED STATES AND MEXICO CAN RESULT IN TARIFFS,
QUOTAS AND BANS ON IMPORTS, INCLUDING OUR PRODUCTS, WHICH CAN HURT OUR
FINANCIAL CONDITION
Despite the enactment of the North American Free Trade Agreement, Mexico and
the United States from time to time are involved in trade disputes. The United
States has, on occasion, imposed tariffs, quotas, and importation bans on
products produced in Mexico. U.S. tomato growers have brought dumping claims
against Mexican tomato growers and may do so again. Because some of our
subsidiaries produce products in Mexico, which we sell in the United States,
such actions, if taken, could adversely affect our business.
GENERAL BUSINESS RISKS
BIONOVA INTERNATIONAL, INC. HAS SUBSTANTIAL CONTROL OVER OUR COMPANY AND CAN
AFFECT VIRTUALLY ALL DECISIONS MADE BY OUR STOCKHOLDERS
Bionova International beneficially owns 18,076,839 shares of our common
stock accounting for 76.6% of all issued and outstanding shares. As a result,
Bionova International has the requisite voting power to significantly affect
virtually all decisions made by Bionova and our stockholders, including the
power to elect all of our directors and to block corporate actions such as an
amendment to most provisions of our certificate of incorporation. This ownership
and management structure will inhibit the taking of any action by Bionova which
is not acceptable to Bionova International.
WE MAY NOT BE ABLE TO ADAPT OUR MANAGEMENT INFORMATION SYSTEMS AND CONTROLS TO
KEEP PACE WITH OUR FUTURE GROWTH, WHICH COULD HURT OUR FINANCIAL CONDITION
Our business has undergone rapid growth through acquisition of complementary
businesses. In 1996, we acquired DNA Plant Technology and its subsidiaries. In
1997, we created VPP Corporation to acquire most of the assets of United
Agricorp, Inc. In 1998, we acquired full ownership of ABSA and International
Produce Holding Company, and their subsidiaries. As a result of these
acquisitions, significant strains have been placed on the management, operations
and financial resources of our subsidiaries. The realization of our business
strategy depends on, among other things, our ability to adapt management
information systems and controls and to hire, train and retain qualified
employees to allow these operations to be effectively managed. The geographic
separation of our subsidiaries' operations exacerbates these issues.
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements disclosed in this section and otherwise in
this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The table below provides information about the Company's derivative
financial instruments and consisting primarily of debt obligations that are
sensitive to changes in interest rates. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contracts. Weighted average
variable rates are based on implied forward rates in the yield curve
27
on December 31, 1999. The information is presented in U.S. dollar equivalents,
which is the Company's reporting currency. The instrument's actual cash flows
are denominated in both U.S. dollars and Mexican pesos, and are indicated
accordingly in the tables below.
EXPECTED MATURITY DATE
---------------------------------------------------------------------------------------
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- --------
Short-Term debt:
($US equivalent in millions)
U.S. dollar variable rate..... $21.6 $ 21.6 $ 21.6
Average interest rate....... 9%
Peso variable rate (in $US)... 1.1 1.1 1.1
Average interest rate....... 26%
Long-term debt:
U.S. dollar fixed rate........ $ 2.9 $ 2.9 $ 2.9
Average interest rate....... 10%
U.S. dollar variable rate..... $ 0.3 $0.1 $100.1 $0.1 $100.6 $100.6
Average interest rate....... 12% 12% 13% 12%
The Company tries to use the most cost-effective means to fund its operating
and capital needs. Fixed or variable debt will be borrowed in both U.S. dollars
and Mexican pesos. The Company borrows Mexican pesos to provide for its working
capital needs in its Mexican operations. To minimize exchange risk associated
with the importation of products, the Company will enter into forward exchange
contracts where the functional currency to be used in the transaction is
dollars. At December 31, 1999, approximately 3% of the Company's long-term debt
is fixed rate debt and 97% is variable rate debt. All of the fixed rate
long-term debt is denominated in U.S. dollars. All of the long-term variable
rate debt is denominated in U.S. dollars.
EXCHANGE RATE RISK
The table below provides information about the Company's financial
instruments by functional currency that are subject to exchange risk. This
information is presented in U.S. dollar equivalents. The table summarizes
information on instruments that are sensitive to foreign currency exchange
rates, including peso-denominated debt obligations. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates.
EXPECTED MATURITY DATE
---------------------------------------------------------------------------------------
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- --------
On-Balance sheet
Financial Investments
($US equivalent in millions)
Peso short-term debt:
Variable rate (in $US)....... $ 1.1 $1.1 $1.1
Average interest rate........ 26%
Expected maturity or
transaction date........... Dec. 31
28
The Company had no firmly committed forward sales contracts in Mexican pesos
as of December 31, 1999.
The Company is exposed to U.S. dollar-to-Mexican peso currency exchange risk
due to revenues and costs denominated in Mexican pesos associated with its
Mexican subsidiaries, ABSA and Interfruver. The Company expects it will continue
to be exposed to currency exchange risks in the near future.
The Company's subsidiaries, Interfruver and Premier, from time to time enter
into foreign exchange forward contracts to manage their exposure to fluctuations
in foreign currency denominated payables. These contracts generally mature
within three months. As of December 31, 1999, the Company had foreign exchange
forward contracts outstanding in the amount of $1.883 million. Gains and losses
arising from foreign currency transactions are included in the line item
entitled "Exchange (loss) gain, net" in the Consolidated Statement of Operations
when realized.
COMMODITY PRICE RISK
The table below provides information about the Company's fresh produce
growing crops inventory and fixed price contracts that are sensitive to changes
in commodity prices. For inventory, the table presents the carrying amount and
fair value at December 31, 1999. For the fixed price contracts, the table
presents the notional amounts in Boxes, the weighted average contract prices,
and the total dollar contract amount by expected maturity dates, the latest of
which occurs within one year from the reporting date. Contract amounts are used
to calculate the contractual payments and quantity of fresh produce to be
exchanged under futures contracts.
AT DECEMBER 31,
1999
-------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
On-balance sheet commodity position:
Fresh produce crops in process inventory ($US in
millions)............................................... $ 8.9 $ 8.9
Fixed price contracts:
Contract volumes (158,141 boxes)
Weighted average unit price (per 158,141 boxes)........... $8.50 $8.50
Contract amount ($US in millions)......................... $ 1.3 $ 1.3
In order to manage the exposure to commodity price sensitivity associated
with fresh produce products, the Company enters into fixed price contracts with
certain customers which guarantee specified volumes for the growing season or
the year at a fixed price. The Company believes that its efforts to assure a
high level of product quality along with efforts to develop and market
differentiated, added value products also reduce to some extent its exposure to
commodity price sensitivity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants, and the consolidated financial
statements of the Company and the notes thereto appear on the following pages.
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Bionova Holding Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income and loss, of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Bionova Holding Corporation and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
March 14, 2000
30
BIONOVA HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
-------------------
1999 1998
-------- --------
THOUSANDS OF U.S.
DOLLARS
ASSETS
Current assets:
Cash and cash equivalents................................... $ 4,510 $ 15,405
Accounts receivable, net.................................... 30,499 28,220
Advances to growers, net.................................... 3,151 12,186
Inventories, net............................................ 17,218 16,478
Other current assets........................................ 1,771 1,763
-------- --------
Total current assets...................................... 57,149 74,052
-------- --------
Property, plant and equipment, net.......................... 38,379 38,611
Patents and trademarks, net................................. 15,374 17,025
Goodwill, net............................................... 28,210 29,539
Deferred income taxes....................................... 611 4,174
Other assets, net........................................... 22,230 4,285
-------- --------
Total assets.............................................. $161,953 $167,686
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank loans....................................... $ 22,653 $ 79,751
Current portion of long-term debt........................... 3,250 1,558
Accounts payable and accrued expenses....................... 20,899 26,075
Accounts due to related parties............................. 8,413 7,396
Deferred income taxes....................................... 1,513 5,315
-------- --------
Total current liabilities................................. 56,728 120,095
Long-term debt.............................................. 100,252 4,225
-------- --------
Total liabilities......................................... 156,980 124,320
-------- --------
Minority interest........................................... 1,589 1,249
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized, no
shares issued and outstanding............................. -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
23,588,031 shares issued and outstanding.................. 236 236
Additional paid-in capital.................................. 107,918 107,918
Accumulated deficit......................................... (104,494) ( 65,845)
Accumulated other comprehensive income (loss)............... (276) (192)
-------- --------
Total stockholders' equity.................................. 3,384 42,117
-------- --------
Total liabilities and stockholders' equity................ $161,953 $167,686
======== ========
The accompanying notes are an integral part of these financial statements.
31
BIONOVA HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME AND LOSS
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
THOUSANDS OF U.S. DOLLARS
(EXCEPT PER SHARE AMOUNTS)
Total revenues........................................ $ 242,359 $ 262,111 $ 281,198
----------- ----------- -----------
Cost of sales......................................... 232,220 235,602 262,713
Selling and administrative expenses................... 27,430 25,151 26,660
Research and development expenses..................... 6,442 5,846 5,072
Purchased research and development.................... -- -- 2,815
Amortization of goodwill, patents and trademarks...... 3,345 2,940 2,407
----------- ----------- -----------
269,437 269,539 299,667
----------- ----------- -----------
Operating (loss) income............................... (27,078) (7,428) (18,469)
----------- ----------- -----------
Interest expense...................................... (16,018) (7,982) (5,704)
Interest income....................................... 1,835 1,285 1,964
Exchange (loss) gain , net............................ 905 (1,762) (481)
Other non-operating (expense) income.................. -- 137 (182)
----------- ----------- -----------
(13,278) (8,322) (4,403)
----------- ----------- -----------
Loss before income tax................................ (40,356) (15,750) (22,872)
Income tax expense.................................... 978 456 1,426
----------- ----------- -----------
Loss before minority interest......................... (41,334) (16,206) (24,298)
Minority interest in net loss of subsidiaries, net.... 2,685 601 3,986
----------- ----------- -----------
Net loss.............................................. (38,649) (15,605) (20,312)
Other comprehensive income (expense) net of tax:
Foreign currency translation adjustment............. (84) 116 (207)
----------- ----------- -----------
Comprehensive income (loss)........................... $ (38,733) $ (15,489) $ (20,519)
=========== =========== ===========
Net loss per share--basic and diluted................. $ (1.64) $ (0.80) $ (1.11)
=========== =========== ===========
Weighted average number of common shares
outstanding......................................... 23,588,031 19,603,320 18,370,640
The accompanying notes are an integral part of these financial statements.
32
BIONOVA HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON ADDITIONAL OTHER TOTAL
SHARES COMMON PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL INCOME (LOSS) DEFICIT EQUITY
----------- -------- ---------- ------------- ----------- -------------
THOUSANDS OF U.S. DOLLARS
Balance at December 31, 1996..... 18,370,640 $184 $ 78,535 $(101) $ (29,928) $ 48,690
Options issued in conjunction
with UAC acquisition........... 185 185
Net loss......................... (20,312) (20,312)
Cumulative translation
adjustment..................... (207) (207)
---------- ---- -------- ----- --------- --------
Balance at December 31, 1997..... 18,370,640 184 78,720 (308) (50,240) 28,356
Shares issued to Bionova
International, Inc., net of
expenses....................... 5,217,391 52 29,198 29,250
Net loss......................... (15,605) (15,605)
Cumulative translation
adjustment..................... 116 116
---------- ---- -------- ----- --------- --------
Balance at December 31, 1998..... 23,588,031 236 107,918 (192) (65,845) 42,117
Net loss......................... (38,649) (38,649)
Cumulative translation
adjustment..................... (84) (84)
---------- ---- -------- ----- --------- --------
Balance at December 31, 1999..... 23,588,031 $236 $107,918 $(276) $(104,494) $ 3,384
========== ==== ======== ===== ========= ========
The accompanying notes are an integral part of these financial statements.
33
BIONOVA HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- -------- -----------
THOUSANDS OF U.S. DOLLARS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (38,649) $(15,605) $ (20,312)
Items not affecting cash:
Minority interest......................................... (2,685) (601) (3,986)
Depreciation.............................................. 5,022 4,136 3,938
Amortization of goodwill, patents and trademarks.......... 3,345 2,940 2,407
Purchased research and development........................ -- -- 2,815
Deferred income taxes..................................... (239) (295) 882
Write-off of property, plant and equipment................ -- -- 943
Allowances for uncollectible receivables and slow moving
inventory............................................... 4,596 2,665 2,264
Loss (gain) from sale of property, plant and equipment.... (21) (137) (321)
Net changes (exclusive of acquisitions) in:
Accounts receivable and advances to growers, net.......... (488) (10,010) (3,902)
Inventories............................................... (1,903) 900 2,232
Other assets.............................................. (701) (5,263) 1,524
Accounts payable and accrued expenses..................... (176) (2,120) (2,690)
--------- -------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES......... (31,899) (23,390) (14,206)
--------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for acquisition of intellectual property.......... (5,000) -- (2,630)
Acquisitions, net of cash acquired........................ -- -- (8,188)
Purchases of property, plant and equipment................ (5,738) (9,775) (6,444)
Proceeds from sale of property, plant and equipment....... -- 479 564
Payments for purchases of companies....................... (1,057) (476) (627)
Proceeds from divestiture of Van Namen, net of cash
divested................................................ -- 637 --
Loss on divestiture of subsidiary......................... -- (832) 832
--------- -------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (11,795) (9,967) (16,493)
--------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net changes in short-term borrowings...................... (54,697) 29,955 19,107
Proceeds from bank loans and other debtors................ -- 256 267
Repayments of long-term debt.............................. (4,120) (2,746) (9,211)
Proceeds from long-term debt.............................. 100,147 -- --
Accounts due to related parties........................... 1,017 (14,553) 16,401
Restricted cash........................................... (9,548) -- --
Investment by Bionova International, Inc., net of
expenses................................................ -- 29,250 --
--------- -------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 32,799 42,162 26,564
--------- -------- -----------
Net (decrease) increase in cash and cash equivalents........ (10,895) 8,805 (4,135)
Cash at beginning of year................................... 15,405 6,600 10,735
--------- -------- -----------
Cash at end of year......................................... $ 4,510 $ 15,405 $ 6,600
========= ======== ===========
SUPPLEMENTAL CASH FLOW DATA
Interest paid............................................... $ 14,658 $ 7,439 $ 4,915
Income taxes paid........................................... 1,399 954 294
NON-CASH INVESTING AND FINANCING ACTIVITIES
Options issued in connection with UAC acquisition........... -- -- 185
Issuance of promissory notes in the acquisition of the
minority interests of ABSA and IPHC....................... -- -- 7,220
Reduction in principal due on promissory notes associated
with the acquisition of the minority interests of ABSA and
IPHC...................................................... (709) -- --
Acquisition of Monsanto Company's strawberry development
program................................................... -- 5,000 --
The accompanying notes are an integral part of these financial statements.
34
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
Bionova Holding Corporation, a Delaware corporation (together with its
subsidiaries, "Bionova Holding" or the "Company"), which changed its name on
April 28, 1999 from DNAP Holding Corporation, a subsidiary of Bionova, S.A. de
C.V. ("Bionova Mexico"), a Mexican corporation, was formed on January 12, 1996.
Today, the Company acts as a holding company for (i) Agrobionova, S.A. de C.V.,
of which the Company owns 80% ("ABSA"), (ii) International Produce Holding
Company, of which the Company owns 100% ("IPHC"), (iii) DNA Plant Technology
Corporation, of which the Company owns 100% ("DNAP"), and (iv) VPP Corporation,
of which the Company owns 100% ("VPP").
RISKS AND UNCERTAINTIES
The Company incurred a net loss of $38.6 million and an operating cash flow
deficiency of $31.9 million for the year ended December 31, 1999. Management
anticipates that it may also incur a net loss and an operating cash flow
deficiency for the year ending December 31, 2000. The losses are a result of
unfavorable results of operations, primarily in the Company's farming business
segment, but also are due to significant research and development expenditures
and substantial financing expenses associated with the Company's highly
leveraged financial position.
Management of the Company is in the process of evaluating a variety of
alternatives to help sustain the Company's operations and improve operating
results. Savia, S.A. de C.V. ("Savia"), the indirect parent company of Bionova
Holding, has committed at least through December 31, 2000 to financially support
the Company and its subsidiaries so that they can continue with their business
plans and the fulfillment of their financial obligations. In addition, Savia has
committed to continue to guarantee the short-term bank loans (Note 9) of the
Company, which in the aggregate will not exceed $30 million. There can be no
assurance that any of the alternatives being considered by management will
result in sufficient working capital to significantly improve the Company's
current financial position or its results of operations.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
BIONOVA HOLDING CORPORATION CAPITAL INCREASE DURING 1998
On October 6, 1998, the Company announced a re-capitalization program
whereby all common shareholders as of the record date will be issued rights to
acquire 3 shares of common stock for every 4 shares they own at an exercise
price of $5.75 per share. Rights associated with partial shares will be rounded
up to the next higher whole number of shares equivalent.
As a part of the re-capitalization program, Bionova International, Inc.,
made a capital contribution of $30 million on October 6, 1998, and received in
exchange 5,217,391 shares of Bionova Holding Corporation common stock at a price
of $5.75 per share. Bionova International, Inc. agreed that upon issuance of the
13,557,630 rights it will be due to receive under the re-capitalization program,
it will surrender back to Bionova Holding the equivalent number of rights
(9,130,435) corresponding to the number of shares it purchased in October 1998.
Approximately 4,133,390 rights will be issued to all other stockholders in
accordance with their share holdings.
The Company has been working on the required filings with the SEC to make
the rights offering effective since May of 1999 and still has some questions to
address that were raised by the SEC on February 3, 2000 in response to its
second set of filings. The Company expects to resubmit the required filings to
the SEC on or about March 24, 2000 and will then await a further response from
the SEC. In
35
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BASIS OF PRESENTATION (CONTINUED)
consideration of the long delay in issuing the rights, Bionova Holding's Board
of Directors approved an extension of the expiration date for these rights to
December 29, 2000 at its meeting on March 1, 2000.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Consolidation
The consolidated financial statements include Bionova Holding Corporation
and all of its wholly-owned and majority-owned subsidiaries (the Company). All
significant intercompany accounts and transactions have been eliminated.
Acquired businesses are included in the results of operations since their
acquisition dates. Divested businesses are included in the results of operations
until their divestiture dates. The minority stockholders' interest in the
majority-owned subsidiaries' financial position and results of operations is
presented as a minority interest in the Company's consolidated financial
statements.
b. Management's estimates and assumptions
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from such estimates.
c. Revenue recognition
PRODUCE SALES
The Company sells produce on its own account and on behalf of growers and
other parties on a commissioned basis. Revenue from such sales is recognized
when the produce is shipped, net of an allowance for estimated returns. Since
the Company bears the risk of loss for collection of sales proceeds for sales on
behalf of growers and other parties on which commissions are earned, the
associated sales are recognized at the gross sales amounts, net of an allowance
for estimated returns or other credits. In the consolidated results of
operations, 1999, 1998, and 1997 sales recognized on a commissioned basis and
the related commissions earned were as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
$(000'S)
Sales.......................................... $128,718 $148,079 $98,882
Commissions earned............................. 13,314 13,695 9,132
PRODUCT DEVELOPMENT ACTIVITIES
Revenue from product development activities is recognized during the period
the Company performs the development efforts in accordance with the term of the
agreements and activities undertaken. The revenue is recognized as earned over
the term of the agreement, in accordance with the performance effort. Revenue
that is related to future performance under such agreements is deferred and
recognized as revenue when earned.
36
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Cash and cash equivalents
Cash equivalents are stated at cost, which approximates the fair value. The
Company considers all highly liquid and temporary cash investments with original
maturities of three months or less to be cash equivalents. The Company's policy
is to place its cash and cash equivalents with large creditworthy financial
institutions to limit the amount of credit exposure.
e. Advances to growers
Advances to growers are made for supplies, seed, and other growing and
harvesting costs. The advances are interest bearing and non-interest bearing and
repaid from amounts withheld from sales proceeds due to growers.
f. Association agreements
The Company has entered into certain agreements with growers under which the
Company shares in the profits and losses associated with growing activities. The
Company records these participation agreements under the equity method of
accounting.
One grower in Baja California, Santa Cruz Empacadora, S. de R.L. de C.V.,
accounted in 1999 for approximately 11% of the Company's consolidated sales. Due
to losses incurred during the 1999 growing season, ABSA recently negotiated an
agreement with this grower whereby the grower has pledged certain assets as
collateral to secure his outstanding receivable. ABSA and the grower currently
are in negotiations as to whether they will continue their association agreement
in 2000 and the terms and conditions of this agreement. If an agreement is
reached to continue to grow during this next growing season, the Company expects
it will reduce its financial commitment significantly with a corresponding
reduction in the amount of hectares that will be planted and harvested as
compared with 1999.
g. Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
using the first-in, first-out method for finished produce. Cost of growing crops
includes direct material and labor and an allocation of indirect costs and are
accumulated until the time of the harvest, subject to lower of cost or market
adjustments.
h. Property, plant and equipment
Property, plant and equipment are stated at their acquisition cost.
Additions to property, plant and equipment, including significant improvements
and renewals, are capitalized. Maintenance and repair costs are charged to
expense as incurred. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets.
i. Goodwill
Goodwill consists principally of excess purchase price over the fair value
of tangible and identifiable intangible assets of businesses acquired. Goodwill
is amortized on the straight-line basis over twenty years. Amortization of
goodwill amounted to $1.696 million, $1.708 million, and $1.174 million in 1999,
1998 and 1997, respectively. Accumulated amortization was $6.531 million and
$4.857 million at December 31, 1999 and 1998, respectively.
37
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
j. Patents and trademarks
The costs of obtaining patents are expensed as incurred. Acquired patents
and trademarks are capitalized and amortized using the straight-line method over
their estimated useful lives of 12 years. The historical cost of these patents
and trademarks as of December 31, 1999 and 1998 was $19.8 million for both
years, and the accumulated amortization as of these same dates amounted to
$4.425 million and $2.775 million, respectively. During 1999, 1998, and 1997 the
Company recorded amortization expense of $1.650 million, $1.233 million, and
$1.233 million, respectively.
k. Research and product development costs
All research and product development costs incurred or acquired are
expensed.
l. Stock-based compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income (loss) and earnings (loss) per share as if the fair
value-based method had been applied in measuring compensation expense.
m. Concentration of credit risks
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and
advances to growers. Credit risk associated with trade receivables is limited
due to the large number of customers comprising the Company's customer base.
There can be no assurance that an event outside of the Company's control will
not occur and cause these trade receivables or advances to be at risk. The
Company performs ongoing credit evaluations of its customers' and growers'
financial condition to determine the need for an allowance for uncollectible
accounts.
n. Impairment of long-lived assets
Management periodically reviews for impairment the long-lived assets and
certain identifiable intangibles, including goodwill, whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized whenever the sum of the expected,
undiscounted future net cash flows is less than the carrying amount of the
assets.
o. Income taxes
Current income tax expense or benefit represents the amount of income taxes
expected to be payable or refundable for the current year. A deferred income tax
liability or asset is established for the expected future tax consequences of
temporary differences between the financial reporting and income tax bases of
assets and liabilities. Deferred income tax expense or benefit represents the
net change during the year in the deferred income tax liabilities or assets.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be more likely than not realized in future tax
returns.
p. Fair value of financial instruments
The carrying value of the Company's financial instruments, including cash
and cash equivalents, trade receivables and payables, and advances to growers,
approximate their fair market value due to their short-term maturities. The
carrying value of the Company's long-term debt is estimated to approximate its
fair value.
38
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
q. Translation of financial statements
The financial statements for subsidiaries whose functional currency is not
the U.S. dollar are translated in the following manner: assets and liabilities
at the year-end rates, stockholders' equity at historical rates and results of
operations at the monthly average exchange rates. The effects of exchange rate
changes are reflected as a separate component of stockholders' equity.
For subsidiaries whose activities are recorded in currencies which are not
their functional currency and any subsidiaries located in a hyperinflationary
environment, i.e. countries with inflation exceeding 100% over the prior three
years (which in the case of Bionova Holding's subsidiaries was exclusively ABSA
in 1999, and in 1998 and 1997 included all Mexican subsidiaries), the components
of the financial statements are translated as follows:
BALANCE SHEET:
Current assets, except inventories......................... year-end
Inventories................................................ historical
Liabilities................................................ year-end
Property, plant and equipment.............................. historical
Stockholders' equity....................................... historical
RESULTS OF OPERATIONS:
Sales...................................................... historical
Cost of sales.............................................. historical
Depreciation and amortization.............................. historical
Interest................................................... monthly average
Other expenses and income.................................. monthly average
Income taxes............................................... monthly average
Gains and losses in re-measurement arise mainly from the effect of exchange
rate fluctuations on net monetary items denominated in pesos and are included in
results of operations.
Effective January 1, 1999, Mexico ceased to be considered a highly
inflationary economy. Interfruver, whose functional currency is the peso, now
accounts for foreign exchange impacts on non-monetary balance sheet accounts as
changes to the cumulative translation account under stockholders' equity rather
than as foreign exchange gains and losses on the consolidated statement of
operations. ABSA's functional currency has been and continues to be the U.S.
dollar; therefore, its results are not affected by this change.
r. Net loss per common share
Basic net income (loss) per common share is computed as net income (loss)
divided by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per common share is computed as net income
(loss) divided by the weighted average number of common shares and potential
common shares, using the treasury stock method, outstanding during the period.
There are no reconciling items in calculating the numerator and denominator for
basic and diluted net income (loss) per share for any periods presented.
39
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
s. Employee benefit plan
DNAP has a savings and retirement plan and trust (the "401(k) Plan")
available to all eligible employees of DNAP. An eligible employee may elect to
defer, in the form of contributions to the 401(k) Plan, between 1% and 15% (in
1% increments) of the total compensation that would otherwise be paid to the
employee, subject to annual contribution limitations. An employee's
contributions are invested at the direction of the employee in various
investment options and are fully vested and non-forfeitable immediately upon
contribution. The 401(k) Plan provides for DNAP contributions in the form of
common stock or cash, not to exceed 3% of elective salary deferral
contributions. During 1999, 1998, and 1997, DNAP's cash contributions to the
401(k) Plan were approximately $0.102 million, $0.110 million, and $0.082
million, respectively.
Effective January 1, 1998, Tanimura Distributing, Inc. ("TDI"), implemented
a 401(k) profit sharing plan (the "TDI Plan"), which was available to all
eligible employees of TDI. An eligible employee could elect to defer, in the
form of contributions to the TDI Plan, up to 15% of the total compensation that
would otherwise have been paid to the employee, subject to annual contribution
limitations. An employee's contributions were invested at the direction of the
employee in various investment options and were fully vested and non-forfeitable
immediately upon contribution. The TDI Plan provided for TDI matching
contributions at the discretion of the employer (TDI). For 1998, TDI agreed to
match employee contributions up to a maximum of $500 per employee. During 1999
and 1998, TDI's employer contributions amounted to approximately $0.008 million
and $0.013 million, respectively.
Effective January 1, 1999, Tanimura Distributing, Inc., Bionova
Produce, Inc. and R.B. Packing of California, Inc. were consolidated into the
401(k) Plan. The contributions of Bionova Produce, Inc. and R.B. Packing of
California, Inc. to the plans in 1999 were $0.010 million and $0.003 million for
these companies, respectively.
t. Comprehensive income
Other comprehensive income refers to changes in equity (net assets) which do
not result from investments by owners or distributions to owners. Other
comprehensive income consists of revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income,
but are excluded from net income, as these amounts are recorded directly as an
adjustment to stockholders' equity, net of tax.
u. Segment reporting
The Company reports segment data based on the management approach. The
management approach designates the internal reporting used by management for
making operating decisions and assessing performance as the source of the
Company's reportable operating segments. The Company also discloses information
about products and services, geographical areas and major customers.
40
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
v. New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. FAS 133, as amended by Statement of
Financial Accounting Standards No. 137, is effective for all fiscal years
beginning after June 15, 2000. FAS 133 requires that all derivatives be recorded
on the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedged transaction
and the type of hedge transaction. The ineffective portion of all hedges will be
recognized in earnings. The Company will adopt FAS 133 January 1, 2001 as
required.
w. Reclassification of costs
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 3--ACQUISITIONS, MERGERS, AND DIVESTITURES
In 1996, 1997 and 1998, the Company and its subsidiaries made the following
acquisitions and divestitures:
- In November 1996, IPHC acquired a 51% stake in Royal Van Namen ("RVN"), a
distributor of fresh produce located in The Netherlands. The purchase
price for RVN including earnout payments totaled $1.752 million. In
February 1998, the Company sold IPHC's 51% interest in RVN for
$0.9 million. As part of the consideration, various obligations among the
parties were waived, including IPHC's obligation to make additional
earn-out payments. The loss on the sale was recognized in the 1997
Consolidated Statement of Operations under Other non-operating (expense)
income and amounted to $0.832 million. Revenues, operating profit, and
income before income tax recorded in the consolidated statement of
operations for RVN in 1997 were $54.843 million, $0.486 million, and
$0.355 million, respectively. RVN's operations have been included in the
Distribution segment for purposes of segment accounting.
- In August 1997, the Company, through its wholly owned subsidiary, VPP
Corporation, acquired the intellectual property assets of United
Agricorp, Inc. ("UAC"), including all of UAC's rights to and under
technology, issued patents, trademarks, trade secrets, know-how and all
similar rights. DNAP had been performing work under a research agreement
with UAC since 1995 in the area of genetic modifications of strawberries
to improve various traits. The purchase price for UAC's technology assets
was $2.8 million. In connection with the transaction, in consideration for
certain non-competition and indemnification commitments made by UAC's
major stockholder, the Company issued options to purchase 100,000 shares
of the Company's common stock. The exercise price of these options was the
market price of the common stock on August 27, 1997, which also was the
date on which these options were granted. These options were valued at
$0.185 million on the date of grant using the Black-Scholes option pricing
model. This $0.185 million of value associated with these options was part
of the $2.8 million of consideration awarded to UAC for the purchase of
the assets.
- In October 1997, the Company completed its acquisition of the minority
interests in IPHC and increased its ownership in ABSA to 80.0% (the
effective date of the transaction agreed to by the parties was July 31,
1997 for purposes of allocating minority income and losses). The price for
41
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITIONS, MERGERS, AND DIVESTITURES (CONTINUED)
acquiring these interests was $14.7 million. The goodwill resulting from
the acquisition of these interests was $12.1 million.
- In December 1998, the Company, through its wholly owned subsidiary, VPP
Corporation, acquired Monsanto Company's strawberry development program.
The program includes exclusive rights to most of Monsanto's existing
genetic and gene technology for berry development, and a non-exclusive
right to future Monsanto berry technology, including strawberries,
cranberries, raspberries, blackberries, boysenberries and blueberries. The
package includes a breeding program with a strawberry variety that was
commercialized in the United States in 1999, as well as multiple
strawberry varieties planned for commercial introduction over the next few
years. This acquisition complements the research that DNAP had been
conducting since 1995 in the area of genetic modifications of strawberries
to improve various traits. The purchase price for Monsanto's technology
assets was $5.0 million paid in January, 1999. These technology assets
will be amortized over a period of twelve years. In consideration for
certain additional licenses and assets the Company could be obligated to
pay an additional $7.0 million, which will be recorded as additions to the
purchase price if and when they occur.
NOTE 4--ACCOUNTS RECEIVABLE
Accounts receivable were comprised of the following:
DECEMBER 31,
-------------------
1999 1998
-------- --------
$(000'S)
Trade....................................................... $19,460 $21,960
Recoverable value-added tax................................. 1,581 1,960
Officers and employees...................................... 180 286
Sundry debtors.............................................. 4,024 2,688
Related parties............................................. 8,827 2,484
------- -------
34,072 29,378
Allowance for doubtful accounts and returns................. (3,573) (1,158)
------- -------
$30,499 $28,220
======= =======
The Company sells its produce primarily to retailers and wholesalers in the
United States, Mexico and Canada. No single customer accounted for more than 5%
of the Company's sales, and there were no significant accounts receivable from a
single customer at December 31, 1999 or 1998.
42
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ADVANCES TO GROWERS
Advances to growers were comprised of the following:
DECEMBER 31,
-------------------
1999 1998
-------- --------
$(000'S)
Advances to growers......................................... $3,771 $13,901
Advances to related parties................................. 238 760
------ -------
4,009 14,661
Allowance for doubtful accounts............................. (858) (2,475)
------ -------
$3,151 $12,186
====== =======
The Company has agreements with certain produce growers in Mexico whereby a
significant portion of growing costs are paid in advance by the Company. The
growing costs are recorded as advances to growers and are recognized as a
component of cost of produce sales when the produce is sold. The advances in
Mexico ($0.816 million and $7.572 million at December 31, 1999 and 1998,
respectively) are secured by promissory notes and/or the right to use the
acreage of the grower if the advances are not repaid. Advances to growers in the
United States ($2.335 million and $4.614 million at December 31, 1999 and 1998,
respectively) are generally not collateralized.
Advances earned interest at 12% per annum in 1999 and 14% per annum in 1998
and 1997. Interest income from these advances amounted to $0.462 million,
$0.609 million, and $0.651 million during the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE 6--INVENTORIES
Inventories were comprised of the following:
DECEMBER 31,
-------------------
1999 1998
-------- --------
$(000'S)
Finished produce............................................ $ 1,708 $ 2,756
Growing crops............................................... 8,851 8,020
Advances to suppliers....................................... 281 299
Spare parts and materials................................... 3,834 3,977
Merchandise in transit and other............................ 3,813 1,566
------- -------
18,487 16,618
Allowance for slow moving inventory......................... (1,269) (140)
------- -------
$17,218 $16,478
======= =======
43
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment was comprised of the following:
DECEMBER 31,
------------------- ESTIMATED
1999 1998 LIFE
-------- -------- ---------
$(000'S)
Land.................................................... $ 9,688 $ 9,422
Buildings............................................... 12,030 9,351 25 years
Machinery and equipment................................. 19,780 15,169 15 years
Office equipment........................................ 4,360 3,913 4 years
Transportation equipment................................ 3,746 3,924 10 years
Vineyards and agricultural tools........................ 2,955 2,455 3 years
Land improvements and others............................ 698 704 13 years
Construction in progress................................ 1,082 5,662
------- -------
54,339 50,600
Accumulated depreciation and amortization............... (15,960) (11,989)
------- -------
$38,379 $38,611
======= =======
Equipment amounting to $0.365 million and $2.414 million at December 31,
1999 and 1998, respectively, has been recorded under capitalized leases and
included above. Related accumulated depreciation amounted to $0.098 million and
$0.822 million at December 31, 1999 and 1998, respectively, and the related
depreciation expense amounted to $0.060 million, $0.175 million and
$0.192 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Assets held for sale are valued at their net realizable value.
NOTE 8--OTHER ASSETS, NET
Other assets was comprised of the following:
DECEMBER 31,
-------------------
1999 1998
-------- --------
$(000'S)
Notes receivable from growers............................... $13,495 $3,591
Restricted cash............................................. 9,548 --
Prepaid commissions......................................... 1,167 408
Others...................................................... 592 286
------- ------
24,802 4,285
Allowance for doubtful accounts............................. (2,572) --
------- ------
$22,230 $4,285
======= ======
44
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--BANK LOANS AND LONG-TERM DEBT
SHORT-TERM LOANS
Short-term bank loans consist of amounts due to banks, denominated in U.S.
dollars, under various lines of credit facilities. The lines of credit contain
certain covenants which, among other things, require maintenance of certain
ratio levels and tangible net worth levels. The lines of credit bear interest at
prime (9.9% and 9.7% at December 31, 1999 and 1998, respectively). Various
credit facilities are available with banks whereby the Company may borrow upon
such terms as the subsidiaries and banks mutually agree. At December 31, 1999,
such bank credit facilities amounted to $30.6 million, of which $8.0 million was
not used. The amounts due under bank credit facilities with Mexican banks are
generally renewable at the discretion of the banks. The Company has informal
arrangements with these banks, which permit additional borrowings, subject to
the availability of funds by the banks. Bionova Holding and its subsidiaries are
currently in compliance with all terms and covenants associated with these
short-term bank loan agreements.
At December 31, 1999, Savia, the parent company of Bionova Mexico,
guaranteed $22.6 million of this debt. Savia was obligated under the terms of
the Merger through September, 1999 to provide under certain conditions a
guarantee of indebtedness of the Company of up to $20 million to a financial
institution under a loan or a line of credit. Beginning in November 1998, the
Company began to pay Savia a fee of 1.5% per annum on the aggregate principal
amount of the Company's short and long-term debt that is guaranteed by Savia.
During 1999 and 1998, the Company recorded $1.3 and $0.1 million under this
arrangement. As of January 1, 1999, the fee for Savia's guarantee on the
Company's long-term debt was reduced to 1.0% per annum; Savia's rate for its
guarantee of short-term debt remained at 1.5%.
LONG-TERM LOANS
On March 22, 1999, the Company completed a refinancing of its $85 million in
consolidated debt. This refinancing culminated in a three year $100 million
credit facility enabling the Company to correct the significant working capital
imbalance that had persisted for several years and to relieve the risk
associated with the need to continuously refinance large short-term lines of
credit. The key provisions of this credit arrangement consist of (i) a payment
of the entire principal amount on the third anniversary following closing, (ii)
prepayments at the option of the Company with no penalties, (iii) an interest
rate of LIBOR plus 7%, (iv) up front fees of $3 million to the lead banks which
arranged the financing, and (v) requirements that the Company must keep one
year's worth of interest in an interest bearing reserve account and that all
existing short-term financing had to be paid off with the proceeds of this loan.
The contract also provides that the Company is permitted to obtain up to $30
million in new financing for working capital purposes. This credit facility is
fully guaranteed by Savia. In the loan agreement with respect to Bionova Holding
there are no financial covenants. However, Bionova Holding is subject to the
following restrictions--(i) Bionova Holding and its subsidiaries are only
permitted to make new investments in assets and businesses in the field of
agrobiotechnology, (ii) the proceeds of any new debt beyond this $100 million
credit facility and the $30 million for working capital must be used to pay down
the $100 million credit facility and the new debt must have a final maturity
date that is no earlier than March 23, 2003, and (iii) Bionova Holding and its
subsidiaries are not permitted to merge with any other company unless Bionova
Holding (or its subsidiaries) is the surviving corporate entity. Savia has
similar restrictions pertaining to its three year, $450 million floating rate
notes--(i) Savia and its subsidiaries are only permitted to make investments in
business arenas in which they are currently involved, (ii) Savia will not incur
additional debt exceeding $70 million unless the proceeds of any new debt are
used to pay down the floating rate notes it issued and the new debt must have a
final maturity date that is no earlier than
45
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--BANK LOANS AND LONG-TERM DEBT (CONTINUED)
March 23, 2003, and (iii) Savia and its subsidiaries are not permitted to merge
with any other company unless Savia (or its subsidiaries) is the surviving
corporate entity. Savia's Mexican packaging company, Empaques, S.A. de C.V., and
its worldwide seed company, Seminis, Inc. have debt to EBITDA requirements they
must maintain on a rolling four quarter basis, and Savia's Mexican insurance
company, Seguros Comercial America, S.A. de C.V., is required to be in
compliance with minimum paid-in capital and technical reserve requirements and
any other financial ratios or covenants as prescribed and applicable under the
Ministry of Finance in Mexico. If Savia or Bionova Holding is in default on any
of its obligations under the loan agreement, then the lenders have the right to
declare default and accelerate all of the notes. Both Bionova Holding and Savia
are currently in compliance with these restrictions and covenants.
Consolidated obligations under long-term debt arrangements are denominated
in U.S. dollars and were comprised of:
DECEMBER 31,
-------------------
1999 1998
-------- --------
$(000'S)
Floating rate notes payable to banks guaranteed by Savia,
interest at LIBOR + 7.0% (12.2% at December 31, 1999)
interest payable quarterly and maturing in March, 2002.... $100,000 --
Capital lease obligations secured by the related equipment
acquired, bearing interest at variable annual rates (14%
at December 31, 1999 and 1998)............................ 351 $ 306
Mortgage notes payable to banks secured by the related real
estate, interest at prime plus 1.5% (10.0% and 8.75% at
December 31, 1999 and 1998, respectively), interest
payable monthly and maturing on dates through October,
2001...................................................... 198 234
Notes to former minority stockholders of ABSA and IPHC,
bearing interest at 10% and payable annually in
installments in 2000...................................... 2,946 4,972
Other....................................................... 7 271
-------- -------
103,502 5,783
Less current portion........................................ (3,250) (1,558)
-------- -------
Long-term debt.............................................. $100,252 $ 4,225
======== =======
46
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--BANK LOANS AND LONG-TERM DEBT (CONTINUED)
The maturities of the long-term debt at December 31, 1999 were as follows:
FOR THE YEARS ENDED DECEMBER 31, $(000'S)
- -------------------------------- --------
2000........................................................ $ 3,250
2001........................................................ 94
2002........................................................ 100,055
2003........................................................ 32
2004........................................................ 22
Thereafter.................................................. 49
--------
$103,502
========
NOTE 10--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses were comprised of the following:
DECEMBER 31,
-------------------
1999 1998
-------- --------
$(000'S)
Trade....................................................... $10,165 $ 8,528
Payables to growers......................................... 4,304 6,889
Accrued compensation........................................ 2,033 1,749
Accrued interest............................................ 669 996
Income taxes payable........................................ 593 578
Accrual for purchase of strawberry development program...... -- 5,000
Sundry creditors............................................ 3,135 2,335
------- -------
$20,899 $26,075
======= =======
47
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES
The (charges) credits for income taxes are summarized as follows:
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
$(000'S)
CURRENT
United States
Federal.................................................. $(118) $ (313)
State.................................................... $ (85) (1) (85)
Foreign.................................................... (1,132) (632) (146)
------- ----- -------
(1,217) (751) (544)
------- ----- -------
DEFERRED
United States
Federal.................................................. 50 3 (160)
State.................................................... 203 (2) 21
Foreign.................................................... (14) 294 (743)
------- ----- -------
239 295 (882)
------- ----- -------
INCOME TAX EXPENSE......................................... $ (978) $(456) $(1,426)
======= ===== =======
Income tax (expense) benefit differs from the amounts computed by applying
the statutory federal income tax rate (35% in Mexico and 34% in United States)
to pretax income as a result of the following:
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
$(000'S)
Tax benefit at statutory rate in the United States
(34%).................................................. $ 13,721 $ 5,355 $ 7,776
Effect of lower tax rate of 17% for agricultural
businesses in Mexico................................... (3,186) (1,949) (1,650)
Change in valuation allowance of deferred tax assets..... (13,392) (1,679) (5,872)
Taxable inflationary gains in Mexico..................... 18 (1,243) (944)
Depreciation on inflation-indexed value of property,
plant, and equipment in Mexico......................... (1) 215 501
Expected settlement of prior years' income taxes......... -- -- (519)
State taxes.............................................. 118 2 --
Effect of change in ABSA's tax filing status............. 1,557 -- --
Other.................................................... 187 (1,157) (718)
-------- ------- -------
$ (978) $ (456) $(1,426)
======== ======= =======
48
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
at December 31, 1999 and 1998 are shown below:
DECEMBER 31,
-------------------
1999 1998
-------- --------
$(000'S)
DEFERRED TAX ASSETS
Tax loss carryforwards.................................... $ 30,825 $ 21,912
Non-deductible provisions................................. 1,345 748
Other..................................................... 319 --
-------- --------
Total deferred tax assets................................... 32,489 22,660
Valuation allowance......................................... (31,878) (18,486)
-------- --------
Net deferred tax assets..................................... 611 4,174
-------- --------
DEFERRED TAX LIABILITIES
Inventories............................................... (1,175) (3,209)
Other..................................................... (338) (2,106)
-------- --------
Total deferred tax liabilities.............................. (1,513) (5,315)
-------- --------
Net deferred tax liabilities................................ $ (902) $ (1,141)
======== ========
The Mexican asset tax of 1.8% on certain net assets is not applied during
the first three years after an asset is placed in service. This tax, once
applied, is due if Mexican federal income taxes are not in excess of the asset
tax and can be reduced by tax credits for certain property, plant and equipment
investments. Asset taxes paid can be recovered in future years from taxes on
future income in excess of future asset taxes. Through December 31, 1999,
investment tax credits have offset applicable asset taxes.
Effective for the year ended December 31, 1999, ABSA changed to a simplified
tax filing status for agricultural businesses as permitted by Mexican tax law.
Under the simplified filing status, taxable income is calculated as
stockholders' equity over and above common stock and additional paid-in-capital
and is payable when dividends are paid to stockholders. As a result, deferred
tax assets generated under the simplified tax filing status consist of the
accumulated deficit recorded on the books of ABSA and are included in tax loss
carryforwards.
At December 31, 1999, the Company had total tax loss carryforwards of
approximately $105.1 million. Tax loss carryforwards from the Company's Mexican
subsidiaries can be inflation-indexed in Mexico until the date of their
application against future taxable profits. The tax loss carryforwards expire
from 2003 to 2009. The tax loss carryforwards are contained in the Company's
Mexican subsidiaries ($34.1 million), U.S. subsidiaries ($70.9 million), and
other foreign subsidiaries ($0.1 million).
DNAP had tax loss carryforwards at the date of the Merger whose utilization
is limited to $27.8 million. A full valuation allowance has been provided with
respect to these tax loss carryforwards.
The Internal Revenue Service currently is reviewing the 1996 tax return for
Bionova Produce, Inc. and the 1997 tax return of IPHC. The Company made a
provision in 1996 and 1997 amounting to $0.650 million, which included interest
and state income taxes, in anticipation of settling certain issues relating to
income and expense recognition arising from the 1995, 1996 and 1997 tax returns
associated with these subsidiary companies.
49
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTIONS AND WARRANTS
STOCK OPTION PLANS
As a result of the Merger the Company assumed DNAP's existing stock option
plans. The number of shares and option exercise prices were adjusted to give
effect to the exchange ratio stipulated in the merger agreement. The six plans
are the 1982 Stock Option Plan, 1986 Stock Option Plan, 1994 Stock Option Plan,
the Non-Employee Directors Stock Option Plan, the Incentive Stock Option Plan,
and the Non-Qualified Stock Option Plan. Approximately 54,093 options were
outstanding at December 31, 1999 under all of these stock option plans. The
Company does not expect to award any new options under any of these plans.
The 1986 Plan and 1994 Plan provided for the granting of incentive stock
options, as defined under the Internal Revenue Code, and non-qualified stock
options, restricted stock and stock appreciation rights to officers and
employees of, and consultants and advisors to DNAP (and now the Company), at
prices which were generally not less than the fair market value of the common
stock on the date of grant and expiring ten years from the date of grant.
The Directors' Plan provided for initial and annual grants of non-qualified
stock options to each non-employee director at prices which were equal to 90%
and 100%, respectively, of the fair market value of DNAP's (and now the
Company's) common stock on the date of grant and expiring ten years from the
date of grant. An initial director's option became exercisable in five equal
annual installments, beginning one year from the date of grant, and the annual
awards became fully exercisable within one year from the date of grant.
In addition to the options plans assumed at the time of the Merger, the
first awards were made under Bionova Holding Corporation's 1998 Long-Term
Incentive Plan in 1999. This plan provides for the issuance of stock options and
other forms of stock-based awards to all employees and directors of the Company.
The maximum number of shares of common stock that are available for grant of
awards under this plan is not to exceed 2,000,000 shares. At December 31, 1999
there were 308,000 options outstanding under this plan. These options vest in
equal amounts of 25% per year over a four-year period, and the first 25% will
vest on April 28, 2000.
50
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the activity under all of the Company's stock option plans
during 1997, 1998, 1999 is as follows:
Outstanding on December 31, 1996............................ 134,768
Granted................................................... --
Exercised................................................. --
Expired and canceled...................................... (10,745)
---------------
Outstanding on December 31, 1997............................ 124,023
Granted................................................... --
Exercised................................................. --
Expired and canceled...................................... (58,241)
---------------
Outstanding on December 31, 1998............................ 65,782
---------------
Granted................................................... 392,600
Exercised................................................. --
Expired and canceled...................................... (96,290)
---------------
Outstanding on December 31, 1999............................ 362,092
---------------
Available for grant at December 31.......................... 1,692,000
---------------
Exercisable at December 31.................................. 54,093
---------------
Option prices per share..................................... $ 3.25
Exercised................................................. None
Expired or canceled....................................... $3.25 to $52.50
Outstanding............................................... $3.25 to $76.25
The following table summarizes information about the outstanding stock
options at December 31, 1999.
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER OF AVERAGE
OPTIONS CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
$3.25................................... 308,000 9.33 Yrs. $ 3.25 0 $ 3.25
$20.31 - $29.40......................... 4,418 5.32 Yrs. $21.47 4,418 $21.47
$30.00 - $38.75......................... 16,378 3.95 Yrs. $33.84 16,378 $33.84
$41.25 - $50.00......................... 18,886 3.17 Yrs. $47.04 18,886 $47.04
$51.25 - $76.25......................... 14,410 2.56 Yrs. $55.19 14,410 $55.19
------- ------
Total................................... 362,092 8.45 Yrs. $ 9.21 54,092 $43.13
======= ======
FAIR VALUE DISCLOSURES
The weighted average fair value per share of options granted during 1999 was
$2.90. The fair value for these options was estimated using the Black-Scholes
model with the following weighted average assumptions for the year ended
December 31, 1999: dividend yield of 0%, expected volatility of 114%, risk free
interest rate of 5.2%, and an expected life of 7 years.
51
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTIONS AND WARRANTS (CONTINUED)
The table that follows summarizes the pro forma effect on net income (loss)
if the fair values of stock-based compensation related to the 1999 grants had
been recognized in the year presented as compensation expense on a straight-line
basis over the vesting period of the grant. During 1998 and 1997, had
compensation expense for the Company's option plans been determined based on the
fair value at grant dates, the Company's net loss per share would not have been
materially different than the reported amounts.
YEAR ENDED DECEMBER 31, 1999
(THOUSANDS OF U.S. DOLLARS
EXCEPT PER SHARE AMOUNTS)
Loss before income tax:
As reported............................................... $(40,356)
Pro forma................................................. (40,505)
Net loss:
As reported............................................... (38,649)
Pro forma................................................. (38,798)
Diluted loss per share:
As reported............................................... (1.64)
Pro forma................................................. (1.64)
WARRANTS
At December 31, 1999 the Company had 407,018 warrants outstanding entitling
holders to purchase one share of the Company's common stock for each warrant
they hold at an exercise price of $25.00. These warrants were issued by DNAP in
connection with an issuance of stock it completed during 1995. These warrants
expire during the third and fourth quarters of 2000.
NOTE 13--BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The Company believes that the terms of the related party transactions
discussed in this section were at least as favorable to Bionova Holding as those
that could have been secured in arm's length transactions.
SAVIA CREDIT LINE
The short-term accounts due to related parties shown in the consolidated
balance sheet bear interest at variable rates comparable to those prevailing in
the market place. The debt with related parties arose from the long-term credit
line made available to affiliates of Savia and bears interest at variable rates
similar to those prevailing in the market place. At December 31, 1999, such
credit facility amounted to $13.0 million, of which $1.556 million was used. At
December 31, 1998, $0.2 million was outstanding under this arrangement. During
1999, 1998, and 1997, the Company incurred interest expense of $0.0 million,
$0.883 million, and $0.519 million, respectively.
INSURANCE AND FACTORING ARRANGEMENTS
The Company contracts for insurance and factoring services with a related
party. During 1999, 1998 and 1997, the Company incurred insurance expense of
$0.346 million, $0.213 million, and $0.289 million,
52
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--BALANCES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
respectively. Amounts due under factoring arrangements were $0.0 million and
$0.0 million at December 31, 1999 and 1998, respectively, and interest expense
incurred in connection with factoring arrangements was $0.014 million,
$0.035 million, and $0.00 million in 1999, 1998, and 1997, respectively.
LABOR AND ADMINISTRATIVE SERVICES
From 1995 through October, 1997, ABSA had a contractual arrangement with
Copropriedad Agricola Batiz Hermanos ("CABH") pursuant to which CABH provided
labor and administrative services to ABSA, and ABSA paid a fee to CABH based on
CABH's costs incurred in connection with providing such services. Both Raul
Batiz G. and Guillermo Batiz G., former executive officers of ABSA, owned in
excess of 10% of CABH and were deemed, by virtue of their positions with ABSA,
to be executive officers of DNAP Holding. In 1997, ABSA paid a total of
approximately $14.094 million to CABH under this arrangement. As of October 31,
1997, ABSA terminated its relationship with CABH. Labor and administrative
services are now being provided by Siembra Cultivo y Cosecha del Noroeste, S.A.
de C.V., which is a subsidiary of ABSA.
ADMINISTRATIVE SERVICES AGREEMENT
An Administrative Services Agreement between the Company and Bionova Mexico
was entered into on July 1, 1996. This agreement provides that Bionova Mexico
will render certain administrative and clerical services to the Company and its
direct and indirect subsidiaries in return for payment equivalent to the
compensation, benefits, and other overhead attributable to the employees of
Bionova Mexico performing these services, all of which will be performed in
Mexico. The initial term of the agreement was extended to December 31, 1999 and
will continue thereafter for successive one-year terms unless either the Company
or Bionova Mexico elects to terminate the agreement. Amounts billed in 1999,
1998 and 1997 by Bionova Mexico under this agreement were $5.415 million, $3.050
million and $1.000 million, respectively. As of December 31, 1999, 1998 and
1997, the Company had a payable to Bionova Mexico outstanding of $5.356 million,
$4.530 million and $3.001 million, respectively. The outstanding balances bear
interest at variable rates comparable to those prevailing in the market place.
ADVANCES TO GROWER RELATED PARTIES
The Company has agreements with certain related party produce growers in
Mexico, whereby a significant portion of growing costs are paid in advance by
the Company. The growing costs are recorded as advances to growers and are
recognized as a component of cost of produce sales when the produce is sold.
These advances in some cases are secured by promissory notes and/or the right to
use the acreage of the grower if the advances are not repaid.
LOANS
Pursuant to a loan agreement dated January 26, 1996 between the Company and
DNAP, the Company made two loans to DNAP in equal amounts of $5 million on
January 26, 1996 and July 1, 1996. These loans are secured by the assignment to
the Company of DNAP's right, title, and interest in the patents relating to
DNAP's Transwitch gene suppression technology, and the Company may require
additional security under certain circumstances. These loans, which were
originally due to mature in January 1999, have been extended with the principal
plus accrued interest due in full on January 31, 2001.
53
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--BALANCES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
LONG-TERM FUNDED RESEARCH AGREEMENT
On September 26, 1996, in connection with the merger, DNAP and Savia entered
into a long-term funded research agreement, which provided that DNAP and Savia,
directly or through its affiliates, will use their best efforts to agree on
research projects to be conducted by DNAP for Savia or its affiliates and which
will result in payments to DNAP of $30 million over a 10-year period, with
minimum funding (subject to carry forwards) of $9 million in any three-year
period. Unless otherwise agreed by the parties, payments of at least $0.625
million in respect of Savia's obligation to fund research projects are to be
paid at the beginning of each calendar quarter. In the fourth quarter of 1996,
Seminis Vegetable Seeds, Inc. ("Seminis"), a subsidiary of Savia, commenced work
under this long-term research agreement with DNAP. Through December 31, 1999
Seminis paid DNAP $8.1 million in cash. Work performed during 1999, 1998 and
1997 earned revenue in the amounts of $2.816 million, $2.775 million, and
$2.008 million, respectively. There remained $0.368 million of deferred revenue
at December 31, 1999 associated with the Seminis work that is included in
accounts due to related parties. During 1999, DNAP earned revenue of
$1.500 million in accordance with the minimum funding required over the first
three year period of this long-term funded research agreement.
LEGAL REPRESENTATION
The Secretary of the Company is a shareholder in the law firm which provides
legal services to the Company and several subsidiaries. During 1999, 1998, and
1997, the law firm billed approximately $0.942 million, $0.684 million, and
$0.694 million, respectively, to the Company.
NOTE 14--OTHER NON-OPERATING INCOME (LOSS)
During 1999, 1998, and 1997 the Company recorded a gain upon sale of
property, plant and equipment of $0.021 million, $0.137 million, and $0.321
million, respectively, and received subsidies of $0.520 million in 1997 in
connection with a special incentive program sponsored by the various Mexican
government and banking institutions for companies in the agriculture, fishing,
and forestry industries. The subsidy received was determined using specified
formulas based on ABSA's debt outstanding as of June 30, 1996 and the repayments
of principal and interest made by ABSA from July 1996 through June 1997. The
special incentive program was terminated in June 1997.
NOTE 15--COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
On January 21, 1997, a class action lawsuit styled GORDON K. AARON
ET AL. V. EMPRESAS LA MODERNA, S.A. DE C.V., ET AL. was filed in the U.S.
federal district court for the Northern District of California. The plaintiffs
allege that, prior to the merger (the "Merger") of DNAP with a subsidiary of
Bionova Holding on September 26, 1996, they owned shares of DNAP's $2.25
Convertible, Exchangeable Preferred Stock ("Preferred Stock"). In connection
with the Merger, all of the shares of common stock and Preferred Stock of DNAP
were converted into the number of shares of common stock of Bionova Holding
specified in the Merger Agreement. The plaintiffs allege that they were denied
the right to vote and certain other rights they allegedly had under the terms of
the Preferred Stock and that certain individuals (the "Individual Defendants"),
each of whom was a director of DNAP prior to the Merger and in some cases later
served as a director of Bionova Holding, breached fiduciary duties of loyalty,
candor and care allegedly owed to
54
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED)
DNAP and its stockholders. The plaintiffs claim to have been damaged by the
alleged actions of the defendants and therefore the plaintiffs seek unspecified
actual and punitive damages as well as reimbursement of their litigation costs
and expenses. On August 27, 1997, the court granted motions to dismiss all of
the claims pending against all of the defendants, except the claims of breach of
the fiduciary duty of loyalty against the Individual Defendants. The court also
gave the plaintiffs leave to amend the complaint against certain other named
defendants, including Bionova Holding, as to a claim for aiding and abetting the
alleged breach of fiduciary duty of loyalty. On January 14, 1999, the court
reinstated the plaintiffs' claims that the preferred stockholders were denied
their contractual right to vote on the Merger, then on March 13, 2000, the court
dismissed these claims with prejudice. Bionova Holding and DNAP deny any
wrongdoing or liability in this matter and intend to vigorously contest this
lawsuit.
On August 13, 1997, a lawsuit styled GRACE BROTHERS, LTD. V. DNAP HOLDING
CORPORATION, DNA PLANT TECHNOLOGY CORPORATION AND DOES 1 THROUGH 20 INCLUSIVE
was filed in the United States District Court for the Northern District of
California. This claim arose out of the private placement of common stock and
warrants made by DNAP in August of 1995. The plaintiff alleged that DNAP failed
to disclose material non-public information relating to DNAP's efforts to enter
into a strategic relationship with a third party in violation of federal and
state securities laws and the terms of the contract relating to the private
placement. On November 17, 1997, the plaintiff dismissed Bionova Holding from
the lawsuit. Subsequently, the Court dismissed the plaintiff's claim for federal
securities fraud and, in February, 1999, the Court granted DNAP's Motion for
Summary Judgment and dismissed all of the remaining claims. The plaintiff has
filed an appeal to the dismissal of this case. DNAP denies any wrongdoing or
liability in this matter and intends to vigorously contest this lawsuit.
On August 29, 1997, a lawsuit styled GRACE BROTHERS, LTD. V. DNAP HOLDING
CORPORATION, DNA PLANT TECHNOLOGY CORPORATION AND DOES 1 THROUGH 20 INCLUSIVE
was filed in the Superior Court of the State of California, County of Alameda.
This claim arose out of the Merger on September 26, 1996 of DNAP with a
wholly-owned subsidiary of Bionova Holding. In the Merger, shares of DNAP's
Preferred Stock were converted into the right to receive shares of common stock
of Bionova Holding. The plaintiff alleged that it owned shares of Preferred
Stock and that DNAP breached its contractual obligations to the plaintiff by,
among other things, not providing special conversion privileges to the preferred
stockholders. The plaintiff also alleged that the former holders of DNAP common
stock were unjustly enriched by DNAP's alleged breach of the Certificate of
Designation. On February 17, 1999, the Court granted Bionova Holding's and
DNAP's Motion for Summary Judgment and dismissed all of the plaintiff's claims.
The plaintiff has filed an appeal to the dismissal of this case. DNAP denies any
wrongdoing or liability in this matter and intends to vigorously contest this
lawsuit.
On January 7, 1999, a class action lawsuit styled GORDON K. AARON
ET AL. V. EMPRESAS LA MODERNA, S.A. DE C.V., ET AL. was filed in the U.S.
federal district court for the Northern District of California. The plaintiffs
allege that, prior to the Merger of DNAP with a subsidiary of Bionova Holding on
September 26, 1996, they owned shares of DNAP's Preferred Stock. In connection
with the Merger, all of the shares of common stock and Preferred Stock of DNAP
were converted into the number of shares of common stock of Bionova Holding
specified in the Merger Agreement. The plaintiffs allege that the Proxy
Statement/ Prospectus distributed to DNAP's stockholders in connection with the
merger contained material misrepresentations and omitted to state material
facts. Both DNAP and Bionova Holding, as well as certain former and current
directors of DNAP and Bionova Holding, have been named as defendants in this
matter. The plaintiffs claim to have been damaged by the alleged actions of the
defendants and therefore
55
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED)
the plaintiffs seek unspecified actual damages, reimbursement of their
litigation costs and expenses, and equitable relief, including rescission of the
Merger. The plaintiffs also allege that they were entitled to receive, and seek
specific performance of, special conversion privileges under the terms of the
Certificate of Designation that established the Preferred Stock. On March 8,
2000, the court dismissed nearly all of the plaintiffs' claims, though the
plaintiffs were given the opportunity to file by March 27, 2000 an amended
complaint with respect to some of the dismissed claims. Bionova Holding and DNAP
deny any wrongdoing and liability in this matter and intend to vigorously
contest this lawsuit.
On January 28, 1999, a class action lawsuit styled ROBERT KACZAK V. EMPRESAS
LA MODERNA, S.A. DE C.V., ET AL. was filed in the U.S. federal district court
for the Northern District of California. The complaint is substantially
identical to the above-described complaint filed on January 7, 1999 by the AARON
plaintiffs. This case has been consolidated with the lawsuit filed by the AARON
plaintiffs on January 7, 1999. Bionova Holding and DNAP deny any wrongdoing and
liability in this matter and intend to vigorously contest this lawsuit.
DNAP has been named as a defendant in several lawsuits asserting claims
against DNAP relating to research DNAP performed from 1983 through 1994 for
Brown & Williamson Tobacco Company ("B&W"). In general, the cases allege that
DNAP engaged in unfair business practices under California law and/or
participated in an alleged conspiracy among cigarette manufacturers to deceive
the public regarding the hazards of smoking. All of the pending cases are in
California state courts (but DNAP was also sued, and later dismissed, from a
case in the Nevada state courts, and DNAP was sued in a case in the West
Virginia state courts which case has been dismissed). In December, 1999, B&W
agreed to indemnify DNAP against all costs (including costs of defense and of
costs of any judgment or settlement) incurred by DNAP in connection with these
cases and any similar cases in the future. Therefore, management no longer
believes that these cases could have a material adverse effect on the Company's
financial condition or results of operations. DNAP denies any wrongdoing or
liability in these matters and intends to vigorously contest these lawsuits.
ABSA owns one hundred hectares (approximately 247 acres) of rural land in
the State of Sinaloa, Mexico, which is the subject of a judicial proceeding
pending in Mexico initiated by a group of campesinos. The petitioners asserted
that a previous owner of the subject land, Miguel Angel Suarez, owned rural land
in excess of the maximum that was then allowed by law and that therefore the
land rightfully belonged to them. On September 25, 1996, the court upheld the
petition and ordered the land turned over to the petitioners. The court also
ruled that the transfer of the property to Olga Elena Batiz Esquer on June 2,
1990 was null and void, which would mean that the transfer of the land by
Ms. Batiz to ABSA in 1993 was ineffective. On October 23, 1996, Ms. Batiz, who
was a party to the trial court proceeding, filed a challenge to the judicial
determination based on alleged violations of her constitutional rights and
procedural and substantive errors in the trial court proceedings. If ABSA is
ultimately required to transfer the subject land, which constitutes
approximately 8% of the total agricultural land owned by ABSA, Mexican law gives
ABSA indemnification rights against the State of Sinaloa and Ms. Batiz.
ABSA owns two hundred seventy-four hectares (approximately 677 acres) of
rural land in the State of Sinaloa, Mexico, which is the subject of a judicial
proceeding pending in Mexico initiated by a group of campesinos. The petitioners
asserted that a previous owner of the subject land owned rural land in excess of
the maximum that was then allowed by law and that therefore the land rightfully
belonged to them. On August 27, 1997, the court denied the petition and ruled in
favor of ABSA. On May 25, 1998, the petitioners filed a challenge to the
judicial determination based on alleged violations of their constitutional
56
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED)
rights. If ABSA is ultimately required to transfer the subject land, which
constitutes approximately 22% of the total agricultural land owned by ABSA,
Mexican law gives ABSA limited indemnification rights against the State of
Sinaloa.
COMMITMENTS
The Company leases certain facilities and land under non-cancelable
operating lease agreements. The leases expire at various dates through 2006 and
provide that the Company pay the taxes, insurance and maintenance expenses
related to the leased facilities. The monthly rental payments are subject to
periodic adjustments. Certain leases contain fixed escalation clauses, and rent
under these leases is charged ratably over the lease term.
The aggregate future minimum lease obligations under capital and operating
leases are as follows:
CAPITAL OPERATING
-------- ---------
$(000'S)
FOR THE YEAR ENDING DECEMBER 31,
2000..................................................... $ 106 $ 863
2001..................................................... 99 479
2002..................................................... 72 467
2003..................................................... 31 461
2004..................................................... 31 0
Thereafter............................................... 56 0
----- ------
Total future minimum lease payments...................... 395 $2,270
======
Amount representing interest............................. (107)
-----
$ 288
=====
Current portion of future minimum lease payments......... $ 89
=====
Capital lease obligations are reported under long-term debt. Rent expense
incurred under the non-cancelable operating leases totaled $0.392 million,
$0.426 million, and $0.692 million during the years ended December 31, 1999,
1998 and 1997 respectively.
NOTE 16--INFORMATION ON SEGMENTS AND OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
The Company classifies its business into three fundamental areas: FARMING,
which consists principally of interests in 100% Company-owned fresh produce
production facilities and joint ventures with other growers; DISTRIBUTION,
consisting principally of interests in sales and distribution companies in
Mexico, the United States, and Canada; and RESEARCH AND DEVELOPMENT consisting
of business units focused on the development of fruits and vegetables and
intellectual properties associated with these development efforts.
Information pertaining to the operations of these different business
segments is set forth below. The Company evaluates performance based on several
factors. The most significant financial measure used to evaluate business
performance is business segment operating income. The accounting policies for
each of the business segments are the same as those described in the summary of
significant accounting policies in Note 2. Inter-segment sales are accounted for
at fair value as if the sales were to third parties. Segment
57
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INFORMATION ON SEGMENTS AND OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
(CONTINUED)
information includes the allocation of corporate overhead to the various
segments, as looked at from the point of view of the segment presidents, and all
acquired goodwill has been pushed down to the companies and segments that have
made the acquisitions.
RESEARCH TOTAL OF
AND REPORTABLE
FARMING DISTRIBUTION DEVELOPMENT SEGMENTS
-------- ------------ ----------- ----------
$(000'S)
1999
Revenues from unaffiliated customers............ $ 681 $236,146 $ 5,532 $242,359
Inter-segment revenues.......................... 58,288 -- -- 58,288
-------- -------- ------- --------
Total revenues.................................. 58,969 236,146 5,532 300,647
======== ======== ======= ========
Operating income (loss)......................... (16,771) (1,723) (5,702) (24,196)
======== ======== ======= ========
Depreciation, amortization, and writeoffs of
purchased research and development............ 4,826 1,119 2,422 8,367
======== ======== ======= ========
Identifiable assets (1)......................... 70,714 55,237 43,253 169,204
======== ======== ======= ========
Acquisition of long-lived assets................ 4,176 2,353 266 6,795
======== ======== ======= ========
1998
Revenues from unaffiliated customers............ $ 1,022 $253,040 $ 8,049 $262,111
Inter-segment revenues.......................... 71,279 86 -- 71,365
-------- -------- ------- --------
Total revenues.................................. 72,301 253,126 8,049 333,476
======== ======== ======= ========
Operating income (loss)......................... (5,560) 535 (2,403) (7,428)
======== ======== ======= ========
Depreciation, amortization, and writeoffs of
purchased research and development............ 3,952 1,178 1,946 7,076
======== ======== ======= ========
Identifiable assets (1)......................... 75,940 56,934 39,363 172,237
======== ======== ======= ========
Acquisition of long-lived assets................ 8,543 1,427 5,280 15,250
======== ======== ======= ========
1997
Revenues from unaffiliated customers............ $ 798 $275,696 $ 4,704 $281,198
Inter-segment revenues.......................... 71,597 -- -- 71,597
-------- -------- ------- --------
Total revenues.................................. 72,395 275,696 4,704 352,795
======== ======== ======= ========
Operating income (loss)......................... (7,933) (2,755) (7,781) (18,469)
======== ======== ======= ========
Depreciation, amortization and writeoffs of
purchased research and development............ 3,270 1,196 4,694 9,160
======== ======== ======= ========
Identifiable assets (1)......................... 65,320 58,726 34,769 158,815
======== ======== ======= ========
Acquisition of long-lived assets................ 11,675 7,687 335 19,697
======== ======== ======= ========
NOTES:
(1) Identifiable assets for segments are defined as total assets less cash in
banks, deferred income taxes and investment in shares.
58
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INFORMATION ON SEGMENTS AND OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
(CONTINUED)
Reconciliation of the segments to total consolidated amounts is set forth
below:
1999 1998 1997
-------- -------- --------
$(000'S)
REVENUES
Total segment revenues......................... $300,647 $333,476 $352,795
Elimination of inter-segment revenues.......... (58,288) (71,365) (71,597)
-------- -------- --------
Consolidated revenues.......................... $242,359 $262,111 $281,198
======== ======== ========
INCOME BEFORE TAXES
Total operating income (loss) from reportable
segments..................................... $(24,196) $ (7,428) $(18,469)
Total operating income (loss) from Bionova
Holding Corp................................. (2,882)(1) -- --
Interest, net.................................. (14,183) (6,697) (3,740)
Exchange gain (loss), net...................... 905 (1,762) (481)
Other non-operating income (loss), net......... -- 137 (182)
-------- -------- --------
Consolidated income (loss) before taxes........ $(40,356) $(15,750) $(22,872)
======== ======== ========
ASSETS
Total segment identifiable assets.............. $169,204 $172,237 $158,815
Unallocated and corporate assets............... 17,265 (2) 23,318 (2) 10,676 (2)
Eliminations................................... (24,516)(3) (27,869)(3) (22,242)(3)
-------- -------- --------
Consolidated assets............................ $161,953 $167,686 $147,249
======== ======== ========
NOTES:
(1) Certain expenses, such as shareholder litigation, investor relations, and
Board and professional fees that were allocated in 1998 and 1997 to the
operating segments were not allocated to these segments in 1999. This change
was made because management determined that these types of expenses were not
associated with, nor did the results of these activities benefit the
operating segments. Management further determined that it was impractical to
restate 1998 and 1997 to exclude these types of expenses from the operating
segments in the prior years.
(2) Includes Bionova Holding's and segments' cash in banks, deferred income
taxes and other corporate assets.
(3) Consists principally of inter-segment intercompany balances.
59
BIONOVA HOLDING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--INFORMATION ON SEGMENTS AND OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
(CONTINUED)
Revenue from external customers by product / service category is set forth
below:
RESEARCH TOTAL OF
AND REPORTABLE
FARMING DISTRIBUTION DEVELOPMENT SEGMENTS
-------- ------------ ----------- ----------
$(000'S)
1999
Core vegetables (1).............................. $121,823 $121,823
Fruits and other fresh produce (2)............... $ 681 114,323 $ 172 115,176
Contracted R&D revenue........................... 4,793 4,793
Licensed technology and royalties................ 567 567
1998
Core vegetables (1).............................. 156,812 156,812
Fruits and other fresh produce (2)............... 1,022 96,228 97,250
Contracted R&D revenue........................... 3,198 3,198
Licensed technology and royalties................ 4,851 4,851
1997
Core vegetables (1).............................. 176,562 176,562
Fruits and other fresh produce (2)............... 798 99,134 99,932
Contracted R&D revenue........................... 2,799 2,799
Licensed technology and royalties................ 1,905 1,905
NOTES:
(1) Core vegetables include tomatoes, bell peppers and cucumbers.
(2) Fruits and other fresh produce include papayas, mangoes, grapes, melons,
watermelons and others.
Information about the Company's operations by geographic area is summarized
below:
MEXICO U.S. CANADA EUROPE CONSOLIDATED
-------- -------- -------- -------- ------------
$(000'S)
1999
Revenues from unaffiliated customers...... $90,014 $116,176 $36,169 -- $242,359
Identifiable long-lived assets............ 46,504 35,083 376 -- 81,963
1998
Revenues from unaffiliated customers...... $92,367 $139,752 $29,992 -- $262,111
Identifiable long-lived assets............ 47,237 37,588 350 -- 85,175
1997
Revenues from unaffiliated customers...... $72,441 $135,691 $19,052 $54,014 $281,198
Identifiable long-lived assets............ 42,356 34,661 358 3,225 80,600
60
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The section entitled "Election of Directors" appearing in the Company's
proxy statement for the 2000 annual meeting of stockholders sets forth certain
information with respect to the directors of the Company and is incorporated
herein by reference. Certain information with respect to persons who are or may
be deemed to be executive officers of the Company is set forth under the caption
"Executive Officers of the Company" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Company's
proxy statement for the 2000 annual meeting of stockholders sets forth certain
information with respect to the compensation of management of the Company and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Relationships and Related Ownership of
Certain Beneficial Owners" and "Security Ownership of Directors and Executive
Officers" appearing in the Company's proxy statement for the 2000 annual meeting
of stockholders sets forth certain information with respect to the ownership of
the Company's Common Stock and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The section entitled "Certain Transactions" appearing in the Company's proxy
statement for the 2000 annual meeting of stockholders sets forth certain
information with respect to certain business relationships and transactions
between the Company and its directors and officers and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements included in Item 8 herein:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations and Comprehensive
Income and Loss for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
61
(2) Financial Statement Schedules included in Item 8 herein:
The following Financial Statement Schedules are filed pursuant to
paragraph (d):
Schedule II: Valuation and Qualifying Accounts and Reserves
(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1* Certificate of Incorporation of the Company
3.2 Certificate of Amendment to the Certificate of Incorporation
of the Company effective September 26, 1996 (filed as an
exhibit to the Company's quarterly report on Form 10-Q for
the quarterly period ended June 30, 1996 and incorporated
herein by reference)
3.3 Certificate of Amendment to the Certificate of Incorporation
of the Company effective April 28, 1999 (filed as an exhibit
to the Company's quarterly report on Form 10-Q for the
quarterly period ended March 31, 1999 and incorporated
herein by reference)
3.4** Bylaws of the Company
4.1** Note Acquisition Agreement dated as of March 22, 1999 among
Savia, S.A. de C.V., the Company, the Holders referred to
therein, Morgan Guaranty Trust Company of New York, as
Administrative Agent and Documentation Agent, Bankers Trust
Company, as Paying Agent and Registrar, and Citibank, N.A.,
as Collateral Agent.
10.1* Loan Agreement dated as of January 26, 1996, between the
Company and DNAP
10.2* Assignment of Patents dated January 26, 1996, between the
Company and DNAP
10.3* Sole Patent License Agreement dated as of January 26, 1996,
between the Company and DNAP
10.4* Non-Exclusive Patent License Agreement dated as of
January 26, 1996, between the Company and DNAP
10.5** Promissory Note made January 25, 1999, by DNAP in favor of
the Company
10.6 Governance Agreement dated as of September 26, 1996, between
Savia and the Company (filed as an exhibit to the Company's
current report on Form 8-K dated September 26, 1996 and
incorporated herein by reference)
10.7 Long-Term Funded Research Agreement dated as of
September 26, 1996, between Savia and DNAP (filed as an
exhibit to the Company's current report on Form 8-K dated
September 26, 1996 and incorporated herein by reference)
10.8 Stock Purchase Agreement dated as of August 12, 1997, by and
among International Produce Holding Company, DNAP Holding
Corporation, Raul Batiz E., Pedro Batiz G., J. Guillermo
Batiz G., and Raul Batiz G. (filed as an exhibit to the
Company's current report on Form 8-K dated October 6, 1997
and incorporated herein by reference).
10.9 First Amendment to Stock Purchase Agreement dated as of
October 6, 1997, by and among International Produce Holding
Company, DNAP Holding Corporation, Raul Batiz E., Pedro
Batiz G., J. Guillermo Batiz G., and Raul Batiz G. (filed as
an exhibit to the Company's current report on Form 8-K dated
October 6, 1997 and incorporated herein by reference).
10.10 English-language summary of the CONVENIO RELATIVO AL
EJERCICIO DEL DERECHO DE RETIRO TOTAL DE APORTACIONES
(Agreement Concerning the Exercise of the Right of
Withdrawal of all Contributions) dated August 29, 1997, by
and among Agricola Batiz, S.A. de C.V., certain of its
shareholders, and DNAP Holding Corporation (filed as an
exhibit to the Company's current report on Form 8-K dated
October 6, 1997 and incorporated herein by reference).
62
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.11** Long-Term Funded Research Agreement dated as of January 1,
1997, between Seminis Vegetable Seeds, Inc. and DNAP.
10.12 Stock Purchase Agreement dated as of October 1, 1998,
between the Company and Bionova International, Inc. (filed
as an exhibit to the Company's quarterly report on Form 10-Q
for the quarterly period ended September 30, 1998 and
incorporated herein by reference).
10.13** Amendment to Stock Purchase Agreement dated as of
January 14, 1999, between the Company and Bionova
International, Inc.
10.14** Credit Agreement dated November 19, 1998, among the Company,
Harris Trust and Savings Bank, and certain other parties.
10.15** Amendment to Governance Agreement dated as of January 14,
1999, between Savia and the Company.
10.16 DNAP Holding Corporation 1998 Long-Term Incentive Plan
(filed as an exhibit to the Company's proxy statement for
the annual meeting of stockholders held on May 28, 1998 and
incorporated herein by reference).
21.1 Subsidiaries
27.1 Financial Data Schedule
NOTES:
* Filed as an exhibit to the Company's Registration Statement on Form S-4 (No.
333-09975) and incorporated herein by reference.
** Filed as an exhibit to the Company's annual report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
The information required by this Item 14(a)(3) is set forth in the Index
to Exhibits accompanying this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
63
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, Bionova Holding Corporation has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 20, 2000 BIONOVA HOLDING CORPORATION
By: /s/ BERNARDO JIMENEZ
-----------------------------------------
Bernardo Jimenez
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ BERNARDO JIMENEZ Chief Executive Officer and March 20, 2000
------------------------------------------- Chairman of the Board
Bernardo Jimenez (Principal Executive
Officer)
/s/ ARTHUR H. FINNEL Chief Financial Officer March 20, 2000
------------------------------------------- (Principal Financial and
Arthur H. Finnel Accounting Officer)
/s/ EVELYN BEREZIN Director March 20, 2000
-------------------------------------------
Evelyn Berezin
/s/ PETER DAVIS Director March 20, 2000
-------------------------------------------
Peter Davis
/s/ CARLOS HERRERA Director March 20, 2000
-------------------------------------------
Carlos Herrera
/s/ EUGENIO NAJERA Director March 20, 2000
-------------------------------------------
Eugenio Najera
Director
-------------------------------------------
Gerald Laubach
Director
-------------------------------------------
Alejandro Perez
/s/ ELI SHLIFER Director March 20, 2000
-------------------------------------------
Eli Shlifer
/s/ CHRISTOPHER SOMERVILLE Director March 21, 2000
-------------------------------------------
Christopher Somerville
64
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
THOUSANDS OF U.S. DOLLARS
ACCOUNTS ADVANCES TO
RECEIVABLE GROWERS INVENTORIES OTHER ASSETS
------------- ------------- ----------- -------------
ALLOWANCE FOR ALLOWANCE
DOUBTFUL ALLOWANCE FOR FOR SLOW ALLOWANCE FOR
ACCOUNTS AND DOUBTFUL MOVING DOUBTFUL
SALES RETURNS ACCOUNTS INVENTORY ACCOUNTS
------ ------- ------ ------
Balance at December 31, 1996...... $2,019 $ 0 $ 552 $ 0
Provision....................... 1,056 1,080 128 --
Write-off....................... (348) (92) (553) --
Recovery........................ -- -- -- --
------ ------- ------ ------
Balance at December 31, 1997...... 2,727 988 127 0
Provision....................... 399 2,107 159 --
Write-off....................... (991) (620) (146) --
Recovery........................ (977) -- -- --
------ ------- ------ ------
Balance at December 31, 1998...... 1,158 2,475 140 0
Provision....................... 861 -- 1,163 2,572
Write-off....................... (63) -- (34) --
Recovery........................ -- -- -- --
Transfer of allowance........... 1,617 (1,617) -- --
------ ------- ------ ------
Balance at December 31, 1999...... $3,573 $ 858 $1,269 $2,572
====== ======= ====== ======
65
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1* Certificate of Incorporation of the Company
3.2 Certificate of Amendment to the Certificate of Incorporation
of the Company effective September 26, 1996 (filed as an
exhibit to the Company's quarterly report on Form 10-Q for
the quarterly period ended June 30, 1996 and incorporated
herein by reference)
3.3 Certificate of Amendment to the Certificate of Incorporation
of the Company effective April 28, 1999 (filed as an exhibit
to the Company's quarterly report on Form 10-Q for the
quarterly period ended March 31, 1999 and incorporated
herein by reference)
3.4** Bylaws of the Company
4.1** Note Acquisition Agreement dated as of March 22, 1999 among
Savia, S.A. de C.V., the Company, the Holders referred to
therein, Morgan Guaranty Trust Company of New York, as
Administrative Agent and Documentation Agent, Bankers Trust
Company, as Paying Agent and Registrar, and Citibank, N.A.,
as Collateral Agent.
10.1* Loan Agreement dated as of January 26, 1996, between the
Company and DNAP
10.2* Assignment of Patents dated January 26, 1996, between the
Company and DNAP
10.3* Sole Patent License Agreement dated as of January 26, 1996,
between the Company and DNAP
10.4* Non-Exclusive Patent License Agreement dated as of
January 26, 1996, between the Company and DNAP
10.5** Promissory Note made January 25, 1999, by DNAP in favor of
the Company
10.6 Governance Agreement dated as of September 26, 1996, between
Savia and the Company (filed as an exhibit to the Company's
current report on Form 8-K dated September 26, 1996 and
incorporated herein by reference)
10.7 Long-Term Funded Research Agreement dated as of
September 26, 1996, between Savia and DNAP (filed as an
exhibit to the Company's current report on Form 8-K dated
September 26, 1996 and incorporated herein by reference)
10.8 Stock Purchase Agreement dated as of August 12, 1997, by and
among International Produce Holding Company, DNAP Holding
Corporation, Raul Batiz E., Pedro Batiz G., J. Guillermo
Batiz G., and Raul Batiz G. (filed as an exhibit to the
Company's current report on Form 8-K dated October 6, 1997
and incorporated herein by reference).
10.9 First Amendment to Stock Purchase Agreement dated as of
October 6, 1997, by and among International Produce Holding
Company, DNAP Holding Corporation, Raul Batiz E., Pedro
Batiz G., J. Guillermo Batiz G., and Raul Batiz G. (filed as
an exhibit to the Company's current report on Form 8-K dated
October 6, 1997 and incorporated herein by reference).
10.10 English-language summary of the CONVENIO RELATIVO AL
EJERCICIO DEL DERECHO DE RETIRO TOTAL DE APORTACIONES
(Agreement Concerning the Exercise of the Right of
Withdrawal of all Contributions) dated August 29, 1997, by
and among Agricola Batiz, S.A. de C.V., certain of its
shareholders, and DNAP Holding Corporation (filed as an
exhibit to the Company's current report on Form 8-K dated
October 6, 1997 and incorporated herein by reference).
10.11** Long-Term Funded Research Agreement dated as of January 1,
1997, between Seminis Vegetable Seeds, Inc. and DNAP.
66
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.12 Stock Purchase Agreement dated as of October 1, 1998,
between the Company and Bionova International, Inc. (filed
as an exhibit to the Company's quarterly report on Form 10-Q
for the quarterly period ended September 30, 1998 and
incorporated herein by reference).
10.13** Amendment to Stock Purchase Agreement dated as of
January 14, 1999, between the Company and Bionova
International, Inc.
10.14** Credit Agreement dated November 19, 1998, among the Company,
Harris Trust and Savings Bank, and certain other parties.
10.15** Amendment to Governance Agreement dated as of January 14,
1999, between Savia and the Company.
10.16 DNAP Holding Corporation 1998 Long-Term Incentive Plan
(filed as an exhibit to the Company's proxy statement for
the annual meeting of stockholders held on May 28, 1998 and
incorporated herein by reference).
21.1 Subsidiaries
27.1 Financial Data Schedule
NOTES:
* Filed as an exhibit to the Company's Registration Statement on Form S-4 (No.
333-09975) and incorporated herein by reference.
** Filed as an exhibit to the Company's annual report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
67