UNITED STATES
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, 2001
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: 0-12177
BIONOVA HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2632242
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6701 San Pablo Avenue
Oakland, California 94608
(Address of principal executive offices) (Zip Code)
(510) 547-2395
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
As of August 9, 2001, 23,588,031 shares of common stock, par value $0.01
per share, of Bionova Holding Corporation were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIONOVA HOLDING CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEET
THOUSANDS OF U.S. DOLLARS
(EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, December 31,
2001 2000
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 65 $ 233
Accounts receivable, net.............................................. 1,399 1,683
Net assets of discontinued operations (see note 3).................... 63,271 60,552
Assets held for sale.................................................. 1,500 --
Inventories, net...................................................... 345 352
Other current assets.................................................. 111 215
------------------ ------------------
Total current assets.................................................. 66,691 63,035
Property, plant and equipment, net...................................... 910 932
Patents and trademarks, net............................................. 10,288 14,765
Goodwill, net........................................................... 7,928 8,144
Other assets............................................................ 58 65
------------------ ------------------
Total assets............................................................ $ 85,875 $ 86,941
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................. $ 9,068 $ 3,388
Accounts due to related parties....................................... 5,513 477
Advances towards sale of discontinued operations (see note 3)......... 63,271 60,552
------------------ ------------------
Total current liabilities............................................ 77,852 64,417
Contingencies (see note 8)
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000 shares authorized, 200 shares
issued and outstanding at June 30, 2001 and December 31,
2000 (liquidation value of $10,000 per share)......................... -- --
Common stock, $0.01 par value, 50,000,000 shares authorized,
23,588,031 shares issued and outstanding at June 30, 2001 and
December 31, 2000..................................................... 236 236
Additional paid-in capital............................................ 166,177 168,897
Accumulated deficit................................................... (158,390) (146,609)
------------------ ------------------
Total stockholders' equity............................................ 8,023 22,524
------------------ ------------------
Total liabilities and stockholders' equity.............................. $ 85,875 $ 86,941
================== ==================
The accompanying notes are an integral part of these financial statements.
2
BIONOVA HOLDING CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME AND LOSS
THOUSANDS OF U.S. DOLLARS
(EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Total revenues $ 346 $ 625 $ 942 $ 2,119
------------ ------------ ------------ ------------
Selling and administrative expenses.................. 1,353 1,905 2,542 3,280
Research and development expenses.................... 1,029 1,383 2,666 2,921
Amortization of goodwill, patents and trademarks..... 566 502 1,130 1,004
Impairment of assets held for sale (see note 4)...... 2,063 -- 2,063 --
------------ ------------ ------------ ------------
5,011 3,790 8,401 7,205
------------ ------------ ------------ ------------
Operating loss....................................... (4,665) (3,165) (7,459) (5,086)
Interest expense..................................... (53) (3,295) (132) (7,067)
Interest income...................................... 82 54 87 217
Shareholder litigation expense (see note 8).......... (6,379) -- (6,379) --
------------ ------------ ------------ ------------
Loss from continuing operations before discontinued
operations........................................... (11,015) (6,406) (13,883) (11,936)
Discontinued operations:
Income (loss) from operations of fresh produce
business........................................... (1,522) (6,028) 2,102 (10,177)
Extraordinary loss on retirement of floating
rate notes........................................... -- (1,917) -- (1,917)
------------ ------------ ------------ ------------
Net loss............................................. $ (12,537) $ (14,351) $ (11,781) $ (24,030)
============ ============ ============ ============
Loss per share from continuing operations............ $ (0.47) $ (0.27) $ (0.59) $ (0.52)
Income (loss) per share from discontinued
operations........................................... (0.06) (0.26) 0.09 (0.43)
Loss per share from extraordinary items.............. -- (0.08) -- (0.08)
------------ ------------ ------------ ------------
Net loss per share - basic and diluted............... $ (0.53) $ (0.61) $ (0.50) $ (1.02)
============ ============ ============ ============
Weighted average number of common shares
outstanding.......................................... 23,588,031 23,588,031 23,588,031 23,58 ,031
The accompanying notes are an integral part of these financial statements.
3
BIONOVA HOLDING CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF U.S. DOLLARS
Six Months Ended
June 30,
----------------------------------------
2001 2000
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................... $ (11,781) $ (24,030)
Adjustments to reconcile net loss to net cash used by
continuing operations:
Depreciation......................................................... 120 120
Amortization of goodwill, patents and trademarks..................... 1,130 1,004
Impairment of assets held for sale................................... 2,063 --
Net changes (exclusive of subsidiaries acquired or divested) in:
Accounts receivable, net............................................. 284 (536)
Inventories.......................................................... 7 1
Net assets of discontinued operations................................ (2,720) 7,815
Other assets......................................................... 111 6,623
Accounts payable and accrued expenses................................ 5,680 211
------------------ ------------------
NET CASH USED IN BY OPERATING ACTIVITIES............................... (5,106) (8,792)
------------------ ------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property, plant and equipment........................... (102) (153)
Proceeds from sale of property, plant and equipment.................. 4
------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES.................................. (98) (153)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Accounts due to related parties........................................ 5,036 (114)
Restricted cash........................................................ -- 9,545
------------------ ------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................................................. 5,036 9,431
------------------ ------------------
Net increase (decrease) in cash and cash equivalents................... (168) 486
Cash at beginning of year.............................................. 233 207
------------------ ------------------
Cash at end of period.................................................. $ 65 $ 693
================== ==================
The accompanying notes are an integral part of these financial statements.
4
BIONOVA HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 - BASIS OF PRESENTATION
For operating and financial reporting purposes, the Company
historically has classified its business into three fundamental areas: (1)
FARMING, which consists principally of interests in 100% Company-owned fresh
produce production facilities and joint ventures or contract growing
arrangements with other growers; (2) DISTRIBUTION, consisting principally of
interests in sales and distribution companies in Mexico, the United States,
and Canada; and (3) RESEARCH AND DEVELOPMENT (OR TECHNOLOGY), consisting of
business units focused on the development of fruits and vegetables and
intellectual properties associated with these development efforts. IF THE
SALE OF THE FRESH PRODUCE BUSINESS IS APPROVED BY THE STOCKHOLDERS OF THE
COMPANY, BIONOVA HOLDING WILL SELL THE SUBSIDIARIES ENGAGED IN THE FARMING
AND DISTRIBUTION BUSINESSES AND WILL RETAIN ONLY THE RESEARCH AND DEVELOPMENT
BUSINESS. THE COMPANY EXPECTS TO ISSUE A PROXY AND COMPLETE THE STOCKHOLDER
VOTE IN THE FOURTH QUARTER OF 2001. Therefore, the Farming and Distribution
segments have been reclassified as discontinued operations. The Company's
sole business segment now consists of its Research and Development business.
In management's opinion, the accompanying unaudited consolidated
financial statements for Bionova Holding for the three and six month periods
ended June 30, 2001 and 2000 have been prepared in accordance with generally
accepted accounting principles for interim financial statements and include
all adjustments (consisting only of normal recurring accruals) that the
Company considers necessary for a fair presentation of its financial
position, results of operations, and cash flows for such periods. However,
the accompanying financial statements do not contain all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The accompanying unaudited financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto presented in its 2000 Form 10-K for the fiscal
year ended December 31, 2000. Footnotes which would substantially duplicate
disclosures in the Company's audited financial statements for the fiscal year
ended December 31, 2000 contained in the 2000 Form 10-K report have been
omitted. The interim financial information contained herein is not
necessarily indicative of the results to be expected for any other interim
period or the full fiscal year ending December 31, 2001.
GOING CONCERN
The Company incurred a net loss of $42.1 million and an operating
cash flow deficiency of $22.1 million for the year ended December 31, 2000.
The loss in fiscal year 2000 included a significant loss from discontinued
operations, but also stemmed from significant research and development
expenditures, administrative expenses and financing expenses associated with
the Company's highly leveraged financial position. The Company also sustained
significant operating losses and operating cash flow deficiencies in 1999 and
1998. The Company experienced a net loss of $11.8 million during the first
six months of 2001 and used $5.1 million of cash in operations during this
same period. Management anticipates the Company will incur a net loss and
further cash flows deficiencies in the last six months of 2001. The Company
also must address the recent setback its subsidiary, DNA Plant Technology
Corporation ("DNAP"), experienced in a shareholder litigation case and how
DNAP will fund any final judgment for damages that might be rendered against
it (see note 8). Due to the continuing losses and operating cash flow
deficiencies, there is substantial doubt about the Company's ability to
continue as a going concern.
Management has been and is continuing to address the Company's
financial condition by selling assets, exiting the fresh produce business,
and by reaching an agreement with its parent company, Savia, to capitalize
all advances Savia made to the Company in 2000 (other than those advances
that will be paid for by the sale of the fresh produce business to Savia) and
advances it has made and will continue to make to the Company in 2001 to
support operations. These actions were taken to (i) eliminate the sizable
payment that would have been due on the advances by Savia in March 2002 that
in all likelihood the Company would not have been able to meet, (ii) to
reduce future volatility in earnings and cash requirements emanating from the
cyclical and unpredictable nature of the farming operations of the fresh
produce business and the vulnerability of this business to highly volatile
market prices, and (iii) to enable the Company to concentrate on its
technology business.
5
There can be no assurance that these actions will result in sufficient
working capital to significantly improve the Company's current financial
position or its results of operations. The Company also is dependent on Savia to
meet its commitments under the Cash Support Agreement, which is in doubt due to
recent declines in Savia's financial position and the significant debt
obligations it must service. While the Company is actively seeking to develop
alternative sources of funding, there can be no assurance the Company will be
able to meet its obligations in 2001 nor secure funds beyond the 2001 calendar
year.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 2 - NET LOSS PER COMMON SHARE
The weighted average number of common shares outstanding during the
three and six month periods ended June 30, 2001 and 2000 was 23,588,031.
The following table sets forth the potential shares of common stock
that are not included in the diluted net income or loss per share attributable
to common stockholders because to do so would be anti-dilutive for the periods
indicated (in thousands):
(THOUSANDS OF SHARES)
----------------------------------
JUNE 30
----------------- ----------------
2001 2000
----------------- ----------------
Effect of dilutive securities:
Convertible preferred stock outstanding 23,156 --
Stock options outstanding 326 362
Warrants outstanding -- 407
NOTE 3 - DISCONTINUED OPERATIONS
On December 28, 2000 Bionova Holding Corporation (" the Company") and
its parent company, Savia, S.A. de C.V., entered into a Purchase Agreement to
which Savia's subsidiary, Bionova International, Inc. is also a party. Among
other commitments and conditions the Company agreed to sell its fresh produce
farming and distribution business segments ("fresh produce business"), including
all of the debt and liabilities of the business, to Savia for $48 million. The
purchase price for the business will be paid by the application of $48 million
of advances previously made by Savia to the Company. Also, on December 29, 2000
the Company issued 200 shares of convertible preferred stock to Bionova
International for $63.7 million, which was paid through the application of all
of the remaining outstanding advances previously made by Savia to the Company
(other than the $48 million which will be retired upon the sale of the fresh
produce business). These 200 shares of preferred stock are convertible into
23,156,116 shares of common stock (a conversion ratio based on $2.75 per share)
at any time after adoption and filing by the Company of a charter amendment
increasing the authorized number of shares of Common Stock to at least
70,000,000.
For accounting purposes, the sale of the fresh produce business and the
sale of the Series A convertible preferred stock were accounted for as
transactions between entities under common control. No gain or loss is
recognized on the transactions as any differences between cash received and
assets transferred to the parent are treated as capital contributions or
distributions. Accordingly, the Company accounted for the $111.7 million in cash
received (in the form of advances retired) from Savia and its subsidiary,
Bionova International, Inc., as follows:
1. The sale of the fresh produce business was accounted for at historical
cost, and $63.3 million of the proceeds have been included as advances
towards the sale of discontinued operations on the balance sheet.
2. The sale of Series A convertible preferred stock was recorded at $34.7
million, which represents the market value of the common stock on
December 29, 2000, the date of the transaction, into which the Series A
convertible preferred shares may be converted.
6
3. The remaining $13.7 million was accounted for as an additional capital
contribution.
In addition, the Company accrued interest expense totaling $9.9 million
related to the advances from Savia and its subsidiary, Bionova International,
Inc., from April 13 through December 29, 2000. As a result of these
transactions, the interest is not payable and the reversal of accrued interest
was accounted for as an additional capital contribution.
The effective date of December 29, 2000 is the measurement date
referred to when discussing the results of operations of this business elsewhere
in this Form 10-Q.
The presentation of the discontinued operations includes segregation
of the operating results in the Consolidated Statement of Operations and
Comprehensive Income and Loss for the quarters and six months ended June 30,
2001 and 2000. The net assets and cash flows of the discontinued operations
are segregated in the Consolidated Balance Sheet at June 30, 2001 and
December 31, 2000 and in the Consolidated Statement of Cash Flows for the six
months ended June 30, 2001 and 2000. Accordingly, the revenues, costs and
expenses, assets and liabilities and cash flows of these discontinued
operations have been excluded from the respective captions in the
Consolidated Statement of Operations and Comprehensive Income and Loss,
Consolidated Balance Sheet and Consolidated Statement of Cash Flows and have
been reported as "Income (loss) from operations of fresh produce business,"
"Net assets of discontinued operations," and as "Net changes in: Net assets
of discontinued operations" for the periods noted above. The results of
discontinued operations do not include any interest expense or management
fees allocated by the Company. Data presented for earnings per share reflect
the reclassification of the discontinued operations.
The results of the discontinued operations through the appropriate
measurement dates are summarized as follows (in thousands of dollars):
FARMING DISTRIBUTION TOTAL
SIX MONTHS ENDED JUNE 30, 2001 ------- ------------ -----
------------------------------
Revenues............................................. $ 1,098 $126,539 $127,637
Income (loss) before provision for income taxes...... (2,320) 5,748 3,428
Income tax expense................................... (1,083) (1,083)
Income (loss) from operations, net of income taxes
and minority interest............................... (1,797) 3,899 2,102
Net income (loss).................................... (1,797) 3,899 2,102
SIX MONTHS ENDED JUNE 30, 2000
------------------------------
Revenues............................................. $ -- $125,722 $ 125,722
Loss before provision for income taxes............... (10,760) (331) (11,091)
Income tax expense................................... -- (489) (489)
Loss from operations, net of income taxes
and minority interest............................... (9,454) (723) (10,177)
Net loss............................................. (9,454) (723) (10,177)
7
For financial reporting purposes, the assets and liabilities
attributable to undisposed discontinued operations have been classified in the
consolidated balance sheet as net assets of discontinued operations and consist
of the following (in thousands of dollars):
FARMING DISTRIBUTION TOTAL
AT JUNE 30, 2001 ------- ------------ -----
----------------
Current assets............................ $ 14,796 $ 43,176 $ 57,972
Total assets.............................. 78,542 47,600 126,142
Current liabilities....................... 25,725 33,724 59,449
Total liabilities......................... 25,736 34,783 60,519
Minority interest......................... (1,015) 3,264 2,249
Accumulated other comprehensive income.... -- 103 103
Net assets of discontinued operations..... 53,821 9,450 63,271
AT DECEMBER 31, 2000
--------------------
Current assets............................ $ 22,672 $ 38,981 $ 61,653
Total assets.............................. 84,880 44,038 128,918
Current liabilities....................... 30,396 35,438 65,834
Total liabilities......................... 30,415 35,622 66,037
Minority interest......................... (1,145) 3,214 2,069
Accumulated other comprehensive income.... 0 260 260
Net assets of discontinued operations..... 55,610 4,942 60,552
In conjunction with the Purchase Agreement, the Company and Savia
entered into a Cash Support Agreement. This agreement provides that, during
2001, Savia will advance funds to the Company as requested to finance the
Research and Development segment of the business and administrative expenses
(but this agreement does not provide for any payments for satisfying judgments
or settlements associated with shareholder litigation). These advances will be
applied (i.e., exchanged) to the purchase by Savia of additional common
shares when the sale of the fresh produce business is closed, and thereafter,
through December 31, 2001. The purchase price for these shares will be $2.50
per share prior to the expiration of the rights offering, and then will be
the higher of $2.50 per share or the average market price of the Company's
common stock. The Company has budgeted cash requirements for the calendar
year 2001 in a range of $7 to $8 million. The Cash Support Agreement also
acknowledges that Savia will be responsible for providing or arranging the
required financing of the fresh produce business prior to completion of the
sale.
The pending sale of the fresh produce business remains subject to
various conditions, including the approval of stockholders of Bionova Holding.
Stockholders will also be asked to authorize additional shares of common stock
to permit conversion of the preferred stock issued to Savia and to issue the
rights.
EXCEPT AS NOTED, THE FOOTNOTES TO THESE FINANCIAL STATEMENTS REFLECT
BALANCES OF CONTINUING OPERATIONS AS OF JUNE 30, 2001 AND DECEMBER 31, 2000.
INCOME AND EXPENSE DISCLOSURES IN THE FOOTNOTES TO THESE FINANCIAL STATEMENTS,
UNLESS OTHERWISE NOTED, REFLECT ONLY THOSE FROM CONTINUING OPERATIONS FOR THE
QUARTERS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000.
NOTE 4 - ASSETS HELD FOR SALE
The Company's strawberry breeding assets were re-classified as
assets held for sale due to the Company's decision in April 2001 to
re-structure its strawberry business and sell the Company's strawberry
breeding assets. A $2.1 million charge was taken in the second quarter of
2001 for the impairment of these assets held for sale. This $2.1 million
charge reflects the difference between the original purchase price of these
breeding assets in December 1998 less the accrued amortization through June
30, 2001 and the expected realization of $1.5 million on the sale. As these
assets are now recorded as being held for sale, no additional amortization
charges will be recorded in the future. Amortization charges on these assets
have been recorded at $0.1 million per quarter.
NOTE 5 - INVENTORIES
Inventories were comprised of the following:
THOUSANDS OF U.S. DOLLARS
-------------------------------------------
JUNE 30, DECEMBER 31,
2001 2000
------------------ -------------------
Finished produce.................. $332 $332
Spare parts and materials......... 13 20
------------------ -------------------
$345 $352
================== ===================
8
NOTE 6 - RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 7 - SEGMENT REPORTING
The Company classifies its business into three fundamental areas:
FARMING, which consists principally of interests in Company-owned fresh produce
production facilities and joint ventures with other growers; DISTRIBUTION,
consisting principally of interests in sales and distribution companies in
Mexico, the United States, and Canada; and RESEARCH AND DEVELOPMENT, consisting
of business units focused on the development of fruits and vegetables and
intellectual properties associated with these development efforts.
Information pertaining to the operations of these different business
segments is set forth below. The Company evaluates performance based on several
factors. The most significant financial measure used to evaluate business
performance is business segment operating income. Inter-segment sales are
accounted for at fair value as if the sales were to third parties. Segment
information includes the allocation of corporate overhead to the various
segments, as looked at from the point of view of the segment presidents. All
acquired goodwill has been pushed down to the companies and segments that have
made the acquisitions.
THOUSANDS OF U.S. DOLLARS
Total of
Discontinued Research and Reportable
Operations Development Segments
------------- ------------ ----------
JANUARY 1 - JUNE 30, 2001
Total revenues........................ $ 127,637 $ 942 $ 128,579
Operating income (loss)............... 3,954 (7,459) (3,505)
Depreciation and amortization......... 1,523 1,250 2,773
Identifiable assets at June 30 (1)... 122,480 22,482 144,962
Acquisition of long-lived assets...... 3,740 102 3,842
JANUARY 1 - JUNE 30, 2000
Total revenues........................ $ 125,722 2,119 $ 127,841
Operating loss........................ (10,237) (5,086) (15,323)
Depreciation and amortization......... 1,743 1,124 2,867
Identifiable assets at June 30 (1)... 113,088 23,536 136,624
Acquisition of long-lived assets...... 1,018 153 1,171
NOTES:
1. IDENTIFIABLE ASSETS for segments are defined as total assets less cash
in banks, deferred income taxes and investment in shares.
9
Reconciliation of the segments to total consolidated amounts is set
forth below:
THOUSANDS OF U.S. DOLLARS
JANUARY 1 - JUNE 30
2001 2000
--------- ---------
REVENUES
Total segment revenues..................................... $ 128,579 $ 127,841
Revenues of discontinued operations........................ (127,637) (125,722)
--------- ---------
Consolidated revenues...................................... $ 942 $ 2,119
========= =========
INCOME BEFORE TAXES
Total operating loss from reportable segments.............. $ (3,505) $ (15,323)
Interest, net.............................................. (45) (6,850)
Shareholder litigation expense............................. (6,379) --
Exchange gain (loss)....................................... (158) (222)
Operating (income) loss of discontinued operations......... (3,954) 10,237
--------- ---------
Consolidated loss before taxes............................. (13,883) (12,790)
========= =========
ASSETS
Total segment identifiable assets.......................... $ 144,961 $ 136,624
Unallocated and corporate assets (1)....................... 123 759
Total assets of discontinued operations.................... (122,480) (113,088)
Net assets of discontinued operations...................... 63,271 58,425
--------- ---------
Consolidated assets........................................ $ 85,875 $ 82,720
========= =========
NOTES:
1. Includes Bionova Holding's and segments' cash in banks, deferred income
taxes and other corporate assets.
Revenue from external customers by product/service category is set
forth below:
(THOUSANDS OF U.S. DOLLARS)
Total of
Discontinued Research and Reportable
Operations Development Segments
--------------- --------------- ----------------
JANUARY 1 - JUNE 30, 2001
Core vegetables (1)....................... $ 64,732 $ 64,732
Fruits and other fresh produce (2)........ 62,905 62,905
Contracted R&D revenue.................... 942
Licensed technology and royalties......... $ 942
-------- -------- --------
Total..................................... $127,637 $ 942 $128,579
JANUARY 1 - JUNE 30, 2000
Core vegetables (1)....................... $ 71,141 $ 71,141
Fruits and other fresh produce (2)........ 54,581 54,581
Contracted R&D revenue.................... $ 1,841 1,841
Licensed technology and royalties......... 278 278
-------- -------- --------
Total..................................... $125,722 $ 2,119 $127,841
NOTES:
1. Core vegetables include tomatoes, bell peppers and cucumbers.
2. Fruits and other fresh produce include papayas, mangoes, grapes,
melons, watermelons and others.
10
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 ("FAS 141"), Business
Combinations, and No. 142 ("FAS 142"), Goodwill and Other Intangible Assets.
FAS 141, effective June 30, 2001, requires that all business
combinations initiated after June 30, 2001 be accounted for under the
purchase method of accounting; the use of the pooling-of-interests method of
accounting is eliminated. FAS 141 also establishes how the purchase method is
to be applied for business combinations completed after June 30, 2001. This
guidance is similar to previous generally accepted accounting principles,
however, FAS 141 establishes additional disclosure requirements for
transactions occurring after the effective date.
FAS 142, effective on July 1, 2001, eliminates amortization of
goodwill associated with business combinations completed after June 30, 2001.
During a transition period, goodwill associated with business combinations
completed prior to July 1, 2001, will continue to be amortized. All goodwill
amortization expense will cease effective January 1, 2002. However, goodwill
will be reviewed annually (or more frequently if impairment indicators arise)
for impairment by applying a fair-value-based test. FAS 142 also provides
additional guidance on acquired intangible assets that should be separately
recognized and amortized over their useful lives, which could result in the
recognition of additional intangible assets, as compared with previous
generally accepted accounting principles.
Under FAS 142, the Company's goodwill amortization expense (included
in amortization of goodwill, patents and trademarks) will be approximately
$0.1 million quarterly for the remainder of 2001. The elimination of
goodwill amortization effective January 1, 2002 is expected to reduce
operating expenses by approximately $0.5 million (pretax) and increase net
income by approximately $0.5 million (after tax), for the year ended
December 31, 2002, compared with 2001.
The initial goodwill impairment assessment is expected to be
completed in early 2002; the Company cannot determine if a transition
impairment charge will be recognized in 2002.
NOTE 9 - SHAREHOLDER LITIGATION EXPENSE AND CONTINGENCIES
On August 29, 1997, a lawsuit styled GRACE BROTHERS, LTD. V. DNAP
HOLDING CORPORATION, DNA PLANT TECHNOLOGY CORPORATION AND DOES 1 THROUGH 20
INCLUSIVE was filed in the Superior Court of the State of California, County
of Alameda. This claim arose out of the Merger ("the Merger") on September
26, 1996 of DNAP with a wholly-owned subsidiary of Bionova Holding. In the
Merger, shares of DNAP's Preferred Stock were converted into the right to
receive shares of common stock of Bionova Holding. The plaintiff alleged that
it owned shares of Preferred Stock and that DNAP breached its contractual
obligations to the plaintiff by, among other things, not providing special
conversion privileges to the preferred stockholders. The plaintiff also
alleged that Bionova Holding and the former holders of DNAP common stock were
unjustly enriched by DNAP's alleged breach of the Certificate of Designation.
The plaintiff filed a motion for summary adjudication against DNAP, and on
August 10, 2001, the court ruled in favor of the plaintiff and against DNAP
in the amount of $6.4 million. DNAP denies any wrongdoing or liability in
this matter and intends to vigorously contest this lawsuit. The $6.4 million
was accrued as a 2001 second quarter expense based on the court's ruling.
The Company, DNAP, and former directors of DNAP also have been
defendants in two other shareholder litigation actions stemming from the Merger.
These actions all were decided in favor of the Company, its affiliates, and
directors at the trial court level. Both of these cases currently are under
appeal. Bionova Holding and DNAP deny any wrongdoing and liability in these
matters and intend to vigorously contest these lawsuits. Please see the
Company's Form 10-K for the year ended December 31, 2000 that was filed on April
2, 2001 for further discussion on the Company's pending litigation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
Bionova Holding Corporation, a Delaware corporation (together with its
subsidiaries, unless the context requires otherwise, "Bionova Holding" or the
"Company"), was formed in January 1996, and acts as a holding company for (i)
Agrobionova, S.A. de C.V., a corporation organized under the laws of the United
Mexican States, of which the Company owns 80% ("ABSA"), (ii) International
Produce Holding Company, a Delaware corporation, of which the Company owns 100%
("IPHC"), (iii) DNA Plant Technology Corporation, a Delaware corporation, of
which the Company owns 100% ("DNAP"), and (iv) VPP Corporation, a Delaware
corporation, of which the Company owns 100% ("VPP"). Since October 6, 1998,
approximately 76.6% of the outstanding common stock of the Company has been
indirectly owned by Savia, S.A. de C.V.
For operating and financial reporting purposes, the Company
historically has classified its business into three fundamental areas: (1)
FARMING, which consists principally of interests in 100% Company-owned fresh
produce production facilities and joint ventures or contract growing
arrangements with other growers; (2) DISTRIBUTION, consisting principally of
interests in sales and distribution companies in Mexico, the United States,
and Canada; and (3) RESEARCH AND DEVELOPMENT (OR TECHNOLOGY), consisting of
business units focused on the development of fruits and vegetables and
intellectual properties associated with these development efforts. IF THE
SALE OF THE FRESH PRODUCE BUSINESS IS APPROVED BY THE STOCKHOLDERS OF THE
COMPANY, BIONOVA HOLDING WILL SELL THE SUBSIDIARIES ENGAGED IN THE FARMING
AND DISTRIBUTION BUSINESSES AND WILL RETAIN ONLY THE RESEARCH AND DEVELOPMENT
BUSINESS. THE COMPANY EXPECTS TO ISSUE A PROXY AND COMPLETE THE STOCKHOLDER
VOTE IN THE FOURTH QUARTER OF 2001. Therefore, the Farming and Distribution
segments have been reclassified as discontinued operations. The Company's
sole business segment now consists of its Research and Development business.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
Revenues of RESEARCH AND DEVELOPMENT declined from $0.6 million in the
second quarter of 2000 to $0.3 million in the second quarter of 2001. The
revenue decline was attributable to lower revenues
11
recorded on the research activities being conducted on behalf of Seminis and
a reduction in royalty revenues.
Selling and administrative expenses decreased from $1.9 million in the
second quarter of 2000 to $1.4 million in the second quarter of 2001 due to
reductions in corporate overhead compensation allocated to the ongoing
operations of the research and development business.
Research and development expenses declined by $0.4 million from the
second quarter of 2000 to the same quarter in 2001 due to a lower level of
research activity and a commensurate reduction in expenses along with the
re-structuring of the technology operations undertaken in the second quarter of
2001.
A $2.1 million charge was taken in the second quarter of 2001 for
the impairment of assets held for sale. This charge stems from the Company's
recently announced effort to re-structure its strawberry business and the
April 2001 decision to terminate the Company's breeding program and sell the
related assets. The $2.1 million charge reflects the difference between the
original purchase price of these breeding assets in December 1998 less the
accrued amortization through June 30, 2001 and the expected realization of
$1.5 million on the sale. As these assets are now recorded as being held for
sale, no additional amortization charges will be recorded in the future.
Amortization charges on these assets have been recorded at $0.1 million per
quarter.
Interest expense declined from $3.3 million in the second quarter of
2000 to $0.1 million in second quarter of 2001. During the second quarter of
2000 the Company paid interest on its $100,000,000 of Senior Guaranteed Floating
Rate Notes prior to their retirement on April 13, 2000 and recorded interest on
the advances made by Savia to retire the floating rate notes and to support the
operations of the Company. In accordance with the Purchase Agreement concluded
on December 29, 2000 all of the 2000 interest expense to Savia was not to be
paid and was accounted for as a capital contribution.
A $6.4 million charge was taken in the second quarter of 2001 for
shareholder litigation expense due to a court ruling issued by the California
Superior Court on August 10, 2001 in favor of the Grace Brothers on their
motion for summary judgment against DNAP.
The net loss from discontinued operations of the fresh produce business
declined from $6.0 million in the second quarter of 2000 to $1.5 million in the
second quarter of 2001. This improvement in the second quarter was due to better
operating results of the Company's Mexican distributing company and the
elimination of write offs that were experienced by the U.S. distributing
companies in the second quarter of 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
Revenues of RESEARCH AND DEVELOPMENT declined from $2.1 million in the
first six months of 2000 to $0.9 million in the same period of 2001. The revenue
decline was attributable to lower revenues recorded on the research activities
being conducted on behalf of Seminis and a reduction in royalty revenues.
Selling and administrative expenses decreased from $3.3 million in the
first six months of 2000 to $2.5 million in the same period of 2001 due to
reductions in corporate overhead compensation allocated to the ongoing
operations of the research and development business.
Research and development expenses declined from $2.9 million in the
first six months of 2000 to $2.7 million in the same period of 2001 due to a
lower level of research activity and a commensurate reduction in expenses along
with the re-structuring of the technology operations undertaken in the second
quarter of 2001.
A $2.1 million charge was taken in the second quarter of 2001 for
the impairment of assets held for sale. This charge stems from the Company's
recently announced effort to re-structure its strawberry business and the
April 2001 decision to terminate the Company's breeding program and sell the
related assets. The $2.1 million charge reflects the difference between the
original purchase price of these breeding assets in December 1998 less the
accrued amortization through June 30, 2001 and the expected realization of
$1.5 million on the sale. As these assets are now recorded as being held for
sale, no additional amortization charges will be recorded in the future.
Amortization charges on these assets have been recorded at $0.1 million per
quarter.
Interest expense declined from $7.1 million in the first six months of
2000 to $0.1 million in the first six months of 2001. Through April 13, 2000 the
Company paid interest on its $100,000,000 of Senior Guaranteed Floating Rate
Notes prior to their retirement on April 13, 2000 and recorded interest on the
advances made by Savia to retire the floating rate notes and to support the
operations of the Company. In accordance with the Purchase Agreement concluded
on December 29, 2000 all of the 2000 interest expense to Savia was not to be
paid and was accounted for as a capital contribution.
A $6.4 million charge was taken in the second quarter of 2001 for
shareholder litigation expense due to a court ruling issued by the California
Superior Court on August 10, 2001 in favor of the Grace Brothers on their
motion for summary judgment against DNAP.
The turnaround from a $10.2 million net loss in the discontinued
operations of the fresh produce business in the first six months of 2000 to
income of $2.1 million in the first six months of 2001 was primarily a result of
significantly better market conditions in the United States this year versus
prior year and the re-structuring of business operations undertaken in 2000.
Farming losses were reduced from $9.5 million to $1.8 million from the first six
months of 2000 to the same period in 2001. This improvement was due primarily to
better pricing for the Company's products and lower administrative expenses due
to the restructuring undertaken in 2000. An improvement of $4.6 million in the
net income of the distribution businesses was achieved due to higher prices and
volumes in the U.S. markets in the first six months of
12
2001 as compared with the same period of 2000 and the elimination of write
offs in this segment of the business that occurred in the first six months of
2000.
CAPITAL EXPENDITURES
During the first six months of 2001 the Company made capital
investments of $0.1 million, the majority of which was spent to purchase
computer hardware and software required for the new trait genomics platform.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2001, the Company used $5.1
million of cash in operating activities. Cash used in the results of
operations amounted to $8.5 million (i.e., net income as adjusted for items
not affecting cash, including depreciation, amortization, and the impairment
of assets). Working capital requirements declined by $3.4 million during the
first six months of 2001. A $2.7 million increase in the net assets of the
discontinued operations of the fresh produce business was more than offset by
the increase in accounts payable of $5.7 million due to the accrual of the
expense associated with the shareholder lawsuit, offset in part by a $0.3
million decline in accounts receivable.
As a result of the Company's operating losses during the past three
years and management's anticipation that the Company will incur a net loss
and an operating cash flow deficiency for the year ending December 31, 2001,
there continues to be substantial doubt about the Company's ability to
continue as a going concern. These deficiencies have been exacerbated by the
recent setback of the Company's subsidiary, DNAP, experienced in a
shareholder litigation case and how DNAP will fund any final judgment for
damages that might be rendered against it. Management has been and is
continuing to address the Company's financial condition by selling assets,
exiting the fresh produce business, re-structuring its technology business to
reduce the cash burn in 2001 and beyond, and by entering into a Cash Support
Agreement for 2001 with Savia. During the first six months of 2001 Savia
provided to the Company $5.0 million of funding under this agreement to fund
the activities of the technology business and to cover corporate overheads.
There can be no assurance that the actions the Company is taking will result
in sufficient working capital to significantly improve the Company's current
financial position or its results of operations. The Company also is
dependent on Savia to meet its commitments under the Cash Support Agreement,
which is in doubt due to recent declines in Savia's financial position and
the significant debt obligations it must service. While the Company is
actively seeking to develop alternative sources of funding, there can be no
assurance the Company will be able to meet its obligations in 2001 nor secure
funds beyond the 2001 calendar year. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 ("FAS 141"), Business
Combinations, and No. 142 ("FAS 142"), Goodwill and Other Intangible Assets.
FAS 141, effective June 30, 2001, requires that all business
combinations initiated after June 30, 2001 be accounted for under the
purchase method of accounting; the use of the pooling-of-interests method of
accounting is eliminated. FAS 141 also establishes how the purchase method is
to be applied for business combinations completed after June 30, 2001. This
guidance is similar to previous generally accepted accounting principles,
however, FAS 141 establishes additional disclosure requirements for
transactions occurring after the effective date.
FAS 142, effective on July 1, 2001, eliminates amortization of
goodwill associated with business combinations completed after June 30, 2001.
During a transition period, goodwill associated with business combinations
completed prior to July 1, 2001, will continue to be amortized. All goodwill
amortization expense will cease effective January 1, 2002. However, goodwill
will be reviewed annually (or more frequently if impairment indicators arise)
for impairment by applying a fair-value-based test. FAS 142 also provides
additional guidance on acquired intangible assets that should be separately
recognized and amortized over their useful lives, which could result in the
recognition of additional intangible assets, as compared with previous
generally accepted accounting principles.
Under FAS 142, the Company's goodwill amortization expense (included
in amortization of goodwill, patents and trademarks) will be approximately
$0.1 million quarterly for the remainder of 2001. The elimination of
goodwill amortization effective January 1, 2002 is expected to reduce
operating expenses by approximately $0.5 million (pretax) and increase net
income by approximately $0.5 million (after tax), for the year ended
December 31, 2002, compared with 2001.
The initial goodwill impairment assessment is expected to be
completed in early 2002; the Company cannot determine if a transition
impairment charge will be recognized in 2002.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. All statements, including without limitation
statements contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" other than statements of historical facts
included in this Form 10-Q, including statements regarding our financial
position, business strategy, prospects, plans and objectives of our management
for future operations, and industry conditions, are forward-looking statements.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we can give you no assurance that these expectations
will prove to be correct. In addition to important factors described elsewhere
in this report, the following "Risk Factors," sometimes have affected, and in
the future could affect, our actual results and could cause these results during
2001 and beyond, to differ materially from those expressed in any
forward-looking statements made by us or on our behalf. When we use the terms
"Bionova," "we," "us," and "our," these terms refer to the Company and its
subsidiaries.
13
WE MAY NOT BE ABLE TO SATISFY LIABILITIES THAT WE INCUR AS A RESULT OF
STOCKHOLDER LAWSUITS
The Company and its subsidiary, DNA Plant Technology Corporation, have
been sued in several lawsuits relating to the 1996 merger transaction (the
"Merger") in which DNAP became a subsidiary of the Company. In some of those
lawsuits, the former preferred stockholders of DNAP alleged they should have
received much more consideration for their shares in the Merger than they did.
Two of the cases were decided in favor of the company and are on appeal.
However, in another case, the court issued a $6.4 million judgment against
DNAP. See "Other Information - Legal Proceedings." DNAP may not have the
resources to satisfy this judgment, or may need to liquidate significant
assets in order to do so.
IF WE DO NOT COMPLETE THE SALE OF THE FRESH PRODUCE BUSINESS, WE MAY NOT BE ABLE
TO FIND THE FINANCING TO OPERATE OUR BUSINESS OR TO MEET OUR FINANCIAL
OBLIGATIONS IN 2001 AND 2002
If this transaction is not completed, the Company probably will not
have enough money to pay the $48 million it will owe to Savia on March 23, 2002
(this obligation would be satisfied as part of the sale of the fresh produce
business). The Company may also have difficulty meeting debt obligations to
banks or other sources of financing it establishes.
While Bionova International, Inc. ("BII") has agreed to vote its shares
in favor of the transaction to sell the Company's fresh produce business to
Savia, any disruptions which would cause BII to withhold its vote or vote no to
this transaction or any failure to achieve other approvals, such as those
required of certain regulatory authorities in the United States and Mexico,
could result in a failure to complete this transaction. If the transaction is
not completed, then the Company's debt and/or other financial obligations will
continue to increase due to the funding that Savia is required to provide during
2001 for operations and accruing interest expense on these advances. It is
highly unlikely the Company will be able to generate the necessary funds to pay
these obligations when they become due in 2002.
The Company is likely to be constrained in efforts it is pursuing to
develop partnerships or other types of collaboration arrangements in its
technology business and in raising new capital required to carry on the
technology business after 2001 with the high level of debt it will be carrying.
EVEN IF WE DO COMPLETE THE SALE OF THE FRESH PRODUCE BUSINESS, WE MAY NOT BE
ABLE TO OBTAIN THE FINANCING NECESSARY TO IMPLEMENT OUR BUSINESS PLAN
The Company sustained losses in 1998, 1999 and 2000 and during the
first six months of 2001. While most of these losses arose in the fresh produce
business, the Company's technology business also lost money in each of those
years. Moreover, we do not expect the technology business to become profitable
for at least three years, and it may never become profitable. Therefore, the
Company will need additional financing to achieve its growth and technology
objectives and to fund working capital requirements, capital expenditures and
the purchase and development of new technologies.
For 2001, Savia has agreed to provide financing to the Company in
exchange for stock, but Savia may not have the resources to fulfill this
commitment. For 2002 and later, the Company will need to find additional debt or
equity financing, which may not be available. Furthermore, additional financing
may dilute or otherwise adversely affect the rights of existing stockholders,
cause the Company to relinquish rights to its technologies or cause it to grant
licenses on unfavorable terms.
WE MAY NOT BE ABLE TO FORM THE STRATEGIC ALLIANCES NECESSARY TO IMPLEMENT OUR
BUSINESS PLAN
Development and commercialization of the Company's technologies depends
on customer relationships and strategic alliances with other companies. If the
Company cannot find customers or strategic partners in the future, or if the
Company cannot maintain existing strategic alliances, the Company may not be
able to develop its technologies or products. If the Company does not develop
commercially successful products, its business may be significantly harmed.
Since the Company's technologies have many potential applications and it has
limited resources, our focus on any particular area may result in a failure to
capitalize on more profitable areas.
14
WE MAY NOT BE ABLE TO ACQUIRE OR MAINTAIN THE INTELLECTUAL PROPERTY RIGHTS
NECESSARY TO IMPLEMENT OUR BUSINESS PLAN
For our business plan to succeed, we will need to develop new
technology and to acquire rights to technology owned by third parties. We may
not be able to negotiate agreements to use all of the technology we will need,
leaving us unable to grow the company in accordance with our projections.
The Company may not be successful in obtaining patents on new
technology, protecting its trade secrets and conducting its business without
infringing on the rights of others, which could adversely affect its business.
The Company's success depends, in part, on its ability to obtain and
enforce patents, maintain trade secret protection, and conduct its business
without infringing the proprietary rights of others. If others develop competing
technologies and market competing products, the Company's sales could be
adversely affected. If the Company is not able to maintain its trade secrets or
to enforce its patents, the Company's competitive position could be adversely
affected. In addition, the Company licenses technology from third parties. If
the Company cannot maintain these licenses, or if it cannot obtain licenses to
other useful technology on commercially reasonable terms, its research efforts
could be adversely affected.
Any inability to adequately protect the Company's proprietary
technologies could harm its competitive position. Furthermore, litigation or
other proceedings or third party claims of intellectual property infringement
could require the Company to spend time and money and could shut down some of
its operations. Because the Company may not be able to obtain appropriate
patents or licenses, it may not be able to successfully operate its business.
The Company intends to conduct proprietary research programs, and any conflicts
with its strategic partners could harm its business.
WE MAY NOT BE ABLE TO KEEP UP WITH ADVANCES IN TECHNOLOGY
Genomic technologies have undergone and are expected to continue to
undergo rapid and significant change. The Company's future success will depend
in large part on maintaining a competitive position in the integration of
functional genomics with plant transformation and evaluation. Rapid
technological development by the Company or others may result in products or
technologies becoming obsolete before it recovers the expenses incurred in
connection with their development. Products offered by the Company, its
customers or its strategic partners could be made obsolete by less expensive or
more effective crop enhancement and nutrition enhancement technologies,
including technologies that may be unrelated to genomics. The Company may not be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies.
WE MAY LOSE THE SCIENTISTS AND MANAGEMENT PERSONNEL NECESSARY TO IMPLEMENT OUR
BUSINESS PLAN
The Company depends on the services of a number of key personnel, and a
loss of any of these personnel could disrupt operations and result in reduced
revenues.
The realization of the Company's new business strategy depends on,
among other things, its ability to adapt management information systems and
controls and to hire, train and retain qualified employees to allow operations
to be effectively managed.
15
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY
The Company faces significant competition in its chosen fields: novel
crop production traits and specialized technology services. The Company may not
be able to compete effectively, which could cause its business to suffer.
Both traditional and specialized agricultural chemical firms offer
competing technology (e.g., traditional chemicals and biopesticides) that can be
deployed against fungal disease and nematodes pests. Several agricultural
chemical firms offer novel crop protection traits through biotechnology as well.
Several specialized biotechnology research firms offer pesticide target
discovery of target pathogens, pests or weed species. These biotechnology
research firms may also compete with us in providing specialized technology
services.
There are also many companies engaged in research and product
development activities based on agricultural biotechnology. Competitors include
specialized biotechnology firms, as well as major pharmaceutical, food and
chemical companies that have biotechnology divisions, many of which have
considerably greater financial, technical, and marketing resources than the
Company. Competition may intensify as technological developments occur at a
rapid rate in the agricultural biotechnology industry.
WE MAY NOT COMPLETE THE DEVELOPMENT OF, OR BE ABLE TO SUCCESSFULLY COMMERCIALIZE
NEW TECHNOLOGY PRODUCTS AND SERVICES
If the products the Company develops and markets are not commercial
successes, it will not recoup its development and production costs, which will
hurt its financial condition.
The Company is currently in the early stages of research and
development, and there can be no assurance that any of its projects will be
successful or will produce significant revenues or profits. The success of these
and future products depends on many variables, including technical risks
associated with using genetic engineering for crop protection and nutrition,
business risks associated with selecting commercial targets and capturing value
from customers.
The Company may be sued for product liability, which, if a suit were
successful, could cause it to face substantial liabilities that exceed its
resources.
The Company may be held liable if any product it develops, or any
product that is made using its technologies, causes injury or is found
unsuitable during product testing, manufacturing, marketing or sale. These risks
are inherent in the development of agricultural and food products. The Company
currently does not have product liability insurance. If it chooses to obtain
product liability insurance, but cannot obtain sufficient insurance coverage at
an acceptable cost or otherwise protect against potential product liability
claims, the commercialization of products that the Company's customers,
strategic partners, or that it develops may be prevented. If the Company is sued
for any injury caused by its products, its liability could exceed its total
assets.
WE MAY NOT GAIN PUBLIC ACCEPTANCE FOR OUR GENETICALLY-ENGINEERED PRODUCTS
If the public is unwilling to accept genetically engineered products,
the Company will not recoup its development and production costs, which will
hurt its financial condition. Social and environmental concerns may limit the
acceptance of genetically engineered products.
Most of the Company's products are being developed through the use of
genetic engineering. The commercial success of these products will depend in
part on public acceptance of the cultivation and consumption of genetically
engineered products. The Company cannot assure you that these products will gain
sufficient public acceptance to be profitable, even if these products obtain the
required regulatory approvals.
Public debate surrounding food and fiber crops enhanced through
biotechnology has recently intensified in the United States and internationally.
Technology critics have urged U.S. regulatory agencies
16
to tighten their regulation of biotechnology crops, including withdrawal of
certain product registrations, implementation of product labeling, and
stricter pre-market approval procedures. Internationally, agricultural
biotechnology issues are being debated within the World Trade Organization,
the United Nations Convention on Biological Diversity, the Codex
Alimentarius, and on several regional fronts. The Company believes that
progress has been made to ensure that science-based rules form the basis for
international trade of agricultural biotechnology products. However, the
extent of government regulation that might arise from future legislative or
administrative actions and the potential consequences to the business is not
known and cannot be predicted with certainty.
GOVERNMENT REGULATION
Government regulation can cause delays and increased costs, which may
decrease the Company's revenues and profitability. Stringent laws may limit the
market for genetically engineered agricultural products that it may develop.
Business opportunities and products developed using technology developed by the
Company may be subject to a lengthy and uncertain government regulatory process
that may not result in the necessary approvals, may delay the commercialization
of its customers' products or may be costly, which could harm its business.
The Company's activities in the United States are extensively regulated
by the Food and Drug Administration, the United States Department of
Agriculture, the Environmental Protection Agency, and other federal and state
regulatory agencies in the United States. Also, the Company's genetically
engineered products may require regulatory approval or notification in the
United States or in other countries in which they are tested, used or sold. The
regulatory process may delay research, development, production, or marketing and
require more costly and time-consuming procedures, and there can be no assurance
that requisite regulatory approvals or registration of the Company's current or
future genetically engineered products will be granted on a timely basis.
SAVIA AND BIONOVA INTERNATIONAL, INC. HAVE SUBSTANTIAL CONTROL OVER THE COMPANY
AND CAN AFFECT VIRTUALLY ALL DECISIONS MADE BY ITS STOCKHOLDERS AND DIRECTORS
BII beneficially owns 18,076,839 shares of our common stock accounting
for 76.6% of all issued and outstanding shares. As a result, BII has the
requisite voting power to significantly affect virtually all decisions made by
the Company and its stockholders, including the power to elect all directors and
to block corporate actions such as an amendment to most provisions of the
Company's certificate of incorporation. This ownership and management structure
will inhibit the taking of any action by the Company that is not acceptable to
BII.
AGRIBUSINESS RISKS
Extreme weather conditions, disease and pests can materially and
adversely affect the quality and quantity of strawberry starter plants of the
Company's products. There can be no assurance that these factors will not affect
a portion of the Company's revenues in any year and have a material adverse
effect on its business. Defective starter plants could result in warranty claims
and negative publicity, and the insurance covering warranty claims may become
unavailable or be inadequate, which could have a material adverse effect on the
Company's business.
All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements disclosed in this section and otherwise in
this report.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The table below provides information about the Company's derivative
financial instruments consisting primarily of debt obligations that are
sensitive to changes in interest rates. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contracts. Weighted average
variable rates are based on implied forward rates in the yield curve on June 30,
2001. The information is presented in U.S. dollar equivalents, which is the
Company's reporting currency. The instrument's actual cash flows are denominated
in both U.S. dollars and Mexican pesos, and are indicated accordingly in the
tables below.
------------------------------------ ------------------------------------------------ ---------- ----------
EXPECTED MATURITY DATE
------------------------------------ ------------------------------------------------ ---------- ----------
There Fair
2001 2002 2003 2004 After Total Value
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
Short-term debt:
($US equivalent in millions)
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
U.S. dollar variable rate...... $ 5.4 $ 5.4 $ 5.4
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
Average interest rate........ 9%
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
Peso variable rate (in $US).... $ 0.6 $ 0.6 $ 0.6
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
Average interest rate........ 26%
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
Long-term debt:
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
U.S. dollar fixed rate......... $ 0.0 $ 0.0 $ 0.0
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
Average interest rate........ 0%
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
U.S. dollar variable rate...... $ 0.2 $ 0.2 $ 0.2 $ 0.1 $ 0.6 $ 1.3 $ 1.4
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
Average interest rate........ 10% 10% 10% 10% 10%
------------------------------------ --------- -------- --------- --------- --------- ---------- ----------
The Company tries to use the most cost-effective means to fund its
operating and capital needs. Fixed or variable debt will be borrowed in both
U.S. dollars and Mexican pesos. The Company borrows Mexican pesos to provide for
its working capital needs in its Mexican operations. To minimize exchange risk
associated with the importation of products, the Company will enter into forward
exchange contracts where the functional currency to be used in the transaction
is dollars. At June 30, 2001, all of the Company's long-term debt is variable
rate debt and is denominated in U.S. dollars
EXCHANGE RATE RISK
The table below provides information about the Company's financial
instruments by functional currency that are subject to exchange risk. This
information is presented in U.S. dollar equivalents. The table summarizes
information on instruments that are sensitive to foreign currency exchange
rates, including peso-denominated debt obligations. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates.
--------------------------------------------- ----------------- ----------------- ----------------
Fair
2001 Total Value
--------------------------------------------- ----------------- ----------------- ----------------
On-Balance sheet
Financial Investments
($US equivalent in millions)
--------------------------------------------- ----------------- ----------------- ----------------
--------------------------------------------- ----------------- ----------------- ----------------
Peso short-term debt:
--------------------------------------------- ----------------- ----------------- ----------------
Variable rate (in $US)................ $ 0.6 $ 0.6 $ 0.6
--------------------------------------------- ----------------- ----------------- ----------------
Average interest rate................. 26%
--------------------------------------------- ----------------- ----------------- ----------------
Expected maturity or
Transaction date.................... Dec. 31
--------------------------------------------- ----------------- ----------------- ----------------
18
The Company had no firmly committed forward sales contracts in Mexican
pesos as of June 30, 2001.
The Company is exposed to U.S. dollar-to-Mexican peso currency exchange
risk due to revenues and costs denominated in Mexican pesos associated with its
Mexican subsidiaries, ABSA and Interfruver. The Company expects it will continue
to be exposed to currency exchange risks in the near future.
COMMODITY PRICE RISK
The table below provides information about the Company's fresh produce growing
crops inventory and fixed price contracts that are sensitive to changes in
commodity prices. For inventory, the table presents the carrying amount and fair
value at June 30, 2001. For the fixed price contracts, the table presents the
notional amounts in Boxes, the weighted average contract prices, and the total
dollar contract amount by expected maturity dates, the latest of which occurs
within one year from the reporting date. Contract amounts are used to calculate
the contractual payments and quantity of fresh produce to be exchanged under
futures contracts.
---------------------------------------------------------------------------------------------------------
AT JUNE 30, 2001
---------------------------------------------------------------------------------------------------------
Carrying Fair
Amount Value
--------------------------------------------------------------------- ----------------- -----------------
On-balance sheet commodity position:
Fresh produce crops in process inventory ($US in millions)...... $2.1 $2.1
--------------------------------------------------------------------- ----------------- -----------------
--------------------------------------------------------------------- ----------------- -----------------
Fixed price contracts:
Contract volumes (2,169,628 boxes)
Weighted average unit price (per 2,169,628 boxes)............... $ 8.53 $ 8.53
Contract amount ($US in millions)............................... $18.5 $18.5
--------------------------------------------------------------------- ----------------- -----------------
In order to manage the exposure to commodity price sensitivity
associated with fresh produce products, the Company enters into fixed price
contracts with certain customers which guarantee specified volumes for the
growing season or the year at a fixed price. The Company believes that its
efforts to assure a high level of product quality along with efforts to develop
and market differentiated, added value products also reduce to some extent its
exposure to commodity price sensitivity.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 29, 1997, a lawsuit styled GRACE BROTHERS, LTD. V. DNAP
HOLDING CORPORATION, DNA PLANT TECHNOLOGY CORPORATION AND DOES 1 THROUGH 20
INCLUSIVE was filed in the Superior Court of the State of California, County
of Alameda. This claim arose out of the Merger ("the Merger") on September
26, 1996 of DNAP with a wholly-owned subsidiary of Bionova Holding. In the
Merger, shares of DNAP's Preferred Stock were converted into the right to
receive shares of common stock of Bionova Holding. The plaintiff alleged that
it owned shares of Preferred Stock and that DNAP breached its contractual
obligations to the plaintiff by, among other things, not providing special
conversion privileges to the preferred stockholders. The plaintiff also
alleged that Bionova Holding and the former holders of DNAP common stock were
unjustly enriched by DNAP's alleged breach of the Certificate of Designation.
The plaintiff filed a motion for summary adjudication against DNAP, and on
August 10, 2001, the court ruled in favor of the plaintiff and against DNAP
in the amount of $6.4 million. Bionova Holding and DNAP deny any wrongdoing
or liability in this matter and intend to vigorously contest this lawsuit.
ITEM 5. OTHER INFORMATION
EXECUTIVE CHANGES
Omar Diaz, an Executive Vice President of Bionova Holding and President
of the Fresh Produce Business, retired on May 31. Fidel Hoyos was promoted from
his previous position as Vice President of Production and Purchasing to become
the President of the Fresh Produce Business. Dr. Neal Gutterson, who has been
with DNAP for nearly 20 years, was elected Vice President of Research of both
DNA Plant Technology Corporation and VPP Corporation.
CONTROLLING STOCKHOLDER; CONFLICTS OF INTEREST
Approximately 76.6% of the outstanding shares of common stock of the
Company are owned of record by Bionova International, Inc., an indirect,
wholly-owned subsidiary of Savia. Therefore, Savia has the power to elect a
majority of the Company's board of directors and to determine the outcome of any
action requiring the approval of the holders of the Company's common stock. This
ownership and management structure will inhibit the taking of any action by the
Company which is not acceptable to the controlling stockholder.
Certain of the Company's directors and executive officers are also
currently serving as board members or executive officers of Savia or companies
related to Savia, and it is expected that each will continue to do so. Such
management interrelationships and intercorporate relationships may lead to
possible conflicts of interest.
The Company and other entities that may be deemed to be controlled by
or affiliated with Savia sometimes engage in (i) intercorporate transactions
such as guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties and (ii) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties. The
Company continuously considers, reviews and evaluates, and understands that
Savia and related entities consider, review and evaluate, transactions of the
type described above. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more of
such transactions in the future in addition to those currently in force, such as
the Long Term Funded Research Agreement dated January 1, 1997 between Seminis
Vegetable Seeds, Inc., an indirect subsidiary of Savia, and DNAP. In connection
with these activities the Company might consider issuing additional equity
securities or incurring additional indebtedness. The Company's acquisition
activities may in the future include participation in the acquisition or
restructuring activities conducted by other companies that may be deemed to be
controlled by Savia.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company (filed as an exhibit to
the Company's Registration Statement on Form S-4 (No. 333-09975)
and incorporated herein by reference).
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company effective September 26, 1996 (filed as an exhibit to the
Company's quarterly report on Form 10-Q for the quarterly period ended
June 30, 1996 and incorporated herein by reference).
3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company effective April 28, 1999 (filed as an exhibit to the Company's
20
Quarterly report on Form 10-Q for the quarterly period ended March 31,
1999 and incorporated herein by reference).
3.4 Bylaws of the Company (filed as an exhibit to the Company's annual
report on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference).
4.1 Certificate of Designations for Series A Convertible Preferred Stock
(filed as an exhibit to the Company's current report of Form 8-K filed
on January 12, 2001 and incorporated herein by reference).
(b) Reports on Form 8-K
None.
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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.
BIONOVA HOLDING CORPORATION
Date: August 13, 2001 By: /s/ ARTHUR H. FINNEL
-------------------------------------
Arthur H. Finnel,
Executive Vice President,
Treasurer and Chief Financial Officer
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INDEX TO EXHIBITS
3.1 Certificate of Incorporation of the Company (filed as an exhibit to the
Company's Registration Statement on Form S-4 (No. 333-09975) and
incorporated herein by reference).
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company effective September 26, 1996 (filed as an exhibit to the
Company's quarterly report on Form 10-Q for the quarterly period ended
June 30, 1996 and incorporated herein by reference).
3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company effective April 28, 1999 (filed as an exhibit to the Company's
Quarterly report on Form 10-Q for the quarterly period ended March 31,
1999 and incorporated herein by reference).
3.4 Bylaws of the Company (filed as an exhibit to the Company's annual
report on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference)
4.1 Certificate of Designations for Series A Convertible Preferred Stock
(filed as an exhibit to the Company's current report of Form 8-K filed
on January 12, 2001 and incorporated herein by reference).
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