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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK (ONE)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period
ended September 30, 2002
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period
from _________________ to ____________________
Commission file number 0-26096
THE UNIMARK GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2436543
(State of incorporation or organization) (I.R.S. Employer Identification No.)
UNIMARK HOUSE
124 MCMAKIN ROAD
BARTONVILLE, TEXAS 76226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 491-2992
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 .
--- ---
As of November 18, 2002, the number of shares outstanding of each
class of common stock was:
Common Stock, $0.01 par value: 21,044,828 shares
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets,
December 31, 2001 and September 30, 2002................................................... 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2001 and 2002............................ 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2001 and 2002...................................... 5
Notes to Condensed Consolidated Financial Statements - September 30, 2002.................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........15
Item 3. Quantitative and Qualitative Disclosures About Market Risks..................................29
Item 4. Controls and Procedures......................................................................29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................30
Item 2. Sale of Unregistered Securities..............................................................30
Item 3. Defaults Upon Senior Securities..............................................................30
Item 4. Submission of Matters to a Vote of Security Holders..........................................30
Item 5. Other Information...........................................................................30
Item 6. Exhibits and Reports on Form 8-K.............................................................30
SIGNATURES.............................................................................................31
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
2001 2002
---------------- ----------------
(NOTE 1) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 1,135 $ 487
Accounts receivable - trade, net of allowance of $1,317 in
2001 and $979 in 2002........................................ 2,311 725
Accounts receivable - other.................................... 219 234
Note receivable................................................ 340 358
Income and value added taxes receivable........................ 537 758
Inventories.................................................... 7,560 4,382
Prepaid expenses............................................... 239 118
Property held for sale......................................... 5,372 --
---------------- ----------------
Total current assets..................................... 17,713 7,062
Property, plant and equipment, net................................ 27,459 33,212
Goodwill, net..................................................... 2,516 2,516
Deposit on plant facility......................................... 2,262 2,057
Note receivable, less current portion............................. 259 27
Other assets...................................................... 203 234
---------------- ----------------
Total assets............................................. $ 50,412 $ 45,108
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.......................................... $ 5,437 $ 4,961
Current portion of long-term debt.............................. 2,243 856
Accounts payable - trade ...................................... 3,845 3,471
Accrued liabilities............................................ 4,767 5,326
---------------- ----------------
Total current liabilities................................ 16,292 14,614
Long-term debt, less current portion.............................. 6,851 7,694
Deferred Mexican statutory profit sharing and income taxes........ 1,730 1,579
Commitments
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares - 40,000,000;
Issued and outstanding shares - 21,044,828 in 2001 and 2002.. 210 210
Additional paid-in capital..................................... 68,671 68,671
Accumulated deficit............................................ (43,342) (47,660)
---------------- ----------------
Total shareholders' equity............................... 25,539 21,221
---------------- ----------------
Total liabilities and shareholders' equity............... $ 50,412 $ 45,108
================ ================
See accompanying notes.
3
THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2001 2002 2001 2002
------------- -------------- --------------- -------------
(In thousands, except for per share amounts)
Net sales...................................... $ 5,265 $ 5,435 $ 23,468 $ 20,197
Cost of products sold.......................... 5,798 6,536 23,389 21,062
---------- --------- -------- --------
Gross profit (loss)............................ (533) (1,101) 79 (865)
Selling, general and administrative expenses... 1,536 846 4,199 2,884
---------- --------- -------- --------
Loss from operations........................... (2,069) (1,947) (4,120) (3,749)
Other income (expense):
Interest expense............................ (177) (130) (829) (329)
Other income................................ 151 51 207 242
Foreign currency translation gain (loss).... 13 (104) (353) 304
---------- --------- -------- --------
(13) (183) (975) 217
---------- --------- -------- --------
Loss before extraordinary gain and
income tax expense.......................... (2,082) (2,130) (5,095) (3,532)
Income tax expense............................. 241 169 288 786
---------- --------- -------- --------
Loss before extraordinary gain................. (2,323) (2,299) (5,383) (4,318)
Extraordinary gain on forgiveness of debt...... -- -- 2,870 --
---------- --------- -------- --------
Net loss....................................... $ (2,323) $ (2,299) $ (2,513) $ (4,318)
========== ========= ======== ========
Basic and diluted income (loss) per share:
Loss before extraordinary gain.............. $ (0.11) $ (0.11) $ (0.32) $ (0.21)
Extraordinary gain on forgiveness of debt... -- -- 0.17 --
---------- --------- -------- --------
Net loss per share.......................... $ (0.11) $ (0.11) $ (0.15) $ (0.21)
========== ========= ======== ========
See accompanying notes.
4
THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2001 2002
---------------- ----------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net loss ................................................................ $ (2,513) (4,318)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation......................................................... 1,638 1,251
Amortization of goodwill and other intangible assets................. 85 --
Deferred Mexican statutory profit sharing and income taxes........... 9 (151)
Extraordinary gain on forgiveness of debt............................ (2,870) --
Cash provided by (used in) operating working capital:
Receivables...................................................... 4,398 1,564
Inventories...................................................... 1,927 3,178
Prepaid expenses................................................. 240 121
Accounts payable and accrued liabilities......................... (1,807) 185
---------------- ----------------
Net cash provided by operating activities................................ 1,107 1,830
---------------- ----------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment............................... (2,945) (1,632)
Decrease in deposit on plant facility.................................... 23 205
Decrease (increase) in other assets...................................... 180 (31)
---------------- ----------------
Net cash used in investing activities.................................... (2,742) (1,458)
---------------- ----------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock............................... 4,976 --
Proceeds from issuance of short-term promissory note..................... 1,800 --
Payment of short-term promissory note.................................... (1,800) --
Decrease in short-term and current portion of long-term debt............. (2,978) (999)
Payment of long-term debt................................................ (23) (21)
---------------- ----------------
Net cash provided by (used in) financing activities...................... 1,975 (1,020)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents..................... 340 (648)
Cash and cash equivalents at beginning of period......................... 1,075 1,135
---------------- ----------------
Cash and cash equivalents at end of period............................... $ 1,415 $ 487
================ ================
See accompanying notes.
5
THE UNIMARK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Our company, The UniMark Group, Inc., a Texas
corporation, is a vertically integrated citrus and tropical fruit growing and
processing company with substantially all of its operations in Mexico.
We conduct substantially all of our operations through our wholly-owned
operating subsidiaries. In Mexico, our subsidiaries include: Industrias
Citricolas de Montemorelos, S.A. de C.V. ("ICMOSA"), Grupo Industrial Santa
Engracia, S.A. de C.V. ("GISE") and AgroMark, S.A. de C.V. ("AgroMark"). In the
United States our subsidiary is UniMark Foods, Inc. ("UniMark Foods").
We have, for operating and financial reporting purposes, historically
classified our business into two distinct business segments: packaged fruit and
juice and oil.
Within the packaged fruit segment, we focus on niche citrus and tropical
fruit products including chilled, frozen and canned cut fruits and other
specialty food ingredients. The packaged fruit segment processes and packages
our products at three plants in Mexico. We also utilize independent food brokers
to sell our food service and industrial products in the United States. Sales to
our Japanese consumers are facilitated through Japanese trading companies.
Within our juice and oil segment, we are continuing our agricultural
development strategy. Pursuant to a long-term Supply Contract with The Coca-Cola
Export Corporation ("Coca-Cola"), an affiliate of The Coca-Cola Company, which
was amended during 2001, we acquired, developed and planted approximately 6,400
acres of Italian lemon groves (the "Lemon Project"). The planting program began
in November 1996 and harvesting of the first crops commenced in late 2000. Based
on recent agricultural conditions in Mexico, commercial production may not begin
until the 2004 harvest.
Due to the continued unfavorable and volatile worldwide market prices of
frozen concentrate orange juice ("FCOJ") that has existed over the past several
years and negative long-term prospects for the FCOJ market, in early 2002, we
explored various strategic alternatives for our juice division. We suspended our
frozen concentrate orange juice operations and offered the juice divisions
plants for sale. Based on our intentions to sell these assets, we reclassified
our juice division's long-lived assets as "Property held for sale" in our
December 31, 2001 and March 31, 2002 condensed consolidated balance sheets.
During the first quarter of 2002, we leased our Victoria juice processing plant
to the largest FCOJ producer in Mexico, under a lease that expired May 31, 2002.
Subsequent to May 15, 2002, we determined that our efforts and prospects to
divest our juice division's long-term assets on acceptable terms were unlikely
given current market conditions. As such, we engaged in active discussions with
an unaffiliated third party to lease these plants. In this regard, we pursued
the strategic alternative of leasing or operating our juice plants. Based on our
decision to lease or operate these plants, these plant assets are now classified
as long-term property, plant and equipment in our condensed consolidated balance
sheet at September 30, 2002. On November 1, 2002, our Mexican subsidiary, GISE,
entered into an operating agreement with a third party to produce various citrus
juices and concentrates during the 2002/2003 juice processing season. See Note
12 to the condensed consolidated financial statements for a further discussion
of this operating agreement.
Going Concern Considerations: The accompanying condensed consolidated
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. We have sustained net losses in each of the last
five fiscal years and in the first nine months of 2002. As of September 30,
2002, our accumulated deficit was $47.7 million,
6
we are unable to repay two of our Mexican subsidiaries loans and accrued
interest under expired loan agreements, we had a working capital deficit of $7.5
million, our on hand cash balances were $487,000 and we are generating negative
gross margins. Also, our efforts to raise capital through the divestiture of our
juice division's assets were unsuccessful. Our cash requirements for the
remainder of 2002 and beyond will depend upon the level of sales and gross
margins, expenditures for capital equipment and improvements, investments in
agricultural projects, the timing of inventory purchases and necessary
reductions of debt. Projected working capital requirements for the remainder of
2002 and beyond are significantly greater than current levels of available
financing. We have, in recent years, relied upon sales of our common stock to
our principal shareholder and bank financing to finance our working capital and
certain of our capital expenditures. Our inability to obtain sufficient debt or
equity capital for these projects and commitments and for working capital
requirements could have a material adverse effect on us and our projects
including the realization of the amounts capitalized, deferred costs and
deposits related to these projects and commitments. These matters raise
substantial doubt about our ability to continue as a going concern.
The condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amounts and classification of liabilities that might be necessary should we be
unable to continue as a going concern. Our continuation as a going concern is
dependent on our ability to obtain additional financing for our working capital
requirements and in generating sufficient cash flows to operate our business.
Our independent public accountants have informed us that they will be
unable to complete their review of our interim financial statements for the
quarterly period ended September 30, 2002, prior to the filing of this Form
10-Q. As a result, the interim financial statements contained in our quarterly
report on Form 10-Q for the quarter ended September 30, 2002 have not been
reviewed by our independent public accountants as required pursuant to Rule
10-01(d) of Regulation S-X, and therefore, the filing of this Form 10-Q is
considered to be incomplete. As soon as our independent public accountants
complete their review of our third quarter 2002 financial statements, we will
file an amended Form 10-Q/A.
Interim Financial Statements: The condensed consolidated financial
statements at September 30, 2002, and for the three and nine month periods then
ended are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
interim period. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations, contained in our Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission. The
results of operations for the three and nine month periods ended September 30,
2002 are not necessarily indicative of future financial results.
Year End Balance Sheet: The condensed consolidated balance sheet at December
31, 2001 has been derived from the audited consolidated financial statements at
that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
Risk Factors: Our operations are subject to risk factors that could impact
our business. These factors include risks relating to our financial condition,
our Mexican operations, general business risks and risks relating to our common
stock. Risks relating to our financial condition include the fact that we are
experiencing significant liquidity problems and have many indications of "going
concern" conditions; we may be forced to seek protection under applicable
provisions of the federal bankruptcy code if Rabobank Nederland or one of our
Mexican banks exercise their legal rights and remedies; we may continue to
sustain losses and accumulated deficits in the future; we are dependent upon a
limited number of customers; we are subject to risks associated in
implementation of our business strategy; additional financing will be required
to achieve our growth and to perform our contractual obligations. Risks relating
to our Mexican operations include the fact that we are subject to the risk of
fluctuating foreign currency exchange rates and inflation; we are dependent upon
fruit growing conditions, access to water and availability and price of fresh
fruit; labor shortages and union activity could affect our ability to hire and
we are dependent on the Mexican labor market; we are subject to statutory
employee profit sharing in Mexico; we are subject to volatile
7
interest rates in Mexico which could increase our capital costs; trade disputes
between the United States and Mexico could result in tariffs, quotas and bans on
imports, including our products, which could impair our financial condition; we
are subject to governmental laws that relate to ownership of rural lands in
Mexico. General business risks include the fact that we may be subject to
product liability and product recall; we are subject to governmental and
environmental regulations; we are dependent upon our management team; we have a
seasonal business; we face strong competition; and we have a shareholder that
has substantial control over our company and can affect virtually all decisions
made by our shareholders and directors. Risks related to our common stock
include the delisting in March 2001 from the Nasdaq National Market may reduce
the liquidity and marketability of our common stock and may depress the market
price of our common stock; "penny stock" regulations may impose restrictions on
marketability of our common stock; our common stock price has been and may
continue to be highly volatile; and we have never paid a dividend. For a
discussion of additional factors that may affect actual results, investors
should refer to our filings with the Securities and Exchange Commission and
those factors listed under "Risk Factors" starting on page 22 of this Form 10-Q.
Recently Issued Accounting Pronouncements:
Goodwill: We adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002. SFAS
No. 142 requires that an intangible asset that is acquired shall be initially
recognized and measured based on its fair value. This SFAS also provides that
goodwill should not be amortized, but shall be tested for impairment annually or
more frequently if circumstance indicates potential impairment, through a
comparison of fair value to its carrying amount. As of January 1, 2002, we
ceased amortization of goodwill. Transitional impairment tests of our goodwill
did not require an adjustment as of January 1, 2002. Goodwill amortization for
the three and nine month periods ended September 30, 2001 was $20,400 and
$61,200 respectively, and was immaterial on a basic and diluted per share basis.
As of December 31, 2001 and September 30, 2002, goodwill is net of accumulated
amortization of $422,000.
Impairment of Long-Lived Assets: We adopted SFAS No. 144, "Accounting for
the Impairment of Long-Lived Assets", effective January 1, 2002. SFAS No. 144
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the
accounting and reporting provisions of APB No. 30, "Reporting the Results of
Operations" for a disposal of a segment of a business. The adoption of SFAS No.
144 did not have a material impact on our consolidated financial position or
results of operations.
New Accounting Pronouncements:
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations", which establishes
the accounting standards for the recognition and measurement of obligations
associated with the retirement of tangible long-lived assets. Under SFAS No.
143, the costs of retiring an asset will be recorded as a liability when the
retirement obligation arises, and will be amortized over the life of the asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 is not expected to have a material impact on our
consolidated results of operations and financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44 and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections". This pronouncement, among other things, requires certain gains and
losses on the extinguishment of debt previously treated as extraordinary items
to be classified as income or loss from continuing operations. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The adoption of SFAS
No. 145 is not expected to have a material impact on our consolidated results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities". This pronouncement addresses the financial accounting and
reporting costs associated with an exit activity (including restructuring) or
with a disposal of long-lived assets. SFAS No. 146 requires an entity to record
8
a liability for costs associated with an exit or disposal activity when that
liability is incurred and can be measured at fair value, and to subsequently
adjust the recorded liability for changes in estimated cash flows. SFAS No. 146
is effective for exit or disposal activities initiated after December 31, 2002.
We are currently evaluating the potential impact, if any, that the
implementation will have on our consolidated results of operations and financial
position.
Reclassifications: Certain prior period items have been reclassified to
conform to the current period presentation in the accompanying condensed
consolidated financial statements.
NOTE 2 - LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we owed $1.5 million to Cooperative Centrale
Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland") under a loan agreement
with our Mexican subsidiary, GISE, which expired on January 2, 2002. To date,
Rabobank Nederland has not agreed to extend or restructure its loan and has not
pursued legal remedies under the security and guarantee agreements. Although we
are currently negotiating repayment schedules with Rabobank Nederland, if
Rabobank Nederland were to exercise all of its rights and remedies, under the
security and guarantee agreements, such action could have a significant adverse
effect upon our consolidated financial condition and prospects and could
significantly impact our ability to implement our business strategy, including
our ability to operate the Lemon Project and our ability to continue as a going
concern. In such event, we may be forced to seek protection under applicable
provisions of the federal bankruptcy code. As of September 30, 2002, accrued
interest of approximately $60,000 was outstanding.
In early July 2002, our Mexican subsidiary, ICMOSA, entered into a
restructured loan agreement with Grupo Financiero Banorte ("Banorte"), which
amortized the outstanding principal balance at June 30, 2002 of $3.1 million
over a period of five and one-half years. The loan repayment schedule requires
quarterly payments of principal and interest (Libor plus 3.75%) through December
31, 2007, with $275,000 due over the next twelve months. In our September 30,
2002 condensed consolidated balance sheet we have classified $2.7 million as
long-term debt. We are current in our scheduled interest payments to Banorte.
As of September 30, 2002, our Mexican subsidiary, ICMOSA, owed $3.5 million
under a secured pre-export financing loan agreement with Banco Nacional de
Comercio Exterior, S.N.C. ("Bancomext"). The outstanding balance consisted of
six separate notes that became due in various amounts and dates between July 9,
2002 and August 6, 2002. Bancomext has not renewed these notes. As of September
30, 2002, accrued interest on these notes of approximately $67,000 was
outstanding. Because we are currently exploring a restructuring of these notes
with Bancomext, to date, they have not pursued their legal remedies under the
loan agreement. No assurances can be given, however, that we will be successful
in our restructuring efforts. If Bancomext were to exercise all of its rights
and remedies, such action could have a significant adverse effect upon our
consolidated financial condition and prospects and could significantly impact
our ability to implement our business strategy, including our ability to
continue as a going concern.
On February 21, 2000, we entered into a $5.1 million (48 million Mexican
pesos) nine-year term financing agreement (the "FOCIR Agreement") with Fondo de
Capitalizacion e Inversion del Sector Rural (`FOCIR"), a public Trust of the
Mexican Federal Government that invests in agricultural projects with long-term
viability. Under the terms of the FOCIR Agreement, FOCIR will provide up to $5.1
million to fund additional Lemon Project costs, which will include land
preparation, planting, equipment, irrigation systems and grove maintenance. This
financing represents the purchase of an equity interest in GISE of approximately
17.6%. Amounts advanced under the FOCIR Agreement are classified outside equity
due to mandatory redemption provisions. As of September 30, 2002, total advances
under the FOCIR Agreement were $4.9 million (47,033,971 Mexican pesos).
The terms of the FOCIR Agreement provide for the calculation and accrual of
annual accretion using one of two alternative methods. The first method
determines accretion by multiplying the year's Mexican inflation index rate plus
4.2% by the FOCIR balance. The second method determines annual accretion by
multiplying GISE's shareholders equity, using Mexican generally accepted
accounting principles, at the end of the year by a factor of 1.036 and then
multiplying by the FOCIR equity interest percent. The calculation
9
that results in the greater amount will be the annual accretion amount.
Accretion accumulates annually over the nine-year period of the FOCIR Agreement
and is paid only upon expiration or early termination of the FOCIR Agreement.
During the term of the FOCIR Agreement, we have the option to prepay the loan at
any time. As of September 30, 2002, accretion accrued under the FOCIR Agreement
amounted to $744,000 and the weighted average annual accretion rate for all
advances was approximately 5.4%. The FOCIR Agreement also contains, among other
things, certain provisions relating to GISE's future financial performance, the
establishment of an irrevocable trust guaranteeing the FOCIR loan, which
includes transferring to the trust GISE common shares that represent 33.4% of
GISE's outstanding shares and the governance of GISE.
Under the terms of our lemon processing contract with Coca-Cola, we have
the option to receive an advance on the current years processing volume. This
advance can be up to 50% of the prior years billings. Accordingly, in June 2002,
we requested and received a $580,000, non-interest, cash advance. This cash
advance is being amortized during the current processing season billings. As of
September 30, 2002, approximately $450,000 of this advance was outstanding.
In September 2002, we received $800,000 as a working capital cash advance
from our largest customer, in connection with the production of a new product
beginning in the fourth quarter of 2002. This advance is being repaid in 16
weekly installments of $50,000 commencing in mid October 2002. Interest at 8.5%
will be included with the final payment.
Our juice processing division has a long-term lemon processing contract
with an affiliate of The Coca-Cola Company that expires in 2007. Under the terms
of this contract, we are obligated to process annually between 12,000 and
300,000 metric tons of lemons for Coca-Cola. Our current processing capacity for
Italian lemons is approximately 40,000 metric tons. During the current
processing season, we anticipate processing between 25,000 and 30,000 metric
tons. As we presently do not have sufficient production capacity for future
years processing, we anticipate that performing the terms of this contract will
require substantial capital expenditures or additional processing capacity. In
connection with exploring various strategic alternatives for our juice
processing division's assets, we are exploring restructuring our lemon
processing contract with Coca-Cola. Our failure to obtain capital to expand our
production capacity or the failure to restructure our lemon processing agreement
or to secure additional processing capacity could have a material adverse effect
on our business, prospects, Lemon Project and financial condition.
In recent years, we have relied upon bank financing, principally short-term,
to finance our working capital and certain of our capital expenditure needs.
Presently, we are in active discussions with several financial institutions to
replace working capital facilities that expired to establish a working capital
debt facility for the Lemon Project and are pursuing equity alternatives. Our
failure to obtain additional financing beyond current levels to meet our working
capital and capital expenditure requirements could have a material adverse
effect on us and our ability to continue as a going concern.
NOTE 3 - SALE OF COMMON STOCK AND INCREASE IN AUTHORIZED SHARES
On June 25, 2001, we completed a rights offering wherein existing
shareholders purchased an additional 7,106,502 shares of common stock at a price
of $0.73 per share, with gross proceeds to us of approximately $5.2 million. Our
largest shareholder, M & M Nominee, LLC, purchased 6,849,315 shares in the
offering, increasing their ownership to 13,149,274 shares, or 62.5% of our
outstanding common stock. As a result of the rights offering, our outstanding
shares of common stock increased to 21,044,828.
At our annual meeting held in June 2001, shareholders approved an amendment
to our Articles of Incorporation that increased the authorized number of shares
of our common stock from 20,000,000 shares to 40,000,000 shares.
10
NOTE 4 - RELATED PARTY TRANSACTIONS
Effective September 1, 2000, we entered into an agreement with Promecap,
S.C. for the services of Emilio Castillo Olea to be our President and Chief
Executive Officer at an annual rate of $150,000. Mr. Castillo is also a Director
of Promecap, S.C.
On February 15, 2001, we borrowed $1.8 million under the terms of an
unsecured, 12% promissory note from our largest shareholder. This note was
repaid in June 2001, including accrued interest of approximately $78,000, from
the proceeds of the rights offering.
NOTE 5 - LEMON PROJECT
In April 1998, GISE and Coca-Cola, entered into a twenty-year Supply
Contract, with a ten-year renewal option, for the production of Italian lemons.
This new Supply Contract replaced the original contract entered into in October
1996. Pursuant to the terms of the Supply Contract, GISE was required to plant
and grow 3,500 hectares (approximately 8,650 acres) of Italian lemons within the
following three years for sale to Coca-Cola at pre-determined prices. The Supply
Contract required Coca-Cola to provide, free of charge, up to 875,000 lemon tree
seedlings, enough to plant approximately 2,800 hectares. In addition, the Supply
Contract requires Coca-Cola to purchase all the production from the project. As
a result of several amendments to the Supply Contract during 2001, the project
has been reduced to approximately 2,572 hectares (approximately 6,353 acres),
which represents all the land currently planted, and reduced the seedlings to
765,000, enough to plant approximately 2,448 hectares (6,047 acres), which have
been delivered to the project by Coca-Cola. During 2001, we sold our two smaller
lemon groves, Laborcitas (240 acres) and Paraiso (339 acres), with all the
proceeds used to reduce outstanding debt. These groves were more mature but
geographically situated apart from the remaining groves. The status of the Lemon
Project as of September 30, 2002, adjusted to reflect the Supply Contract
amendments and the groves disposed, is as follows:
HECTARES ACRES
-------- -----
Land -
Acquired......................................... 2,862 7,071
Prepared and planted............................. 2,572 6,353
Land held in reserve and access roads............ 290 718
Expenditures -
Total projected expenditures, as revised......... $20.5 million
Incurred since inception......................... 18.0 million
Projected for remainder of 2002 and beyond....... 2.5 million
The planting program began in November 1996 with the first harvests in late
2000. Peak harvesting of our lemon crop generally occurs in our fourth quarter.
Following is a summary of the first two years harvests, net of divestitures:
2000 2001
-------- --------
Metric tons........................... 96 3,800
Billed revenue........................ $ 13,000 $560,000
Until the groves reach commercial production, all revenues from the
harvest, net of harvesting and shipping costs to our processing plant, are
offset against the Lemon Project costs, which are capitalized. Based on recent
agricultural conditions in Mexico, commercial production may not begin until the
2004 harvest. As a result, we have revised our total projected expenditures to
reflect this delay. Once commercial production is reached, deferred orchard
costs will be amortized based on the year's yield to total estimated yield for
the remaining years of the Supply Contract.
11
Our juice processing division has a long-term lemon processing contract
with an affiliate of The Coca-Cola Company that expires in 2007. Under the terms
of this contract, we are obligated to process annually between 12,000 and
300,000 metric tons of Italian lemons for Coca-Cola. Our current processing
capacity for Italian lemons is approximately 40,000 metric tons. During the
current processing season, we anticipate processing between 25,000 and 30,000
metric tons. As we presently do not have sufficient production capacity for
future years processing, we anticipate that performing the terms of this
contract will require substantial capital expenditures or securing additional
processing capacity. In connection with exploring various strategic alternatives
for our juice processing division's assets, we are exploring restructuring our
lemon processing contract with Coca-Cola. Our failure to obtain capital to
expand our production capacity or the failure to restructure our lemon
processing agreement or to secure additional processing capacity could have a
material adverse effect on our business, prospects, Lemon Project and financial
condition.
NOTE 6 - SETTLEMENT OF INDEBTEDNESS
In June 2001, our Mexico subsidiary, ICMOSA, entered into a settlement
agreement with Bancrecer, S.A., Institucion de Banca Multiple ("Bancrecer") to
resolve all outstanding issues between them, including the existing litigation
relating to the outstanding $4.0 million term note and accrued interest of
approximately $750,000. Under the terms of the settlement agreement, ICMOSA paid
$1.8 million to Bancrecer prior to the end of June 2001, as payment in full of
all outstanding obligations. The portion of principal and interest forgiven by
Bancrecer of approximately $2.9 million, net of professional fees associated
with the settlement, has been reported as an extraordinary gain in the nine
months ended September 30, 2001 condensed consolidated statement of operations.
NOTE 7 - NET LOSS PER SHARE
The following table sets forth the computation of our basic and diluted loss
per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2001 2002 2001 2002
---------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NUMERATOR
Loss before extraordinary gain................... $ (2,323) $ (2,299) $ (5,383) $ (4,318)
Extraordinary gain............................... -- -- 2,870 --
---------- --------- -------- --------
Net loss......................................... $ (2,323) $ (2,299) $ (2,513) $ (4,318)
---------- --------- -------- --------
DENOMINATOR
Denominator for basic loss per share - weighted
average shares outstanding..................... 21,045 21,045 16,463 21,045
========== ========= ======== ========
Basic and diluted net loss before extraordinary
gain per share.................................. $ (0.11) $ (0.11) $ (0.32) $ (0.21)
========== ========= ======== ========
Basic and diluted net loss per share............. $ (0.11) $ (0.11) $ (0.15) $ (0.21)
========== ========= ======== ========
We had stock options outstanding of 268,000 and 132,500 at September 30,
2001 and September 30, 2002, respectively, that were not included in their
respective periods per share calculations because their effect would have been
anti-dilutive.
12
NOTE 8 - INVENTORIES
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------ -------------
(IN THOUSANDS)
Finished goods:
Cut fruits ............................... $ 2,964 $ 1,893
Juice and oils ........................... 554 12
-------- -------
3,518 1,905
Pineapple orchards............................ 1,219 --
Raw materials and supplies.................... 2,018 1,768
Advances to suppliers......................... 805 709
-------- -------
Total $ 7,560 $ 4,382
======== ========
NOTE 9 - DELISTING FROM THE NASDAQ NATIONAL MARKET
On March 14, 2001, we received a Nasdaq Staff Determination indicating that
we failed to present a definitive plan which would enable us to evidence
compliance satisfying all requirements for continued listing on Nasdaq's
National Market System ("NMS") within a reasonable period of time and to sustain
compliance with those requirements over the long-term. The continued listing
requirements that we were unable to sustain were the minimum bid of $1.00 per
share for over thirty consecutive trading days and the minimum market value of
public float of $5.0 million. As such, our common stock was delisted from the
Nasdaq's NMS effective at the opening of business on March 15, 2001. Our common
stock now trades on the Over-the-Counter Electronic Bulletin Board under the
symbol "UNMG.OB".
NOTE 10 - SEGMENT INFORMATION
We have two reportable segments: packaged fruit and juice and oil.
PACKAGED JUICE
FRUIT AND OIL TOTAL
------------ ----------- -----------
THREE MONTHS ENDED SEPTEMBER 30, 2001
Revenues from external customers........... $ 3,681 $ 1,584 $ 5,265
Segment loss .............................. (1,251) (378) (1,629)
THREE MONTHS ENDED SEPTEMBER 30, 2002
Revenues from external customers........... $ 5,036 $ 399 $ 5,435
Segment loss............................... (1,716) (152) (1,868)
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues from external customers........... $ 18,840 $ 4,628 $ 23,468
Segment loss............................... (2,925) (988) (3,913)
NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenues from external customers........... $ 19,183 $ 1,014 $ 20,197
Segment loss.............................. (2,003) (738) (2,741)
13
The following are reconciliations of reportable segment profit or loss to
our consolidated totals.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2001 2002 2001 2002
----------------------------- -------------- --------------
Total loss for reportable segments....... $ (1,629) $ (1,868) $ (3,913) $ (2,741)
Amortization of subsidiary acquisition
costs recognized in consolidation...... (70) -- (211) --
Unallocated corporate expenses
- General and administrative.......... (383) (262) (971) (791)
---------- -------- -------- --------
Loss before extraordinary gain and income
tax expense............................ $ (2,082) $ (2,130) $ (5,095) $ (3,532)
=========== ======== ======== ========
NOTE 11 - COMMITMENTS AND LITIGATION
Effective January 1, 1995, we entered into a five-year operating agreement
with Industrias Horticolas de Montemorelos, S.A. de C.V. ("IHMSA") to operate a
freezing plant located in Montemorelos, Nuevo Leon, Mexico. Pursuant to the
terms of the operating agreement, we were obligated to pay IHMSA an operating
fee sufficient to cover the interest payments on IHMSA's $3.4 million of
outstanding debt. During the term of the operating agreement, we have the option
to buy the IHMSA facility.
During the third quarter of 2001, we negotiated revisions to the operating
agreement with IHMSA's management, extending the agreement's expiration date to
January 1, 2021, and reduced the purchase option price from $4.5 to $3.5
million, which includes the assumption of approximately $1.2 million of IHMSA's
debt. During 1997, we elected to advance $1.7 million to IHMSA to retire certain
of its outstanding debt and during the fourth quarter of 2001 we advanced IHMSA
an additional $636,000, both of which will be applied to the purchase price.
In December 2001, we exercised our purchase option and expect to finalize
formal closing documents and take title to the facility by December 31, 2002.
All amounts previously paid to IHMSA, along with the assumption of the $1.2
million of debt comprise the final purchase price. At December 31, 2001 and
September 30, 2002, all amounts advanced to IHMSA, of $2.3 and $2.1 million,
respectively, are included in "Deposit on plant facility" in the condensed
consolidated balance sheets at December 31, 2001 and September 30, 2002.
Our juice processing division has a long-term lemon processing contract
with an affiliate of The Coca-Cola Company that expires in 2007. Under the terms
of this contract, we are obligated to processing annually between 12,000 and
300,000 metric tons of Italian lemons for Coca-Cola. Our current processing
capacity for Italian lemons is approximately 40,000 metric tons. During the
current processing season, we anticipate processing between 25,000 and 30,000
metric tons. As we presently do not have sufficient production capacity for
future years processing, we anticipate that performing the terms of this
contract will require substantial capital expenditures or securing additional
processing capacity. In connection with exploring various strategic alternatives
for our juice processing division's assets, we are exploring restructuring our
lemon processing contract with Coca-Cola. Our failure to obtain capital to
expand our production capacity or to restructure our lemon processing agreement
or to secure additional processing capacity could have a material adverse effect
on our business, prospects, Lemon Project and financial condition.
Several legal proceedings arising in the normal course of business are
pending against us, including certain of our Mexican subsidiaries. On September
18, 2002, an action captioned "Complaint for Avoidance of Preferential Transfers
and Turnover of Property of the Estate" styled Golden Gem Growers, Inc., a
Reorganized Debtor and Daniel E. Dempsey, CPA, Disbursing Agent for The Estate
of Golden Gem Growers, Inc., Plaintiff vs. The UniMark Group, Inc., Gisalamo
S.A. de C.V., and Grupo Industrial Santa
14
Engracia S.A. de C.V., Defendants, was filed in the United States Bankruptcy
Court, Middle District of Florida, Orlando Division, Adversary Proceeding No.
02-258. The compliant seeks recovery of $200,000 of payments made by Golden Gem
prior to its filing for bankruptcy protection in September 2001. Although the
ultimate resolution of this matter cannot be determined at this time, any
unfavorable outcome could have a material adverse effect on our financial
condition and in our ability to continue as a going concern.
In September 2002, we settled certain claims made by the owners of a juice
processing facility in Mexico that was previously leased. Under the settlement,
we paid the claimant $125,000 in cash to discharge all claims against certain of
our Mexican subsidiaries and certain of our former and current officers and
directors. This settlement was provided for in prior period financial
statements.
NOTE 12 - SUBSEQUENT EVENTS
On November 1, 2002, our Mexican subsidiary, GISE, entered into an operating
agreement with a third party to process various citrus juices and concentrates
at our Poza Rica plant for the period of November 1, 2002 through October 31,
2003 and at our Victoria plant from January 1, 2003 through May 31, 2003. The
operating agreement requires the third party to pay a fixed processing fee of
$400,000 for the processing of products at the two plants, reimburse us for
substantially all of the plants' variable production expenses, reimburse us for
all the labor costs associated with the Poza Rica plant and $25,000 of the
Victoria plant labor costs and provide all the citrus fruit to be processed. In
addition, the operating agreement can be terminated by either party upon the
occurrence of specified conditions with defined financial penalties.
Finalization of the operating agreement is subject to the third party entering
into a binding agreement with a certain equipment supplier by November 26, 2002.
Subsequent to September 30, 2002, our current president and chief executive
officer announced his intentions to resign his officer position for personal
reasons. Although no specific timetable has been established for his departure,
our board of directors have established search criteria for his replacement.
PART I. - ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion in this Quarterly Report on Form 10-Q contains
forward-looking statements that involve risks and uncertainties. The actual
results could differ significantly from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as well as those discussed elsewhere in this report.
Statements contained in this report that are not historical facts are
forward-looking statements that are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. A number of important factors
could cause the actual results for 2002 and beyond to differ materially from
those expressed in any forward-looking statements made by us, or on our behalf.
These factors include risks relating to our financial condition, our Mexican
operations, general business risks and risks relating to our common stock. For a
discussion of these factors that may affect actual results, investors should
refer to our filings with the Securities and Exchange Commission and those
factors listed under "Risk Factors" starting on page 22 of this Form 10-Q.
CONVERSION TO U.S. GAAP
We conduct substantially all of our operations through our wholly-owned
operating subsidiaries. ICMOSA is a Mexican corporation with its headquarters
located in Montemorelos, Nuevo Leon, Mexico, whose principal activities consist
of operating citrus processing plants and various citrus groves throughout
Mexico. GISE is a Mexican corporation with its headquarters located in Cd.
Victoria, Tamaulipas, Mexico, whose principal activities are the operation of
two citrus juice and oil processing plants, as well as
15
managing the Lemon Project. ICMOSA and GISE maintain their accounting records in
Mexican pesos and in accordance with Mexican generally accepted accounting
principles and are subject to Mexican income tax laws. Our Mexican subsidiaries
financial statements have been converted to United States generally accepted
accounting principles ("U.S. GAAP") and U.S. dollars.
Unless otherwise indicated, all dollar amounts included herein are set
forth in U.S. dollars. The functional currency of UniMark and its subsidiaries
is the U.S. dollar.
RESULTS OF OPERATIONS
The following table sets forth certain condensed consolidated financial
data, expressed as a percentage of net sales for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
2001 2002 2001 2002
---- ---- ---- ----
Net sales................................... 100.0% 100.0% 100.0% 100.0%
Cost of products sold....................... 110.1 120.3 99.7 104.3
--------- ------- ------- -------
Gross profit (loss)......................... (10.1) (20.3) 0.3 (4.3)
Selling, general and administrative expenses 29.2 15.5 17.9 14.3
--------- ------- ------- -------
Loss from operations........................ (39.3) (35.8) (17.6) (18.6)
Other income (expense):
Interest expense........................ (3.3) (2.4) (3.5) (1.6)
Other income............................ 2.9 0.9 0.9 1.2
Foreign currency translation gain (loss) 0.2 (1.9) (1.5) 1.5
--------- ------- ------- -------
(0.2) (3.4) (4.1) 1.1
--------- ------- -------- -------
Loss before extraordinary gain and income
tax expense............................. (39.5) (39.2) (21.7) (17.5)
Income tax expense.......................... 4.6 3.1 1.2 3.9
--------- ------- ------- -------
Loss before extraordinary gain.............. (44.1) (42.3) (22.9) (21.4)
Extraordinary gain on forgiveness of debt... -- -- 12.2 --
--------- ------- ------- -------
Net loss.................................... (44.1)% (42.3)% (10.7)% (21.4)%
========= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net sales consist of packaged fruit and citrus juice and oil.
Packaged fruit sales increased $1.3 million from $3.7 million in 2001 to
$5.0 million in 2002, or 35.1%. This increase was primarily caused by increases
in our retail sales of $1.2 million from $2.4 million in 2001 to $3.6 million in
2002, or 50.0%, and an increase in our Japan sales of $233,000 from $335,000 in
2001 to $568,000 in 2002, or 70.0%. Retail sales consist primarily of sales to
Del Monte, which includes both retail and wholesale club products. The increase
in retail sales was primarily due to the timing of our production schedule for
our citrus products. The increase in our Japan sales during the third quarter of
2002 was caused by timing differences in shipments compared to the prior year
quarter. Although our sales to Japan increased in the current period, future
period sales are anticipated to decline as a result of reduced demand for our
products by our Japanese customers. Typically, given the availability of fresh
citrus, during our first and fourth quarters, we produce and ship a substantial
amount of our annual citrus products. During the first nine months of 2002, we
extended the citrus processing season compared with prior years and reduced some
of the seasonality in our production scheduling by procuring citrus from other
growing regions in Mexico.
Citrus juice and oil sales decreased $1.2 million from $1.6 million in 2001
to $400,000 in 2002, or 75.0%. Due to the continued unfavorable and volatile
worldwide market prices for FCOJ that has existed over the past several years
and negative long-term prospects for the FCOJ market, in early 2002, we
16
suspended our frozen concentrate orange juice operations. See Notes 1 and 12 to
the condensed consolidated financial statements for a further discussion of our
juice division operations.
As a result of the foregoing, net sales increased slightly from $5.3
million in 2001 to $5.4 million in 2002, or 1.8% due to increased sales in our
packaged fruit segment, which were offset by reduced sales in our juice and oil
segment.
Gross profit, as a percentage, for our packaged fruit segment decreased
from a loss of 12.9% in 2001 to a loss of 15.5% in 2002. The gross margin
reduction in the current period was impacted on a positive basis through
aggressive cost cutting, favorable fruit purchasing and improved plant
efficiencies over the 2001 quarter, but was negatively impacted in the 2002
quarter by a non-cash inventory write-down of $567,000, which reduced gross
margin by 11.3%, as a result of our decision to discontinue our pineapple
growing operations.
Citrus juice and oil gross profit decreased from a loss of 3.7% in 2001 to
a loss of 79.9% in 2002. This decrease was primarily due to unabsorbed plant
costs related to our decision not to produce during the 2001/2002 processing
season and costs associated with selling our remaining inventory.
Gross loss overall decreased as a percent of net sales from a loss of 10.1%
in 2001 to a loss of 20.3% in 2002 due to the factors discussed above.
Selling, general and administrative expenses ("SG&A") decreased from $1.5
million in 2001 to $846,000 in 2002, or 43.6%. This significant improvement was
due to reduced SG&A expenses in both our packaged fruit and juice and oil
segments and those associated with being a publicly-held company.
Interest expense decreased $47,000 from $177,000 in 2001 to $130,000 in
2002, or 26.6%. This decrease was due to a $3.6 million reduction in our total
outstanding debt from $16.8 million at September 30, 2001 to $13.5 million at
September 30, 2002, reduced interest rates and the capitalization of interest
costs associated with our Lemon Project.
Other income decreased by $100,000 in 2002 as compared to 2001 and consists
of miscellaneous non- operating income and expense items.
Foreign currency translation gain (loss) decreased from a gain of $13,000 in
2001 to a loss of $104,000 in 2002, and resulted primarily from the conversion
of our foreign subsidiaries financial statements from Mexican pesos to U.S. GAAP
in U.S. dollars. Our foreign currency translation losses during the current
quarter were mainly due to an increase in the exchange rate between the Mexican
peso and the U.S. dollar.
Income tax expense decreased by $72,000 from $241,000 in 2001 to $169,000
in 2002, and was insignificant between periods.
As a result of the foregoing, we reported net losses of $2.3 million in
both periods.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net sales consist of packaged fruit and citrus juice and oil.
Packaged fruit sales increased slightly by $400,000 from $18.8 million in
2001 to $19.2 million in 2002, or 2.1%. This increase was caused by an increase
in our retail sales of $900,000 from $11.6 million in 2001 to $12.5 million in
2002, or 7.7%, offset by a decrease in our foodservice and industrial sales of
$300,000 from $2.3 million in 2001 to $2.0 million in 2002, or 13.0% and a
decrease in our Japan sales of $200,000 from $4.6 million in 2001 to $4.4
million in 2002, or 4.3%. Retail sales consist primarily of sales to Del Monte,
which includes both retail and wholesale club products. This increase in retail
sales was attributable to the timing of our production schedule for our citrus
products. The decrease in our Japan sales during the 2002 period was caused by
timing differences in shipments compared to the prior year period. Although our
sales to Japan decreased in the current period, future period sales are
anticipated to decline as a result of
17
reduced demand for our products by our Japanese customers. Foodservice and
industrial sales were impacted by our focus on higher margin customers, which
resulted in lost revenues. Typically, given the availability of fresh citrus,
during our first and fourth quarters, we produce and ship a substantial amount
of our annual citrus products. During the first nine months of 2002, we extended
the citrus processing season beyond prior years and reduced some of the
seasonality in our production scheduling by procuring citrus from other growing
regions in Mexico
Citrus juice and oil sales decreased $3.6 million from $4.6 million in 2001
to $1.0 million in 2002, or 78.3%. Due to the continued unfavorable and volatile
worldwide market prices for FCOJ that has existed over the past several years
and negative long-term prospects for the FCOJ market, in early 2002, we
suspended our frozen concentrate orange juice operations. See Notes 1 and 12 to
the consolidated financial statements for a further discussion of our juice
division operations.
As a result of the foregoing, net sales decreased $3.3 million from $23.5
million in 2001 to $20.2 million in 2002, or 14.0% due to the sales decrease in
our juice and oil segment.
Gross profit, as a percentage, for our packaged fruit segment decreased
from a loss of 0.7% in 2001 to a loss of 1.1% in 2002. The gross margin
reduction in the current period was impacted on a positive basis through
aggressive cost cutting, favorable fruit purchasing and improved plant
efficiencies over the 2001 quarter, but was negatively impacted in the 2002
quarter by non-cash inventory write-downs of $1.1 million, which reduced gross
margin by 5.7%, as a result of our decision to discontinue our pineapple growing
operations.
Citrus juice and oil gross profit decreased from 4.5% in 2001 to a loss of
64.6% in 2002. This significant decrease was primarily due to unabsorbed plant
costs related to our decision not to produce during the 2001/2002 processing
season and costs associated with selling our remaining inventory.
Gross profit overall decreased as a percent of net sales from 0.3% in 2001
to a loss of 4.3% in 2002 due to the factors discussed above.
Selling, general and administrative expenses ("SG&A") decreased $1.3
million from $4.2 million in 2001 to $2.9 million in 2002, or 31.0%. This
significant improvement was due to reduced SG&A expenses at both our packaged
fruit and juice and oil segments and those associated with being a publicly-held
company.
Interest expense decreased $500,000, from $829,000 in 2001 to $329,000 in
2002, or 60.3%. This decrease was due to a $3.6 million reduction in our total
outstanding debt from $16.8 million at September 30, 2001 to $13.5 million at
September 30, 2002, reduced interest rates and the capitalization of interest
costs associated with our Lemon Project.
Other income increased slightly by $35,000 in 2002 as compared to 2001 and
consists of miscellaneous non-operating income and expenses items.
Foreign currency translation gain (loss), which increased from a net loss of
$353,000 in 2001 to a net gain of $304,000 in 2002, resulted primarily from the
conversion of our foreign subsidiaries financial statements from Mexican pesos
to U.S. GAAP in U.S dollars. The increase in our foreign currency translation
gain is the result of a weaker Mexican peso in the current period as compared to
the U.S. dollar.
Income tax expense increased by $498,000 from $288,000 in 2001 to $786,000
in 2002, and was primarily due to an increase in our valuation allowances
associated with financial and tax reporting timing differences in Mexico, which
is required in accordance with U.S. GAAP.
Extraordinary gain on forgiveness of debt of $2.9 million, net of expenses,
in the 2001 period represents the agreement reached in June 2001, with a Mexican
bank on the settlement of approximately $4.7 million of outstanding principal
and accrued interest for $1.8 million. See Note 6 to the condensed consolidated
financial statements for a further discussion of this gain.
18
As a result of the foregoing, we reported a net loss of $2.5 million in
2001 as compared to a net loss of $4.3 million in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, our cash and cash equivalents totaled $487,000, a
decrease of $648,000 from year-end 2001. During 2002, our operating activities
generated cash of $1.8 million primarily from reductions in our year-end 2001
receivables and inventories of $1.6 and $2.2 million, respectively, and
depreciation expense of $1.3 million offset by our net loss of $4.3 million.
Under the terms of our lemon processing contract with Coca-Cola, we have
the option to receive an advance on the current years processing volume. This
advance can be up to 50% of the prior years billings. Accordingly, in June 2002,
we requested and received a $580,000, non-interest, cash advance. This cash
advance is being amortized during the current processing season billings. As of
September 30, 2002, approximately $450,000 of this advance was outstanding.
In September 2002, we received $800,000 as a working capital cash advance
from our largest customer, in connection with the production of a new product
beginning in the fourth quarter of 2002. This advance is being repaid in 16
weekly installments of $50,000 commencing in mid October 2002. Interest at 8.5%
will be included with the final payment.
As of September 30, 2002, we owed $1.5 million to Cooperative Centrale
Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland") under a loan agreement
with our Mexican subsidiary, GISE, which expired on January 2, 2002. To date,
Rabobank Nederland has not agreed to extend or restructure its loan and has not
pursued legal remedies under the security and guarantee agreements. Although we
are currently negotiating repayment schedules with Rabobank Nederland, if
Rabobank Nederland were to exercise all of its rights and remedies, under the
security and guarantee agreements, such action could have a significant adverse
effect upon our consolidated financial condition and prospects and could
significantly impact our ability to implement our business strategy, including
our ability to operate the Lemon Project and our ability to continue as a going
concern. In such event, we may be forced to seek protection under applicable
provisions of the federal bankruptcy code. As of September 30, 2002, accrued
interest of approximately $60,000 was outstanding.
In early July 2002, our Mexican subsidiary, ICMOSA, entered into a
restructured loan agreement with Grupo Financiero Banorte ("Banorte"), which
amortized the outstanding principal balance of $3.1 million over a period of
five and one-half years. The loan repayment schedule requires quarterly payments
of principal and interest (Libor plus 3.75%) through December 31, 2007, with
$275,000 due over the next twelve months. In our September 30, 2002 condensed
consolidated balance sheet we have classified $2.7 million as long-term debt. We
are current in our scheduled interest payments to Banorte.
As of September 30, 2002, our Mexican subsidiary, ICMOSA, owed $3.5 million
under a secured pre-export financing loan agreement with Banco Nacional de
Comercio Exterior, S.N.C. ("Bancomext"). The outstanding balance consisted of
six separate notes that became due in various amounts and dates between July 9,
2002 and August 6, 2002. Bancomext has not renewed these notes. As of September
30, 2002, accrued interest on these notes of approximately $67,000 was
outstanding. Because we are currently exploring a restructuring of these notes
with Bancomext, to date, they have not pursued their legal remedies under the
loan agreement. No assurances can be given, however, that we will be successful
in our restructuring efforts. If Bancomext were to exercise all of its rights
and remedies, such action could have a significant adverse effect upon our
consolidated financial condition and prospects and could significantly impact
our ability to implement our business strategy, including our ability to
continue as a going concern.
On February 21, 2000, we entered into a $5.1 million (48 million Mexican
pesos) nine-year term financing agreement (the "FOCIR Agreement") with Fondo de
Capitalizacion e Inversion del Sector Rural (`FOCIR"), a public Trust of the
Mexican Federal Government that invests in agricultural projects with long-term
viability. Under the terms of the FOCIR Agreement, FOCIR will provide up to $5.1
million to fund additional Lemon Project costs, which will include land
preparation, planting, equipment, irrigation
19
systems and grove maintenance. This financing represents the purchase of an
equity interest in GISE of approximately 17.6%. Amounts advanced under the FOCIR
Agreement are classified outside equity due to mandatory redemption provisions.
As of September 30, 2002, total advances under the FOCIR Agreement were $4.9
million (47,033,971 Mexican pesos).
The terms of the FOCIR Agreement provide for the calculation and accrual of
annual accretion using one of two alternative methods. The first method
determines accretion by multiplying the year's Mexican inflation index rate plus
4.2% by the FOCIR balance. The second method determines annual accretion by
multiplying GISE's shareholders equity, using Mexican generally accepted
accounting principles, at the end of the year by a factor of 1.036 and then
multiplying by the FOCIR equity interest percent. The calculation that results
in the greater amount will be the annual accretion amount. Accretion accumulates
annually over the nine-year period of the FOCIR Agreement and is paid only upon
expiration or early termination of the FOCIR Agreement. During the term of the
FOCIR Agreement, we have the option to prepay the loan at any time. As of
September 30, 2002, accretion accrued under the FOCIR Agreement amounted to
$744,000 and the weighted average annual accretion rate for all advances was
approximately 5.4%. The FOCIR Agreement also contains, among other things,
certain provisions relating to GISE's future financial performance, the
establishment of an irrevocable trust guaranteeing the FOCIR loan, which
includes transferring to the trust GISE common shares that represent 33.4% of
GISE's outstanding shares and the governance of GISE.
In recent years, we have relied upon bank financing, principally short
term, to finance our working capital and certain of our capital expenditure
needs. Presently, we are in active discussions with several financial
institutions to replace existing working capital facilities that expired and to
establish a working capital debt facility for the Lemon Project and we are also
pursuing equity alternatives. Our failure to obtain additional financing beyond
current levels to meet our working capital and capital expenditure requirements
could have a material adverse effect on us and our ability to continue as a
going concern.
Our 2001 audited consolidated financial statements, which is included in
our Form 10-K for the fiscal year ended December 31, 2001, includes a report
from our independent auditors with a "going concern" explanatory paragraph (see
Note 2 to our 2001 consolidated financial statements) which discusses certain
conditions that could impact our ability to continue operations under the
current business conditions given our recurring losses, negative cash flows and
substantial difficulties in meeting our obligations. We cannot be sure that our
cash and cash equivalents on hand and our cash availability will be sufficient
to meet our anticipated working capital needs and capital expenditures. We began
to address our "going concern" issue and the underlying liquidity problem
through the Del Monte transaction during 2000 and a fundamental change in our
business strategy. We also decided to discontinue the juice division of our
juice and oil segment and pursue all strategic alternatives available to
maximize asset value. Our efforts to raise capital through the divestiture of
our juice division's assets have been unsuccessful. To finance our current
working capital requirements and our current and future expenditures, we will
need to issue additional equity securities and or incur additional debt. We may
not be able to obtain additional required capital on satisfactory terms, if at
all.
In April 1998, GISE and Coca-Cola entered into a twenty-year Supply
Contract, with a ten-year renewal option, for the production of Italian lemons.
This new Supply Contract replaced the original contract entered into in October
1996. Pursuant to the terms of the Supply Contract, GISE was required to plant
and grow 3,500 hectares (approximately 8,650 acres) of Italian lemons within the
following three years for sale to Coca-Cola at pre-determined prices. The Supply
Contract required Coca-Cola to provide, free of charge, up to 875,000 lemon tree
seedlings, enough to plant approximately 2,800 hectares. In addition, the Supply
Contract requires Coca-Cola to purchase all the production from the project. As
a result of amendments to the Supply Contract during 2001, the Lemon Project has
been reduced to approximately 2,572 hectares (approximately 6,353 acres), which
represents all the land currently planted, and reduced the seedlings to 765,000
(enough to plant approximately 2,448 hectares (6,047 acres), which have been
delivered to the project by Coca-Cola. As a result of the amendments to the
Supply Contract, substantially all of the development costs have been incurred.
During 2001, we sold our two smaller lemon groves, Laborcitas (240 acres) and
Paraiso (339 acres). Although these were mature groves, they were geographically
situated
20
apart from the remaining groves. The status of the Lemon Project as of September
30, 2002, adjusted to reflect the Supply Contract amendments and the groves
disposed, is as follows:
HECTARES ACRES
-------- -----
Land -
Acquired......................................... 2,862 7,071
Prepared and planted............................. 2,572 6,353
Land held in reserve and access roads............ 290 718
Expenditures -
Total projected expenditures, as revised......... $20.5 million
Incurred since inception......................... 18.0 million
Projected for remainder of 2002 and beyond....... 2.5 million
The planting program began in November 1996 with the first harvests in late
2000. Peak harvesting of our lemon crop generally occurs in our fourth quarter.
Following is a summary of the first two years harvests, net of divestitures:
2000 2001
-------- --------
Metric tons........................ 96 3,800
Billed revenue..................... $ 13,000 $560,000
Until the groves reach commercial production, all revenues from the
harvest, net of harvesting and shipping costs to our processing plant, are
offset against the Lemon Project costs, which are capitalized. Based on recent
agricultural conditions in Mexico, commercial production may not begin until the
2004 harvest. As a result, we have revised our total projected expenditures to
reflect this delay. Once commercial production is reached, deferred orchard
costs will be amortized based on the year's yield to total estimated yield for
the remaining years of the Supply Contract.
Our juice processing division has a long-term lemon processing contract
with an affiliate of The Coca-Cola Company that expires in 2007. Under the terms
of this contract, we are obligated to processing annually between 12,000 and
300,000 metric tons of Italian lemons for Coca-Cola. Our current processing
capacity for Italian lemons is approximately 40,000 metric tons. During the
current processing season, we anticipate processing between 25,000 and 30,000
metric tons. As we presently do not have sufficient production capacity for
future years processing, we anticipate that performing the terms of this
contract will require substantial capital expenditures or securing additional
processing capacity. In connection with exploring various strategic alternatives
for our juice processing division's assets, we are exploring restructuring our
lemon processing contract with Coca-Cola. Our failure to obtain capital to
expand our production capacity or to restructure our lemon processing agreement
or to secure additional processing capacity could have a material adverse effect
on our business, prospects, Lemon Project and financial condition.
Our cash requirements for the remainder of 2002 and beyond will depend
primarily upon the level of our sales and gross margins, expenditures for
capital equipment and improvements, investments in agricultural projects, the
timing of inventory purchases, increased acceptance of recently introduced
products and necessary reductions of debt. Presently, we are in discussions with
other financial institutions regarding further extending or replacing our
existing debt facilities and we are also pursuing equity alternatives. No
assurances can be given that we will be able to obtain such debt facilities on
acceptable terms. The failure to obtain such debt facilities could have a
material adverse effect on results of operations and financial condition.
21
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No.143, "Accounting for Asset
Retirement Obligations" which establishes the accounting standards for the
recognition and measurement of obligations associated with the retirement of
tangible long-lived assets. Under SFAS No. 143, the costs of retiring an asset
will be recorded as a liability when the retirement obligation arises, and will
be amortized over the life of the asset. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. The adoption of SFAS No. 143 is not
expected to have a material impact on our consolidated results of operations and
financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44 and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections". This pronouncement, among other things, requires certain gains and
losses on the extinguishment of debt previously treated as extraordinary items
to be classified as income or loss from continuing operations. SFAS No. 145 is
effective fiscal years beginning after May 15, 2002. The adoption of SFAS No.
145 is not expected to have a material impact on our consolidated results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities". This pronouncement addresses the financial accounting and
reporting costs associated with an exit activity (including restructuring) or
with a disposal of long-lived assets. SFAS No. 146 requires an entity to record
a liability for costs associated with an exit or disposal activity when that
liability is incurred and can be measured at fair value, and to subsequently
adjust the recorded liability for changes in estimated cash flows. SFAS No. 146
is effective for exit or disposal activities initiated after December 31, 2002.
We are currently evaluating the potential impact, if any, that the
implementation will have on our consolidated results of operations and financial
position.
RISK FACTORS
If any of the following risks actually occur, our business, financial
condition or operating results could be materially adversely affected. In such
case, the trading price of our underlying common stock could decline and you may
lose part or all of your investment. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations. As a result, we cannot predict every risk factor, nor can
we assess the impact of all of the risk factors on our businesses or to the
extent to which any factor, or combination of factors, may impact our financial
condition and results of operation. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations, and perhaps our ability to continue as a going concern.
RISKS RELATING TO OUR FINANCIAL CONDITION
WE ARE EXPERIENCING SIGNIFICANT LIQUIDITY PROBLEMS AND HAVE MANY INDICATIONS OF
"GOING CONCERN" CONDITIONS.
We have sustained net losses in each of the last five fiscal years and in
the first nine months of 2002. As of September 30, 2002, our accumulated deficit
was $47.7 million, we are unable to repay two of our Mexican subsidiaries loans
and accrued interest under expired loan agreements, we had a working capital
deficit of $7.5 million, our on hand cash balances were $487,000 and we are
generating negative gross margins. Also, our efforts to raise capital through
the divestiture of our juice division's assets were unsuccessful. Our cash
requirements for the remainder of 2002 and beyond will depend upon the level of
sales and gross margins, expenditures for capital equipment and improvements,
investments in agricultural projects, the timing of inventory purchases and
necessary reductions of debt. Projected working capital requirements for the
remainder of 2002 and beyond are significantly greater than current levels of
available financing. We have, in recent years, relied upon sales of our common
stock to our principal shareholder and bank financing to finance our working
capital and certain of our capital expenditures. Our inability to obtain
sufficient debt or equity capital for these projects and commitments and for
working capital requirements could have a material adverse effect on us and our
projects including the realization of the
22
amounts capitalized, deferred costs and deposits related to these projects and
commitments. To finance current and future expenditures, we will need to issue
additional equity securities and/or incur additional debt. We may not be able to
obtain additional required capital on satisfactory terms, if at all, which
raises serious doubt about our ability to continue as a going concern.
WE MAY BE FORCED TO SEEK PROTECTION UNDER APPLICABLE PROVISIONS OF THE FEDERAL
BANKRUPTCY CODE IF RABOBANK NEDERLAND OR ONE OF OUR MEXICAN BANKS EXERCISES
THEIR LEGAL RIGHTS AND REMEDIES.
As of September 30, 2002, we owed $1.5 million to Cooperative Centrale
Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland") under a loan agreement
with our Mexican subsidiary, GISE, which expired on January 2, 2002. To date,
Rabobank Nederland has not agreed to extend or restructure its loan and has not
pursued legal remedies under the security and guarantee agreements. Although we
are currently negotiating repayment schedules with Rabobank Nederland, if
Rabobank Nederland were to exercise all of its rights and remedies, under the
security and guarantee agreements, such action could have a significant adverse
effect upon our consolidated financial condition and prospects and could
significantly impact our ability to implement our business strategy, including
our ability to operate the Lemon Project and our ability to continue as a going
concern. In such event, we may be forced to seek protection under applicable
provisions of the federal bankruptcy code. As of September 30, 2002, accrued
interest of approximately $60,000 was outstanding.
As of September 30, 2002, our Mexican subsidiary, ICMOSA, owed $3.5
million under a secured pre-export financing loan agreement with Banco Nacional
de Comercio Exterior, S.N.C. ("Bancomext"). The outstanding balance consisted of
six separate notes that became due in various amounts and dates between July 9,
2002 and August 6, 2002. Bancomext has not renewed these notes. As of September
30, 2002, accrued interest on these notes of approximately $67,000 was
outstanding. Because we are currently exploring a restructuring of these notes
with Bancomext, to date, they have not pursued their legal remedies under the
loan agreement. No assurances can be given, however, that we will be successful
in our restructuring efforts. If Bancomext were to exercise all of its rights
and remedies, such action could have a significant adverse effect upon our
consolidated financial condition and prospects and could significantly impact
our ability to implement our business strategy, including our ability to
continue as a going concern.
WE MAY CONTINUE TO SUSTAIN LOSSES AND ACCUMULATED DEFICITS IN THE FUTURE.
We have sustained net losses in each of the last five fiscal years and in
the first nine months of 2002. As of September 30, 2002 our accumulated deficit
was $47.7 million. Our ability to achieve profitability in the future will
depend on many factors, including our ability to produce and market commercially
acceptable products into foreign countries while reducing operating costs.
Because we were not profitable in each of the last five years and during the
first nine months of 2002, there can be no assurance that we will achieve a
profitable level of operations in the remainder of 2002 and beyond, or, if
profitability is achieved that it can be sustained.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF CUSTOMERS.
We have a limited number of customers. As a result of the sale of our
Sunfresh(R) brand to Del Monte during 2000 and the entering into a long-term
supply agreement to supply a minimum quantity of chilled and canned citrus
products for distribution by Del Monte under the Sunfresh(R) brand into the
United States retail and wholesale club markets, sales to them represented 46.4%
of our 2001 net sales and 59.8 % for the nine months ended September 30, 2002.
In addition, we expect that more than half of our foreseeable future net sales
will be dependent on Del Monte. We believe that our future success depends upon
the future operating results of Del Monte with respect to the Sunfresh(R) brand
and their ability to broaden the customer base of the Sunfresh(R) brand
products. Although the long-term supply agreement requires Del Monte to purchase
minimum quantities of product, there can be no assurances that Del Monte will
not reduce, delay or eliminate purchases from us, which could have a material
adverse effect on our results of operations and financial condition. In
addition, Del Monte has significant leverage and could attempt to
23
change the terms, including pricing and volume, upon which Del Monte and we do
business, thereby adversely affecting our consolidated results of operations and
financial condition.
WE ARE SUBJECT TO RISKS ASSOCIATED IN IMPLEMENTATION OF OUR BUSINESS STRATEGY.
We are subject to our ability to implement our business strategy and
improve our operating results, which will depend in part on our ability to
realize significant cost savings associated with our supply agreement with Del
Monte through operating efficiencies, achieve additional sales penetration for
products sold into foreign markets and develop new products and customers in our
packaged fruit segment. No assurance can be given that we will be able to
achieve such goals or that, in implementing cost saving measures, it will not
impair our ability to respond rapidly or efficiently to changes in the
competitive environment. In such circumstances, our consolidated results of
operations and financial condition could be materially adversely affected.
ADDITIONAL FINANCING WILL BE REQUIRED TO ACHIEVE OUR GROWTH.
If we do not achieve or maintain significant revenues or profitability or
have not accurately predicted our cash needs, or if we decide to change our
business plans, we will need to raise additional funds in the future. There can
be no assurance that we will be able to raise additional funds on favorable
terms or at all, or that such funds, if raised, will be sufficient to permit us
to manufacture and distribute our products. If we raise additional funds by
issuing equity securities, shareholders may experience dilution in their
ownership interest. If we raise additional funds by issuing debt securities, we
may incur significant interest expense and become subject to covenants that
could limit our ability to operate and fund our business. Further, we may be
forced to sell certain of our assets, which may be sold at a loss. If additional
funds are not available when required, we may be unable to effectively realize
our current plans.
ADDITIONAL FINANCING WILL BE REQUIRED TO PERFORM OUR CONTRACTUAL OBLIGATIONS.
Our juice processing division has a long-term lemon processing contract
with an affiliate of the Coca-Cola Company that expires in 2007. Under the terms
of this contract, we are obligated to processing annually between 12,000 and
300,000 metric tons of Italian lemons for Coca-Cola. Our current processing
capacity for Italian lemons is approximately 40,000 metric tons. During the
current processing season, we anticipate processing between 25,000 and 30,000
metric tons. As we presently do not have sufficient production capacity for
future years processing, we anticipate that performing the terms of this
contract will require substantial capital expenditures or securing additional
processing capacity. In connection with exploring various strategic alternatives
for our juice processing division's assets, we are exploring restructuring our
lemon processing contract with Coca-Cola. Our failure to obtain capital to
expand our production capacity or the failure to restructure our lemon
processing agreement or to secure additional processing capacity could have a
material adverse effect on our business, prospects, Lemon Project and
consolidated financial condition.
RISKS RELATING TO OUR MEXICAN OPERATIONS
WE ARE SUBJECT TO THE RISK OF FLUCTUATING FOREIGN CURRENCY EXCHANGE RATES AND
INFLATION.
We are subject to market risk associated with adverse changes in foreign
currency exchange rates and inflation in our operations in Mexico. Our
consolidated results of operations are affected by changes in the valuation of
the Mexican peso to the extent that our Mexican subsidiaries have peso
denominated net monetary assets or net monetary liabilities. In periods where
the peso has been devalued in relation to the U.S. dollar, a gain will be
recognized to the extent there are peso denominated net monetary liabilities
while a loss will be recognized to the extent there are peso denominated net
monetary assets. In periods where the peso has gained value, the converse would
be recognized. Our consolidated results of operations are also subject to
fluctuations in the value of the peso as they affect the translation to U.S.
dollars of Mexican subsidiaries net deferred tax assets or net deferred tax
liabilities. Since these assets and liabilities are peso denominated, a falling
peso results in a translation loss to the extent there are net deferred tax
assets or a translation gain to the extent there are net deferred tax
liabilities. Pricing associated with the long-term
24
supply agreement entered into with Del Monte is in U.S. dollars. Our exposure to
foreign currency exchange rate risk is difficult to estimate due to factors such
as balance sheets accounts, and the existing economic uncertainty and future
economic conditions in the international marketplace.
Significant fluctuations in the exchange rate of the Mexican peso compared
to the U.S. dollar, as well as the Mexican inflation rate, could significantly
impact our ability to fulfill our contractual obligations under the Del Monte
supply agreement in a profitable manner, which could result in a material
adverse effect upon our consolidated results of operations and financial
conditions.
WE ARE DEPENDENT UPON FRUIT GROWING CONDITIONS, ACCESS TO WATER AND AVAILABILITY
AND PRICE OF FRESH FRUIT.
We grow grapefruit used in our packaged fruit operations and grow Italian
lemons pursuant to the terms of a long-term supply contract with an affiliate of
Coca-Cola. Severe weather conditions, lack of water and natural disasters, such
as floods, droughts, frosts, earthquakes or pestilence, may affect the supply of
one or more of our products and could significantly impact the development of
the Lemon Project. A substantial amount of our growing operations are irrigated
and a lack of water has not had a material adverse effect on our growing
operations for many years. There can be no assurances that future weather
conditions and lack of irrigation water will not have a material adverse effect
on results of operations and financial conditions. In addition, we also source a
substantial amount of our raw materials from third-party suppliers throughout
various growing regions in Mexico and Texas. A crop reduction or failure in any
of these fruit growing regions resulting from factors such as weather,
pestilence, disease or other natural disasters, could increase the cost of our
raw materials or otherwise adversely affect our operations. Competitors may be
affected differently depending upon their ability to obtain adequate supplies
from sources in other geographic areas. If we are unable to pass along the
increased raw material costs, our consolidated financial condition and results
of operations could be materially adversely affected.
LABOR SHORTAGES AND UNION ACTIVITY COULD AFFECT OUR ABILITY TO HIRE AND WE ARE
DEPENDENT ON THE MEXICAN LABOR MARKET.
We are heavily dependent upon the availability of a large labor force to
produce our products. The turnover rate among the labor force is high. If it
becomes necessary to pay more to attract labor, our labor costs will increase.
The Mexican agricultural work force, whether seasonal or permanent, are
generally affiliated with labor unions which are generally affiliated with a
national confederation. If the unions attempt to disrupt production and are
successful on a large scale, labor costs will likely increase and work stoppages
may be encountered, which could be particularly damaging in our industry where
the harvesting season for citrus crops occur at peak times and getting the fruit
processed and packed on a timely basis is critical.
WE ARE SUBJECT TO STATUTORY EMPLOYEE PROFIT SHARING IN MEXICO.
All Mexican companies, including ours, are required to pay their employees,
in addition to their agreed compensation benefits, profit sharing in an
aggregate amount equal to 10% of taxable income, as adjusted to eliminate most
of the effects of Mexican inflation, calculated for employee profit sharing
purposes, of the individual corporation employing such employees. As a result of
losses for income tax purposes at our Mexican subsidiaries over the past several
years, we have not been required to pay any profit sharing. Statutory employee
profit sharing expense, when paid, is reflected in our cost of goods sold and
selling, general and administrative expenses, depending upon the function of the
employees to whom profit sharing payments are made. Our net losses on a
consolidated basis as shown in the condensed consolidated financial statements
are not a meaningful indication of taxable income of our subsidiaries for profit
sharing purposes or of the amount of employee profit sharing.
25
WE ARE SUBJECT TO VOLATILE INTEREST RATES IN MEXICO, WHICH COULD INCREASE OUR
CAPITAL COSTS.
We are subject to volatile interest rates in Mexico. 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. As a result, costs of operations for our
Mexican subsidiaries could be higher.
TRADE DISPUTES BETWEEN THE UNITED STATES, MEXICO AND EUROPE COULD RESULT IN
TARIFFS, QUOTAS AND BANS ON IMPORTS, INCLUDING OUR PRODUCTS, WHICH COULD IMPAIR
OUR FINANCIAL CONDITION.
We are subject to trade agreements between Mexico, the United States and
Europe. 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
limitations on products produced in Mexico. Because all of our products are
currently produced by our subsidiaries in Mexico, which we sell in the United
States and Europe, such actions, if taken, could adversely affect our business.
WE ARE SUBJECT TO GOVERNMENTAL LAWS THAT RELATE TO OWNERSHIP OF RURAL LANDS IN
MEXICO.
We own or lease, on a long-term basis, approximately 7,000 acres of rural
land in Mexico, which is used for production of the Lemon Project. Historically,
the ownership of rural land in Mexico has been subject to governmental
regulations, which in some cases could lead to the owner being unable to sell
his land to companies putting together significant land concentrations. Although
we have not experienced any major legal disputes in obtaining the land for the
Lemon Project, there can be no assurance that we will be able to obtain large
blocks of land for future growing projects without incurring government
resistance.
GENERAL BUSINESS RISKS
WE MAY BE SUBJECT TO PRODUCT LIABILITY AND PRODUCT RECALL.
We produce a consumer product that is subject to product recall. The
testing, marketing, distribution and sale of food and beverage products entail
an inherent risk of product liability and product recall. There can be no
assurance that product liability claims will not be asserted against us or that
we will not be obligated to recall our products. Although we maintain product
liability insurance coverage in the amount of $11,000,000 per occurrence, there
can be no assurance that this level of coverage is adequate. A product recall or
a partially or completely uninsured judgment against us could have a material
adverse effect on our consolidated results of operations and financial
condition.
WE ARE SUBJECT TO GOVERNMENTAL AND ENVIRONMENTAL REGULATIONS.
We are subject to numerous domestic and foreign governmental and
environmental laws and regulations as a result of our agricultural, food and
juice processing activities.
The Food and Drug Administration ("FDA"), the United States Department of
Agriculture ("USDA"), the Environmental Protection Agency, and other federal and
state regulatory agencies in the United States extensively regulate our
activities in the United States. The manufacturing, processing, packing,
storage, distribution and labeling of food and juice products are subject to
extensive regulations enforced by, among others, the FDA and to inspection by
the USDA and other federal, state, local agencies. Applicable statutes and
regulations governing food products include "standards of identity" for the
content of specific types of foods, nutritional labeling and serving size
requirements and under "Good Manufacturing Practices" with respect to production
processes. We believe that our products satisfy, and any new products will
satisfy, all applicable regulations and that all of the ingredients used in our
products are "Generally Recognized as Safe" by the FDA for the intended purposes
for which they will be used. Failure to comply with applicable laws and
regulations could subject us to civil remedies, including fines, injunctions,
recalls or seizures, as
26
well as potential criminal sanctions, which could have a material adverse effect
on our consolidated results of operations and financial condition.
The Secretaria de Agricultura, Ganaderia, Desarrollo Rural, Pesca y
Alimentacion (SAGARPA), the Secretaria de Medio Ambiente y Recursos Naturales
(SEMARNAT), the Secretaria de Salud (SS), and other federal and state regulatory
agencies in Mexico extensively regulate our Mexican operations. Many of these
laws and regulations are becoming increasingly stringent and compliance with
them is becoming increasingly expensive. On a daily basis, we test our products
in our internal laboratories and, periodically, submit samples of our products
to independent laboratories for analysis. Failure to comply with applicable laws
and regulations could subject us to civil remedies, including fines,
injunctions, recalls or seizures, as well as potential criminal sanctions, which
could have a material adverse effect on results of operations and financial
condition. Although we believe that our facilities are currently in compliance
with all applicable environmental laws, failure to comply with any such laws
could have a material adverse effect on our consolidated results of operations
and financial condition.
WE ARE DEPENDENT UPON OUR MANAGEMENT TEAM.
We rely on the business, technical expertise and experience of our senior
management and certain other key employees. The loss of the services of any of
these individuals could have a material adverse effect on results of operations
and financial condition. We believe that our future success is also dependent
upon our ability to continue to attract and retain qualified personnel in all
areas of our business. No senior members of our Mexican operations are bound by
non-compete agreements, and if such members were to depart and subsequently
compete with us, such competition could have a material adverse effect on our
consolidated results of operations and financial condition.
WE HAVE A SEASONAL BUSINESS.
We are a seasonal business and, as with any agribusiness, demand for our
citrus and tropical fruit products is strongest during the fall, winter and
spring when many seasonal fresh products are not readily available for sale in
supermarkets in North America. In addition, a substantial portion of our exports
to Japan are processed and shipped during the first and fourth quarters of each
year. Our management believes that our quarterly consolidated net sales will
continue to be impacted by this pattern of seasonality.
WE FACE STRONG COMPETITION.
We operate in a highly competitive market. The food industry, including the
markets in which we compete, is highly competitive with respect to price and
quality, including taste, texture, healthfulness and nutritional value. We face
direct competition from citrus processors with respect to our existing product
lines and face potential competition from numerous, well established competitors
possessing substantially greater financial, marketing, personnel and other
resources than we do. In recent years, numerous companies have introduced
products positioned to capitalize on growing consumer preference for fresh fruit
products. It can be expected that we will be subject to increasing competition
from companies whose products or marketing strategies address these consumer
preferences.
WE HAVE A SHAREHOLDER THAT HAS SUBSTANTIAL CONTROL OVER OUR COMPANY AND CAN
AFFECT VIRTUALLY ALL DECISIONS MADE BY OUR SHAREHOLDERS AND DIRECTORS.
M & M Nominee LLC ("M & M Nominee") owns 13,149,274 shares of our common
stock accounting for 62.5% of all issued and outstanding shares. As a result, M
& M Nominee has the requisite voting power to significantly affect virtually all
decisions made by our company and its shareholders, including the power to elect
all directors and to block corporate actions such as amendments to most
provisions of our articles of incorporation. This ownership and management
structure could inhibit the taking of any action by our company that is not
acceptable to M & M Nominee.
27
RISKS RELATING TO OUR COMMON STOCK
THE DELISTING IN MARCH 2001 FROM THE NASDAQ NATIONAL MARKET MAY REDUCE THE
LIQUIDITY AND MARKETABILITY OF OUR COMMON STOCK AND MAY DEPRESS THE MARKET PRICE
OF OUR COMMON STOCK.
On March 15, 2001, Nasdaq delisted our common stock from The Nasdaq
National Market and moved our common stock to the Over-the-Counter Electronic
Bulletin Board ("OTC Bulletin Board") under the symbol "UNMG.OB". Although our
securities are included on the OTC Bulletin Board, there can be no assurance
that a regular trading market for the securities will be sustained in the
future. The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter
market which provides significantly less liquidity than The Nasdaq Stock Market,
and quotes for stocks included on the OTC Bulletin Board are not listed in the
financial sections of newspapers as are those for The Nasdaq Stock Market.
Therefore, prices for securities traded solely on the OTC Bulletin Board may be
difficult to obtain. The reduced liquidity of our common stock and the reduced
public access to quotations for our common stock could depress the market price
of our common stock.
"PENNY STOCK" REGULATIONS MAY IMPOSE RESTRICTIONS ON MARKETABILITY OF OUR COMMON
STOCK.
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that is not traded on a
national securities exchange or Nasdaq and that has a market price of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. Since our securities that are currently included on the OTC
Bulletin Board are trading at less than $5.00 per share at any time, our common
stock may become subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors. Accredited investors generally
include investors that have assets in excess of $1,000,000 or an individual
annual income exceeding $200,000, or, together with the investor's spouse, a
joint income of $300,000. For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
such securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the rules require, among other things, the delivery,
prior to the transaction, of a risk disclosure document mandated by the SEC
relating to the penny stock market and the risks associated therewith. The
broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the penny stock rules may restrict
the ability of broker-dealers to sell our securities and may affect the ability
of stockholders to sell our securities in the secondary market.
OUR COMMON STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE.
The price of our common stock has been particularly volatile and will
likely continue to fluctuate in the future. Announcements of chronological
innovations, regulatory matters or new commercial products by us or our
competitors, developments or disputes concerning patent or proprietary rights,
publicity regarding actual or potential product results relating to products
under development by us or our competitors, regulatory developments in both the
United States and foreign countries, public concern as to the safety of
pharmaceutical or dietary supplement products, and economic and other external
factors, as well as period-to-period fluctuations in financial results, may have
a significant impact on the market price of our common stock. In addition, from
time to time, the stock market experiences significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies or industries. The market price of our common stock, like the stock
prices of many publicly traded smaller companies, has been and may continue to
be highly volatile.
28
WE HAVE NEVER PAID A DIVIDEND.
We have never paid cash dividends on our common stock or any other
securities. We anticipate that we will retain any future earnings for use in the
expansion and operation of our business, and do not anticipate paying cash
dividends in the foreseeable future.
PART I. - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We are exposed to market risk from changes in our outstanding bank debt and
interest rates. The following table presents principal cash flows and related
weighted-average interest rates by expected maturity dates for our debt
obligations.
INTEREST RATE SENSITIVITY
Principal Amount by Expected Maturity
Average Interest Rate
(In thousands, except interest rates)
Estimated
Fair
There- Value
2002 2003 2004 2005 2006 after Total 9/30/02
------ ------ ------ ------ ------ ------- ----- ---------
Long-term debt, including
current portion
Fixed rate.................... $ 466 $ 28 $ 14 $ -- $ -- $ -- $ 505 $ 508
Average interest rate......... 18.3% 6.9% 6.9%
Variable rate................. $ 146 $ 300 $300 $ 400 $ 700 $6,196 $8,042 $8,042
Average interest rate......... 9.1% 7.3% 7.3% 7.3% 7.3% 6.8%
At September 30, 2002, U.S. dollar denominated long-term debt amounted to
$3.2 million as compared to Mexican peso denominated long-term debt of $5.4
million.
PART I. - ITEM 4 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We have conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as
amended, within 90 days of the filing date of this Quarterly Report on Form
10-Q. Based on our evaluation, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us is
recorded, processed, summarized and reported within the required time periods.
In designing and evaluating the disclosure controls and procedures, we
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Changes in Internal Controls. There have been no significant changes in our
internal controls or in other factors that could significantly affect the
internal controls subsequent to the date of our evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 11, "Commitments and Litigation", to our condensed consolidated
financial statements for a discussion of our legal proceedings.
29
ITEM 2. SALE OF UNREGISTERED SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and " Risk Factors -
Risks Relating to Our Financial Condition - We may be forced to seek protection
under applicable provisions of the federal bankruptcy code if Rabobank Nederland
or one of our Mexican banks exercises their legal rights and remedies", for a
discussion of our noncompliance with our loan agreements with Bancomext and
Rabobank Nederland.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders on September 18, 2002, the
shareholders of our company elected or ratified, along with the results of these
votes, the following:
1. Elected seven (7) Directors.
DIRECTOR NOMINEES FOR ABSTAIN
----------------- ---------- -------
Emilio Castillo Olea ......................... 17,312,345 48,732
David E. Ziegler ............................. 17,312,345 48,732
Jakes Jordaan ................................ 17,315,545 45,532
Federico Chavez Peon ......................... 17,312,545 48,532
Luis A. Chico Pardo .......................... 17,315,545 45,532
Iain Aitken .................................. 17,315,595 45,482
Arturo Herrera Barre ......................... 17,312,595 48,482
2. Ratified Mancera, S.C., Member Practice of Ernst & Young Global as
independent public accountants of our company for the fiscal year ending
December 31, 2002. Results of the voting, are as follows:
FOR: ............... 17,282,382
AGAINST: ........... 25,195
ABSTAIN: ........... 53,500
ITEM 5. OTHER INFORMATION
None
ITEM 6 . EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
EXHIBIT NO. 99
99(a) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
B. Reports on Form 8-K:
None
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE UNIMARK GROUP, INC.
-------------------------------
Registrant
Date: November 19, 2002 /s/ Emilio Castillo Olea
------------------- -------------------------------
Emilio Castillo Olea, President
(Principal Executive Officer)
Date: November 19, 2002 /s/ David E. Ziegler
------------------- -------------------------------
David E. Ziegler, Chief Financial Officer
(Principal Accounting Officer)
31
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Emilio Castillo Olea certify that:
1. I have reviewed this quarterly report on Form 10-Q of The UniMark Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002 /s/ Emilio Castillo Olea
----------------- -------------------------------
Emilio Castillo Olea, President
(Principal Executive Officer)
32
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, David E. Ziegler certify that:
1. I have reviewed this quarterly report on Form 10-Q of The UniMark Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002 /s/ David E. Ziegler
------------------ ---------------------
David E. Ziegler, Chief Financial Officer
(Principal Accounting Officer)
33
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
99(a) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002