<PAGE>
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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 SEPTEMBER 30, 1996
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
DNAP HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2632242
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 [_] No [X]
As of October 28, 1996, 18,370,640 shares of common stock, par value $0.01
per share, of DNAP Holding Corporation were outstanding.
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<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DNAP HOLDING CORPORATION
(FORMERLY BIONOVA U.S. INC.)
UNAUDITED CONSOLIDATED BALANCE SHEET
THOUSANDS OF US DOLLARS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... 14,490 1,580
Accounts receivable................................ 16,404 25,444
Advances to growers................................ 11,278 7,889
Inventories........................................ 13,427 14,730
Other current assets............................... 850 142
------- -------
Total current assets........................... 56,449 49,785
------- -------
Patents and trademarks............................. 14,800
Property, plant and equipment, net................. 29,026 25,983
Deferred income taxes.............................. 39 3,281
Goodwill, net...................................... 19,348 9,319
Other assets....................................... 1,018 758
------- -------
Total assets................................... 120,680 89,126
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term bank loans.............................. 29,024 32,493
Current portion of long-term debt.................. 158 610
Payables to growers................................ 3,489 8,885
Accounts payable and accrued expenses.............. 16,059 10,798
Deferred income taxes.............................. -- 2,037
------- -------
Total current liabilities...................... 48,730 54,823
------- -------
Long-term debt..................................... 10,289 10,222
Long-term debt to related parties.................. 392 293
Other.............................................. 934 --
------- -------
Total liabilities.............................. 60,345 65,338
------- -------
Minority interest.................................. 8,854 8,603
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, no shares issued and outstanding...... -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 18,370,640 issued and outstanding..... 184 --
Additional paid-in capital......................... 78,495 --
Contributed capital by parent company.............. -- 27,848
Accumulated deficit................................ (27,306) (12,434)
Unrealized gain.................................... 6 --
Cumulative translation adjustment.................. 102 (229)
------- -------
51,481 15,185
------- -------
Total liabilities and stockholders' equity..... 120,680 89,126
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
DNAP HOLDING CORPORATION
(FORMERLY BIONOVA U.S. INC.)
UNAUDITED CONSOLIDATED RESULTS OF OPERATIONS
THOUSANDS OF US DOLLARS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ------------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.......................... 31,944 29,980 136,245 139,612
------- ------- -------- --------
Cost of sales........................... (30,997) (27,069) (115,264) (120,403)
Selling and administrative expenses..... (3,117) (3,626) (18,505) (14,395)
Purchased research and development...... (12,900) -- (12,900) --
Amortization of goodwill................ (136) (135) (405) (404)
------- ------- -------- --------
(47,150) (30,830) (147,074) (135,202)
------- ------- -------- --------
Operating income (loss)................. (15,206) (850) (10,829) 4,410
Interest expense........................ (1,240) (2,285) (4,186) (4,607)
Interest income......................... 150 971 1,100 2,021
Gain (loss) on sale of assets........... 136 -- 136 --
Exchange gain (loss)--net............... (898) 352 (308) (129)
------- ------- -------- --------
Income (loss) before income tax......... (17,058) (1,812) (14,087) 1,695
Income tax (expense) benefit............ 284 767 (1,026) (984)
------- ------- -------- --------
Net income (loss) before minority
interest............................... (16,774) (1,045) (15,113) 711
Minority interest in net loss (income)
of subsidiaries........................ 1,538 360 241 (713)
------- ------- -------- --------
Net income (loss)....................... (15,236) (685) (14,872) (2)
======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DNAP HOLDING CORPORATION
(FORMERLY BIONOVA U.S. INC.)
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF US DOLLARS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. (14,872) (2)
Items not affecting cash:
Minority interest....................................... (241) 713
Depreciation............................................ 1,248 1,897
Amortization of goodwill................................ 405 404
Purchased research and development...................... 12,900 --
Deferred income taxes................................... 577 (47)
Net changes (exclusive of changes due to subsidiaries ac-
quired):
Accounts receivable and advances to growers............. 7,633 (18,104)
Inventories............................................. 1,761 919
Other assets............................................ 42 (91)
Accounts payable, accrued expenses, and payables to
growers................................................ (2,534) 1,965
Other................................................... 1,435 756
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....... 8,354 (11,590)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries--net of cash acquired......... -- (2,026)
Amounts advanced to DNAP, net of cash provided
upon merger.............................................. (6,664) --
Purchases of property, plant and equipment................ (3,721) (1,629)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES..................... (10,385) (3,655)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments of) proceeds from bank loans.................. (3,857) 10,458
Amounts due to related parties............................ 493 2,495
Investment by Bionova, S.A. de C.V. ...................... 18,305 936
Investment by minority interests.......................... -- 936
-------- --------
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES.......... 14,941 14,825
-------- --------
Net increase (decrease) in cash and cash equivalents...... 12,910 (420)
Cash at beginning of period............................... 1,580 2,540
-------- --------
Cash at end of period..................................... 14,490 2,120
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES...............................................
Contribution of Bionova, S.A. de C.V. investment in
subsidiaries for common stock............................ 27,848 --
Patents and trademarks resulting from merger with DNA
Plant Technology Corporation............................. 14,800 --
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DNAP HOLDING CORPORATION
(FORMERLY BIONOVA U.S. INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
DNAP Holding Corporation (the Company), a subsidiary of Bionova, S.A. de C.V.,
was formed on January 12, 1996 to be the holding company of the consolidated
group, which includes certain former subsidiaries of Bionova, S.A. de C.V. (the
Bionova Subsidiaries) and, after consummation of a merger effective September
26, 1996, DNA Plant Technology Corporation and its subsidiaries (DNAP). The
Bionova Subsidiaries consist of majority interests in Agricola Batiz, S.A. de
C.V., a Mexican company, and subsidiaries (ABSA) and International Produce
Holding Company, a Delaware corporation and subsidiaries (IPHC).
Effective July 1, 1996 Bionova, S.A. de C.V. contributed its interests in the
Bionova Subsidiaries to the Company. The unaudited financial statements,
included herein, have been prepared giving retroactive effect of the
contribution of the Bionova Subsidiaries in a manner similar to a pooling of
interest (see note 3).
The accompanying financial statements include the accounts of the Company,
the Bionova Subsidiaries and, effective September 26, 1996, DNAP. All
intercompany accounts and transactions are eliminated in consolidation.
The unaudited financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission and should be read in conjunction with the combined financial
statements of the Bionova Subsidiaries and notes thereto for the year ended
December 31, 1995 contained in the Company's Registration Statement on Form S-4
(No. 333-09975). Certain information and footnote disclosure normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of the Company's management, the accompanying unaudited
financial statements contain adjustments, all of which are of a normal
recurring nature, necessary to present fairly the financial position of the
Company as of September 30, 1996 and the results of its operations and its cash
flows for the three and nine months ended September 30, 1996 and 1995. Interim
financial information is not necessarily indicative of results for the full
year.
2. NET INVESTMENT IN THE BIONOVA SUBSIDIARIES AND CONTRIBUTIONS AND LOANS FROM
BIONOVA, S.A. DE C.V.
At December 31, 1995 the net investment by Bionova S.A. de C.V. in the Bionova
Subsidiaries was $27.8 million.
On January 26, 1996, the Company issued 25,000 common shares to Bionova, S.A.
de C.V. in exchange for a capital contribution of $25,000 and on January
26, 1996 the Company borrowed $5 million from Bionova, S.A. de C.V. under a
demand note agreement, at a fixed interest rate of 10.25%.
On July 1, 1996 Bionova, S.A. de C.V. transferred its interests in the
Bionova Subsidiaries to the Company and $5 million in cash in exchange for
270,922 common shares and acquired an additional 2,800 common shares of the
Company for $280,000 in cash on August 1, 1996. Additionally, Bionova,
S.A. de C.V. contributed the $5 million demand note in exchange for 50,000
common shares on August 2, 1996.
On August 5, 1996 Bionova, S.A. de C.V. contributed its shares of the Company's
common stock to its wholly-owned subsidiary, Bionova International, Inc.
5
<PAGE>
DNAP HOLDING CORPORATION
(FORMERLY BIONOVA U.S. INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. DNAP MERGER
On September 26, 1996, the merger of Bionova Acquisition, Inc., a wholly-owned
subsidiary of the Company, with and into DNAP (the "Merger") was approved by
DNAP stockholders and was consummated on that date. Upon consummation of the
merger, Bionova International, Inc. contributed an additional $8 million in cash
to the Company in exchange for 12,510,000 common shares. In connection with the
merger the name of the Company was changed to DNAP Holding Corporation.
The value of the shares of the Company's common stock issued in the Merger was
determined based on the number of shares of DNAP's common stock and DNAP's $2.25
convertible exchangeable preferred stock outstanding at June 30, 1996 times
their respective closing prices on July 29, 1996.
<TABLE>
<CAPTION>
Estimated
outstanding Closing
shares share price Value at
June 30, July 29, July 29,
1996 1996 1996
----------- ------------ ---------
(thousands) (thousands)
<S> <C> <C> <C>
DNAP common stock..................... 45,676 $ .531 $ 24,254
DNAP $2.25 convertible exchangeable
preferred stock....................... 1,380 3.125 4,312
--------
28,566
Plus: Costs incurred by Bionova,
S.A. de C.V. associated with the
merger............................... 4,000
--------
Total purchase price................... $ 32,566
========
</TABLE>
The purchase price has been allocated as of September 30, 1996 to the following
items based on a valuation of the intangibles by an independent appraiser.
<TABLE>
<CAPTION>
(thousands)
<S> <C>
Patents and trademarks......................................... $ 14,800
Research and development....................................... 12,900
Goodwill....................................................... 10,471
Net liabilities of DNAP at historical value.................... (5,605)
--------
$ 32,566
========
</TABLE>
Purchased research and development costs of $12.9 million were written off to
results of operations for the nine-month period ended September 30, 1996.
Proforma disclosure of the results of operations for the nine months ended
September 30, 1996 and 1995, as though the merger had occurred on January 1,
1995, is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
(thousands, except
per share amounts)
1996 1995
-------- --------
<S> <C> <C>
Revenues................ 146,574 149,704
Net Loss(1)............. (24,973) (10,477)
Loss per share.......... (1.37) (0.61)
Proforma average common
shares outstanding..... 18,220 17,067
</TABLE>
(1) Includes $12.9 million write-off in 1996 of purchased research and
development costs.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(thousands) (thousands)
<S> <C> <C>
Finished produce.......................... $ 966 $ 3,357
Growing crops............................. 6,811 8,436
Advances to suppliers..................... 1,073 718
Spare parts and materials................. 4,597 1,932
Merchandise in transit.................... 37 387
------- --------
13,484 14,830
Allowance for slow moving inventory....... (57) (100)
------- --------
$13,427 $ 14,730
======= ========
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
DNAP Holding Corporation (together with its consolidated subsidiaries,
unless the context requires otherwise, "DNAP Holding" or the "Company") was
formed in January 1996 and acts as a holding company for (i) Agricola Batiz,
S.A. de C.V., a corporation organized under the laws of the United Mexican
States, of which the Company owns 50.004% ("ABSA"), (ii) International Produce
Holding Company, a Delaware corporation, of which the Company owns 51% ("IPHC"),
and (iii) DNA Plant Technology Corporation, a Delaware corporation ("DNAP").
DNAP became a wholly-owned subsidiary of the Company on September 26, 1996, as a
result of the merger (the "Merger") of Bionova Acquisition, Inc., a Delaware
corporation that was a wholly-owned subsidiary of the Company, with and into
DNAP.
ABSA engages in the business of growing fresh fruits and vegetables,
primarily tomatoes and peppers, in Mexico and exporting fresh produce to the
United States and other markets. ABSA owns a 50.01% interest in Interfruver de
Mexico, S.A. de C.V., a corporation organized under the laws of the United
Mexican States ("Interfruver"), which engages in the business of marketing and
distributing fresh produce in Mexico, including fruits and vegetables produced
by ABSA. IPHC is a holding company whose subsidiaries are in the business of
marketing and distributing fresh produce in the United States and Canada,
including fruits and vegetables produced by ABSA. DNAP is an agribusiness
biotechnology company focused on the development and application of genetic
engineering and transformation technologies in plants and, together with its
subsidiaries (including FreshWorld Farms, Inc.), the development and marketing
of premium, differentiated, fresh and processed, branded fruits and vegetables.
RESULTS OF OPERATIONS
Three Months ended September 30, 1996 Compared to Three Months ended
September 30, 1995
Revenues for the third quarter increased by 7% versus the same period a year
ago. This increase reflects increased sales volumes at Interfruver, partially
offset by lower production at ABSA. Interfruver's sales volume increased due to
(i) the addition of new commodities to the products sold by Interfruver, (ii)
slightly higher prices due to improved brand name recognition and quality, and
(iii) additional sales to a major Mexican retailer. ABSA's production decreased
due to the Company's decision to terminate relationships with some of its
growers in 1996. As a consequence of the decrease in production at ABSA, the
Company had less produce to market in the United States.
Gross profit margins (sales less cost of sales) declined both in absolute
terms and as a percentage of sales during the third quarter of 1996 versus the
comparable period a year ago. This decline was caused by the lower proportion
of produce sourced from ABSA, which historically has had higher margins than
produce sourced from outside of the Company, and the sale of some new products
which had a lower margin than the mix of products sold in 1995.
Selling and administrative expenses during the third quarter of 1996
decreased by $.5 million versus the same period in 1995. The majority of this
reduction was attributable to reduced depreciation charges associated with the
Company's investment in vineyards in Mexico.
During the third quarter of 1996 the Company wrote off $12.9 million of
purchased research and development costs resulting from the Merger. This one-
time charge reflects the value of in-process research and development programs
ongoing at DNAP at the time of the Merger, as estimated by an independent
appraiser, which was part of the purchase price in this transaction. These
product programs were considered in-process since the products being developed
were in various stages of development, have not been commercially introduced,
and require additional research and development before such products can be
produced and introduced to the marketplace. Accordingly, consistent with
generally accepted accounting principles, these costs must be charged off
immediately to current income.
Interest expense decreased by $1.0 million, or 46%, during the third quarter
of 1996 versus the comparable quarter in 1995. This decrease was due to a
decline in the average interest rate that the Company paid on its short-term
debt and a lower average level of debt outstanding during the quarter. The
reduction in debt in the quarter was consistent with ABSA's reduction in
growing operations during this time period.
Interest income declined by $.8 million during the third quarter of 1996
compared to the third quarter of 1995. The Company charges interest on loans
advanced to farmers (grower receivables) to support their growing activities
during the planting and harvesting seasons and continues to charge interest on
these advances until they are collected. Because the volume of growing activity
was reduced during this quarter of 1996 versus the comparable quarter in 1995,
and because certain outstanding advances that accrued interest in 1995 were
deemed uncollectible in the fourth quarter of 1995 and therefore no longer
continued to accrue interest, the average level of grower receivables was lower
in 1996 than in 1995. This lower level of receivables, in conjunction with
lower interest rates in this quarter of 1996 versus the comparable quarter of
1995 caused the decline in interest income during the quarter.
During the third quarter of 1996 the Company experienced a net foreign
exchange loss of $.9 million versus a foreign exchange gain of $.4 million
during the same quarter in 1995. This change resulted from variations in the
peso/dollar exchange rate during this quarter and related adjustments, compared
to the variations experienced during the comparable quarter in 1995.
The provision for income taxes for the third quarter was reduced from the
provision made as of June 30 by $.3 million and $.8 million for the 1996 and
1995 tax years, respectively. The smaller reduction in the quarterly tax
provision in 1996 versus 1995 was due to the lower losses experienced by the
Company's distributing operations in the third quarter of 1996 compared to the
third quarter of 1995.
During the third quarter of 1996 the share of losses allocable to minority
interests was $1.5 million as compared with $.4 million for the comparable
quarter in 1995. These allocations are consistent with the losses sustained by
the Company's majority-owned subsidiary companies during this quarter, in
particular ABSA, and resulted primarily from the grower decisions discussed
above and the typically lower sales rates that occur during this season of the
year.
Nine Months ended September 30, 1996 Compared to Nine Months ended
September 30, 1995
Revenues for the first nine months ended September 30, 1996 declined by 2%
versus the same period a year ago. This decline reflected the effect of lower
average realized prices of fresh produce sold in the United States during the
first six months of the year and the reduction in ABSA's production during the
third quarter that resulted from the Company's decision to terminate
relationships with some of its growers in 1996. As a consequence the Company
had less produce to market in the United States. These factors were partially
offset by increased revenues at Interfruver during the nine months ended
September 30, 1996 for the reasons discussed above.
While gross profit margins (sales less cost of sales) declined in the third
quarter of 1996 versus the comparable quarter in 1995, they continued to remain
higher for the nine months ended September 30, 1996 versus 1995, both in
absolute terms and as a percentage of sales. Higher amounts of acreage
cultivated, greater production and distribution of independent growers'
products, and the impact of the dollar's value against the Mexican peso resulted
in a lower cost of sales during the first half of 1996 as compared with 1995,
which more than offset the third quarter results.
Selling and administrative expenses for the nine month period ended
September 30, 1996 increased by $4.1 million versus the same period in 1995. The
most significant factor that accounted for the increase during the nine months
ended September 30, 1996 was $3.6 million of higher distribution costs, which
were caused by the higher volumes shipped during this time period and higher
unit freight costs in Mexico resulting from the high level of inflation during
the year. Selling and administrative expenses also were impacted in the nine
months ended September 30, 1996 by the start up of a new farming operation in
Baja California and higher costs across the Company's wholesaling and
distributing companies, consistent with efforts to grow these businesses and the
impact of inflation on the Mexican distributing company's costs.
During the third quarter of 1996 the Company wrote off $12.9 million of
purchased research and development costs resulting from the Merger. This one-
time charge reflects the value of in-process research and development programs
ongoing at DNAP at the time of the Merger, as estimated by an independent
appraiser, which was part of the purchase price in this transaction. These
product programs were considered in-process since the products being developed
were in various stages of development, have not been commercially introduced,
and require additional research and development before such products can be
produced and introduced to the marketplace. Accordingly, consistent with
generally accepted accounting principles, these costs must be charged off
immediately to current income.
Interest expense for the nine months ended September 30, 1996 declined by
$.4 million as compared with the same period in 1995. This decline resulted from
a reduction in the average interest rate (primarily during the third quarter)
that the Company paid on its short-term debt and the lower average level of debt
outstanding during the third quarter. During the first half of the year interest
expense was higher in 1996 as compared with 1995 due to higher borrowing during
the first quarter to finance the growth of the business.
Interest income declined by $.9 million during the nine months ended
September 30, 1996 as compared with the same period in 1995. This decline
occurred primarily during the third quarter and was due to the lower level of
grower receivables on which the Company collected interest in 1996 versus the
comparable period of 1995.
During the first nine months of 1996 the Company experienced a net foreign
exchange loss of $.3 million versus a foreign exchange loss of $.1 million
during the same period in 1995. This change resulted from variations in the
peso/dollar exchange rate during this period and related adjustments, compared
to the variations experienced during the comparable period in 1995.
The provision for income taxes for the nine months ended September 30, 1996
was $1.0 million, which was comparable to the provision recorded for the same
period in 1995. While the Company had a pretax loss for the nine months ended
September 30, 1996 and pretax income during the nine months ended September 30,
1995, the majority of this change was due to ABSA's pretax gains and losses in
the respective periods. The Company currently does not pay any taxes on ABSA's
income due to tax loss carry forwards. Pretax income from the Company's
distributing subsidiaries was substantially similar during the nine months ended
September 30, 1996 and 1995.
The allocation of losses to minority interests for the nine months ended
September 30, 1996 was $0.2 million as compared with an allocation of profits of
$.7 million in the comparable period in 1995. The 1996 allocation of losses
and the 1995 allocation of profits are consistent with the minority interest
positions held across the operating subsidiaries of the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1996 the Company generated $8.4
million in cash from operations, which resulted primarily from a reduction in
working capital. The reduction in working capital is consistent with the
seasonality of the business, because accounts receivable and inventories are
typically lower at September 30 when the growing activities are just beginning
to expand, and liabilities are correspondingly increasing, as compared with
December 31.
During this same period the Company made capital investments of $3.7 million
in property, plant, and equipment. The majority of these investments were made
to expand farming activities in Mexico, in particular, the new farming operation
in Baja California which became one of the sources of produce sold by the
Company in the second quarter of 1996 and is expected to be a source of produce
sales by the Company in the future.
The Company made a net investment of $6.7 million in DNAP during the first
nine months of 1996. The Company advanced $10.5 million to DNAP prior to the
Merger of DNAP with a subsidiary of the Company, and DNAP provided $3.8 million
of cash at September 26, 1996, the date of the Merger.
The Company used cash to pay down bank loans in the amount of $3.9 million.
Cash provided by financing activities during the first nine months of 1996
was $18.8 million. The great majority of this cash, $18.3 million, was received
in the form of capital contributions by Bionova S.A. de C.V. in connection with
the Merger.
Because of the capital contributions made to the Company in connection with
the Merger, the Company's working capital deficit positions as of December 31,
1995 and June 30, 1996 of $5.0 million and $10.1 million, respectively, were
reversed, and the Company's working capital position as of September 30, 1996
was positive $7.7 million. As of September 30, 1996 the Company's cash position
was $14.5 million versus $1.6 million on December 31, 1995.
The Company previously had indicated its intention to use a portion of the
cash contributed to the Company in connection with the Merger to fund working
capital and enable the Company to move ahead on its planned acquisition
strategy. On October 18, 1996 the Company announced it had acquired a
controlling interest in Rijnhout Food Group B.V., a Holland-based holding
company with interests in fresh produce distribution in Europe, the Middle East,
and the Far East. Pursuant to the terms of the transaction, IPHC will pay $1.5
million in connection with the closing and, additionally, could be required to
pay up to $.5 million per year for the next four years depending on the
financial performance of the acquired company.
The Company believes its existing cash, its available borrowing capacity and
funds generated from operations will be sufficient to meet its operating and
capital expenditure requirements for at least the next twelve months.
-7-
<PAGE>
DISCLOSURES 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, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including
without limitation statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and under "Notes to
Unaudited Consolidated Financial Statements" located elsewhere herein regarding
the Company's financial position, business strategy, plans and objectives of
management of the Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to
important factors described elsewhere in this report, the following significant
factors, among others, sometimes have affected, and in the future could affect,
the Company's actual results and could cause such results during the remainder
of 1996, and beyond, to differ materially from those expressed in any forward-
looking statements made by or on behalf of the Company:
MANAGEMENT INFORMATION SYSTEMS AND CONTROLS. The Company's business is
undergoing rapid growth. As a result of this rapid growth, significant strains
have been placed on the management, operations and financial resources of the
Company's subsidiaries. The realization of the business strategy for the
Company and its subsidiaries will be dependent upon, among other things, the
ability of the Company to adapt management information systems and controls and
to hire, train and retain qualified employees to allow the operations thereof to
be effectively managed. The geographic separation of the operations of the
Company's subsidiaries and their traditionally decentralized, family-based
management teams exacerbate these issues.
HISTORICAL LOSSES AND ACCUMULATED DEFICITS. IPHC and ABSA sustained losses
in 1993, 1994 and 1995. DNAP sustained losses in each year since its
incorporation in 1981. There is no assurance that some of the factors that
caused these historical losses will not be present in future periods or that the
Company will be profitable in the future.
POSSIBLE NEED FOR ADDITIONAL FINANCING. The projected cash flows from
operations and existing capital resources of the Company, including existing
credit lines, may not be sufficient to permit the Company to pursue proposed
business strategies to acquire additional producers, distributors or marketers
and related businesses. Therefore, the ability to pursue such acquisitions may
be dependent upon the Company's ability to obtain additional capital, which
could result in the incurrence of additional debt or potentially dilutive
issuances of additional equity securities. There can be no assurance that the
Company will be successful in obtaining such capital and, as a result, may be
restricted in its pursuit of its future growth and acquisition strategies.
GOVERNMENTAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN OPERATIONS. Nearly
all of the growing and approximately 25% of the Company's sales occur in Mexico.
Foreign operations such as those conducted by the Company, especially in
countries with volatile economies, are subject to political and economic risks,
including political instability, currency
-8-
<PAGE>
controls, currency devaluations, exchange rate fluctuations, increased credit
risks, inflation, foreign tax laws, changes in import/export or other
regulations and tariff and freight rates. Political and other factors beyond
the Company's control, including without limitation those factors discussed
below, could have a materially adverse effect on the Company's operations.
Currency Fluctuations and Inflation. The currency exchange rates in
Mexico have historically been volatile. For example, in December 1994, the
Mexican government announced its intention to float the Mexican peso against the
United States dollar and, as a result, the peso devalued over 40% relative to
the dollar during that month. Such exchange rate fluctuations impact the
business of the Company's subsidiaries. If the value of the peso decreases
relative to the value of the dollar, then (i) imports of Chilean and other
produce into Mexico for distribution by the Company's subsidiaries become more
expensive in peso terms and therefore more difficult to sell in the Mexican
market and (ii) inflation that generally accompanies reductions in the value of
the peso reduces the purchasing power of Mexican consumers, which reduces the
demand for all products including produce and, in particular, imported, branded
or other premium-quality produce. Conversely, if the value of the peso
increases relative to the value of the dollar, Mexican production costs increase
in dollar terms, which results in lower margins or higher prices with respect to
produce grown in Mexico and sold in the United States and Canada.
Interest Rates. 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 the
Company's subsidiaries that are Mexican companies and for growers and other
Mexican parties with whom they do business, both for borrowings denominated in
pesos and for borrowings denominated in dollars. Costs of operations for these
Mexican entities are higher as a result.
Trade Sanctions. Notwithstanding the enactment of the North American
Free Trade Agreement, Mexico and the United States from time to time are
involved in trade disputes. On occasion, the United States has imposed tariffs,
quotas, and importation bans on products produced in Mexico. Such actions, if
taken, could subject the Company to an additional financial burden, some or all
of which may not be able to be passed on to consumers.
AGRIBUSINESS RISKS. A variety of risks are inherent in the agribusiness
industry, including, without limitation, the following:
Supply and Demand. The fresh produce business is particularly sensitive
to fluctuations in supply and demand. When the supply of produce in the market
exceeds the demand for such products, the market price for fresh produce may be
driven down significantly, in some instances below the cost of harvesting and
packing. In such situations it may be uneconomical to harvest a crop, resulting
in a total loss of the costs incurred in growing such crop. Even when market
prices are sufficient to permit recovery of direct harvesting and packing costs,
prices may not be high enough to permit recovery of growing costs and/or
overhead and other indirect costs. In addition, oversupply can affect the
prices obtained for premium quality produce. Oversupply can result from, among
other reasons, an increase in the number of growers, an increase in the acreage
allocated by growers to a particular crop,
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<PAGE>
unusually favorable growing conditions or increased supply from foreign
competitors (which could be caused by a variety of economic and climatic factors
in such competitors' home countries).
Limited Barriers to Entry. The relatively low capital requirements for
farming and produce distribution permit relatively easy entrance into the fresh
produce business, which in turn can result in oversupply.
Weather. Weather conditions greatly affect the amount of fresh produce
that is brought to market, and, accordingly, the prices received for such
produce. Storms, frosts, droughts, and particularly floods, can destroy a crop
and less severe weather conditions, such as excess precipitation, cold weather
and heat, can kill or damage significant portions of a crop, rendering much of
it unpackable and unsalable. Conversely, unusually favorable weather conditions
can result in oversupply that drives down the prices realized by producers,
including ABSA.
Crop Disease and Pestilence. Crop disease and pestilence can be
unpredictable and can have a devastating effect on crops, rendering them
unsalable and resulting in the loss of all or a portion of the crop for that
harvest season. Even when only a portion of the crop is damaged, the profits a
grower could have made on the crop will be severely affected because the costs
to plant and cultivate the entire crop will have been incurred although only a
portion of it can be sold.
Labor Shortages and Union Activity. The production of fresh produce is
heavily dependent upon the availability of a large labor force to harvest crops.
The turnover rate among the labor force is high due to the strenuous work, long
hours, necessary relocation and relatively low pay. To the extent it becomes
necessary to pay more to attract labor to farm work, labor costs can be expected
to increase.
The Mexican farm work force retained by ABSA is unionized. If the union
attempted to disrupt production and were successful on a large scale, labor
costs would likely increase and there could be work stoppages, which would be
particularly damaging in an industry where harvesting crops at peak times and
getting them to market on a timely basis is critical.
The majority of fresh produce is shipped by truck. In Mexico, truck
deliveries are sometimes less reliable than in the United States due to, among
other factors, the unreliability of some Mexican trucking companies and drivers
to make deliveries on schedule, poorer quality and maintenance of the trucks
used by Mexican trucking companies and poor road conditions in some areas. In
the United States and in Mexico, the trucking industry is largely unionized and
therefore susceptible to labor disturbances. Delivery delays caused by labor
disturbances in the trucking industry or any other reason limit the ability to
get fresh produce to market before it spoils.
Availability of Supply. To pursue its goal of providing year-round
fresh produce supply, ABSA diversified its growing operations to several regions
of Mexico, including regions
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where ABSA does not have significant land holdings. Consequently, ABSA
increasingly relies on agricultural land leased from others and production
associations with other growers. If the other parties to these leases and other
arrangements were to choose not to renew their agreements with ABSA, ABSA would
be required to locate alternate sources of supply and/or land or, in some cases,
to pay increased rents for land. In addition to increased rental rates,
increases in land costs could result from increases in water charges, property
taxes and related expenses.
DEPENDENCE ON ONE SUPPLIER. One grower in Baja California, Santa Cruz
Empacadora, S. de R.L. de C.V., accounted in 1995 for approximately 10% of the
combined sales of the Company's subsidiaries (excluding DNAP). ABSA has entered
into one-year production association agreements with this grower for each of the
past two years and expects to continue to do so, but there can be no assurance
that the grower will continue to be willing to enter into such agreements with
ABSA on terms satisfactory to ABSA.
GOVERNMENTAL REGULATION. The U.S. activities of the Company's subsidiaries
are subject to extensive regulation by the Food and Drug Administration, the
United States Department of Agriculture, and other federal and state regulatory
agencies in the United States. Similarly, the Mexican activities of the
Company's subsidiaries are subject to extensive regulation by the Secretaria de
Agricultura, Ganaderia y Desarrollo Rural, the Secretaria de Salud, and other
federal and state regulatory agencies in Mexico. Also, certain of the Company's
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 certain of its current or
future genetically engineered products will be granted on a timely basis.
PRODUCT LIABILITY. Certain of the products being marketed and developed
by the Company entail a risk of product liability. While the Company has taken
what it believes are adequate precautions, there can be no assurance that it
will avoid significant product liability exposure.
NUMEROUS COMPETITORS. The fresh produce industry in general, and the tomato
industry in particular, are characterized by a large number of competitors at
both the production and distribution levels. In the past some of these
competitors have sought to limit the importation of Mexican-grown tomatoes and
peppers into the United States. DNAP is one of 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, many of which have substantial
financial, technical and marketing resources.
MARKETING OF PREMIUM QUALITY PRODUCE. The Company's subsidiaries are
currently producing and distributing premium quality fresh fruits and
vegetables. The success of these and future products depends on many variables,
including the ability to produce and make available to the market consistent,
premium quality fruits and vegetables on a year-round basis,
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<PAGE>
consumers' willingness to pay higher prices for premium quality fruits and
vegetables, and retailers' willingness to carry such fruits and vegetables.
NO ASSURANCE OF COMMERCIAL SUCCESS OF PRODUCTS BEING DEVELOPED AND MARKETED.
Marketing of several products currently developed by DNAP is in the early
stages, and there can be no assurance that any of these products will be
successful or will produce significant revenues or profits. In addition, a
number of DNAP's product development projects are in the early stages, and there
can be no assurance that these projects will be successful or that any resulting
products will be commercially successful or profitable. In particular, although
DNAP has produced and sold a limited amount of its products, there can be no
assurance that it will be able to produce or market such products on a larger
scale.
NO ASSURANCE OF PUBLIC ACCEPTANCE OF GENETICALLY ENGINEERED PRODUCTS.
DNAP's second generation products are being developed through the use of genetic
engineering. The commercial success of these products will depend in part on
public acceptance of the cultivation and consumption of genetically engineered
products. There can be no assurance that such products will gain sufficient
public acceptance to be profitable, even if such products obtain the required
regulatory approvals.
POSSIBLE LOSS OF SHORT TERM RESEARCH CONTRACTS. A portion of DNAP's
revenues is earned by conducting scientific research projects for third parties.
Some of those third parties may be less likely to retain DNAP to conduct such
research now that DNAP is a part of a larger group of companies with interests
in some of the same fields as the third parties that typically retain DNAP to
conduct such research. There can be no assurance that third parties will
continue to retain DNAP to conduct scientific research in the future.
POSSIBLE DEVELOPMENT OF SUPERIOR TECHNOLOGY BY COMPETITORS. The application
of recombinant DNA and related technologies to plants is complex and subject to
rapid change. A number of companies are engaged in research related to plant
biotechnology, including companies that rely on the use of recombinant DNA as a
principal scientific strategy and companies that rely on other technologies.
Technological advances by others could render the Company's products less
competitive. Some of these companies, as well as competitors that supply non-
genetically-engineered products, have substantial resources.
PROPRIETARY PROTECTION. The Company's success will depend, in part, on its
ability to obtain patents, maintain trade secret protection, and conduct its
business without infringing the proprietary rights of others. There can be no
assurance that others will not develop competing technologies and market
competing products or that DNAP will be able to enforce the patents which it
currently possesses or will be able otherwise to obtain or enforce any patents
for which it has filed an application. DNAP also relies upon unpatented
proprietary and trade secret technology.
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.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ABSA owns one hundred hectares (approximately 247 acres) of rural land in
the state of Sinaloa, Mexico which is the subject of a judicial proceeding
pending in Mexico. The proceeding arose from a petition presented on September
1, 1964, by a group of campesinos from the town of "La Eureka," Municipality of
Culiacan, Sinaloa, to the Governor of the state of Sinaloa. The petition
asserted that a previous owner of the subject land, Miguel Angel Suarez, owned
rural land in excess of the maximum that was then allowed by law and that
therefore the land rightfully belonged to the petitioners. A trial on this
matter was instituted on August 4, 1993, in the Tribunal Superior Agrario in
Sinaloa. In its judicial determination published in the Mexican Diario Oficial
de la Federacion on September 25, 1996, the court upheld the petition and
ordered the land turned over to the petitioners. The court also ruled that the
transfer of the property to Olga Elena Batiz Esquer on June 2, 1990 was null and
void, which would mean that the transfer of the land by Ms. Batiz to ABSA in
1993 was ineffective. On October 23, 1996, Ms. Batiz, who was a party to the
trial court proceeding, filed an "amparo" before the Tribunal Colegiado del
Primer Circuito en Materia Administrativa in Mexico City challenging the
judicial determination based on alleged violations of her constitutional rights
and procedural and substantive errors in the trial court proceedings. If ABSA is
ultimately required to transfer the subject land, which constitutes
approximately 9% of the total land owned by ABSA, Mexican law gives ABSA
indemnification rights against Ms. Batiz.
The Company is also subject to the legal proceedings described in its report
on Form 10-Q for the quarter ended June 30, 1996.
ITEM 5. OTHER INFORMATION
CONTROLLING STOCKHOLDER; CONFLICTS OF INTEREST
Seventy percent of the outstanding shares of common stock of the Company are
owned of record by Bionova International, Inc., an indirect wholly-owned
subsidiary of Empresas La Moderna, S.A. de C.V., a corporation organized under
the laws of the United Mexican States ("ELM"). Pursuant to a Governance
Agreement dated as of September 26, 1996, between ELM and the Company, ELM
(together with its affiliates) may acquire additional shares of common stock of
the Company so long as their aggregate beneficial ownership of the Company's
common stock does not exceed 80.1%, subject to applicable law. Also, pursuant
to the Governance Agreement, ELM 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 ELM or companies related to
ELM 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 ELM 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 ELM
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 September 26, 1996 between ELM 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 ELM.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
2.1* Agreement and Plan of Merger dated as of January 26, 1996, among
ELM, Bionova, S.A. de C.V., Bionova U.S. Inc., Bionova
Acquisition, Inc., and DNA Plant Technology Corporation
2.2* Amendment No. 1 to Agreement and Plan of Merger dated as of May
16, 1996
2.3* Amendment No. 2 to Agreement and Plan of Merger dated as of July
30, 1996
3.1* Certificate of Incorporation of the Company
3.2** Certificate of Amendment to the Certificate of Incorporation of
the Company
3.3* Bylaws of the Company
10.1* Loan Agreement dated as of January 26, 1996, between the Company
and DNAP
10.2* Assignment of Patents dated January 26, 1996, between the
Company and DNAP
10.3* Sole Patent License Agreement dated as of January 26, 1996,
between the Company and DNAP
10.4* Non-Exclusive Patent License Agreement dated as of January 26,
1996, between the Company and DNAP
10.5* Promissory Note made January 26, 1996, by DNAP in favor of the
Company
10.6*** Governance Agreement dated as of September 26, 1996, between ELM
and the Company
10.7*** Long-Term Funded Research Agreement dated as of September 26,
1996, between ELM and DNAP
10.8 Stock Purchase Agreement dated October 18, 1996, between
International Produce Holding Company and Houdstermaatschappij
C.J. Rijnhout B.V.
27.1 Financial Data Schedule
________________________
* Filed as an exhibit to the Company's Registration Statement on
Form S-4 (No. 333-09975) and incorporated herein by reference.
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** 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.
*** Filed as an exhibit to the Company's current report on Form 8-K
dated September 26, 1996 and incorporated herein by reference.
(b) Reports on Form 8-K
-------------------
On October 11, 1996, the Company filed a report on Form 8-K dated September
26, 1996 relating to the acquisition of DNAP by means of a merger of DNAP
with Bionova Acquisition, Inc., which was a wholly-owned subsidiary of the
Company (the "Acquisition"). The following financial statements were filed
with or incorporated by reference in such Form 8-K:
Audited consolidated financial statements and schedule of DNA Plant
Technology Corporation and Subsidiaries, consisting of:
Consolidated balance sheets at December 31, 1995 and 1994
Consolidated statements of operations for the years ended December
31, 1995, 1994 and 1993
Consolidated statements of cash flows for the years ended December
31, 1995, 1994 and 1993
Consolidated statements of stockholders' equity for the years ended
December 31, 1995, 1994 and 1993
Notes to consolidated financial statements
Schedule II: Valuation and qualifying account for the years ended
December 31, 1995, 1994 and 1993
Unaudited consolidated financial statements of DNA Plant Technology
Corporation and Subsidiaries, consisting of:
Unaudited consolidated balance sheets at June 30, 1996 and December
31, 1995.
Unaudited consolidated statements of operations for the three and
six months ended June 30, 1996 and 1995.
Unaudited consolidated statements of cash flows for the six months
ended June 30, 1996 and 1995.
Notes to unaudited consolidated financial statements.
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<PAGE>
On November 6, 1996, the Company filed a report on Form 8-K/A dated
September 26, 1996 relating to the Acquisition. The following financial
statements were filed with such Form 8-K/A:
Unaudited pro forma condensed combined financial information of DNAP
Holding Corporation and its subsidiaries, consisting of:
Unaudited pro forma condensed combined balance sheet as of June 30,
1996
Unaudited pro forma condensed combined income statement for the year
ended December 31, 1995
Unaudited pro forma condensed combined income statement for the six
months ended June 30, 1996
Notes to unaudited pro forma condensed combined financial statements
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<PAGE>
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.
DNAP HOLDING CORPORATION
Date: November 14, 1996 By: /s/ ARTHUR H. FINNEL
-------------------------------------------
Arthur H. Finnel,
Treasurer and Chief Financial Officer
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<PAGE>
INDEX TO EXHIBITS
2.1* Agreement and Plan of Merger dated as of January 26, 1996, among
ELM, Bionova, S.A. de C.V., Bionova U.S. Inc., Bionova
Acquisition, Inc., and DNA Plant Technology Corporation
2.2* Amendment No. 1 to Agreement and Plan of Merger dated as of May
16, 1996
2.3* Amendment No. 2 to Agreement and Plan of Merger dated as of July
30, 1996
3.1* Certificate of Incorporation of the Company
3.2** Certificate of Amendment to the Certificate of Incorporation of
the Company
3.3* Bylaws of the Company
10.1* Loan Agreement dated as of January 26, 1996, between the Company
and DNAP
10.2* Assignment of Patents dated January 26, 1996, between the
Company and DNAP
10.3* Sole Patent License Agreement dated as of January 26, 1996,
between the Company and DNAP
10.4* Non-Exclusive Patent License Agreement dated as of January 26,
1996, between the Company and DNAP
10.5* Promissory Note made January 26, 1996, by DNAP in favor of the
Company
10.6*** Governance Agreement dated as of September 26, 1996, between ELM
and the Company
10.7*** Long-Term Funded Research Agreement dated as of September 26,
1996, between ELM and DNAP
10.8 Stock Purchase Agreement dated October 18, 1996, between
International Produce Holding Company and Houdstermaatschappij
C.J. Rijnhout B.V.
27.1 Financial Data Schedule
________________________
* Filed as an exhibit to the Company's Registration Statement on
Form S-4 (No. 333-09975) and incorporated herein by reference.
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<PAGE>
** 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.
*** Filed as an exhibit to the Company's current report on Form 8-K
dated September 26, 1996 and incorporated herein by reference.
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<PAGE>
EXHIBIT 10.8
AGREEMENT FOR THE SALE OF SHARES IN
RIJNHOUT FOOD GROUP B.V.
The undersigned:
1. The private company with limited liability HOUDSTERMAATSCHAPPIJ C.J.
RIJNHOUT B.V., established in Zwijndrecht but maintaining offices in 2291
XJ Barendrecht at Dierensteinweg 14a, represented in this matter by its
sole director Mr C.J. Rijnhout, hereinafter referred to as the Seller,
and
2. INTERNATIONAL PRODUCE HOLDING COMPANY, a company incorporated and existing
under the laws of the State of Delaware (USA), established in and having
its registered office at 1209 Orange Street, Wilmington, Delaware 19801
(USA) represented in this matter by Mr. Carlos Herrera, hereinafter
referred to as the Buyer,
WHEREAS:
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The Seller is holder of all the issued shares, consisting of 40 (forty) shares,
each with a nominal value of Hfl. 1,000.00, numbered 1 to 40 inclusive, in the
capital of the private company with limited liability RIJNHOUT FOOD GROUP B.V.
(hereinafter referred to as "the Company"), established in Zwijndrecht but
maintaining offices in Barendrecht.
The Company is in turn the sole shareholder of its operating companies, these
being (a) the private company with limited liability KONINKLIJKE EXPORTHANDEL
JAC. VAN NAMEN & ZONEN B.V. and (b) the private company with limited liability
RIJNHOUT GROENTEN B.V. (hereinafter referred to as "the Operating Companies"),
both operating companies also established in Zwijndrecht but maintaining offices
in Barendrecht. The Company and the Operating Companies are hereinafter jointly
referred to as "the Companies".
The Seller wishes to sell and transfer ownership of 51% of the issued share
capital of the Company to the Buyer and the Buyer wishes to purchase and acquire
ownership of 51% of the shares in the issued capital of the Company. The said
51% of the shares is in the issued capital of the Company are hereinafter
referred to as "the Shares".
Parties have reached agreements on the conditions under which the purchase and
sale of the Shares shall take place.
Parties wish to make the following written record of the agreement reached.
HAVE AGREED AS FOLLOWS:
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Article 1 (purchase and sale)
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1. The Seller hereby sells the Shares to the Buyer and the Buyer purchases the
Shares from the Seller. The purchase and sale of the Shares shall take
place with all rights attached thereto. The Shares shall be for the account
and risk of the Buyer from 1 January 1996.
<PAGE>
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2. The transfer of the Shares by the Seller to the Buyer shall take place by
virtue of the execution of the Deed of Transfer, also including
acknowledgement of this transfer by the Company, before Mr. L.E.H.M.
Vinken, civil law notary in Hendrik Ido Ambacht, or his deputy at latest
three days after the Ministry of Justice approved the amendment of the
articles of association mentioned hereafter.
The date of transfer is hereinafter referred to as the "Transfer date". The
draft of the Deed of Transfer is attached to this agreement as Appendix I.
3. Because the division of the share capital in coupons makes the transfer of
exactly 51% of the issued share capital impossible, the Seller shall amend
the articles of association before the transfer to the effect that the
authorized capital of the Company shall be divided into 20,000 (twenty
thousand) shares each with a nominal value Hfl. 10, of which 4,000 (four
thousand) shares each with a nominal value of Hfl. 10 shall be issued after
the amendment of the articles of association, so that pursuant to this
agreement the Seller shall transfer 2,040 (two thousand and forty) shares
with a nominal value of Hfl. 10.-in the issued capital of the Company.
4. On the Transfer Date the Seller shall hand over to the Buyer a copy of the
register of shareholders of the Company and copies of the registers of
shareholders of the Operating Companies.
Article 2 (purchase price and repayment of current account)
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1. The purchase price of the shares shall be paid by the Buyer to the Seller
in installments and the total amount shall in part depend on the profits
achieved in the years 1996, 1997, 1998 and 1999, whereby in this context
profit is defined as the profit before tax and interest as reported in the
annual accounts of the Company as adopted and including an auditor's
statement approving them. The profits as so defined shall hereinafter be
referred to as "EBIT". The purchase price shall be made up and determined
as follows:
a. On the passing of the Deed of Transfer, Buyer shall make a payment to
the Seller of Hfl. 2,509,200 (in words: two million five hundred and
nine thousand and two hundred guilders) on such account as shall be
designated by the notary.
b. Subsequently, four annual installments of Hfl. 418,200 (in words: four
hundred and eighteen thousand and two hundred guilders) will be paid,
which may, however, be increased or lowered depending on the EBIT
achieved in the year concerned. If the EBIT, as reported in the annual
accounts, including an auditor's statement approving them, is equal in
the years 1996, 1997, 1998 and 1999 to the average EBIT in the years
1993, 1994 and 1995, that is Hfl. 1,870,000 (in words: one million
eight hundred and seventy thousand guilders -hereinafter referred to
as the "Target EBIT"), in the year concerned the said amount of Hfl.
418,200 shall be paid. If, however, the EBIT for any of the said years
is lower or higher than the said Target EBIT the amount of Hfl.
418,200 to be paid for the year concerned shall be increased or
decreased in proportion, with the understanding, however, that the
amount to be paid by the Buyer in
<PAGE>
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any year shall never be more than Hfl. 836,400. (Example: Assume EBIT
for 1996 is Hfl. 2,000,000.- The installment for the year 1996 is then
2,000,000/1,870,000 x 418,200 = 447,273). Seller shall never have the
obligation to pay back any part of the purchase price, even if the
EBIT of the respective year should be negative.
c. Each of the installments referred to in b. shall be paid by the Buyer
to the Seller within fourteen days after the general meeting of
shareholders of the Company has adopted the annual accounts for the
year concerned, on such account as shall be designated by the Seller.
To secure the obligation of the Buyer to pay the said installments on
behalf of Seller a right of pledge will be established on 80 shares to
be acquired by the Buyer on the Transfer Date. Buyer will retain the
voting rights on the shares to be pledged.
d. Changes to the principles of valuation and the methods of determining
the results in the annual accounts shall be eliminated for the
purposes of determining the EBIT.
e. The current account arrangement between Seller and the Company shall
be terminated as of the date of Transfer. Before the transfer of the
shares takes place, Seller shall give Buyer a statement of the amount
he owes on the basis of this current account arrangement to the
Company (including the interest at 6% per annum to be calculated from
1 January 1996). Parties will request the Notary to use (part of) the
purchase price to repay the amount of money Seller owes to the
company. As far as required Seller hereby gives full and irrevocable
power of attorney to Buyer to instruct the notary in this matter.
f. If the Companies' agent in North America, Mrs. Honingberg, solely and
exclusively because of the closing of this Agreement, terminates her
agreements with the Companies, and such termination has a negative
effect on the North American revenues (considering such revenues as
the average of the years that ended December 31, 1993, 1994 and 1995),
which cannot be compensated by any other agreement or business
combination in such territory, and consequently the Target EBIT for
1997 can not be reached, then such negative effect shall not be
considered for purposes of determination of the Target EBIT.
Article 3 (Management)
- ---------
1. From the Transfer Date the Board of Managing Directors of the Company shall
consist of the following persons:
- Mr. C.J. Rijnhout
- Mrs. A.N.E. Ros-Bank
- Mr. Th. C. Slijkerman.
Contracts of employment/management have been concluded with said persons,
copies of which employment/management contracts are attached to this deed
as appendices 2, 3 and 4. On the Transfer Date - after the Transfer of the
Shares took place - a general meeting of shareholders of the Company shall
be held at which meeting Mr. Th. C. Slijkerman shall be appointed a
(managing) director of the Company.
<PAGE>
-4-
2. As Appendices 5a and 5b to this deed, declarations are attached from Mr.
Th. C. Slijkerman and J.L. van de Heuvel, who are currently entered in the
commercial register as members of the Supervisory Board of Koninklijke
Exporthandel Jac. van Namen & Zonen B.V. to the effect that they shall
resign as members of the Supervisory Board with effect from the date of
transfer of the shares and that they have no further claim of the Company
arising from the performance of their duties or their resignations. The
parties herewith discharge Mr. Slijkerman and Mr. van den Heuvel from their
duties in their capacity as supervising director as from the date of their
resignation.
3. New provisions regarding the powers of the directors, the appointment of a
Supervisory Board and its powers shall be drawn up in accordance with the
model attached to this deed as Appendix 6. Seller and Buyer have agreed
that the Supervisory Board shall consist of three members, two of whom
shall be appointed by the Buyer and one by the Seller. Furthermore, the
provision in the articles of association that a member of the board can
only be dismissed by two thirds of the votes (Article 17, paragraph3)
shall be scrapped.
Seller shall ensure that the articles of association of the Company are
amended in accordance with this article prior to the transfer of the
shares.
Article 4 (warranties and liability)
- ---------
1. The Seller warrants to the Buyer that the declarations included in Appendix
7 ("warranties") are completely accurate on the Date of Transfer.
2. The investigations conducted by the Buyer and the information given by the
Seller to the Buyer shall in no way act to discharge the Seller from his
obligations under the warranties unless this is explicitly stipulated in
this agreement and the accompanying appendices.
3. In the event of infringement by the Seller of one or more warranties under
this agreement or in the event that the Seller is in breach of other
obligations under this agreement, the Seller shall be liable towards the
Buyer for any resulting damage, including the costs reasonably incurred by
the Buyer and/or Companies in respect thereof and the statutory interest to
be calculated from the Transfer date, all this without prejudice to any
other rights which the Buyer may have by reason of such an infringement.
Any such damages and costs shall be treated as a correction of the purchase
prices for the Shares.
4. The following restriction shall applly with respect to the damages by
reason of breach of the warranties.
The Seller is only liable if the damage after the deduction of
unprecedented advantages not shown in the Transfer Account, exceeds a total
of Hfl. 55,000.-. If that is the case, the Seller is then liable for the
full amount (therefore not only for the excess amount).
<PAGE>
-5-
5. Without prejudice to the provisions of sub-section 6 of this article, the
liability of the Seller for infringements from the Transfer Date shall
apply:
a. for an unlimited period with respect to the warranties given in
Appendix 7, numbers 1, 2 and 7;
b. with respect to the guarantees relating to taxes and social security
contributions (Appendix 7, number 5) for such period as the relevant
authorities can still impose (supplementary) demands for the period
prior to the Transfer Date, plus 1 year after the end of said period;
c. up to 36 months after the Transfer Date with respect to the other
warranties in Appendix 7, unless otherwise stipulated there.
6. The restriction of the liability as referred to in sub-sections 4 and 5 of
this article shall, however, not apply if the inaccuracy of the relevant
warranties on the Transfer date was known to the Seller or could reasonably
have been known to the Seller.
7. In the event of an infringement, the Buyer shall notify in writing by
registered mail the Seller thereof as soon as possible. The Buyer shall
then be free, if a fact proves to be other than was guaranteed on the basis
of more than one warranty, to decide which warranty he shall invoke. The
Seller has the right - at his own expense - to raise a defence against
claims the absence of which is warranted in this agreement.
Article 5 (indemnity)
- ---------
1. The Seller shall indemnify the Buyer and the Companies against:
a. all claims which arise from the obligations of the Companies by virtue
of the warranties provided by them or sureties given by them with
respect to, or liabilities accepted by them or arising from law
(whether or not jointly and severally) for obligations (including:
fiscal liabilities) of third parties, all this is so far as no
adequate provision has been made for them in the Transfer Account as
of 31 December 1995.
b. Claims of third parties arising from obligations entered into in the
past by the Companies together with the third parties as referred to
under a. above, all in so far as no provisions has been made for them
in the Transfer Account as of 31 December 1995.
2. As Appendix 8 to this deed shall be attached a declaration by ING Bank N.V.
to the effect that this bank shall not avail of its power to terminate the
credit relationship with the Companies as a sole result of the transfer of
the Shares by the Seller to the Buyer and that it releases the Companies
from the joint and several liability for the Seller's debts to the bank.
<PAGE>
-6-
Article 6 (non-competition and confidentiality clause)
- ---------
1. The Seller is forbidden from establishing, carrying on, jointly running or
having someone else run a business similar to or in competition with the
business of the Companies for a period of seven years after the Transfer
Date, as well as working for such a business of a third party, whether for
remuneration or not, this on penalty of a fine, payable immediately without
notice of default of Hfl. 1,000,000 plus Hfl. 10,000 for each day that any
breach continues. This non-competition clause applies worldwide.
2. Except in so far as legally or otherwise required, the Seller shall not
publish or any way provide to third parties or otherwise make accessible,
directly or indirectly, any information relating to a confidential or
secret aspect of the business of the Companies.
3. The obligations stipulated above have also been accepted by Mr. C.J.
Rijnhout in his private capacity, who in evidence thereof has cosigned
this agreement.
Article 7 (future acquisitions by Buyer)
- ---------
The Buyer proposes acquiring majority interests in Europe and Asia in businesses
similar to that conducted by the Companies, this is, in businesses dedicated to
the distribution of fresh produce. The Buyer or its affiliated companies may do
this directly by acquiring interests, or it may be done indirectly by acquiring
interests through the Company. For purposes of this Article, "affiliated
companies" shall mean (i) any corporation of which more than 50% of its stock is
owned by Buyer; (ii) any corporation which owns more than 50% of the stock of
Buyer; (iii) any corporation which its stock is owned more than 50% by the
corporation described in (ii).
Both the acquisition of interests in similar businesses by the Buyer directly
and acquisition indirectly through the Company may effect the equity value of
the Company. In order to prevent the Seller as a minority shareholder from
suffering a disadvantage from the Buyer's acquisition policy, the parties have
agreed as follows:
a. If the Buyer proposes acquiring an interest in a business similar to that
conducted by the Companies in Europe and Asia, the Buyer shall give the
minority shareholders the opportunity to participate jointly for up to 49%
in any such acquisition provided that (i) Buyer and/or its affiliated
companies shall retain voting control over such joint interest in an
acquired company; (ii) such participation by the minority shareholders is
not restricted by any law, decree or governmental regulation; and, (iii)
such participation by the minority shareholders is not restrained by any
provision of a contract, agreement, instrument or obligation to which the
Buyer and/or its affiliated companies may be bound.
b. If the Buyer proposes acquiring a business similar to that conducted by the
Companies in Europe and Asia indirectly through the Company the minority
shareholders shall have to contribute pro rata to the necessary capital. If
the minority shareholders, for whatever reason, are unwilling or unable to
participate in the capital increase which is necessary for a proposed
acquisition, they shall permit their relative share in the issued capital
of the Company to be reduced.
<PAGE>
-7-
c. If, however, one or more of the minority shareholders - supported by expert
opinions from at least two external experts - can plausibly demonstrate
that the equity value of the Company would suffer as a result of
acquisitions as referred to under a. and b. and the minority shareholders
object with at least forty percent of the votes represented in the general
meeting of shareholders to such an acquisition, the Buyer now accepts for
such an event the obligation to buy out the shareholders who have declared
their opposition to such an acquisition, in which case the purchase price
shall be fixed according to the following method.
1. The purchase of such a minority equity participation shall be in cash
and the equity value together with the earn out (as stipulated in
Article 2, section 1, sub-section b), if applicable, will be
determined based on the same valuation method as was used for the
acquisition of the Shares, which is as follows:
(a) Value of shares: ten times the average earnings before interest
---------------
and after taxes ("EBIAT"), over the last three years, minus the long
term debt, the permanent portion of the short term debt and any other
debt now sown in the balance sheet, divided by the then outstanding
number of Shares; and,
(b) Unpaid Earn Out: the average EBIT over the then immediately
preceding 3 years.
2. Unless there has been a material change on the long term debt, in the
permanent portion of the short term debt or other debt has been
incurred ("Material Change"), the audited financial statements of the
immediately preceding 3 years will be used for valuation.
3. If a material change has occurred or if more than 6 months have
elapsed from the closing of the last financial statements, then an
audit will be carried out and the valuation will be calculated as
follows:
(i) EBIT and EBIAT will be based on the average of the last 3
years;
(ii) long term debt, will be determined according to the closing of
the previous month before the agreed transaction date:
(iii) the permanent portion of the short term debt will be based upon
the preceding 12 months, before the agreed transaction date;
and,
(iv) other debt and receivables incurred since the last audited
financial statement will be taken into account.
d. The seller undertakes to impose the stipulations of this article in a
perpetual clause on third parties to whom he - with due observance of the
blocking rules in the Company's articles of association - sells shares in
the capital of the Company.
Article 8 (Transfer of annuity and pension commitment)
- ---------
The Seller and the Buyer undertake to ensure that the annuity commitment towards
Mr J.L. Rijnhout entered into by the Company and the pension commitment under
its own management towards Mr C.J. Rijnhout shall be
<PAGE>
-8-
assumed by the Seller, this with the permission of and subject to the condition
imposed by the tax authorities at a time to be determined by the Seller at its
sole discretion. As long as the said commitments are not assumed by Seller, the
Seller warrants the Buyer that any claim resulting form said commitments shall
not exceed the amount of the relevant provisions in the Transfer Account unless
said claims are adequatly covered by insurance.
Article 9 (Sale and Delivery of land at Vrouwgelenweg)
- ---------
Seller warrants that on the date of transfer at the latest the Company shall
sell and transfer to the Seller title to the registered properties consisting of
a plot of land with shed and a wooden bridge on it, situated at Vrouwgelenweg in
Hendrik Ido Ambacht and a plot of land on Vrouwgelenweg in Hendrik Ido Ambacht,
entered in the land registry of the municipality of Hendrik Ido Ambacht, section
E, number 9592, size 40 are and 10 centiare and municipality of Hendrik Ido
Ambacht section E 9593 size 20 are and 85 centiare for the purchase price of
Hfl. 298,486, cost for the buyer's account. Seller shall accept said registered
properties from the Company in their condition as of the date of delivery and
shall require no indemnity of any nature whatever from the Company.
Article 10 (participation Mr Slijkerman)
- ----------
1. Seller wishes to sell 20% of the outstanding capital of the Company to Mr
Th. C. Slijkerman, residing at Zwijndrecht, The Netherlands, or to a
limited liability company (B.V.) controlled by said Mr Slijkerman
(hereinafter referred to as "Slijkerman"). Buyer declares now for then that
it agrees to Slijkerman's participation and that it shall not evoke the
statutory blocking restriction.
2. Seller has stipulated with regard to the shares to be acquired by
Slijkerman that Seller will be entitled to buy them back from Slijkerman,
who shall be obliged to sell them in the following cases:
- upon Mr. Th.C. Slijkerman reaching the age of sixty;
- in the event of Mr Th.C. Slijkerman's death before said age;
- in the event of Mr Th.C. Slijkerman's dismissal as managing director of
the Company, other than at his own request.
Buyer declares now for then that in the said cases it will not exercise any
rights based on the share transfer restriction in the articles of
association with respect to the shares in question.
3. In the event Buyer purchases additional shares from Slijkerman or the
Seller the purchase price will be determined according to the same
valuation method as mentioned in article 7.
Article 11 (costs)
- ----------
Each of the parties shall bear its own costs relating to this transaction for
accountants and fiscal and legal advice. The costs of this deed and the costs
of the deed of transfer shall be borne by the Buyer.
<PAGE>
-9-
Article 12 (Exclusion of cancellation)
- ----------
Parties waive their right for whatever reason to claim cancellation or
dissolvement of the agreement and the deed of delivery wholly or in part.
Article 13 (Appendices)
- ----------
The appendices to this agreement constitute an integral part of the agreement.
Any reference to this agreement shall also involve a reference to said
appendices.
Article 14 (Applicable law)
- ----------
This agreement is governed by the law of the Netherlands. Disputes arising from
this agreement shall be submitted to the court with jurisdiction in the District
of Rotterdam or shall be settled at the sole discretion of Buyer by arbitration
in accordance with the Rules of the Netherlands Arbitration Institute
(Nederlands Arbitrage Instituut). The arbitral tribunal shall be composed of
three arbiters when the claim amounts to more than Hfl. 100,000 or one arbiter
when the claim is less than Hfl. 100,000
The losing party shall have to reimburse to the other party not only the costs
awarded in the verdict but also the other costs reasonably incurred by the other
party or the Companies.
Article 15 (Notifications)
- ----------
All notifications by virtue of this agreement must be made in writing and sent
by registered delivery to the following addresses:
The Seller: Houdstermaatschappij C.J. Rijnhout B.V.
- ----------
Att. Mr C.J. Rijnhout
Onderdijkse Rijweg 345
3341 BP HENDRIK IDO AMBACHT
Visser en Legger Advocaten
Att. Mr J.A. Visser
Postbus 1034
3300 BA DORDRECHT
The Buyer: International Produce Holding Company
- ---------
C/O Pulsar International, S.A. de C.V.
Att. Lic. Alejandro F. Sanchez Mujica
Edificio Torre Alta, Mezzanine
Ave. Roble no. 300, Col Valle del Campestre
SAN PEDRO GARZA GARCIA, Nuevo Leon,
Mexico
Van den Boomen Advocaten
Att. Mr M.J.P.N. Steijven
Postbus 193
5580 AD WAALRE
<PAGE>
-10-
Article 16 (Final provision)
- ----------
If one or more of the provisions in this agreement prove to be non-binding, the
remaining provisions hereof shall remain in force as between the parties.
Parties undertake to replace non-binding provisions with such provisions which
are binding and which diverge as little as possible - with a view to the purpose
and scope of this agreement - from the non-binding provisions.
So executed and signed in triplicate in Barendrecht on the 18th of October 1996.
/s/ C.J. RIJNHOUT /s/ CARLOS HERRERA
Seller Buyer
In evidence of agreement with the provisions of Article 6:
/s/ C.J. RIJNHOUT
C.J. Rijnhout
Appendices
- ----------
1. Deed of Transfer
2. Employmentcontract Mr C.J. Rijnhout
3. Employmentcontract Mrs. A.N.E. Ros-Bank
4. Managementcontract T.S. Agro/Mr Th.C. Slijkerman
5. a. Declaration by Mr Th.C. Slijkerman
b. Declaration by Mr J.L. van den Heuvel
6. Draft Articles of Association concerning Management and Supervisory Board
7. Warranties
8. Declaration by ING Bank N.V.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS AT AND FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
INCLUDED IN THE COMPANY'S FORM 10-Q QUARTERLY REPORT FOR SUCH PERIOD AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,490
<SECURITIES> 0
<RECEIVABLES> 33,134
<ALLOWANCES> 5,452
<INVENTORY> 11,278
<CURRENT-ASSETS> 56,449
<PP&E> 34,221
<DEPRECIATION> 5,195
<TOTAL-ASSETS> 120,680
<CURRENT-LIABILITIES> 48,730
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> 51,297
<TOTAL-LIABILITY-AND-EQUITY> 120,680
<SALES> 136,245
<TOTAL-REVENUES> 136,245
<CGS> 115,264
<TOTAL-COSTS> 147,074<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,186
<INCOME-PRETAX> (14,087)
<INCOME-TAX> 1,026
<INCOME-CONTINUING> (14,872)<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,872)
<EPS-PRIMARY> (.82)<F3>
<EPS-DILUTED> (.82)
<FN>
<F1>TOTAL COSTS INCLUDES A ONE-TIME CHARGE OF $12.9 MILLION FOR PURCHASED
RESEARCH AND DEVELOPMENT IMMEDIATELY CHARGED OFF TO INCOME AFTER THE MERGER WITH
DNA PLANT TECHNOLOGY CORPORATION.
<F2>NET OF LOSS RELATING TO MINORITY INTERESTS.
<F3>BASED ON 18.220 MILLION AVERAGE COMMON SHARES OUTSTANDING DURING THE PERIOD
WHICH CONSIDERS THE EFFECT OF THE MERGER WITH DNA PLANT TECHNOLOGY CORPORATION.
</FN>
</TABLE>
