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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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.
-----------------------
UNIMARK HOUSE
124 McMAKIN ROAD
BARTONVILLE, TEXAS 76226
REGISTRANT'S TELEPHONE NUMBER: (817) 491-2992
STATE OF INCORPORATION IRS EMPLOYER IDENTIFICATION NO.
---------------------- -------------------------------
TEXAS 75-2436543
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 [ ] NO [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12b-2). YES [ ] NO [X]
AS OF MARCH 5, 2004, THERE WERE 21,044,828 SHARES OF COMMON STOCK, PAR VALUE
$0.01 PER SHARE, OUTSTANDING.
1
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets,
December 31, 2002 and June 30, 2003....................................... 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 2002 and 2003................. 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2002 and 2003........................... 5
Notes to Condensed Consolidated Financial Statements - June 30, 2003......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risks.................. 32
Item 4. Controls and Procedures...................................................... 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 34
Item 2. Changes in Securities and Use of Proceeds.................................... 35
Item 3. Defaults Upon Senior Securities.............................................. 35
Item 4. Submission of Matters to a Vote of Security Holders.......................... 35
Item 5. Other Information............................................................ 35
Item 6. Exhibits and Reports on Form 8-K............................................. 35
SIGNATURES............................................................................ 36
EXHIBIT INDEX......................................................................... 37
2
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, JUNE 30,
2002 2003
------------ --------
(NOTE 1) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 406 $ 9,686
Accounts receivable - trade, net of allowance of $1,118 in
2002 and $1,096 in 2003 ................................... 736 801
Accounts receivable - other .................................. 246 390
Notes receivable ............................................. 310 647
Income and value added taxes receivable ...................... 909 726
Inventories .................................................. 5,221 4,353
Prepaid expenses ............................................. 199 492
---------- ----------
Total current assets ................................... 8,027 17,095
Property, plant and equipment, net .............................. 32,486 17,420
Deposit on plant facility ....................................... 2,044 1,929
Notes receivable, less current portion .......................... -- 320
Other assets .................................................... 218 121
---------- ----------
Total assets ........................................... $ 42,775 $ 36,885
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ........................................ $ 100 $ --
Short-term and long-term debt in default ..................... 8,529 6,931
Current portion of long-term debt ............................ 28 26
Accounts payable - trade ..................................... 4,401 2,764
Accrued liabilities .......................................... 4,621 4,963
---------- ----------
Total current liabilities .............................. 17,679 14,684
Long-term debt, less current portion ............................ 4,622 4,491
Deferred Mexican statutory profit sharing ....................... 1,443 381
Other long-term liability ....................................... 1,434 1,577
---------- ----------
Total liabilities ...................................... 25,178 21,133
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 21,044,828 in
2002 and 2003 ............................................ 210 210
Additional paid-in capital ................................... 68,671 68,671
Accumulated deficit .......................................... (51,284) (53,129)
---------- ----------
Total shareholders' equity ............................. 17,597 15,752
---------- ----------
Total liabilities and shareholders' equity ............. $ 42,775 $ 36,885
========== ==========
See accompanying notes.
3
THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
(In thousands, except for per share amounts)
Net sales ...................................... $ 7,622 $ 7,120 $ 14,762 $ 15,311
Cost of products sold .......................... 8,042 7,691 14,526 14,580
---------- ---------- ---------- ----------
Gross profit (loss) ............................ (420) (571) 236 731
Selling, general and administrative expenses ... 1,029 236 2,038 1,211
Impairment of long-lived assets ................ -- -- -- 232
---------- ---------- ---------- ----------
Loss from operations ........................... (1,449) (807) (1,802) (712)
Other income (expense):
Interest expense ............................ (97) (106) (199) (215)
Other income (expense), net ................. 71 5 191 (40)
Foreign currency translation gain (loss) .... 444 (256) 408 (552)
---------- ---------- ---------- ----------
418 (357) 400 (807)
---------- ---------- ---------- ----------
Loss before income taxes ....................... (1,031) (1,164) (1,402) (1,519)
Income tax expense ............................. 621 161 617 326
---------- ---------- ---------- ----------
Net loss ....................................... $ (1,652) $ (1,325) $ (2,019) $ (1,845)
========== ========== ========== ==========
Basic and diluted net loss per share ........... $ (0.08) $ (0.06) $ (0.10) $ (0.09)
========== ========== ========== ==========
See accompanying notes.
4
THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2003
----------- ------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net loss .................................................................. $ (2,019) $ (1,845)
Adjustments to reconcile net loss to net cash provided by (used in)
Operating activities:
Depreciation .......................................................... 830 1,334
Deferred Mexican statutory profit sharing ............................. (127) (1,062)
Impairment of long-lived assets ....................................... -- 232
Loss on disposal of property and equipment ............................ -- 168
Cash provided by (used in) operating working capital:
Receivables ....................................................... 1,365 (945)
Inventories ....................................................... 2,196 868
Prepaid expenses .................................................. 102 (293)
Accounts payable and accrued liabilities .......................... (86) (1,124)
Other long-term liability ......................................... (17) 143
---------- ----------
Net cash provided by (used in) operating activities ....................... 2,244 (2,524)
---------- ----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ................................ (1,023) (374)
Proceeds from the rescission of all contract rights relating to the
growing and processing of Italian lemons ............................... -- 12,500
Proceeds from sale of Poza Rica plant and equipment ....................... -- 1,035
Decrease in deposit on plant facility ..................................... 158 115
Decrease (increase) in other assets ....................................... (62) 97
---------- ----------
Net cash (used in) provided by investing activities ....................... (927) 13,373
---------- ----------
FINANCING ACTIVITIES
Proceeds from short-term promissory notes ................................. -- 560
Payment of short-term promissory notes .................................... -- (660)
Net reductions of short-term debt, short and long-term debt in default
and current portion of long-term debt ................................. (904) (1,600)
Change in long-term debt .................................................. (11) 131
---------- ----------
Net cash used in financing activities ..................................... (915) (1,569)
---------- ----------
Net increase in cash and cash equivalents ................................. 402 9,280
Cash and cash equivalents at beginning of period .......................... 1,135 406
---------- ----------
Cash and cash equivalents at end of period ................................ $ 1,537 $ 9,686
========== ==========
See accompanying notes.
5
THE UNIMARK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business: The UniMark Group, Inc., a Texas corporation,
("we," "us," "our" and the "company") is a citrus and tropical fruit growing and
processing company with substantially all of its operations in Mexico. The
company was organized in 1992 to combine the packaged fruit operations of a
Mexican citrus and tropical fruit processor, which commenced operations in 1974,
with UniMark Foods, Inc. ("UniMark Foods") a company that marketed and
distributed products in the United States. We conduct substantially all of our
operations through our wholly-owned operating subsidiaries. In Mexico, our
operating subsidiaries include: Industrias Citricolas de Montemorelos, S.A. de
C.V. ("ICMOSA") and Grupo Industrial Santa Engracia, S.A. de C.V. ("GISE"). In
the United States, our subsidiary is UniMark Foods.
Historically, we have, for operating and financial reporting purposes,
classified our business into two distinct business segments: packaged fruit and
juice and oil. Due to the continued unfavorable and volatile worldwide market
prices of frozen concentrate orange juice ("FCOJ") that existed over the past
several years and negative long-term prospects for the FCOJ market, we explored
various strategic alternatives for our juice and oil business segment. Upon the
divestiture of our juice and oil division's remaining assets, our business
segments for operating and financial reporting purposes will consist of two
distinct business segments: packaged fruit and agricultural operations.
Within our packaged fruit business 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 business segment processes
and packages our products at three processing plants in Mexico. Our Mexican
plants are located in major fruit growing regions. We utilize independent food
brokers to sell our foodservice and industrial products in the United States.
Sales to our Japanese customers are facilitated through Japanese trading
companies.
On August 31, 2000, we sold to Del Monte Foods Company ("Del Monte") all of
our interests in our worldwide rights to the Sunfresh(R), Fruits of Four
Seasons(R) and Flavor Fresh(TM) brands, our McAllen, Texas distribution
facility, including certain inventory associated with our retail and wholesale
club business and other property and equipment. Separately, we entered into a
5-year supply agreement with Del Monte under which we have been contracted to
produce chilled and canned citrus products for Del Monte's retail and wholesale
club markets. Under the terms of the agreement, Del Monte has agreed to purchase
minimum quantities of our citrus products at agreed upon prices for sale in the
United States. We retained the rights to our foodservice, industrial and
Japanese business. Also, we were granted by Del Monte a 5-year license for the
rights to the Sunfresh(R), Fruits of Four Seasons(R) and Flavor Fresh(TM) brands
for specific areas, including Europe, Asia, the Pacific Rim and Mexico.
In March 2003, we received formal offers from The Coca-Cola Export
Corporation, Mexico Branch ("Coca-Cola") to purchase our Victoria juice and oil
plant and rescind certain contract rights for the growing and processing of
Italian lemons for aggregate cash payments by Coca-Cola of $16.0 million. In
April 2003, we consummated the portion of the transaction with Coca-Cola
pertaining to the rescission of all contract rights and obligations for the
growing and processing of Italian lemons for an aggregate cash payment of $12.5
million, plus value added taxes. In this regard, we retained the approximately
7,100 acres of land, of which 4,800 acres are currently planted with lemon
trees. We also retained all of the irrigation systems and related agricultural
property and equipment. As part of the sale agreement we are contractually
restricted from industrially processing our lemons and are limited in marketing
our lemons solely as fresh fruit until July 30, 2007. The proceeds from the
rescission of the contract rights were offset against our deferred orchard costs
during the second quarter of 2003, which were classified in property, plant and
equipment in our condensed consolidated balance sheet at December 31, 2002.
6
In June 2003, we sold our Poza Rica juice plant to an unaffiliated third
party for $1.0 million, plus value added taxes of $120,000. Through February 15,
2004, total cash payments received amounted to $565,000 with the remaining
balance payable in four remaining installments under a promissory note. The
remaining payments, which aggregate $590,000 in 2004, are secured by personal
guarantees of the purchaser's shareholders and a related company and a pledge
agreement.
Effective November 17, 2003, we closed the sale of our Victoria juice and
oil plant to Coca-Cola, for a cash payment of $3.5 million, plus value added
taxes.
Through February 15, 2004, of the $16.0 million proceeds, net of value
added taxes, from the Coca-Cola transactions, approximately $4.1 million have
been used to pay past due accounts payable, current operating expenses of our
lemon groves, operating expenses of our juice and oil processing plants prior to
sale, severance payments to former plant and administrative employees of the
juice division, corporate expense charges, repay the Cooperative Centrale
Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland") loan of $1.5 million,
repay the Banco Nacional de Mexico, S.A., ("Banamex") loans of $558,000 and
repayment of bridge loans to our largest shareholder, M&M Nominee, LLC ("M&M
Nominee") of $368,000. The remaining cash of approximately $9.4 million is
anticipated to be used to pay operating expenses of the lemon groves, repay
Fondo de Capitalizacion e Inversion del Sector Rural ("FOCIR"), provide working
capital for our continuing operations and/or distributed to our shareholders
upon a potential liquidation of the company (See below - Decision to Explore
Strategic Alternatives.) Cash disbursements for purposes other than those
associated with GISE's juice division and agricultural operations are subject to
the 9-year term financing agreement (the "FOCIR Agreement") with FOCIR, a public
Trust of the Mexican Federal Government that invests in agricultural projects
with long-term viability and would require their prior approval for
disbursement.
Decision to Explore Strategic Alternatives: With the completion of the sale
of our Victoria juice and oil plant and related processing equipment, our juice
and oil business segment consists exclusively of our Italian lemon groves. Given
the increased costs associated with being a public company, the lack of
liquidity for our common stock, the liquidity problems at ICMOSA (see discussion
in Note 2 - "Recent Developments Impacting Liquidity and Capital Resources") and
the operational challenges facing the company, to maximize shareholder value, we
are exploring available strategic alternatives, including the sale of all or a
part of the company, its productive assets and strategic partnering
relationships for the growing, distribution and marketing of fresh lemons. No
assurances can be given that our efforts will be successful.
Interim Financial Statements: The condensed consolidated financial
statements at June 30, 2003, and for the three and six 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, 2002 filed with the Securities and Exchange Commission
("SEC"). The results of operations for the three and six months ended June 30,
2003 are not necessarily indicative of future financial results.
Year End Balance Sheet: The condensed consolidated balance sheet at
December 31, 2002 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 our common stock. Risks
relating to our financial condition include the fact that one of our Mexican
banks has recently exercised its legal rights and remedies and we may be forced
to seek protection under applicable provisions of the Mexican bankruptcy code;
we are experiencing significant liquidity problems at one of our Mexican
subsidiaries; that we may continue to sustain losses and accumulated deficits in
the future;
7
that we are dependent upon a limited number of customers, particularly Del
Monte; that we may lose our net operating loss carryforwards, which could
prevent us from offsetting future taxable income in the United States; and that
we are subject to risks associated in implementation of our business strategy.
Risks relating to our Mexican operations include the fact that we are subject to
the risk of fluctuating foreign currency exchange rates and inflation; that we
are dependent upon fruit growing conditions, access and availability of water
and the price of fresh fruit; that we are subject to governmental laws that
relate to ownership of rural lands in Mexico; that labor shortages and union
activity could affect our ability to hire and we are dependent on the Mexican
labor market; that we are subject to statutory employee profit sharing in
Mexico; that we are subject to volatile interest rates in Mexico which could
increase our capital costs; and that trade disputes between the United States,
Mexico, Japan and Europe could result in tariffs, quotas and bans on imports,
including our products, which could impair our financial condition. General
business risk include the fact that we may be subject to product liability and
product recall; that we are subject to governmental and environmental
regulations; that we are dependent upon our management team; that we have a
seasonal business; that we face strong competition; that we have a significant
shareholder that has substantial control over our company and can affect
virtually all decisions made by our shareholders and directors; and we are
subject to recent legislative actions and potential new accounting
pronouncements. Risks relating to our common stock include the delisting from
the Over-the-Counter Bulletin Board has further reduced the liquidity and
marketability of our common stock and may further depress the market price of
our common stock; that "Penny Stock" regulations may impose restrictions on
marketability of our stock; that our common stock price has been and may
continue to be highly volatile; and that 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 SEC and those factors listed
under "Risk Factors" starting on page 25 of this Form 10-Q.
Recently Adopted Accounting Pronouncements:
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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, legal obligations associated
with the retirement of long-lived assets will be recorded as a liability when
the retirement obligation arises, and the cost capitalized as part of the
related long-lived assets and amortized over the life of the assets. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The adoption of
SFAS No. 143 on January 1, 2003 did not have any impact on our condensed
consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44
and 64, Amendment of SFAS 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. We elected to adopt
SFAS No. 145 in 2002 related to a previously reported gain from the settlement
of certain debt with a Mexican bank, and reclassified the amount previously
reported as an extraordinary amount to other income.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with 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. The initial adoption of SFAS No. 146 on
January 1, 2003 did not have any impact on our condensed consolidated results of
operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 supersedes
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others," and
8
provides guidance to guarantors on the recognition and disclosure concerning
obligations under certain guarantees in interim and annual financial statements.
The initial recognition and measurement provisions of Interpretation No. 45 are
effective for guarantees issued or modified after December 31, 2002, and are to
be applied prospectively. The disclosure requirements were effective for
financial statements for interim or annual periods ending after December 15,
2002. The initial adoption of Interpretation No. 45 on January 1, 2003 did not
have any impact on our condensed consolidated results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This Statement also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in annual and
interim financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure provisions of this Statement are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. The adoption of SFAS No. 148 during the first quarter
of 2003 did not have any impact on our condensed consolidated financial position
or results of operations.
New Accounting Pronouncements:
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. We do not expect adoption of this statement to
have any significant impact on our financial accounting and reporting as a
result of implementation of SFAS No 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
required that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. Through June 30, 2003 we have not issued financial
instruments with characteristics of both liabilities and equity.
Reclassifications: Certain prior period items have been reclassified to
conform to the current period presentations in our condensed consolidated
financial statements.
NOTE 2 - LIQUIDITY AND CAPITAL RESOURCES
Financial Position:
At June 30, 2003, our cash and cash equivalents totaled $9.7 million, an
increase of $9.3 million from year-end 2002. During the first six months of
2003, our operating activities used cash of $2.5 million principally from our
net loss of $1.8 million, net changes in our working capital components
aggregating $1.4 million and a reduction in our deferred Mexican statutory
profit sharing liability of $1.1 million, offset by non-cash charges associated
with depreciation expense, impairment of long-lived assets and disposal of
property and equipment aggregating $1.7 million. Investing activities provided
$13.4 million, primarily from the proceeds from the rescission of all contract
rights and obligations for the growing and processing of Italian lemons and the
sale of our Poza Rica juice plant. Net cash used in financing activities was
$1.6 million, which was the result of net debt repayment of $1.7 million.
Working capital at June 30, 2003 amounted to $2.4 million as compared to our
December 31, 2002 deficit of $9.7 million.
9
Recent Transactions:
In April 2003, we consummated the portion of the transaction with Coca-Cola
pertaining to the rescission of all contract rights and obligations for the
growing and processing of Italian lemons for an aggregate cash payment of $12.5
million, plus value added taxes. In June 2003, we sold our Poza Rica juice plant
to an unaffiliated third party for $1.0 million, plus value added taxes of
$120,000. Through February 15, 2004, total cash payments received amount to
$565,000 with the balance payable in four remaining installments under a
promissory note, which aggregate $590,000 in 2004. Effective November 17, 2003,
we closed the sale of our Victoria juice and oil plant to Coca-Cola, for a cash
payment of $3.5 million, plus value added taxes.
Through February 15, 2004, of the $16.0 million proceeds, net of value
added taxes, from the Coca-Cola transactions, approximately $4.1 million have
been used to pay past due accounts payable, current operating expenses of our
lemon groves, operating expenses of our juice and oil processing plants prior to
sale, severance payments to former plant and administrative employees of the
juice division, corporate expense charges, repay the Rabobank Nederland loan of
$1.5 million, repay the Banamex loans of $558,000 and repayment of bridge loans
to our largest shareholder, M&M Nominee of $368,000. The remaining cash of
approximately $9.4 million is anticipated to be used to pay operating expenses
of the lemon groves, repay FOCIR, provide working capital for our continuing
operations and/or distributed to our shareholders upon a potential liquidation
of the company (See Note 1 - Description of Business -Decision to Explore
Strategic Alternatives.) Cash disbursements for purposes other than those
associated with GISE's juice division and agricultural operations are subject to
the FOCIR Agreement and would require their prior approval for disbursement.
Substantially all the proceeds are invested in short-term, interest bearing
investment grade securities. As of June 30, 2003, principal of $4.5 million and
accrued accretion of $1.6 million was owed to FOCIR.
Recent Developments Impacting Liquidity and Capital Resources:
We are experiencing significant operational and financial challenges in the
near term at our ICMOSA subsidiary as a result of its working capital deficits.
Our working capital deficits at ICMOSA are approximately $4.0 million and we
have been recently served with a lawsuit by one of its banks (see discussion in
Note 3 below.) In addition, we are actively evaluating ICMOSA's business
strategy and operational model. The complexity of this evaluation is further
aggravated by the significant immediate liquidity issues that must be addressed
in parallel with any contemplated strategic and operational changes. In order
for ICMOSA to emerge from its current liquidity and operational difficulties
with a profitable business model, it must achieve success on a number of
critical fronts, including price increases from its largest customer and a
favorable conclusion to settlement of its bank debt. While we are focused on
achieving these strategic and operational objectives, there can be no assurance
that ICMOSA will in fact achieve such success.
Although our current cash balances as of February 15, 2004 at our GISE
subsidiary are approximately $9.4 million, this cash is restricted by the FOCIR
Agreement and would require FOCIR's prior approval before such cash could be
used to fund working capital deficits at our ICMOSA subsidiary or our general
corporate overhead. As an alternative, we could prepay the outstanding FOCIR
principal and accreted interest balances, which approximate $6.1 million at June
30, 2003, and have available approximately $3.3 million in cash. This cash, at
our discretion, could then be used to fund working capital deficits and
corporate overhead.
Given the increased costs associated with being a public company, the lack
of liquidity for our common stock, the liquidity problems at ICMOSA and the
operational challenges facing the company, to maximize shareholder value, we are
exploring available strategic alternatives, including the sale of all or a part
of the company, its productive assets and strategic partnering relationships for
the growing, distribution and marketing of fresh lemons. No assurances can be
given that our efforts will be successful.
10
NOTE 3 - SHORT AND LONG-TERM DEBT
Short-term debt:
As of December 31, 2002, we owed $1.5 million to Rabobank Nederland under a
loan agreement that was due and payable on January 2, 2002. This loan, which was
in default at December 31, 2002, was repaid in May 2003.
As of December 31, 2002 and June 30, 2003, 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
during 2002. These notes have not been renewed by Bancomext and are due and
payable. As of June 30, 2003, accrued interest on these notes of approximately
$213,000 is still outstanding.
On February 12, 2004, an action styled Banco Nacional de Comercio Exterior,
S.N.C. Vs. Industrias Citricolas de Montemorelos, S.A. de C.V. and Rafael
Vaquero Bazan was filed in the Federal District (Mexico City), Mexico. The
action seeks recovery of $ 3.5 million in bank debt, past due interest, interest
accruing during the proceedings and expenses and fees resulting from the action.
In addition, in the suit Bancomext seeks to foreclose on ICMOSA's accounts
receivable and seize its bank accounts. Should Bancomext be successful in
obtaining the remedies sought, this lawsuit would have a material adverse effect
on our consolidated financial condition and prospects and would significantly
impact ICMOSA's ability to continue as a going concern. In such event, ICMOSA
may be forced to seek protection under the applicable provisions of the Mexico
bankruptcy code. See Item 2, "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Legal Proceedings and Loss Contingencies"
and "Risk Factor - Risks Relating to Our Financial Condition - One of our
Mexican banks has exercised its legal rights and remedies and we may be forced
to seek protection under applicable provisions of the Mexican bankruptcy code."
The Rabobank Nederland and Bancomext outstanding balances are included
under the caption "Short and long-term debt in default" in our condensed
consolidated balance sheet at December 31, 2002. At June 30, 2003, the Bancomext
debt is included in this caption.
Long-term debt:
During 2002, ICMOSA entered into a restructured loan agreement with Grupo
Financiero Banorte ("Banorte") that amortized the outstanding principal balance
over a period of five and one-half years. The loan repayment schedule requires
quarterly payments of principal and interest (Libor plus 3.50%) through December
31, 2007, with $300,000 due over the next twelve months. As of December 31, 2002
and June 30, 2003, $3.0 million and $2.9 million, respectively, were outstanding
under the restructured loan agreement. The restructured loan agreement is
secured by certain assets of ICMOSA, corporate guarantees by the company and
certain covenants that, amongst others, restrict future borrowings and contain a
cross-default provision. As a result of the default of the Bancomext loan, we
are currently in default of the Banorte loan agreement and the entire loan
balance has been included under the caption "Short and long-term debt in
default" in our condensed consolidated balance sheets at December 31, 2002 and
June 30, 2003. We are currently working on loan restructuring options with
Banorte. To date, they have not pursued their legal remedies available to them
under the loan agreement.
As of June 30, 2003, notes payable to a Mexican bank by GISE, in the
amounts of $450,000 and $96,000, were in default of their scheduled payments and
have been included under the caption "Short and long-term debt in default" in
our condensed consolidated balance sheets at December 31, 2002 and June 30,
2003. These loans were repaid in July 2003.
On February 21, 2000, we entered into a $48.0 million Mexican pesos (U.S.
$5.1 million at the exchange rate in effect at that time), 9-year term financing
agreement with FOCIR. Under the terms of the FOCIR Agreement, FOCIR agreed to
provide up to $48.0 million Mexican pesos to fund additional lemon
11
grove costs, which included 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 a mandatory redemption provision.
As of December 31, 2002 and June 30, 2003, advances under the FOCIR Agreement
were $4.9 million and $4.5 million ($47,033,971 Mexican pesos), respectively.
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, by factors of 1.126 for 2002, and 1.168 for 2003, and
then multiplying by the FOCIR equity interest percentage. The calculation that
results in the greater amount will be the annual accretion amount. Accretion
accumulates annually over the 9-year period of the FOCIR Agreement and is paid
only upon expiration or early termination of the FOCIR Agreement. As of December
31, 2002 and June 30, 2003, accreted interest under the FOCIR Agreement amounted
to $1.4 million and $1.6 million, respectively, which is classified as a
long-term liability in our condensed consolidated balance sheets as of December
31, 2002 and June 30, 2003. As of June 30, 2003, the weighted average accretion
rate for all advances under the FOCIR Agreement was approximately 10.6%. 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 debt, which includes transferring to the trust GISE
common shares that represent 33.4% of GISE's outstanding shares and the
governance of GISE. As of December 31, 2002 and June 30, 2003, we were not in
compliance with certain of the FOCIR Agreement covenants, and accordingly, we
were in default of the agreement. We have received a waiver of these defaults
from FOCIR through June 2004.
Certain of our Mexico loan contracts establish restrictions and obligations
with respect to the application of funds and require maintenance of insurance on
the assets and timely presentation of financial information. In addition, after
considering the repayment of the Rabobank Nederland and Banamex loans during
2003, approximately $7.0 million of net property, plant and equipment and
certain receivables are pledged as collateral under short and long-term debt
agreements.
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 become our President and Chief
Executive Officer at the annual rate of $150,000. Mr. Castillo was also a
Director of Promecap, S.C., a financial advisory services firm to Mexico
Strategic Investment Fund Ltd., which owns 80% of M&M Nominee. M&M Nominee is
our largest shareholder. On January 31, 2003, Mr. Castillo resigned his officer
positions with our company, and on May 30, 2003, resigned as a Director.
On January 10, 2003, January 24, 2003, February 11, 2003 and March 6, 2003,
respectively, we received $125,000, $200,000, $110,000 and $125,000 under the
terms of short-term promissory notes, interest at 10%, from our largest
shareholder. These notes, including an additional note under which we received
$100,000 on December 18, 2002, were repaid in April 2003, including accrued
interest of approximately $16,000.
NOTE 5 - LEMON GROVES
In March 2003, we received formal offers from Coca-Cola to purchase our
Victoria juice and oil plant and rescind certain contract rights for the growing
and processing of Italian lemons for aggregate cash payments by Coca-Cola of
$16.0 million. In April 2003, we consummated the portion of the transaction with
Coca-Cola pertaining to the rescission of all contract rights and obligations
for the growing and processing of Italian lemons for an aggregate cash payment
of $12.5 million, plus value added taxes. In this regard, we retained the
approximately 7,100 acres of land, of which 4,800 acres are currently planted
with lemon trees. We also retained all of the irrigation systems and related
agricultural property and equipment. As part of the sale agreement we are
contractually restricted from industrially processing our lemons and
12
are limited to marketing our lemons solely as fresh fruit until July 30, 2007.
The proceeds from the rescission of the contract rights were offset against our
deferred orchard costs during the second quarter of 2003, which were classified
in property, plant and equipment in our condensed consolidated balance sheet at
December 31, 2002.
As of June 30, 2003, our lemon groves consisted of 2,871 hectares
(approximately 7,100 acres). This land, which is situated in the northern states
of Tamaulipas and San Luis Potosi, consists of two separate groves with
different maturity profiles. These groves were initially planted with
approximately 800,000 lemon trees. Pursuant to the terms of the now cancelled
long-term supply contract, Coca-Cola provided us, free of charge, 765,000 lemon
tree seedlings that were used for planting approximately 6,023 acres. We also
operate our own nursery where young seedlings are prepared for planting, which
provided us with the remaining 35,000 trees, as well as acting as a source of
replanting for damaged trees. In connection with the transaction with Coca-Cola
pertaining to the rescission of all contract rights and obligations for the
growing and processing of Italian lemons for an aggregate cash payment of $12.5
million, we elected to cease active cultivation of recently planted lemon tree
seedlings and used some for replanting of damaged trees. As such, we presently
have approximately 560,000 lemon trees under active cultivation on approximately
4,800 acres. As part of the sale agreement we are contractually restricted from
industrially processing our lemons and are limited to marketing our lemons
solely as fresh fruit until July 30, 2007.
All costs incurred to plant and maintain our lemon orchards were
capitalized and deferred as of March 31, 2003. As a result of the rescission of
all contract rights and obligation for the growing of Italian lemons in April
2003, these deferred and capitalized costs were reduced by the $12.5 million
sale proceeds, and all remaining costs are being amortized over their estimated
useful lives starting in the second quarter of 2003. In prior periods, it was
determined that these deferred costs would be amortized based on the projected
year's yield to total estimated yield over the life of the rescinded supply
contract.
As of June 30, 2003, our lemon groves consisted of the following:
PROPERTY
NAME LOCATION HECTARES ACREAGE CROP INTEREST
-------- -------- ------- ---- --------
Gomez Farias, (A)
Tamaulipas,
El Cielo Grove ....... Mexico 725 1,791 Italian lemons Owned
Cd. Valles,
San Luis Potosi,
Flor de Maria Grove... Mexico 2,146 5,301 Italian lemons Leased
----- -----
Total 2,871 7,092
===== =====
(A) One hectare equals approximately 2.47 acres.
Included in our lemon groves is a 30-year lease associated with 2,100
hectares (approximately 5,200 acres) of rural land used for the growing of
Italian lemons, comprising substantially all the land of our Flor de Maria
grove. This lease, which was prepaid at the land purchase price of $1.9 million,
was entered into in 1999 with a group of local Mexican land owners, which
acquired the land under the "Ejido" system of land ownership. We are currently
in the process of negotiating a transition of the lease into land ownership. No
assurances can be given that such efforts will be successful. In connection with
transfer of this land, we have received a request from the "Ejido" for the
payment of an additional $1.2 million ($12.6 million Mexican pesos). The company
has been advised by Mexican counsel that it has no legal obligation to make such
payment. If we are unsuccessful in our efforts to transition the lease, such
event could adversely affect the potential strategic alternative to divest our
lemon groves.
13
NOTE 6 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss
per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NUMERATOR
Net loss .............................................. $ (1,652) $ (1,325) $ (2,019) $ (1,845)
========== ========== ========== ==========
DENOMINATOR
Denominator for basic net loss per share - weighted
average shares outstanding .......................... 21,045 21,045 21,045 21,045
========== ========== ========== ==========
Basic and diluted net loss per share .................. $ (0.08) $ (0.06) $ (0.10) $ (0.09)
========== ========== ========== ==========
We had stock options outstanding of 132,500 and 95,000 at June 30, 2002 and
June 30, 2003, respectively, that were not included in their respective periods
per share calculations because their effect would have been anti-dilutive.
NOTE 7 - INVENTORIES
Inventories consist of the following:
DECEMBER 31, JUNE 30,
2002 2003
---- ----
(IN THOUSANDS)
Finished Goods - Cut fruit.................... $ 2,939 $ 2,146
Raw materials and supplies.................... 1,825 1,669
Advances to suppliers......................... 457 538
------- --------
Total $ 5,221 $ 4,353
======= ========
NOTE 8 - SEGMENT INFORMATION
For operating and financial reporting purposes, we have historically
classified our business into two fundamental areas: packaged fruit and juice and
oil. Our packaged fruit divisions consists of three operating plants that
hand-process and sell tropical and citrus fruit products directly to our largest
customer, Del Monte, to foodservice providers and distributors and to industrial
food and beverage processors. This division also operated our pineapple
orchards. Our juice and oil business segment has consisted of our juice
division, which produced FCOJ and other citrus juices, which were sold directly
to juice bottlers and the extraction of essential oils from citrus fruits, which
were sold directly to commercial users, and our agricultural operation, which is
developing our Italian lemon orchards. With the completion of the sale of our
Victoria juice and oil plant and related processing equipment, our juice and oil
business segment consists exclusively of our Italian lemon groves.
We evaluate our segment performance and allocate resources based on profit
or loss from operations before income taxes and do not allocate corporate
general and administrative expenses and amortization of intangibles to our
segments. Inter-segment sales and transfers are insignificant. Our reportable
segments are each managed separately because they process and distribute
distinct products with different production processes. Information pertaining to
the operations of our two business segments is set forth below.
14
PACKAGED JUICE
FRUIT AND OIL TOTAL
-------- ------- -----
THREE MONTHS ENDED JUNE 30, 2002
Net sales to external customers ... $ 7,365 $ 257 $ 7,622
Segment loss ...................... (589) (172) (761)
THREE MONTHS ENDED JUNE 30, 2003
Net sales to external customers ... $ 6,923 $ 197 $ 7,120
Segment loss ...................... (420) (425) (845)
SIX MONTHS ENDED JUNE 30, 2002
Net sales to external customers ... $ 14,147 $ 615 $ 14,762
Segment loss ...................... (286) (586) (872)
SIX MONTHS ENDED JUNE 30, 2003
Net sales to external customers ... $ 14,533 $ 778 $ 15,311
Segment loss ...................... (62) (765) (827)
Segment assets .................... 30,702 19,992 50,694
The following are reconciliations of reportable segment profit or loss to
our consolidated totals.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
2002 2003 2002 2003
---- ---- ---- ----
Total loss for reportable segments........ $ (761) $ (845) $ (872) $ (827)
Unallocated corporate expenses
- General and administrative........... (270) (319) (530) (692)
--------- -------- -------- ---------
Loss before income taxes.................. $ (1,031) $ (1,164) $ (1,402) $ (1,519)
========= ======== ======== =========
The following are reconciliations of reportable segment assets to our
consolidated totals.
DECEMBER 31, 2002 JUNE 30, 2003
----------------- -------------
ASSETS
Total assets for reportable segments.................... $ 58,683 $ 50,694
Other assets........................................... 59,165 59,165
Elimination of intercompany profits in inventory....... (48) (48)
Elimination of intercompany receivables................ (24,807) (25,804)
Allocation of acquisition costs of subsidiaries
recorded in consolidation............................ (44,585) (44,585)
Reclassification of deferred tax assets recorded in
consolidation......................................... (5,633) (2,537)
-------- --------
Total consolidated assets................... $ 42,775 $ 36,885
======== ========
NOTE 9 - COMMITMENTS AND CONTINGENCIES
On February 12, 2004, an action styled Banco Nacional de Comercio Exterior,
S.N.C. Vs. Industrias Citricolas de Montemorelos, S.A. de C.V. and Rafael
Vaquero Bazan was filed in the Federal District (Mexico City), Mexico. The
action seeks recovery of $ 3.5 million in bank debt, past due interest, interest
accruing during the proceedings and expenses and fees resulting from the action.
In addition, in the suit Bancomext seeks to foreclose on ICMOSA's accounts
receivable and seize its bank accounts. Should
15
Bancomext be successful in obtaining the remedies sought, this lawsuit would
have a material adverse effect on our consolidated financial condition and
prospects and would significantly impact ICMOSA's ability to continue as a going
concern. In such event, ICMOSA may be forced to seek protection under the
applicable provisions of the Mexico bankruptcy code.
Effective January 1, 1995, we entered into a long-term 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, our company was obligated to pay IHMSA an
operating fee sufficient to cover the interest payments on IHMSA's $3.4 million
of outstanding debt with a Mexican bank. During the term of the operating
agreement, we have the option to buy the IHMSA facility.
During the third quarter of 2001, we successfully negotiated revisions to
the operating agreement with IHMSA's management, extending the agreement's
expiration date from January 1, 2002 to January 1, 2021, and reducing the
purchase option price from $4.5 million to $3.5 million. The revised purchase
option also includes the assumption of approximately $1.0 million of IHMSA's
debt ($11.0 million pesos). During 1997, we elected to advance $1.7 million to
IHMSA to retire certain of its then outstanding debt and during the fourth
quarter of 2001, we advanced IHMSA an additional $636,000, $300,000 of which was
used to retire its $3.4 million of bank debt, both of which will be applied to
the purchase price.
All amounts previously paid to IHMSA, along with the assumption of the $1.0
million of debt comprise the final purchase price. At June 30, 2003, all amounts
advanced to IHMSA of $1.9 million are included under the caption "Deposit on
plant facility" in our condensed consolidated balance sheet at June 30, 2003.
In December 2001, we exercised our purchase option and expected to finalize
formal closing documents and take title to the facility during 2002. The actual
closing of the purchase transaction is subject to approval of the debt
assumption by the Mexican lending institution and ICMOSA's current banks. Until
the closing takes place, ICMOSA will operate the IHMSA facility under the
long-term operating agreement.
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 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 would not
have a material adverse effect on our consolidated financial condition.
As a result of the decline in the worldwide market prices of FCOJ, during
2000 we decided to discontinue operating a juice processing facility in Mexico
that had been leased from Frutalamo S.A. de C.V. ("Frutalamo") under the terms
of deposit, operating and stock purchase agreements entered into in December
1996. As we were unsuccessful in negotiating a settlement with Frutalamo to
terminate such agreements, we wrote off a previously recorded non-refundable
deposit of $1.5 million and recorded a cancellation fee of $1.0 million, both of
which were non-cash charges.
Subsequent to December 31, 2000, Frutalamo and certain of its shareholders
(collectively, the "Frutalamo Plaintiffs") initiated legal proceedings in Mexico
naming as defendants certain of our Mexican subsidiaries, certain current and
former employees, officers and directors of our company and a former contractor.
In September 2002, we settled these claims for $125,000 in cash. Recently, we
learned that, notwithstanding such settlement, certain claims asserted against
us by the Frutalamo Plaintiffs, prior to September 2002, continue to be under
review before the Mexican courts. Management denies any
16
wrongdoing in this matter and intends to vigorously contest these claims. The
resolution of this matter is not expected to have a material adverse effect on
our condensed consolidated financial condition or results of operations.
On October 10, 2003, an action styled James R. Scott, Plaintiff Vs. UniMark
Group, Inc, Defendant," was filed in the County Court, Denton, Texas, Cause
Number TI-2003-01345. The compliant seeks recovery of approximately $90,000 of
unpaid rent and injunctive relief.
In addition to the actions described above, from time to time our company
is engaged in various other legal proceedings in the normal course of business.
The ultimate liability, if any, for the aggregate amounts claimed cannot be
determined at this time. However, our company, based on the consultation with
legal counsel, is of the opinion that there are no matters pending or
threatening, except for Bancomext, which could have a material adverse effect on
our consolidated financial position or results of operations.
NOTE 10 - SUBSEQUENT EVENT
Effective November 17, 2003, we closed the sale of our Victoria juice and
oil plant to Coca-Cola, for a cash payment of $3.5 million, plus value added
taxes.
With the completion of the sale of our Victoria juice and oil plant and
related processing equipment, our juice and oil business segment consists
exclusively of our Italian lemon groves. Given the increased costs associated
with being a public company, the lack of liquidity for our common stock, the
liquidity problems at ICMOSA (see discussions in Note 2 - "Recent Developments
Impacting Liquidity and Capital Resources") and the operational challenges
facing the company, to maximize shareholder value, we are exploring available
strategic alternatives, including the sale of all or a part of the company, its
productive assets and strategic partnering relationships for the growing,
distribution and marketing of fresh lemons. No assurances can be given that our
efforts will be successful.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
Due to the continued unfavorable and volatile worldwide market prices of
FCOJ that existed over the past several years and negative long-term prospects
for the FCOJ market, we explored various strategic alternatives for our juice
and oil business segment.
In March 2003, we received formal offers from Coca-Cola to purchase our
Victoria juice and oil plant and rescind certain contract rights for the growing
and processing of Italian lemons for aggregate cash payments by Coca-Cola of
$16.0 million. In April 2003, we consummated the portion of the transaction with
Coca-Cola pertaining to the rescission of all contract rights and obligations
for the growing and processing of Italian lemons for an aggregate cash payment
of $12.5 million, plus value added taxes. In this regard, we retained the
approximately 7,100 acres of land, of which 4,800 acres are currently planted
with lemon trees. We also retained all of the irrigation systems and related
agricultural property and equipment. As part of the sale agreement we are
contractually restricted from industrially processing our lemons and are limited
in marketing our lemons solely as fresh fruit until July 30, 2007. The proceeds
from the rescission of the contract rights were offset against our deferred
orchard costs during the second quarter of 2003, which were classified in
property plant and equipment in our condensed consolidated balance sheet at
December 31, 2002.
In June 2003, we sold our Poza Rica juice plant to an unaffiliated third
party for $1.0 million, plus value added taxes of $120,000. Through February 15,
2004, total cash payments received amounted to $565,000 with the balance payable
in four remaining installments under a promissory note. The remaining payments,
which aggregate $590,000 in 2004, are secured by personal guarantees of the
purchaser's shareholders and a related company and a pledge agreement.
17
Effective November 17, 2003, we closed the sale of our Victoria juice and
oil plant to Coca-Cola, for a cash payment of $3.5 million, plus value added
taxes.
With the completion of the sale of our Victoria juice and oil plant and
related processing equipment, our juice and oil business segment consists
exclusively of our Italian lemon groves. Given the increased costs associated
with being a public company, the lack of liquidity for our common stock, the
liquidity problems at ICMOSA (see discussions in Note 2 - "Recent Developments
Impacting Liquidity and Capital Resources") and the operational challenges
facing the company, to maximize shareholder value, we are exploring available
strategic alternatives, including the sale of all or a part of the company, its
productive assets and strategic partnering relationships for the growing,
distribution and marketing of fresh lemons. No assurances can be given that our
efforts will be successful.
On February 12, 2004, an action styled Banco Nacional de Comercio Exterior,
S.N.C. Vs. Industrias Citricolas de Montemorelos, S.A. de C.V. and Rafael
Vaquero Bazan was filed in the Federal District (Mexico City), Mexico. The
action seeks recovery of $ 3.5 million in bank debt, past due interest, interest
accruing during the proceedings and expenses and fees resulting from the action.
In addition, in the suit Bancomext seeks to foreclose on ICMOSA's accounts
receivable and seize its bank accounts. Should Bancomext be successful in
obtaining the remedies sought, this lawsuit would have a material adverse effect
on our consolidated financial condition and prospects and would significantly
impact ICMOSA's ability to continue as a going concern. In such event, ICMOSA
may be forced to seek protection under the applicable provisions of the Mexico
bankruptcy code.
CONVERSION TO U.S. GAAP
We conduct substantially all of our operations through our wholly-owned
Mexican subsidiaries. ICMOSA is a Mexican corporation whose principal activities
consist of operating citrus processing plants and various citrus groves
throughout Mexico. GISE is a Mexican corporation whose principal activities were
the operation of two citrus juice and oil processing plants, as well as
currently managing our lemon groves. 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 the company and its
subsidiaries is the U.S. dollar.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with
accounting principals generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported revenues and expenses
during the reporting periods. We base our estimates and judgments on historical
experience and various other factors that we believe to be reasonable under the
circumstances, which results in forming the basis for making judgments about the
carrying values of our assets and liabilities. Actual results may differ from
these estimates under different assumptions or conditions.
The critical accounting policies described herein are those that are most
important to the depiction of our condensed consolidated financial condition and
results of operations and their application requires management's most
subjective judgment in making estimates about the effect of matters that are
inherently uncertain. We believe that the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our condensed consolidated financial statements.
18
ALLOWANCE FOR DOUBTFUL ACCOUNTS
In the normal course of business, we extend credit to our customers on a
short-term basis. Although credit risks associated with our customers is
considered minimal, we routinely review our accounts receivable balances and
make provisions for probable doubtful accounts. In circumstances where
management is aware of a specific customer's inability to meet their financial
obligations to us, a specific reserve is provided to reduce the receivable to
the amount expected to be collected. Historically we do not provide a general
reserve.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS No. 144"), which requires our
management to review for impairment its long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. When such an event occurs, management determines whether there
has been impairment by comparing the anticipated undiscounted future net cash
flows to the related asset's carrying value. If an asset is considered impaired,
the asset is written down to fair value, which is determined based either on
discounted cash flows or appraised value, depending on the nature of the asset.
Prior to January 1, 2002, management determined whether any long-lived assets
had been impaired based on the criteria established in Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be disposed of." The carrying amount
of a long-lived asset was considered impaired when the estimated undiscounted
cash flow from each asset was less than its carrying amount. In that event, we
recorded a loss equal to the amount by which the carrying amount exceeds the
fair value of the long-lived asset. Changes in our projected cash flows as well
as differences in the discount rate used in the calculation could have a
material effect on the condensed consolidated financial statements.
INCOME TAXES
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted rates. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized as income in the period
that includes the enactment date. In assessing the realization of deferred
income tax assets, management considers whether it is more likely than not that
some portion or all of the deferred income tax assets will be realized. The
ultimate realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Due to our historical operating results,
management is unable to conclude on a more likely than not basis that all
deferred income tax assets generated through operating losses through June 30,
2003 will be realized. Accordingly, we have recognized a valuation allowance
equal to the difference between deferred income tax assets and the deferred
income tax liabilities.
LEGAL PROCEEDINGS AND LOSS CONTINGENCIES
Our company is involved in routine legal and administrative matters that
arise from the normal conduct of business. Some of these matters are not within
our control and are difficult to predict and often are resolved over long
periods of time. We maintain insurance, including directors' and officers' and
corporate liability insurance, with third parties to mitigate any loss that is
related to certain claims. Loss contingencies are recorded as liabilities in the
financial statements when it is determined that we have incurred a loss that is
probable and the amount of the loss is reasonably estimable, in accordance with
SFAS No. 5, "Accounting for Contingencies."
In addition, on February 12, 2004, an action styled Banco Nacional de
Comercio Exterior, S.N.C. Vs. Industrias Citricolas de Montemorelos, S.A. de
C.V. and Rafael Vaquero Bazan was filed in the Federal District (Mexico City),
Mexico. The action seeks recovery of $ 3.5 million in bank debt, past due
interest,
19
interest accruing during the proceedings and expenses and fees resulting from
the action. In addition, in the suit Bancomext seeks to foreclose on ICMOSA's
accounts receivables and seize its bank accounts. Should Bancomext be
successful, this lawsuit would have a material adverse effect on our
consolidated financial condition and prospects and would significantly impact
ICMOSA's ability to continue as a going concern. In such event, ICMOSA may be
forced to seek protection under the applicable provisions of the Mexico
bankruptcy code. See Item 2, "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Legal Proceedings and Loss Contingencies"
and "Risk Factor - Risks Relating to Our Financial Condition - One of our
Mexican banks has exercised its legal rights and remedies and we may be forced
to seek protection under applicable provisions of the Mexican bankruptcy code."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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 2003 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 SEC and those factors listed under "Risk Factors"
starting on page 25 of this Form 10-Q.
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
2002 2003 2002 2003
---- ---- ---- ----
Net sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of products sold ............................ 105.5 108.0 98.4 95.2
----- ----- ----- -----
Gross profit (loss) .............................. (5.5) (8.0) 1.6 4.8
Selling, general and administrative expenses ..... 13.5 3.3 13.8 7.9
Impairment of long-lived assets .................. -- -- -- 1.5
----- ----- ----- -----
Loss from operations ............................. (19.0) (11.3) (12.2) (4.6)
Other income (expense):
Interest expense ............................. (1.2) (1.5) (1.4) (1.4)
Other income (expense), net .................. 0.9 0.1 1.3 (0.3)
Foreign currency translation gain (loss) ..... 5.8 (3.6) 2.8 (3.6)
----- ----- ----- -----
5.5 (5.0) 2.7 (5.3)
----- ----- ----- -----
Loss before income taxes ......................... (13.5) (16.3) (9.5) (9.9)
Income tax expense ............................... 8.1 2.3 4.2 2.1
----- ----- ----- -----
Net loss ......................................... (21.6)% (18.6)% (13.7)% (12.0)%
===== ===== ===== =====
Three Months Ended June 30, 2003 and 2002
Net sales consist of packaged fruit and citrus juice and oil. Packaged
fruit sales decreased $500,000 from $7.4 million in 2002 to $6.9 million in
2003, or 6.8%. This sales decrease was primarily caused by increases in our
retail sales of $800,000 from $4.9 million in 2002 to $5.7 million in 2003, or
14.3%, a decrease in our Japan sales of $800,000 from $1.4 million in 2002 to
$600,000 in 2003, or 57.1% and a decrease in our foodservice and industrial
sales of $300,000 from $800,000 in 2002 to $500,000, or 37.5%.
20
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 sold to Del Monte
and the recent introduction of their new 8 ounce cup of fresh red grapefruit,
which is sold under their Fruit Naturals(R) trade name. The decrease in our
Japan sales during the second quarter of 2003 was caused by reduced orders and
timing differences in shipments compared to the prior year quarter and reduced
demand for our citrus products. Foodservice and industrial sales were impacted
by our focus on higher margin customers, which resulted in lower sales volume.
Citrus juice and oil sales decreased $60,000 from $257,000 in 2002 to
$197,000 in 2003, or 23.3%. Sales in both periods were primarily from the
processing of Italian lemons for Coca-Cola under the now rescinded processing
agreement. 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, our board of directors decided to
pursue strategic alternatives available for our juice division and suspended our
juice division's FCOJ operations. In April 2003, we consummated a transaction
with Coca-Cola pertaining to the rescission of all contract rights and
obligations for the growing and processing of Italian lemons. In June 2003, we
sold our Poza Rica juice plant to an unaffiliated third party and in November
2003, we closed the sale of our Victoria juice and oil plant to Coca-Cola. As a
result of these sales, our juice and oil business segment consists exclusively
of our Italian lemon groves.
As a result of the foregoing, net sales decreased from $7.6 million in 2002
to $7.1 million in 2003, or 6.7% due to decreased sales in both our packaged
fruit and juice and oil segments.
Gross profit, as a percentage of net sales, in our packaged fruit segment,
improved from a loss of 3.5% in 2002 to a positive margin of 0.3% in 2003. The
2002 period was negatively impacted by an inventory write-down of $520,000
associated with our pineapple growing operations, which reduced gross margin by
7.1%, as a result of competitive conditions.
Citrus juice and oil gross profit decreased from a loss of 62.5% in 2002 to
a loss of 300.5% in 2003. This significant change in gross margin was due to
unabsorbed plant costs related to our decision in 2002 to discontinue our juice
divisions FCOJ operations and the expensing of all lemon grove operating costs
commencing in our second quarter of 2003. Prior to April 1, 2003, all expenses
relating to the development of our lemon groves were capitalized as deferred
orchard costs. Effective April 7, 2003, with the Coca-Cola transaction discussed
above, we discontinued the deferral of these costs and are now expensing these
costs as incurred. For the 2003 period these costs were approximately $420,000.
Gross profit overall increased as a percent of net sales from a loss of
5.5% in 2002 to a loss of 8.0% in 2003 due to the factors discussed above.
Selling, general and administrative expenses ("SG&A") decreased from $1.0
million in 2002 to $236,000 in 2003, or 76.4%. This reduction consisted
primarily of a gain of $896,000 recognized from the reversal of previously
recorded Mexican deferred profit sharing expenses, as required under generally
accepted accounting principles. This reversal was caused primarily by the
calculation method of determining the deferred profit sharing liability, which
allowed the $12.5 million proceeds from the Coca-Cola transaction to be offset
against prior net operating losses at GISE.
Interest expense increased slightly from $97,000 in 2002 to $106,000 in
2003, primarily resulting from the change in the capitalization of interest
costs associated with our Lemon groves, to expensing these costs in the current
period, offset by reduced interest costs associated with the repayment of the
Rabobank Nederland loan in May 2003.
Other income decreased from net income of $71,000 in 2002 to net income of
$5,000 in 2003. The 2002 amount consisted primarily of short-term rental income
from a lease associated with one of our juice division plants which was
nonrecurring in the 2003 period.
21
Foreign currency translation gain (loss) increased from a net gain of
$444,000 in 2002 to a net loss of $256,000 in 2003 and result primarily from the
re-measurement of our foreign subsidiaries financial statements to U.S. dollars.
This increased loss is the result of a stronger Mexican peso in the current
period as compared to the U.S. dollar.
Income tax expense decreased from $621,000 in 2002 to $161,000 in 2003. The
2002 amount included $150,000 of asset tax expense and $471,000 of deferred
taxes which increased our valuation allowances associated with financial and tax
reporting differences in Mexico, which is required in accordance with U.S. GAAP.
The 2003 period income tax expense consisted entirely of asset tax expense.
Asset tax is an alternative minimum tax in Mexico and is calculated at 1.8% of
assets less certain liabilities.
As a result of the foregoing, we reported net losses of $1.7 million in
2002 and $1.3 million in 2003.
Six Months Ended June 30, 2003 and 2002
Net sales consist of packaged fruit and citrus juice and oil. Packaged
fruit sales increased by $400,000 from $14.1 million in 2002 to $14.5 million in
2003, or 2.8%. This slight sales increase was caused by an increase in our
retail sales of $2.6 million from $8.7 million in 2002 to $11.3 million in 2003,
or 29.9%, but was offset by a reduction in our Japan sales of $2.1 million from
$3.9 million in 2002 to $1.8 million in 2003, or 53.8%. Retail sales consist
primarily of sales to Del Monte, which includes both retail and wholesale club
products. This retail sales increase was attributable to the timing of our
production schedule for our citrus products sold to Del Monte and the
introduction in early 2003 of their new 8 ounce cup of fresh red grapefruit,
which is sold under their Fruit Naturals(R) trade name. The decrease in our
Japan sales during the 2003 period was caused by timing differences in shipments
compared to the prior year period and reduced demand for our citrus products.
Citrus juice and oil sales increased slightly from $615,000 in 2002 to
$778,000 in 2003. Sales in both periods were primarily from the processing of
Italian lemons for Coca-Cola under the now rescinded processing agreement. 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, our board of directors decided to pursue strategic
alternatives available for our juice division and suspended our juice division's
FCOJ operations. In April 2003, we consummated a transaction with Coca-Cola
pertaining to the rescission of all contract rights and obligations for the
growing and processing of Italian lemons. In June 2003, we sold our Poza Rica
juice plant to an unaffiliated third party and in November 2003, we closed the
sale of our Victoria juice and oil plant to Coca-Cola. As a result of these
sales, our juice and oil business segment consists exclusively of our Italian
lemon groves.
As a result of the foregoing, net sales increased from $14.8 million in
2002 to $15.3 million in 2003, or 3.4% due to slight sales increases in both our
packaged fruit and juice and oil segments.
Gross profit, as a percentage of net sales, in our packaged fruit segment
improved from 4.1% in 2002 to 8.4% in 2003. The 2002 period was negatively
impacted by an inventory write-down of $520,000 associated with our pineapple
growing operations, which reduced gross margin by 3.7%, as a result of
competitive conditions.
Citrus juice and oil gross profit decreased from a loss of 54.6% in 2002 to
a loss of 103.9% in 2003. This significant change in gross margin was due to
unabsorbed plant costs related to our decision in 2002 to discontinue our juice
divisions FCOJ operations and the expensing of all lemon grove operating costs
commencing in our second quarter of 2003. Prior to April 1, 2003, all expenses
relating to the development of our lemon groves were capitalized as deferred
orchard costs. Effective April 7, 2003, with the Coca-Cola transaction discussed
above, we discontinued the deferral of these costs and are now expensing these
costs as incurred. For the 2003 period these costs were approximately $420,000.
Gross profit overall increased as a percent of net sales from 1.6% in 2002
to 4.8% in 2003 due to the factors discussed above.
22
Selling, general and administrative expenses ("SG&A") decreased $827,000
from $2.1 million in 2002 to $1.2 million in 2003, or 39.4%. This reduction
consisted primarily of a gain of $896,000 recognized from the reversal of
previously recorded Mexican deferred profit sharing expenses, as required under
generally accepted accounting principles. This reversal was caused primarily by
the calculation method of determining the deferred profit sharing liability,
which allowed the $12.5 million proceeds from the Coca-Cola transaction to be
offset against prior net operating losses at GISE.
Impairment of long-lived assets of $232,000 in the 2003 period represents a
non-cash charge that resulted from our decision to discontinue our pineapple
growing operations and write-down all long-lived assets associated with these
operations to estimated fair value.
Interest expense increased slightly from $199,000 in 2002 to $215,000 in
2003, primarily resulting from the change in the capitalization of interest
costs associated with our Lemon groves, to expensing these costs in the current
period, offset by reduced interest costs associated with the repayment of the
Rabobank Nederland loan in May 2003.
Other income decreased from net income of $191,000 in 2002 to net expense
of $40,000 in 2003. The 2002 amount consisted primarily of short-term rental
income from a lease associated with one of our juice division plants which was
nonrecurring in the 2003 period.
Foreign currency translation gain (loss) increased from a net gain of
$408,000 in 2002 to a net loss of $552,000 in 2003 and result primarily from the
re-measurement of our foreign subsidiaries financial statements to U.S. dollars.
This increased loss is the result of a stronger Mexican peso in the current
period as compared to the U.S. dollar.
Income tax expense decreased from $617,000 in 2002 to $326,000 in 2003. The
2002 amount included $146,000 of asset tax expense and $471,000 of deferred
taxes which increased our valuation allowances associated with financial and tax
reporting differences in Mexico, which is required in accordance with U.S. GAAP.
Offset against the 2002 asset tax expense is a Mexican jobs tax credit of
$169,000 associated with the increased employment at one of our Mexican
subsidiaries in prior years. The 2003 period income tax expense of $321,000
consisted entirely of asset tax expense. Asset tax is an alternative minimum tax
in Mexico and is calculated at 1.8% of assets less certain liabilities.
As a result of the foregoing, we reported net losses of $2.9 million in
2002 and $1.8 million in 2003.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position:
At June 30, 2003, our cash and cash equivalents totaled $9.7 million, an
increase of $9.3 million from year-end 2002. During the first six months of
2003, our operating activities used cash of $2.5 million principally from our
net loss of $1.8 million, net changes in our working capital components
aggregating $1.4 million and a reduction in our deferred Mexican statutory
profit sharing liability of $1.1 million, offset by non-cash charges associated
with depreciation expense, impairment of long-lived assets and disposal of
property and equipment aggregating $1.7 million. Investing activities provided
$13.4 million, primarily from the proceeds from the rescission of all contract
rights and obligations for the growing and processing of Italian lemons and the
sale of our Poza Rica juice plant. Net cash used in financing activities was
$1.6 million, which was the result of net debt repayment of $1.7 million.
Working capital at June 30, 2003 amounted to $2.4 million as compared to our
December 31, 2002 deficit of $9.7 million.
Recent Transactions:
In April 2003, we consummated the portion of the transaction with Coca-Cola
pertaining to the rescission of all contract rights and obligations for the
growing and processing of Italian lemons for an aggregate cash payment of $12.5
million, plus value added taxes. In June 2003, we sold our Poza Rica juice plant
to an unaffiliated third party for $1.0 million, plus value added taxes of
$120,000. As of
23
February 15, 2004, total cash payments received amount to $565,000 with the
balance payable in four remaining installments under a promissory note, which
aggregate $590,000 in 2004. Effective November 17, 2003, we closed the sale of
our Victoria juice and oil plant to Coca-Cola, for a cash payment of $3.5
million, plus value added taxes.
Through February 15, 2004, of the $16.0 million proceeds, net of value
added taxes, from the Coca-Cola transactions, approximately $4.1 million have
been used to pay past due accounts payable, current operating expenses of our
lemon groves, operating expenses of our juice and oil processing plants prior to
sale, severance payments to former plant and administrative employees of the
juice division, corporate expense charges, repay the Rabobank Nederland loan of
$1.5 million, repay the Banamex loans of $558,000 and repayment of bridge loans
to our largest shareholder, M&M Nominee of $368,000. The remaining cash of
approximately $9.4 million is anticipated to be used to pay operating expenses
of the lemon groves, repay FOCIR, provide working capital for our continuing
operations and/or distributed to our shareholders upon a potential liquidation
of the company (See Note 1 - Description of Business - Decision to Explore
Strategic Alternatives.) Cash disbursements for purposes other than those
associated with GISE's juice division and agricultural operations are subject to
the FOCIR Agreement and would require their prior approval for disbursement.
Substantially all the proceeds are invested in short-term, interest bearing
investment grade securities. As of June 30, 2003, principal of $4.5 million and
accrued accretion of $1.6 million was owed to FOCIR.
Recent Developments Impacting Liquidity and Capital Resources:
We are experiencing significant operational and financial challenges in the
near term at our ICMOSA subsidiary as a result of our working capital deficits.
Our working capital deficits at June 30, 2003 at ICMOSA are approximately $4.0
million and we have been recently served with a lawsuit by one of its banks. See
Item 2, "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Legal Proceedings and Loss Contingencies" and "Risk Factor
- - Risks Relating to Our Financial Condition - One of our Mexican banks has
exercised its legal rights and remedies and we may be forced to seek protection
under applicable provisions of the Mexican bankruptcy code." In addition, we are
actively evaluating ICMOSA's business strategy and operational model. The
complexity of this evaluation is further aggravated by the significant immediate
liquidity issues that must be addressed in parallel with any contemplated
strategic and operational changes. In order for ICMOSA to emerge from its
current liquidity and operational difficulties with a profitable business model,
it must achieve success on a number of critical fronts, including price
increases from its largest customer and a favorable conclusion to the
renegotiation of its bank debt. While we are focused on achieving these
strategic and operational objectives, there can be no assurance that ICMOSA will
in fact achieve such success.
Although our current cash balances as of February 15, 2004 at our GISE
subsidiary are approximately $9.4 million, this cash is restricted by the FOCIR
Agreement and would require FOCIR's prior approval before such cash could be
used to fund working capital deficits at our ICMOSA subsidiary or our general
corporate overhead. As an alternative, we could prepay the outstanding FOCIR
principal and accrued interest balances, which approximate $6.1 million, and
have available approximately $3.3 million in cash. This cash, at our discretion
could then be used to fund working capital deficits and corporate overhead.
Given the increased costs associated with being a public company, the lack
of liquidity for our common stock, the liquidity problems at ICMOSA (see
discussion in Item 1. Note 2 - "Recent Developments Impacting Liquidity and
Capital Resources") and the operational challenges facing the company, to
maximize shareholder value, we are exploring available strategic alternatives,
including the sale of all or a part of the company, its productive assets and
strategic partnering relationships for the growing, distribution and marketing
of fresh lemons. No assurances can be given that our efforts will be successful.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
24
and for hedging activities under FASB No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. We do not expect adoption of this
statement to have any significant impact on our financial accounting and
reporting as a result of implementation of SFAS No 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
required that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. Through June 30, 2003, we have not issued financial
instruments with characteristics of both liabilities and equity.
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.
RISKS RELATING TO OUR FINANCIAL CONDITION
ONE OF OUR MEXICAN BANKS HAS RECENTLY EXERCISED ITS LEGAL RIGHTS AND REMEDIES
AND WE MAY BE FORCED TO SEEK PROTECTION UNDER APPLICABLE PROVISIONS OF THE
MEXICAN BANKRUPTCY CODE.
As of June 30, 2003, our Mexican subsidiary, ICMOSA, owed $3.5 million and
$2.9 million, respectively, under secured financing agreements with Bancomext
and Banorte. The loan agreement with Bancomext has not been renewed and is in
default. As of June 30, 2003, accrued interest of approximately $213,000 is
still outstanding. As a result of the default of the Bancomext loan, we are
currently in default of the Banorte loan agreement.
On February 12, 2004, an action styled Banco Nacional de Comercio Exterior,
S.N.C. Vs. Industrias Citricolas de Montemorelos, S.A. de C.V. and Rafael
Vaquero Bazan was filed in the Federal District (Mexico City), Mexico. The
action seeks recovery of $ 3.5 million in bank debt, past due interest, interest
accruing during the proceedings and expenses and fees resulting from the action.
In addition, in the suit Bancomext seeks to foreclose on ICMOSA's accounts
receivable and seize its bank accounts. Should Bancomext be successful in the
remedies sought, this lawsuit would have a material adverse effect on our
consolidated financial condition and prospects and would significantly impact
ICMOSA's ability to continue as a going concern. In such event, ICMOSA may be
forced to seek protection under the applicable provisions of the Mexico
bankruptcy code.
WE ARE EXPERIENCING SIGNIFICANT LIQUIDITY PROBLEMS AT ONE OF OUR MEXICAN
SUBSIDIARIES.
We have sustained net losses in each of the last six fiscal years and in
the first six months of 2003. As of June 30, 2003, our accumulated deficit was
$53.1 million, we are unable to repay two of our Mexican subsidiary's loans with
principal and accrued interest totaling approximately $6.6 million under loan
agreements that are in default (see above for a discussion of the lawsuit that
has been recently served by one of these banks) and we are generating
insufficient gross margins.
25
Although our current cash balances as of February 15, 2004 at our GISE
subsidiary are approximately $9.4 million, this cash is restricted by the FOCIR
Agreement and would require FOCIR's prior approval before such cash could be
used to fund working capital deficits at our ICMOSA subsidiary or our general
corporate overhead. As an alternative, we could prepay the outstanding FOCIR
principal and accrued interest balances, which approximate $6.1 million, and
have available approximately $3.2 million in cash. This cash, at our discretion,
could then be used to fund working capital deficits and corporate overhead.
Given the increased costs associated with being a public company, the lack
of liquidity for our common stock, the liquidity problems at ICMOSA (see
discussion in Item 1. Note 2 - "Recent Developments Impacting Liquidity and
Capital Resources") and the operational challenges facing the company, to
maximize shareholder value, we are exploring available strategic alternatives,
including the sale of all or a part of the company, its productive assets and
strategic partnering relationships for the growing, distribution and marketing
of fresh lemons. No assurances can be given that our efforts will be successful.
WE MAY CONTINUE TO SUSTAIN LOSSES AND ACCUMULATED DEFICITS IN THE FUTURE.
We have sustained net losses in each of the last six fiscal years and in
the first six months of 2003. As of June 30, 2003 our accumulated deficit was
$53.1 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 six years and during the
first six months of 2003, there can be no assurance that we will achieve a
profitable level of operations in remainder of fiscal 2003 and beyond, or, if
profitability is achieved that it can be sustained.
Given the increased costs associated with being a public company, the lack
of liquidity for our common stock, the liquidity problems at ICMOSA and the
operational challenges facing the company, to maximize shareholder value, we are
exploring available strategic alternatives, including the sale of all or a part
of the company, its productive assets and strategic partnering relationships for
the growing, distribution and marketing of fresh lemons. No assurances can be
given that our efforts will be successful.
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 entering into a 5-year 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 64.8%, 59.2%, 79.7%
and 74.1%, respectively, of our three and six months ended June 30, 2002 and
2003 consolidated net sales. 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 5-year 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
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 MAY LOSE OUR NET OPERATING LOSS CARRYFORWARDS, WHICH COULD PREVENT US FROM
OFFSETTING FUTURE TAXABLE INCOME IN THE UNITED STATES.
In June 2001, we completed a rights offering wherein M&M Nominee, our
largest shareholder, purchased an additional 6,849,315 shares of our common
stock increasing their ownership from 45.2% to 62.48%. Accordingly, we
experienced an ownership change as defined by Section 382 of the Internal
Revenue Code of 1986, as amended, which limits the use of net operating loss
carryforwards where changes occur in the stock ownership of a company. As a
result, this limitation will allow us to use only a portion of our pre-change
net operating loss carryforwards, which amounted to $17.7 million at December
26
31, 2002, to reduce subsequent taxable income in the United States, if any for
federal income tax purposes. Based upon the limitations of Section 382, we may
only be allowed to use approximately $425,000 of such losses each year to reduce
taxable income, if any, until such unused losses expire.
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 business 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.
WE HAVE BEEN UNABLE TO FILE OUR FORM 10-Q QUARTERLY REPORT FOR OUR THIRD QUARTER
OF 2003 WITH THE SEC, AND MATERIAL INFORMATION CONCERNING OUR CURRENT OPERATING
RESULTS AND FINANCIAL CONDITION IS THEREFORE UNAVAILABLE.
We have been unable to file our periodic report with the SEC for the
quarter ended September 30, 2003, and the information to be contained therein is
unavailable at this time. We cannot predict how soon complete financial and
operational information relating to our third quarter of 2003 will become
available. When it is, it may reflect changes or trends that are material to our
business.
IF CONDITIONS OR ASSUMPTIONS DIFFER FROM THE JUDGMENTS, ASSUMPTIONS OR ESTIMATES
USED IN OUR CRITICAL ACCOUNTING POLICIES, THE ACCURACY OF OUR FINANCIAL
STATEMENTS AND RELATED DISCLOSURES COULD BE AFFECTED.
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions, and estimates that
affect the amounts reported in our consolidated financial statements and
accompanying notes. Our critical accounting policies, which are set forth above,
describe the significant accounting policies and methods used in the preparation
of our consolidated financial statements. These accounting policies are
considered "critical" because they require judgments, assumptions and estimates
that materially impact our consolidated financial statements and related
disclosures. As a result, if future events differ significantly from the
judgments, assumptions, and estimates in our critical accounting policies or
different assumptions are used in the future, such events or assumptions could
have a material impact on our consolidated financial statements and related
disclosures.
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 our Mexican subsidiaries financial statements. Since the assets and
liabilities therein are peso denominated, a falling peso results in a
translation loss to the extent there are net peso assets or a translation gain
to the extent there are net peso liabilities. Pricing associated with the 5-year
supply agreement entered into with Del Monte is in U.S. dollars. Our exposure to
foreign currency exchange rate risk is difficult to estimate
27
due to factors such as balance sheet accounts, and the existing economic
uncertainty and future economic conditions in the Mexican 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 AND AVAILABILITY OF WATER
AND THE PRICE OF FRESH FRUIT.
We grow grapefruit, which is used in our packaged fruit operations, and
Italian lemons. 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 yields
of our lemon groves. Substantially all of our growing operations are irrigated
and a lack of water has not had a materially adverse effect on our growing
operations. There can be no assurances that future weather conditions and lack
of irrigation water will not have a material adverse effect on the results of
our operations and our 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.
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 7,100 acres of rural
land in Mexico, which are used primarily for growing our Italian lemons.
Historically, the ownership of rural land in Mexico has been subject to legal
limitations and claims by residents of rural communities. Although we have not
experienced any legal disputes with respect to our land ownership, we are
transitioning, pursuant to the terms of an existing agreement with an "Ejido"
system of land ownership, approximately 5,200 acres of land from a 30-year lease
to a land purchase. In connection with transfer of this land, we have received a
request from the "Ejido" for the payment of an additional $1.2 million ($12.6
million Mexican pesos). The company has been advised by Mexican counsel that it
has no legal obligation to make such payment. If we were unsuccessful in our
efforts to transition the lease, such event could adversely affect the potential
strategic alternative to divest our lemon groves.
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 and work our lemon groves. The turnover rate among the
labor force is high due to competitive labor conditions in the area that our
plants are located. If it becomes necessary to pay more to attract labor, our
labor costs will increase.
Our Mexican work force, whether seasonal or permanent, are generally
affiliated with labor unions that 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
28
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 as shown in our consolidated statements of operations are not always a
meaningful indication of taxable income of our subsidiaries for profit sharing
purposes or of the amount of employee profit sharing.
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 U.S. dollars. As a result, costs of operations for our
Mexican subsidiaries could be higher.
TRADE DISPUTES BETWEEN THE UNITED STATES, MEXICO, JAPAN 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 the United States, Mexico, Japan
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, Japan and Europe, such actions, if taken, could adversely affect our
business.
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 $11.0 million 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,
29
injunctions, recalls or seizures, as 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 our 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 own 13,149,274 shares of our common stock accounting for 62.48%
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 initiatives
taken by our company that are not acceptable to M&M Nominee.
30
WE ARE SUBJECT TO RECENT LEGISLATIVE ACTIONS AND POTENTIAL NEW ACCOUNTING
PRONOUNCEMENTS.
In order to comply with the newly adopted Sarbanes-Oxley Act of 2002 and
proposed accounting changes by the SEC, we may be required to increase or modify
our internal controls, hire additional personnel and additional outside legal,
accounting and advisory services, all of which could cause our general and
administrative costs to increase. Proposed changes in accounting rules,
including legislative and other proposals to account for employee stock options
as compensation expense among others, could potentially increase the expenses we
report under United States Generally Accepted Accounting Practices and could
adversely affect our operating results.
RISKS RELATING TO OUR COMMON STOCK
THE DELISTING FROM THE OVER-THE-COUNTER BULLETIN BOARD HAS FURTHER REDUCED THE
LIQUIDITY AND MARKETABILITY OF OUR COMMON STOCK AND MAY FURTHER 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." On May 29,
2003, our common stock ceased to be quoted for trading on the OTC Bulletin
Board, and is presently listed on the "Pink Sheets." Prices for securities
traded solely on the Pink Sheets may be difficult to obtain. As such, our stock
has very limited liquidity and marketability. This very limited liquidity,
marketability, the reduced public access to quotations for our common stock and
lack of a regular trading market for our stock have depressed the market price
of our stock. Although we intend to take actions necessary to have our stock
included in the OTC Bulletin Board, there can be no assurance that we will be
successful. Further, the OTC Bulletin Board is an unorganized, inter-dealer,
over-the-counter market with significantly less liquidity than other recognized
markets such as The Nasdaq Stock Market.
"PENNY STOCK" REGULATIONS MAY IMPOSE RESTRICTIONS ON MARKETABILITY OF OUR COMMON
STOCK.
The SEC 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 $1.0 million 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,
31
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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
Our interest expense is most sensitive to changes in the general level of
U.S. interest rates and London interbank offered rates. In this regard, changes
in these interest rates affect the interest paid on our debt.
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
There- Fair Value
2003 2004 2005 2006 2007 after Total 6/30/03
---- ---- ---- ---- ---- ------ ----- ----------
Long-term debt, including
current portion
Fixed rate $ 476 $ -- $ -- $ -- $ -- $ -- $ 476 $ 476
Average interest rate 17.9%
Variable rate $ 321 $ 300 $ 400 $ 700 $1,260 $4,491 $7,472 $ 7,472
Average interest rate 8.0% 7.3% 7.3% 7.3% 7.3% 10.6%
The scheduled maturities of long-term debt above are based on the original
loan agreement maturities before reclassifications arising from defaults. At
June 30, 2003, U.S. dollar denominated long-term debt amounted to $3.0 million
as compared to Mexican peso denominated long-term debt of $4.9 million.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures", as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that our company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time period specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by our company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to our company's
management, including its principal
32
executive officer and its principal financial officer, as appropriate to allow
timely decisions to be made regarding required disclosure. Our company's Chief
Executive Officer and our Chief Financial Officer have evaluated our company's
disclosure controls and procedures as of a date within 90 days of the filing
date of this quarterly report on Form 10-Q and have concluded that our company's
disclosure controls and procedures need improvement. (See Item 4. (b) below.)
With the filing of this quarterly report on Form 10-Q for the quarterly
period ended June 30, 2003, we will be filing approximately six months past our
extension request to August 14, 2003. This filing delay has been caused by
several factors, which are as follows -
- The annual audit of our consolidated financial statements for our
fiscal year ending December 31, 2002, by our independent public
accountants was finalized on July 25, 2003 and we filed our
annual report on Form 10-K for our fiscal year ended December 31,
2002 on August 12, 2003. Their quarterly review under SAS 100 of
our first quarter 2003 did not commence until shortly after the
completion of their audit. Filing of our Form 10-Q for our
quarterly period ended March 31, 2003 was made on December 5,
2003.
- As a result of the finalization of a transaction with Coca-Cola
for the rescission of certain contract rights for the growing and
processing of Italian lemons in Mexico, which was completed in
April 2003, a detailed analysis of the impact of this transaction
on our December 31, 2002 deferred orchard costs was required to
assess impairment of these long-lived assets under current
accounting literature, which included an expert third party
appraisal of the assets which we obtained in June 2003.
- As part of our company's decision to discontinue the juice
division of our juice and oil business segment, we entered into
contracts to sell our juice processing plants and related
equipment located in Mexico. As a result, additional analysis was
required in assessing the impairment of these long-lived assets
under current accounting literature.
- The review of certain internal control deficiencies by our
company's Audit Committee and independent accountants.
- The replacement of several members of our company's Audit
Committee with independent directors.
- The resignation of certain personnel and their impact on
financial statement preparation.
(b) Changes in Internal Controls
Our company also maintains a system of internal controls. The term
"internal controls", as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of our company's
financial reporting, the effectiveness and efficiency of our company's
operations and our company's compliance with applicable laws and regulations. In
connection with the preparation of this quarterly report on Form 10-Q, our
management identified certain deficiencies in the company's internal control
procedures, none of which would be deemed to be a material weakness under
standards established by the American Institute of Certified Public Accountants.
These internal control deficiencies, which were investigated by our Audit
Committee and independent accountants, did not result in a material misstatement
of our condensed consolidated financial statements. Management and our Audit
Committee have adopted corrective measures, and will be adopting others, to
address and eliminate these deficiencies, which should improve our internal and
disclosure controls. These measures include the hiring of an external accounting
firm to assist in the preparation of timely monthly, quarterly and annual
financial statements in accordance with U.S. GAAP and improved controls relating
to the payment of certain expenses at one of our Mexican subsidiaries and a
closer monitoring of the company's financial results by its Audit Committee.
33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Several legal proceedings arising in the normal course of business are
pending against us, including certain of our Mexican subsidiaries.
On February 12, 2004, an action styled Banco Nacional de Comercio Exterior,
S.N.C. Vs. Industrias Citricolas de Montemorelos, S.A. de C.V. and Rafael
Vaquero Bazan was filed in the Federal District (Mexico City), Mexico. The
action seeks recovery of $ 3.5 million in bank debt, past due interest, interest
accruing during the proceedings and expenses and fees resulting from the action.
In addition, in the suit Bancomext seeks to foreclose on ICMOSA's accounts
receivable and seize its bank accounts. Should Bancomext be successful in
obtaining the remedies sought, this lawsuit would have a material adverse effect
on our consolidated financial condition and prospects and would significantly
impact ICMOSA's ability to continue as a going concern. In such event, ICMOSA
may be forced to seek protection under the applicable provisions of the Mexico
bankruptcy code.
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 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 would not
have a material adverse effect on our consolidated financial condition.
As a result of the decline in the worldwide market prices of FCOJ, during
2000 we decided to discontinue operating a juice processing facility in Mexico
that had been leased from Frutalamo under the terms of deposit, operating and
stock purchase agreements entered into in December 1996. As we were unsuccessful
in negotiating a settlement with Frutalamo to terminate such agreements, we
wrote off a previously recorded non-refundable deposit of $1.5 million and
recorded a cancellation fee of $1.0 million, both of which were non-cash
charges.
Subsequent to December 31, 2000, Frutalamo and certain of its shareholders
initiated legal proceedings in Mexico naming as defendants certain of our
Mexican subsidiaries, certain current and former employees, officers and
directors of our company and a former contractor. In September 2002, we settled
these claims for $125,000 in cash. Recently, we learned that, notwithstanding
such settlement, certain claims asserted against us by the Frutalamo Plaintiffs,
prior to September 2002, continue to be under review before the Mexican courts.
Management denies any wrongdoing in this matter and intends to vigorously
contest these claims. The resolution of this matter is not expected to have a
material adverse effect on our consolidated financial condition or results of
operations.
On October 10, 2003, an action styled "James R. Scott, Plaintiff Vs.
UniMark Group, Inc, Defendant," was filed in the County Court, Denton, Texas,
Cause Number TI-2003-01345. The compliant seeks recovery of approximately
$90,000 of unpaid rent and injunctive relief.
In addition to the actions described above, from time to time our company
is engaged in various other legal proceedings in the normal course of business.
The ultimate liability, if any, for the aggregate amounts claimed cannot be
determined at this time. However, our company, based on the consultation with
legal counsel, is of the opinion that there are no matters pending or
threatening, except for Bancomext, which could have a material adverse effect on
our consolidated financial position or results of operations.
34
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 3 to our condensed consolidated financial statements for a
discussion of our noncompliance with our loan agreements with Banamex, Bancomext
and Banorte.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 -K
(a) Exhibits
See "Exhibit Index" immediately following the signature page.
(b) Reports on Form 8-K -
None
35
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: March 8, 2004 /s/ R. Arturo Herrera Barre
-------------------------------------------
R. Arturo Herrera Barre, President
(Principal Executive Officer)
Date: March 8, 2004 /s/ David E. Ziegler
-------------------------------------------
David E. Ziegler, Chief Financial Officer
(Principal Accounting Officer)
36
EXHIBIT INDEX
Exhibit
Number
- -------
31.1 Certification of Chief Executive Officer Pursuant to Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
37