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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (Fee required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No fee required)
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 of incorporation) (I.R.S. Employer Identification No.)
6701 SAN PABLO AVENUE
OAKLAND, CALIFORNIA 94608
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 547-2395
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes / / No /X/
Aggregate market value of Common Stock held by nonaffiliates as of March
18, 1997: $26,178,162
Number of shares of Common Stock outstanding as of March 18, 1997:
18,370,640
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
definitive proxy statement to be filed for its 1997 annual meeting of
stockholders.
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DNAP Holding Corporation (referred to herein as "DNAP Holding" or "the
Company") has recently reviewed the application of accounting practices
employed by its majority-owned subsidiary, Agricola Batiz, S.A. de C.V.
("ABSA"). In the case of ABSA's joint venture farming activities that carry
over from one calendar year to the next, estimates of total crop production
costs and crop yields are required to be made to determine expected average
unit costs. Expected average unit costs are used to recognize cost of sales
on a crop that has been partially harvested and sold as of the end of an
accounting period. In July 1997, the Company determined that cost of sales
for two joint ventures for the year ended December 31, 1995 were understated
by $0.8 million because ABSA had failed to update estimates of cost of sales
when actual results of operations became known prior to the issuance of the
1995 financial statements. The Company further determined that this
warranted a restatement of its 1995 results of operations and corresponding
changes to its 1996 financial statements, which are presented in this Form
10-K/A and more fully described in Note 2 to the Company's consolidated
financial statements.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for each of the
years in the four year period ended December 31, 1996 are derived from the
consolidated financial statements of DNAP Holding. The consolidated financial
statements and related notes as of December 31, 1996 and 1995 and the three
years in the period ended December 31, 1996 are included elsewhere in this
Form 10-K/A, and the selected consolidated financial information set forth
below should be read in conjunction with such financial statements and notes.
The selected consolidated financial data of DNAP Holding include financial
data for ABSA, International Produce Holding Company, Interfruver de Mexico,
S.A. de C.V., DNA Plant Technology Corporation and Royal Van Namen as from
their respective dates of acquisition.
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(THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
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(RESTATED-
NOTE 2)
1996 1995 1994 1993
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STATEMENT OF OPERATIONS DATA:
Total revenues. . . . . . . . . . . . . $ 192,985 $197,586 $ 64,112 $ 164
Gross profit. . . . . . . . . . . . . . 16,632 19,703 (1,648) (3,638)
Selling and administrative. . . . . . . (16,195) (14,608) (9,509) (915)
Write-off of purchased research and
development. . . . . . . . . . . . . . (12,900) - - -
Research and development expenses . . . (1,244) - - -
Amortization of goodwill, patents
and trademarks . . . . . . . . . . . . (1,008) (538) (404) (404)
Operating income (loss) . . . . . . . . (14,715) 4,557 (11,561) (4,957)
Interest expense, net . . . . . . . . . (3,482) (5,031) (1,254) 404
Exchange gain (loss), net . . . . . . . 569 (4,748) (1,473) (7)
Other non-operating income. . . . . . . 2,058 - - -
Loss before income taxes. . . . . . . . (15,570) (5,222) (14,288) (4,560)
(Provision) benefit for income taxes. . (2,738) (2,132) 1,842 513
Minority interests. . . . . . . . . . . 1,274 3,510 5,673 1,770
Net loss. . . . . . . . . . . . . . . . (17,034) (3,844) (6,773) (2,227)
Net loss per common share (1) . . . . . ($1.19)
Weighted average number of common
shares outstanding (1) . . . . . . . . 14,286,318
AT DECEMBER 31,
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(RESTATED- (RESTATED-
NOTE 2) NOTE 2)
1996 1995 1994 1993
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BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . $ 10,735 $ 1,580 $ 2,540 $ 4,079
Accounts and notes receivable, net. . 36,322 32,526 22,649 3,246
Inventories . . . . . . . . . . . . . 20,139 14,730 10,450 10,758
Total current assets. . . . . . . . . 68,354 48,978 35,761 18,661
Total assets. . . . . . . . . . . . . 141,137 88,108 71,682 45,428
Bank loans and current portion of
long-term debt. . . . . . . . . . . 41,214 33,103 27,977 3,590
Total current liabilities . . . . . . 80,939 54,725 40,992 7,371
Long-term debt and payables. . . . . 2,423 10,515 2,223 1,485
Stockholders' equity. . . . . . . . . 48,690 14,725 17,839 22,083
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(1) Comparative share and per share data for 1995, 1994, 1993 is not presented
because the information is not meaningful.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial information of DNAP Holding and the financial statements and related
notes of DNAP Holding included elsewhere in this Form 10-K/A.
OVERVIEW
DNAP Holding engages in the production, distribution, and sale of fresh
produce to wholesalers and retailers in Mexico, the United States, Canada,
Europe, the Middle East, and the Far East. Since 1993, the business strategy
of the Company and its predecessors has been (i) vertical integration within
the produce/agronomics industry, (ii) growth by acquisition of complementary
businesses and (iii) aggressive growth of the businesses acquired. While
these continue to be important components of the business strategy, DNAP
Holding wanted to improve its access to basic technology to separate itself
from others in the produce business by completing the Merger with DNAP.
DNAP, which was incorporated in Delaware in 1981, is an agribusiness
biotechnology company focused on the development and application of genetic
engineering and transformation technologies in plants, as well as development
and marketing of premium, differentiated, fresh and processed, branded fruits
and vegetables. DNAP uses advanced breeding, genetic engineering, and other
biotechniques to achieve improvements in the taste, texture, product form,
color, and shelf life of produce and to improve production characteristics,
such as disease resistance and production or processing yields.
DNAP Holding expects to capitalize on the combination of production,
distribution, and technology strengths by focusing its longer-term business
strategy on the development and commercialization of value-added, proprietary
differentiated products.
DNAP Holding is seeking to exercise greater control over its production
and distribution operations to facilitate and strengthen its ability to
commercialize new products that are developed with DNAP's technology. DNAP
Holding's recently-announced agreement to acquire the minority interests in
IPHC and ABSA is part of this strategy. The price for acquiring these
interests has been renegotiated downward by the parties to $19.0 million. With
respect to ABSA, due to a provision in Mexican law that restricts foreign
ownership of companies that own agricultural land in Mexico, the parent
company of DNAP Holding, Bionova, S.A. de C.V. ("Bionova Mexico"), will
purchase a 20.5% interest and DNAP Holding will own the other 79.5%.
Accordingly, Bionova Mexico will pay $4.3 million of the total purchase price
and DNAP Holding will pay $14.7 million. DNAP Holding is seeking bank debt
to finance its portion of the acquisition.
DNAP Holding has recently reviewed the application of accounting
practices employed by ABSA. In the case of ABSA's joint venture farming
activities that carry over from one calendar year to the next, estimates of
total crop production costs and crop yields are required to be made to
determine expected average unit costs. Expected average unit costs are used
to recognize cost of sales on a crop that has been partially harvested and
sold as of the end of an accounting period. In July 1997, the Company
determined that cost of sales for two joint ventures for the year ended
December 31, 1995 were understated by $0.8 million because ABSA had failed to
update estimates of cost of sales when actual results of operations became
known prior to the issuance of the 1995 financial statements. The Company
further determined that this warranted a restatement of its 1995 results of
operations and corresponding changes to its 1996 financial statements, which
are presented in this Form 10-K/A and more fully described in Note 2 to the
Company's consolidated financial statements.
RESULTS OF OPERATIONS
YEAR-ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
DNAP Holding's total revenues declined from $197.6 million in 1995 to
$193.0 million in 1996. The primary components of this change were a $5.6
million decline in other service income, a $16.1 million decrease in IPHC's
U.S. and Canadian sales, partially offset by a $6.3 million increase in the
sales of Interfruver in Mexico, and the
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inclusion of $8.2 million in sales generated from the partial year results of
DNAP and Royal Van Namen following their acquisition and merger into DNAP
Holding. ABSA's revenues in 1996 and 1995 were $67.4 million and $61.7
million, respectively, of which $67.0 million and $57.8 million were
intercompany sales (eliminated in consolidation). The decline in U.S. and
Canadian sales reflected the effect of lower average realized prices of fresh
produce sold during the first six months of the year and a reduction in
ABSA's production for the U.S. market during the third quarter. This
reduction in ABSA's production was a direct result of the Company's decision
to terminate relationships with some of its growers in 1996 to improve
product quality, build more stable relationships with its growers, and reduce
credit losses. Interfruver's sales volume increased from 1995 to 1996 due to
the addition of new commodities to the products sold by Interfruver, slightly
higher prices due to improved brand name recognition and quality, and
additional sales to a major Mexican retailer. Other service income from the
sale of materials (seeds, fertilizer, etc.) to contract growers, net of
costs, included in total revenues declined from 1995 to 1996 as a direct
consequence of ABSA's decision to terminate relationships with some of its
growers in 1996, to whom such materials are sold.
Gross profit (sales less cost of sales) declined from $19.7 million in
1995 to $16.6 million in 1996. The negative effects of the lower average
selling prices ($8.6 million) in the U.S. and Canada and the decline in
service income ($5.6 million) in Mexico were offset to some extent by the
incremental margin contribution by DNAP and Royal Van Namen ($1.3 million and
$.7 million, respectively) and lower cost of sales ($9.1 million). Included
in the change in cost of sales is a reduction in the expense recorded in 1996
versus 1995 associated with the provisions for uncollectible grower and
customer receivables ($2.0 million and $5.0 million in 1996 and 1995,
respectively).
Selling and administrative expenses increased from $14.6 million in 1995
to $16.2 million in 1996. This increase was primarily associated with
expenses incurred by DNAP and Royal Van Namen during the fourth quarter of
1996 after the Merger and acquisition, respectively, and their incorporation
into DNAP Holding.
Research and product development expenses appeared in DNAP Holding's
results of operations for the first time in the fourth quarter of 1996. This
$1.2 million expense item reflects DNAP's research and product development
overhead recorded in the fourth quarter.
In 1996, the Company wrote off $12.9 million of purchased research and
development 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 the 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, purchased research and development must be
charged off immediately to current income.
The non-cash charge for amortization of goodwill, patents and trademarks
increased in 1996 due to the first quarter of amortization charges (recorded
in the fourth quarter of 1996) emanating from the DNAP Merger and Royal Van
Namen acquisition, respectively.
Interest expense decreased by $2.9 million in 1996, or 34%, versus 1995.
This decrease was due to a decline in the average interest rate that DNAP
Holding paid on its short term debt during the year.
Interest income declined from $3.5 million in 1995 to $2.2 million in
1996. This decline was due to a lower level of interest income generated by
ABSA on its short-term investments and a lower level of advances to growers
on which ABSA collected interest in 1996 versus 1995.
In 1996, DNAP Holding experienced a net foreign exchange gain of $.6
million as compared to a loss of $4.7 million in 1995. During 1996 the
peso/dollar exchange rate remained relatively stable throughout the year. At
the end of 1994 a significant devaluation of the Mexican peso took place with
further declines experienced throughout 1995. As a consequence, large
exchange losses were experienced in 1995 by ABSA, whose functional currency
is the U.S. dollar, due to its net peso monetary position.
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Income tax expense increased from $2.1 million in 1995 to $2.7 million
in 1996. This increase in expense was attributable to the recognition of a
deferred tax liability for ABSA arising from Mexican tax law which requires
expensing of inventory acquisition costs in the year of purchase. Because
ABSA had no income in 1996 against which to apply these expenses, the
deductions resulted in an increase in ABSA's net operating loss carryforward.
Since realization of such net operating loss carryforwards in their entirety
is not believed to be sufficiently assured, an increase in the valuation
allowance against deferred income tax assets was recorded commensurate with
the increase in deferred income tax assets.
Other non-operating income in 1996 included a gain on the sale of
property, plant and equipment of $.3 million and a subsidy of $1.7 million in
connection with a special incentive program sponsored by various Mexican
government and banking institutions for companies in the agriculture, fishing
and forestry industries.
During 1996 the share of losses allocable to minority interests was $1.3
million as compared with $3.5 million in 1995. The 1996 and 1995 allocations
of losses are consistent with the minority positions held across the operating
subsidiaries of the Company.
YEAR-ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues during 1995 increased 201% to $197.6 million from $64.1
million in 1994. The increase reflects the effect of the start-up of Premier
(1995 sales of $15.9 million), the acquisition of R.B. Packing by IPHC (1995
sales of $90.8 million) in December 1994, the acquisition of Interfruver by
ABSA in January 1995 (1995 sales of $48.8 million), the growth of TDI (1995
sales of $32.3 million), and service income, net of costs ($5.9 million).
ABSA's sales in 1995 amounted to $61.7 million, of which $57.8 million
represented intercompany sales (and were eliminated in consolidation). In
1994 ABSA's sales amounted to $27.0 million, including $20.9 million of sales
to R.B. Packing prior to its acquisition by IPHC. The balance of the sales
in 1994 was generated by IPHC after its acquisition in December, 1994.
Gross profit was negative in 1994. In 1995, gross profit was 10.0% of
total revenues, reflecting the effects of higher average sales prices, sales
volumes and harvest yields versus those in 1994.
Selling and administrative expenses increased 53.7% to $14.6 million
from $9.5 million, but decreased as a percentage of sales from 14.8% in 1994
to 7.4% in 1995 reflecting higher sales volumes in 1995.
The non-cash charge for amortization of goodwill increased in 1995 due
to the acquisition of IPHC in December 1994 and Interfruver in January 1995.
Interest expense increased from $2.2 million in 1994 to $8.5 million in
1995 reflecting the higher average levels of borrowing outstanding during the
year and the higher average cost of borrowing during 1995 (16.4%) as compared
to 1994 (12.1%). The increased borrowings were required to fund the higher
working capital requirements associated with the greatly expanding sales
activities, and advances provided to growers. Interest income increased from
$.9 million in 1994 to $3.5 million in 1995 reflecting the increased level of
financing provided to growers and higher interest rates in Mexico during
1995. Exchange losses relate primarily to the significant effects of the
devaluation of the Mexican peso on the net peso monetary position of ABSA,
whose functional currency is the U.S. dollar.
Income tax expense increased to $2.1 million in 1995 from a benefit of
$1.8 million in 1994 due to income tax payable by IPHC's subsidiaries and the
effects of the devaluation of the Mexican peso, which reduced the effect of
future tax benefits from net operating loss carry-forwards in the Mexican
subsidiaries.
CAPITAL EXPENDITURES
During 1996 the Company made capital investments of $7.1 million in
property, plant, and equipment. The majority of these investments were made
to expand ABSA's 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 beginning
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in the second quarter of 1996. ABSA also made a major investment in
temperature controlled storage space and equipment which it believes will
reduce spoilage and shrinkage and enhance the overall quality of its products.
Capital expenditures during 1995 and 1994 were $4.2 million and $6.1
million, respectively, reflecting primarily the investment levels required to
acquire and develop ABSA's owned and leased acreage in Mexico.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had a working capital deficit
position of $5.7 million. The deficit position increased to $12.6 million at
December 31, 1996. The primary reason for this increase is certain long-term
debt which is scheduled to mature in May 1997 and was therefore reclassified
to current liabilities. The Company is beginning the process of negotiating
long-term financing arrangements. Cash provided by Bionova Mexico was
predominantly used to make acquisitions and acquire property, plant and
equipment.
For the year ended December 31, 1996 the Company generated $5.8 million
in cash from operations, which was due primarily to changes in certain working
capital components. After adjusting for the impact of consolidating DNAP and
Royal Van Namen at the time of the Merger and acquisition, respectively,
accounts receivable reflected a decline due to lower sales in December of
1996 as compared with 1995, and advances to growers also declined due to the
Company's decision to discontinue relationships with some of its growers in
1996. After adjusting for the consolidation of DNAP and Royal Van Namen,
accounts payable and accrued expenses increased $5.6 million during 1996. A
primary driver of this was ABSA ($3.5 million), which invested heavily in
property, plant and equipment and its growing operations during the last few
months of 1996, resulting in a higher level of payables at December 31, 1996
as compared with December 31, 1995. The second major contributor to the
increase in accounts payable was FreshWorld Farms, which ramped up its sourcing
of products at the end of 1996. Partially offsetting these two positive impacts
on cash flows was a $5.0 million increase in inventories, which derived entirely
from the increase in ABSA's growing operations at the end of 1996.
In addition to the capital expenditures discussed above, investment
requirements reflected in the cash flows include the Merger with DNAP and the
acquisition of Royal Van Namen. The Company made a net investment of $6.7
million in DNAP prior to the Merger. The Company advanced DNAP $10.5 million,
and DNAP provided $3.8 million of cash at September 26, 1996, the date of the
Merger. The Company made a net investment of $1.2 million in Van Namen. The
Company paid $1.5 million for the Van Namen acquisition, and Van Namen provided
$.3 million of cash on November 30, the date of acquisition.
Cash provided by financing activities during 1996 was $17.8 million. The
great majority of this cash was received in the form of a capital contribution
by Bionova Mexico in connection with the Merger.
The Company's Board of Directors has authorized management to pursue the
acquisition of the 49.99% interest in ABSA and the 42.3% interest in IPHC
currently held by the Batiz family. The original purchase price of $23.75
million has been adjusted downward to $19.0 million based on the results of the
due diligence review, ABSA's performance, and other factors. As explained
above, Bionova Mexico will purchase a minority interest in ABSA to comply
with Mexican laws regarding foreign ownership of companies that own
agricultural land in Mexico. Accordingly, the Company's portion of the
purchase price is $14.7 million. The Company is currently seeking bank debt
to obtain the necessary financing to complete this transaction and to
continue the Company's aggressive development and growth of its farming,
distribution, and research activities in the future.
DISCLOSURES REGARDING FORWARD LOOKING STATEMENTS
This report on Form 10-K/A 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-K/A,
including without limitation statements contained in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
under "Notes to the 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
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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 1997, 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 1994, 1995 and 1996. 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 dilative 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 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
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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, 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. ABSA relies on agricultural land leased from
others and production associations with other growers for a part of its
supply. 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.
-9-
<PAGE>
DEPENDENCE ON ONE SUPPLIER. One grower in Baja California, Santa Cruz
Empacadora, S. de R.L. de C.V., accounted in 1996 for approximately 10% of
the consolidated 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,
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 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.
-10-
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants, and the consolidated financial
statements of the Company and the notes thereto appear on the following pages.
-11-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DNAP Holding Corporation
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of results of operations, of changes in
stockholders' equity and of cash flows, after the restatement described in
Note 2, present fairly, in all material respects, the financial position of
DNAP Holding Corporation and its subsidiaries at December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of DNAP Holding Corporation management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
March 27, 1997,
except as to Note 2 which is as of August 4, 1997
12
<PAGE>
DNAP HOLDING CORPORATION
(formerly Bionova U.S. Inc.)
CONSOLIDATED BALANCE SHEET
Thousands of U.S. Dollars
DECEMBER 31,
----------------------
(RESTATED- (RESTATED-
NOTE 2) NOTE 2)
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 10,735 $ 1,580
Accounts receivable ........................... 30,941 25,444
Advances to growers ........................... 5,381 7,082
Inventories ................................... 20,139 14,730
Other current assets .......................... 1,158 142
-------- --------
Total current assets ........................ 68,354 48,978
-------- --------
Property, plant and equipment, net ............ 34,573 25,772
Patents and trademarks, net ................... 14,492 --
Goodwill, net ................................. 19,323 9,319
Deferred income taxes ......................... 2,850 3,281
Other assets .................................. 1,545 758
-------- --------
Total assets ................................ $141,137 $ 88,108
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank loans ......................... $ 32,110 $ 32,493
Current portion of long-term debt ............. 9,104 610
Accounts payable and accrued expenses ......... 30,773 17,038
Accounts payable to related parties ........... 5,548 2,735
Deferred income taxes ......................... 3,404 1,849
-------- --------
Total current liabilities ................... 80,939 54,725
Long-term debt ................................ 2,423 10,222
Long-term debt to related parties ............. -- 293
-------- --------
Total liabilities ........................... 83,362 65,240
-------- --------
Minority interest ............................. 9,085 8,143
-------- --------
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 .................... 78,535 --
Capital contributed by Bionova (see note 1) ... -- 27,848
Accumulated deficit ........................... (29,928) (12,894)
Cumulative translation adjustment ............. (101) (229)
-------- --------
48,690 14,725
-------- --------
Total liabilities and stockholders' equity $141,137 $ 88,108
======== ========
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
DNAP HOLDING CORPORATION
(formerly Bionova U.S. Inc.)
CONSOLIDATED RESULTS OF OPERATIONS
Thousands of U.S. Dollars
(except per share amounts)
<TABLE>
YEAR ENDED DECEMBER 31,
-------------------------------------
(RESTATED-
NOTE 2)
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Total revenues .......................................... $ 192,985 $ 197,586 $ 64,112
--------- --------- ---------
Cost of sales ........................................... (176,353) (177,883) (65,760)
Selling and administrative expenses ..................... (16,195) (14,608) (9,509)
Write-off of purchased research and development ......... (12,900) -- --
Research and development expenses ....................... (1,244) -- --
Amortization of goodwill, patents and trademarks ........ (1,008) (538) (404)
--------- --------- ---------
(207,700) (193,029) (75,673)
--------- --------- ---------
Operating income (loss) ................................. (14,715) 4,557 (11,561)
--------- --------- ---------
Interest expense ........................................ (5,651) (8,521) (2,160)
Interest income ......................................... 2,169 3,490 906
Exchange gain (loss), net ............................... 569 (4,748) (1,473)
Other non-operating income .............................. 2,058 -- --
--------- --------- ---------
(855) (9,779) (2,727)
--------- --------- ---------
Income (loss) before income tax ......................... (15,570) (5,222) (14,288)
Income tax (expense) benefit ............................ (2,738) (2,132) 1,842
--------- --------- ---------
Net income (loss) before minority interest ............... (18,308) (7,354) (12,446)
Minority interest in net loss (income) of subsidiaries ... 1,274 3,510 5,673
--------- --------- ---------
Net loss ................................................. $ (17,034) $ (3,844) $ (6,773)
========= ========= =========
Net loss per share ....................................... $ (1.19)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
DNAP HOLDING CORPORATION
(FORMERLY BIONOVA U.S. INC.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THOUSANDS OF U.S. DOLLARS
(RESTATED FOR 1995 AND 1996 - NOTE 2)
<TABLE>
COMMON CUMULATIVE
SHARES COMMON PAID-IN CONTRIBUTED TRANSLATION ACCUMULATED
OUTSTANDING STOCK CAPITAL CAPITAL ADJUSTMENT DEFICIT TOTAL
----------- ------- ------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 $ 24,360 $(2,277) $22,083
Investment by Bionova, S.A. de C.V...... 2,552 2,552
Net loss................................ (6,773) (6,773)
Translation adjustment.................. $ (23) (23)
-------- ----- -------- --------
BALANCES AT DECEMBER 31, 1994 26,912 (23) (9,050) 17,839
Investment by Bionova, S.A. de C.V...... 936 936
Net loss................................ (3,844) (3,844)
Translation adjustment.................. (206) (206)
-------- ----- -------- --------
BALANCES AT DECEMBER 31, 1995 27,848 (229) (12,894) 14,725
Issuance of shares for cash upon the
formation of Bionova U.S., Inc. ...... 25,000 $ 25 25
Issuance of shares for cash and
upon transfer of Bionova S.A.
de C.V.'s interests in the
Bionova subsidiaries.................. 270,922 $ 3 32,845 (27,848) 5,000
Issuance of shares to Bionova, S.A.
de C.V. prior to the merger........... 52,800 1 5,279 5,280
Shares issued to DNA Plant
Technology stockholders upon
consummation of the merger............ 5,511,192 55 32,511 32,566
Shares issued to Bionova International,
Inc. in connection with merger and
capital contribution.................. 12,510,726 125 7,875 8,000
Net loss................................ (17,034) (17,034)
Translation adjustment.................. 128 128
---------- ---- ------- -------- ----- -------- --------
BALANCES AT DECEMBER 31, 1996........... 18,370,640 $184 $78,535 -- $(101) $(29,928) $ 48,690
========== ==== ======= ======== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
DNAP HOLDING CORPORATION
(formerly Bionova U.S. Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of U.S. Dollars
<TABLE>
Year Ended December 31,
--------------------------------
(Restated-Note 2)
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (17,034) $ (3,844) $ (6,773)
Items not affecting cash:
Minority interest . . . . . . . . . . . . . . . . . . . . . . . (1,274) (3,510) (5,673)
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . 2,244 2,805 2,858
Amortization of goodwill, patents and trademarks. . . . . . . . 1,008 538 404
Write-off of purchased research and development . . . . . . . . 12,900 -- --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 1,986 2,132 (1,842)
Gain from sale of property, plant and equipment . . . . . . . . (325) -- --
Net changes (exclusive of changes due to subsidiaries acquired):
Accounts receivable and advances to growers . . . . . . . . . . 5,675 (9,876) (11,999)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (4,951) (4,280) 723
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . (35) (733) (109)
Accounts payable and accrued expenses . . . . . . . . . . . . . 5,627 4,548 2,687
---------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . . . . . . . 5,821 (12,220) (19,724)
---------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment. . . . . . . . . . . (7,104) (4,214) (6,121)
Advances to DNAP prior to merger, net of cash acquired. . . . . (6,664) -- --
Acquisition of subsidiaries, net of cash acquired . . . . . . . (1,221) (2,026) (943)
Proceeds from sale of property, plant and equipment . . . . . . 535 -- --
---------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . (14,454) (6,240) (7,064)
---------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings . . . . . . . . . . . . . . (2,142) -- --
Proceeds from bank loans. . . . . . . . . . . . . . . . . . . . 34,556 13,122 21,932
Repayments of long-term debt. . . . . . . . . . . . . . . . . . (35,451) -- --
Amounts due to related parties. . . . . . . . . . . . . . . . . 2,520 2,506 392
Investment by Bionova, S.A. de C.V. . . . . . . . . . . . . . . 18,305 936 2,552
Investment by minority interests. . . . . . . . . . . . . . . . -- 936 372
---------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . 17,788 17,500 25,248
---------- -------- --------
Net increase (decrease) in cash and cash equivalents. . . . . . . 9,155 (960) (1,540)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . 1,580 2,540 4,080
---------- -------- --------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . $ 10,735 $ 1,580 $ 2,540
========== ======== ========
SUPPLEMENTAL CASH FLOW DATA
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,438 $ 4,578 $ 1,874
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,693 $ 996 --
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>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
DNAP HOLDING CORPORATION
(formerly Bionova U.S. Inc.)
Notes to the Consolidated Financial Statements
December 31, 1996, 1995 and 1994
NOTE 1 - BASIS OF PRESENTATION
DNAP Holding Corporation (together with its subsidiaries, the "Company"), a
subsidiary of Bionova, S.A. de C.V. (Bionova), a Mexican corporation, was
formed on January 12, 1996 and originally named Bionova U.S. Inc., to be the
holding company of a consolidated group, which includes certain former
subsidiaries of Bionova (the "Bionova Subsidiaries") and, after consummation
of the merger discussed below 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).
THE COMPANY AND THE BIONOVA SUBSIDIARIES
On January 26, 1996, the Company issued 25,000 shares to Bionova in exchange
for a capital contribution of $25,000 and borrowed $5 million from Bionova
under a demand note agreement, at a fixed interest rate of 10.25%.
On July 1, 1996 Bionova transferred its interest 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 on
August 1, 1996. Additionally, Bionova contributed the $5 million demand note
in exchange for 50,000 common shares on August 2, 1996. On August 5, 1996
Bionova contributed its shares of the Company's common stock to its
wholly-owned subsidiary, Bionova International, Inc.
The consolidated financial statements included herein have been prepared
giving retroactive effect to the contribution of the Bionova Subsidiaries in
a manner similar to a pooling of interest.
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. Upon consummation of the Merger,
Bionova International, Inc. contributed an additional $8 million to the
Company for 12,510,726 common shares, and the former DNAP stockholders
received 5,511,192 common shares. The name of the Company was changed to
DNAP Holding Corporation immediately prior to the Merger.
The value of the shares of the Company's common stock issued in connection
with 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 the fair value of the securities based on their respective closing prices
as quoted on the Nasdaq National Market at July 30, 1996, the date of the
second amendment to the merger agreement.
17
<PAGE>
Shares Fair market Fair market
Outstanding value value
(000's of shares) per share ($000's)
----------------- ----------- -----------
DNAP common stock. . . . . . 45,676 $ 0.531 $24,254
DNAP $2.25 Convertible
Exchangeable Preferred
Stock . . . . . . . . . . . 1,380 3.125 4,312
-------
28,566
Costs incurred by Bionova
associated with the
Merger. . . . . . . . . . . 4,000
-------
$32,566
=======
The purchase price was allocated to the following items based on a valuation
of the intangibles by an independent appraiser.
($000's)
--------
Patents and trademarks . . . . . . . . . . . . . . $14,800
Research and development . . . . . . . . . . . . . 12,900
Goodwill . . . . . . . . . . . . . . . . . . . . . 10,528
Net liabilities of DNAP at fair value. . . . . . . (5,662)
-------
$32,566
=======
NOTE 2 - RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
For joint venture farming activities of ABSA that carry over from one
calendar year to the next, estimates of total crop production costs and crop
yields are required to be made to determine expected average unit costs.
Expected average unit costs are used to recognize cost of sales on a crop
that has been partially harvested and sold as of the end of an accounting
period. In July 1997, the Company determined that cost of sales for two
joint ventures for the year ended December 31, 1995 were understated by $0.8
million because ABSA had failed to update estimates of cost of sales when
actual results of operations became known prior to the issuance of the 1995
financial statements. The 1995 financial statements have been restated for
the foregoing matter as well as certain other minor items as summarized below:
($000's)
December 31, 1995
----------------------------------
As Originally Reported Restated
---------------------- --------
Cost of sales 177,076 177,883
Selling and administrative expenses 14,397 14,608
Operating income 5,575 4,557
Interest expense 8,430 8,521
Net loss (3,384) (3,844)
Accumulated deficit (12,434) (12,894)
Stockholders' equity 15,185 14,725
In addition, at December 31, 1996, accumulated deficit and stockholders' equity
as originally reported were $29.5 million and $49.2 million, respectively.
Accumulated deficit and stockholders' equity at that date have been restated as
a result of the adjustments discussed above to $29.9 million and $48.7 million,
respectively.
18
<PAGE>
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Consolidation
The accompanying financial statements include the accounts of (i)
the Company, (ii) the Bionova Subsidiaries, (iii) effective
September 26, 1996, DNAP, and (iv) effective November 30, 1996,
Royal Van Namen. All intercompany accounts and transactions are
eliminated in consolidation.
b. Management's estimates and assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
amounts could differ from reported amounts.
c. Revenue recognition
PRODUCE SALES
The Company sells produce on its own account and on behalf of growers and
other parties on a commissioned basis. Revenue from such sales is recognized
when the produce is shipped, net of an allowance for estimated returns.
Since the Company bears the risk of loss for collection of sales proceeds for
sales on behalf of growers and other parties on which commissions are earned,
the associated sales are recognized at the gross sales amounts, net of an
allowance for estimated returns or other credits. In the consolidated
results of operations, 1996 and 1995 sales recognized on a commissioned basis
and the related commissions earned were as follows:
($000's)
Year ended December 31,
-----------------------
1996 1995
------- -------
Sales. . . . . . . . . . . . . . . . . . . . . $30,455 $35,080
Commissions earned . . . . . . . . . . . . . . 3,253 3,189
There were no commissioned sales in 1994.
PRODUCT DEVELOPMENT ACTIVITIES
Revenue from product development activities is recognized during the period
the Company performs the development efforts in accordance with the term of
the agreements and activities undertaken. The revenue is recognized ratably
over the term of the agreement, which generally approximates the performance
effort. Revenue that is related to future performance under such agreements
is deferred and recognized as revenue when earned.
Research and development costs not associated with product development
activities are expensed as incurred.
d. Cash and cash equivalents
Cash equivalents are stated at cost, which approximates the fair value. The
Company considers all highly liquid and temporary cash investments with
original maturities of three months or less to be cash equivalents. The
Company's policy is to place its cash and cash equivalents with large
creditworthy financial institutions and to limit the amount of credit
exposure.
19
<PAGE>
e. Advances to growers
Advances to growers are made for supplies, seed, and other growing and
harvesting costs. The advances are interest bearing and repaid from amounts
withheld from sales proceeds due to growers.
f. Association agreements
The Company has entered into certain participation agreements with growers
under which the Company shares in the profits and losses associated with
growing activities. Since the Company exercises control over the
associations, the Company proportionally consolidates the results of
operations of those growing activities in the results of operations.
g. Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
using the first-in, first-out method for finished produce. Cost of growing
crops includes direct material and labor and an allocation of indirect costs
and are accumulated until the time of the harvest, subject to lower of cost
or market adjustments.
h. Property, plant and equipment
Property, plant and equipment are stated at their acquisition cost. Additions
to property, plant and equipment, including significant improvements and
renewals, are capitalized. Maintenance and repair costs are charged to
expense as incurred. Depreciation is computed using straight-line methods
over the estimated useful lives of the assets.
i. Patents and trademarks
The costs of obtaining patents are expensed as incurred. Acquired patents
and trademarks are capitalized and amortized over their estimated useful
lives. During 1996, the Company recorded amortization expense of $308,000.
j. Research and product development costs
All research and product development costs incurred or acquired are expensed.
k. Stock based compensation
As a result of the Merger, DNA Plant Technology Corporation's existing stock
option plans were assumed by the Company. In October, 1995, the Financial
Accounting Standards Board issued Statement No. 123, Accounting for
Stock-Based Compensation. Statement No. 123 applies to all transactions in
which an entity acquires goods or services by issuing equity instruments such
as common stock, except for employee stock ownership plans. Statement No.
123 establishes a new method of accounting for stock-based compensation
arrangements with employees which is fair value based. The statement
encourages (but does not require) employers to adopt the new method in place
of the provisions of Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees. Companies may continue to apply
the accounting provisions of APB No. 25 in determining net income, however,
they must apply the disclosure requirements of Statement No. 123. If the
Company adopts the fair value based method of Statement No. 123, a higher
compensation cost would result for fixed option plans and a different
compensation cost will result for the Company's contingent and variable stock
option plans. The recognition provisions and disclosure requirements of
Statement No. 123 are effective January 1, 1996. The Company plans to use
the accounting practice under APB No. 25 previously followed by DNAP.
l. Concentration of credit risks
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of trade receivables and advances to growers.
Credit risk associated with trade receivables is limited due to the large
20
<PAGE>
number of customers comprising the Company's customer base. Concentration of
credit risk associated with advances to growers is limited due to the
geographic dispersion of the growers. However, there can be no assurance
that an event outside the Company's control will not occur and cause these
advances to be at risk. The Company performs ongoing credit evaluations of
its customers' and growers' financial condition to determine the need for an
allowance for uncollectible accounts.
m. Acquisitions
The underlying assets and liabilities of acquired companies are recorded at
fair market values and the excess purchase price is recorded as goodwill.
The Company periodically evaluates the recoverability of the recorded
goodwill based upon projected operating income of the related subsidiary.
Goodwill is amortized over twenty years. Goodwill amortization amounted to
$0.700 million, $0.538 million and $0.404 million in 1996, 1995 and 1994,
respectively.
n. Impairment of long-lived assets
Management periodically reviews for impairment the long-lived assets and
certain identifiable intangibles to be held and used by the Company whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. An impairment loss is recognized whenever it
is determined that recoverability is impaired. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that management
expects to hold and use is based on the fair value of the asset.
o. Income taxes
An income tax provision is made using the assets and liability approach.
Under this approach, deferred taxes are provided for the differences between
the financial statement and tax basis of assets and liabilities. Deferred
income tax expense (benefit) is the net change during the year in the
deferred income tax asset or liability. Current income tax expense is the
amount of income taxes expected to be payable for the current year.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
p. Fair value of financial instruments
The carrying value of the Company's financial instruments, including cash and
cash equivalents, trade receivables and payables, and advances to growers,
approximate their fair market value due to their short-term maturities. The
carrying value of the Company's long-term debt is estimated to approximate
its fair value.
q. Translation of financial statements
The financial statements for subsidiaries whose functional currency is not
the U.S. dollar are translated in the following manner: assets and
liabilities at the year end rates; stockholders' equity at historical rates
and results of operations at the monthly average exchange rates. The effects
of exchange rate changes are reflected as a separate component of
stockholders' equity.
For subsidiaries whose activities are recorded in currencies which are not
their functional currency, the components of the financial statements are
translated as follows:
BALANCE SHEET:
Current assets, except inventories year-end
Inventories historical
Liabilities year-end
Property, plant and equipment historical
Stockholders' equity historical
21
<PAGE>
RESULTS OF OPERATIONS:
Sales historical
Cost of sales historical
Depreciation and amortization historical
Interest monthly average
Other expenses and income monthly average
Income taxes monthly average
Gains and losses in remeasurement arise mainly from the effect of exchange
rate fluctuations on net monetary items denominated in pesos and are included
in results of operations.
Effective January 1, 1997, Mexico will be considered a hyperinflationary
environment since the cumulative inflation over the last three years has
exceeded 100%. As a result of this, subsidiaries whose functional currency
is the Mexican peso will be required to translate their financial statements
in a manner similar to that utilized by subsidiaries whose activities are
recorded in currencies which are not their functional currencies.
r. Net loss per common share
The weighted average number of common shares outstanding for 1996, giving
retroactive effect to the common shares issued to Bionova upon the
contribution of its interests in the Bionova subsidiaries and shares issued
in connection with the merger, was 14,286,318.
s. Employee benefit plan
DNAP has a savings and retirement plan and trust (the "401(k) Plan")
available to all eligible employees of DNAP. An eligible employee may elect
to defer, in the form of contributions to the 401(k) Plan, between 1% and 15%
(in 1% increments) of the total compensation that would otherwise be paid to
the employee, subject to annual contribution limitations. An employee's
contributions are invested at the direction of the employee in various
investment options and are fully vested and nonforfeitable immediately upon
contribution. The 401(k) Plan provides for DNAP contributions in the form of
common stock or cash, not to exceed 3% of elective salary deferral
contributions. During the last quarter of 1996 DNAP's cash contributions to
the 401(k) Plan were approximately $17,000.
t. Reclassification of costs
Certain financial statement items have been reclassified to conform to the
current year's format. The most significant of these items was the
reclassification of distribution costs from selling, general and
administrative expenses to cost of sales. Management believes that this
reclassification is a more accurate reflection of the nature of these
expenses in the operations of the business than the manner in which they had
been classified previously. During the years ended December 31, 1996, 1995,
and 1994 distribution costs amounted to $12.3 million, $14.8 million, and
$6.7 million, respectively.
NOTE 4 - ACQUISITIONS AND MERGERS
During the years ended December 31, 1996, 1995 and 1994, Bionova and the
Company acquired control of the following subsidiaries:
- - During 1994, Bionova made a capital contribution toward the formation of
Premier Fruits & Vegetables BBL, Inc. (Premier) in the amount of $161,000
in cash, representing an 80% share of the capital stock. This investment
was contributed to IPHC in December, 1994.
- - During December 1994, Bionova acquired 51% of IPHC for $2.2 million in
cash. This U.S. company distributes fresh produce in the United States
and Canada through its subsidiaries, R.B. Packing, Inc., R.B.
22
<PAGE>
Packing of California, Inc., R.B. Packing of Texas, Inc. (all 100% owned),
Tanimura Distributing, Inc. (75% owned), Premier (80% owned), and in
Europe, the Middle East, and the Far East through its recent acquisition
of Royal Van Namen (discussed below). The goodwill resulting from this
1994 acquisition amounted to $675,000.
- - In January 1995, ABSA acquired a 50.01% stake in Interfruver de Mexico,
S.A. de C.V. (Interfruver), a Mexican distributor of fresh produce, for
$2.055 million in cash, resulting in the recognition of goodwill of $1.94
million. The agreement to acquire Interfruver established that, in
addition to the purchase price mentioned above, a contingent payout of
$2.0 million could be due to the sellers (the minority stockholders) on an
earn out basis over a four-year period beginning in 1995. This contingent
payment, if any, will result in an adjustment of the original purchase
price and a corresponding increase in goodwill and related amortization in
the future. No amounts were due or paid in 1995 under this agreement. The
amount for 1996 has not yet been determined by the Company.
The following table summarizes the net investment by Bionova in the subsidiaries
acquired through December 31, 1995, which were contributed to the Company in
1996.
($000'S)
DECEMBER 31,
--------------------
1995 1994
------- -------
COMPANY ACQUIRED
ABSA . . . . . . . . . . . . . . . . . . . . . . $25,296 $24,360
Tanimura . . . . . . . . . . . . . . . . . . . . 191 191
IPHC . . . . . . . . . . . . . . . . . . . . . . 2,200 2,200
Premier. . . . . . . . . . . . . . . . . . . . . 161 161
------- -------
$27,848 $26,912
======= =======
These acquisitions were accounted for under the purchase method. The companies
are included in the consolidated financial statements since the date of their
acquisition. Tanimura and Premier had no operations prior to their formation
with Bionova as the controlling stockholder.
- - In November 1996, IPHC acquired a 51% stake in Royal Van Namen (Van Namen),
a distributor of fresh produce located in The Netherlands, for $1.475
million in cash, resulting in the recognition of minimal goodwill. Under
the terms of the purchase agreement, a contingent pay out of as much as
$1.945 million could be due to the sellers (the minority stockholders) on
an earn out basis over a four-year period beginning in 1997 (based on prior
year earnings before interest and taxes from the results of operations).
This contingent payment, if any, will result in an adjustment of the
original purchase price and a corresponding increase in goodwill and
related amortization in the future. The amount for 1996 has not yet been
determined by the Company.
The following unaudited pro forma financial information assumes that the Merger
and Van Namen acquisition occurred at the beginning of 1996 and 1995 and gives
effect to certain adjustments, including depreciation and amortization of the
assets acquired, amortization of goodwill, and related income tax effects.
23
<PAGE>
($000'S)
PRO FORMA
(UNAUDITED)
YEAR ENDED DECEMBER 31
------------------------
1996 1995
---------- ----------
Net sales. . . . . . . . . . . . . . $257,895 $254,416
Net loss (1) . . . . . . . . . . . . (11,045) (18,224)
Loss per common share (in dollars) . (0.60) (0.99)
Pro forma weighted average common
shares outstanding . . . . . . . . 18,370,640 18,370,640
(1) does not include the $12.9 million write-off of purchased research and
development.
NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable were comprised of the following:
($000'S)
DECEMBER 31,
-----------------
1996 1995
------- -------
Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . $27,192 $24,452
Recoverable value-added tax. . . . . . . . . . . . . . . . 1,338 980
Officers and employees . . . . . . . . . . . . . . . . . . 287 32
Sundry debtors . . . . . . . . . . . . . . . . . . . . . . 4,143 10
------- -------
32,960 25,474
Allowance for doubtful accounts and returns. . . . . . . . (2,019) (30)
------- -------
$30,941 $25,444
======= =======
The Company sells its produce primarily to retailers and wholesalers in the
United States, Mexico, Canada and Europe. No single customer accounted for
more than 5% of the Company's sales, and there were no significant accounts
receivable from a single customer at December 31, 1996 or 1995.
NOTE 6 - ADVANCES TO GROWERS
($000'S)
DECEMBER 31,
----------------
1996 1995
------ ------
Advances to growers. . . . . . . . . . . . . . . . . . . . $5,050 $5,440
Advances to related parties. . . . . . . . . . . . . . . . 331 1,642
------ ------
$5,381 $7,082
====== ======
The Company has agreements with certain produce growers in Mexico and in the
United States, whereby a significant portion of growing costs are paid in
advance by the Company. The growing costs are recorded as advances to
growers and are recognized as a component of cost of produce sales when the
produce is sold. The advances in Mexico ($4.172 million and $4.882 million
at December 31, 1996 and 1995, respectively) in some cases are secured by
promissory notes and/or the right to use the acreage of the grower if the
advances are not repaid.
24
<PAGE>
Advances to growers in the United States ($1.209 million and $2.200 million
at December 31, 1996 and 1995, respectively) are generally not collateralized.
Advances earned interest at 12% per annum. Interest income from these
advances amounted to $0.884 million, $0.811 million, and $0.279 million
during the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 7 - INVENTORIES
Inventories were comprised of the following:
($000'S)
DECEMBER 31,
-----------------
1996 1995
------- -------
Finished produce . . . . . . . . . . . . . . . . . . . . . $ 2,047 $ 3,357
Growing crops. . . . . . . . . . . . . . . . . . . . . . . 11,317 8,436
Advances to suppliers. . . . . . . . . . . . . . . . . . . 1,274 718
Spare parts and materials. . . . . . . . . . . . . . . . . 5,301 1,932
Merchandise in transit and other . . . . . . . . . . . . . 752 387
------- -------
20,691 14,830
Allowance for slow moving inventory. . . . . . . . . . . . (552) (100)
------- -------
$20,139 $14,730
======= =======
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment was composed of the following:
($000'S)
DECEMBER 31,
------------------ ESTIMATED
1996 1995 USEFUL LIFE
-------- ------- -----------
Land . . . . . . . . . . . . . . . . . . . . $ 10,399 $ 8,490
Buildings. . . . . . . . . . . . . . . . . . 9,570 6,767 25 years
Machinery and equipment. . . . . . . . . . . 14,798 8,155 15 years
Office equipment . . . . . . . . . . . . . . 2,214 3,341 4 years
Transportation equipment . . . . . . . . . . 2,505 2,126 10 years
Vineyards and agricultural tools . . . . . . 2,268 2,672 3 years
Land improvements and other. . . . . . . . . 4,935 438 13 years
-------- -------
46,689 31,989
Accumulated depreciation and amortization. . (12,116) (6,217)
-------- -------
$ 34,573 $25,772
======== =======
Equipment amounting to $2.370 million and $5.279 million at December 31, 1996
and 1995, respectively, has been recorded under capitalized leases and
included above. Related accumulated depreciation amounted to $0.594 million
and $0.951 million at December 31, 1996 and 1995, respectively, and the
related depreciation expense amounted to $0.126 million, $0.317 million and
$0.317 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
25
<PAGE>
NOTE 9 - BANK LOANS AND LONG-TERM DEBT
SHORT-TERM LOANS
Short-term bank loans consist of amounts due to banks, denominated in U.S.
dollars, under various lines of credit facilities. The lines of credit
contain certain covenants which, among other things, require maintenance of
certain ratio levels and tangible net worth levels. The Company is in
compliance with those covenants. The lines of credit bear interest at prime
(8.1% and 8.5% at December 31, 1996 and 1995, respectively).
Various bank credit facilities are available with banks whereby the Company
may borrow upon such terms as the subsidiaries and banks mutually agree. At
December 31, 1996, such bank credit facilities amounted to $42.645 million,
of which $10.535 million was not used.
The amounts due under bank credit facilities with Mexican banks are generally
renewable at the discretion of the banks. The Company has informal
arrangements with these banks which permit additional borrowings, subject to
the availability of funds by the banks.
ELM and the minority shareholders of ABSA and IPHC provide certain guarantees
on both the short-term and long-term bank debt. At December 31, 1996, ELM
guaranteed $20 million of this debt, and ELM and the minority shareholders
guaranteed on a 50/50 basis all otherwise unsecured bank debt. ELM is
obligated under the terms of the Merger through September, 1999 to provide
under certain conditions a guarantee of indebtedness of the Company of up to
$20 million to a financial institution under a loan or a line of credit.
LONG-TERM LOANS
Consolidated obligations under long-term debt arrangements are denominated in
U.S. dollars and were comprised of:
($000'S)
DECEMBER 31,
-----------------
1996 1995
------- -------
Outstanding revolving bank credit facility (bearing
interest at 8.25%; principal and interest are payable
in one installment in May 1997) . . . . . . . . . . . . . $ 7,946 $ 8,508
Bank loan bearing interest at a rate equivalent to Libor
plus 1% at December 31, 1996, secured with first mortgage
on land and buildings in The Netherlands. . . . . . . . . 1,590
Capital lease obligations secured by the related
equipment acquired, bearing interest at variable annual
rates (12% at December 31, 1996 and 1995) . . . . . . . . 1,105 1,222
Mortgage notes payable to banks secured by the related
real estate, interest at prime (8.75% and 8.5% at
December 31, 1996 and 1995, respectively) plus 1.5%,
interest payable monthly and maturing on dates through
October, 2001 . . . . . . . . . . . . . . . . . . . . . . 614 687
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 272 415
------- -------
11,527 10,832
Less current portion. . . . . . . . . . . . . . . . . . . (9,104) (610)
------- -------
Long-term debt. . . . . . . . . . . . . . . . . . . . . . $ 2,423 $10,222
======= =======
26
<PAGE>
The maturities of the long-term debt at December 31, 1996 were as follows:
For the years ended December 31, (000's)
- -------------------------------- -------
1997.................................. $ 9,104
1998.................................. 572
1999.................................. 400
2000.................................. 263
2001.................................. 174
Thereafter............................ 1,014
-------
$11,527
=======
NOTE 10 - INCOME TAXES
The (charges) credits for income taxes are summarized as follows:
($000's)
--------
Year ended December 31,
----------------------------
1996 1995 1994
------- ------- ------
CURRENT
United States
Federal........................... $ (606) $ (740) --
State............................. (146) (256) --
------- ------- ------
(752) (996) --
------- ------- ------
DEFERRED
Mexico - Federal.................... (2,007) (767) $1,460
United States
Federal........................... 21 (323) 382
State............................. -- (46) --
------- ------- ------
(1,986) (1,136) 1,842
------- ------- ------
INCOME TAX (EXPENSE) BENEFIT.......... $(2,738) $(2,132) $1,842
======= ======= ======
Income tax (expense) benefit differs from the amounts computed by
applying the statutory federal income tax rate (34% in both Mexico
and the United States) to pretax income as a result of the
following:
($000's)
--------
Year ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
Tax benefit at statutory rate in the
United States (34%)................. $ 5,189 $ 1,398 $ 4,857
Effect of lower tax rate of 17% for
agricultural businesses in Mexico... (316) (934) (1,915)
Write-off of purchased research and
development......................... (4,386) -- --
Change in valuation allowance of
deferred tax assets................. (2,384) -- --
Tax loss carryforwards for which tax
benefit was lost due to the peso
devaluation......................... -- (1,235) (890)
Inflationary component................ (548) (1,064) (188)
Depreciation on inflation-indexed
value of property, plant and
equipment........................... 328 252 197
State taxes........................... (97) (210) --
Other permanent differences........... (524) (339) (219)
------- ------- -------
$(2,738) $(2,132) $ 1,842
======= ======= =======
27
<PAGE>
Significant components of the Company's deferred tax liabilities and assets at
December 31, 1996 and 1995 are shown below:
($000's)
--------
December 31,
------------------
1996 1995
-------- -------
DEFERRED TAX ASSETS
Tax loss carryforwards....................... $ 13,298 $ 2,403
Non-deductible provisions.................... 420 850
Other........................................ 67 49
-------- -------
Total deferred tax assets...................... 13,785 3,302
Valuation allowance............................ (10,935) (21)
-------- -------
Net deferred tax assets........................ $ 2,850 $ 3,281
======== =======
DEFERRED TAX LIABILITIES
Inventories.................................. (3,376) (1,818)
Other........................................ (28) (31)
-------- -------
Total deferred tax liabilities................. (3,404) (1,849)
-------- -------
Net deferred tax assets (liabilities).......... $ (554) $ 1,432
======== =======
The Mexican asset tax of 1.8% on certain net assets is not applicable in the
first four years of operation. This tax, once applicable, is due if federal
income taxes are not in excess of the asset tax. It can be recovered in
future years from taxes on future income in excess of future asset tax.
At December 31, 1996 the Company had total tax loss carryforwards of
approximately $50.5 million. Tax loss carryforwards from the Company's
Mexican subsidiaries can be inflation-indexed in Mexico until the date of
their application against future taxable profits. The tax loss carryforwards
expire from 2004 to 2011. The tax loss carryforwards are contained in the
Company's Mexican subsidiaries ($23.1 million), U.S. subsidiaries ($26.3
million), and other foreign subsidiaries ($1.1 million).
DNAP had tax loss carryforwards at the date of the merger whose utilization is
limited to $25.1 million. A full valuation allowance has been provided with
respect to these tax loss carryforwards.
NOTE 11 - STOCK OPTIONS AND WARRANTS
STOCK OPTION PLANS
As a result of the Merger the Company assumed DNAP's existing stock option
plans. The number of shares and option exercise prices were adjusted to give
effect to the exchange ratio stipulated in the merger agreement. The three
plans are the 1986 Stock Option Plan (the "1986 Plan"), the 1994 Stock Option
Plan (the "1994 Plan"), and the Non-Employee Directors Stock Option Plan (the
"Directors' Plan"), under which a maximum of 160,000, 300,000 and 80,000
shares of common stock, respectively, are available for issuance.
Approximately 52,072 options were outstanding at December 31, 1996 under three
other stock option plans. It is not anticipated that any further grants will
be awarded under these plans.
The 1986 Plan and the 1994 Plan provided for the granting of incentive stock
options, as defined under the Internal Revenue Code, and non-qualified stock
options, restricted stock and stock appreciation rights to officers and
employees of, and consultants and advisors to DNAP (and now the Company), at
prices which were generally not less than the fair market value of the common
stock on the date of grant and expiring ten years from the date of grant.
28
<PAGE>
The Directors' Plan provided for initial and annual grants of non-qualified
stock options to each non-employee director at prices which were equal to 90%
and 100%, respectively, of the fair market value of DNAP's (and now the
Company's) common stock on the date of grant and expiring ten years from the
date of grant. An initial director's option became exercisable in five equal
annual installments, beginning one year from the date of grant, and the annual
awards became fully exercisable within one year from the date of grant.
A summary of the activity under all of the Company's stock option plans since
the date of the merger is as follows:
DECEMBER 31,
1996
------------
Outstanding, at the effective date of the merger: 134,959
Granted --
Exercised --
Expired and canceled....................................... (191)
-------
Outstanding at the end of the year........................... 134,768
-------
Available for grant at December 31........................... 1,228
-------
Exercisable at December 31................................... 93,275
-------
Option prices per share:
Granted.................................................... none
Exercised.................................................. none
Expired or canceled........................................ $8.75 to $201.90
Outstanding................................................ $13.75 to $128.75
The following table summarizes information about the outstanding stock options
at December 31, 1996.
Weighted
average Weighted Weighted
remaining average Number average
Options contractual exercise of vested exercise
Range of exercise prices outstanding life price options price
- ------------------------ ----------- ----------- -------- --------- --------
$13.75................... 925 8.75 Yrs. $ 13.75 370 $ 13.75
$20.31 - $29.94.......... 33,698 8.13 Yrs. $ 27.50 4,468 $ 20.98
$30.00 - $38.75.......... 35,018 6.99 Yrs. $ 35.09 27,936 $ 35.37
$41.25 - $50.00.......... 37,277 4.28 Yrs. $ 47.22 35,850 $ 47.21
$51.25 - $76.25.......... 22,360 4.80 Yrs. $ 54.36 19,161 $ 54.46
$100.00 - $128.75........ 5,490 0.34 Yrs. $118.59 5,490 $118.59
------- --------- ------- ------ -------
Total.................. 134,768 5.90 Yrs. $ 43.00 93,275 $ 47.96
======= ========= ======= ====== =======
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's option plans been determined based on
the fair value at the grant dates, as prescribed in Statement No. 123, the
Company's net loss and net loss per share would not have been materially
different than the reported amounts.
29
<PAGE>
WARRANTS
At December 31, 1996 the Company had the following warrants and options
outstanding, which it assumed in connection with the merger:
Number of
common shares Price per share Expiration date
- ------------- --------------- ---------------
40,000 $66.50 January, 1999
407,018 25.00 Third and fourth quarters of 2000
72,500 17.50 September, 1997
36,250 17.50 September, 1998 or one year from
the exercise of the unit purchase
options (see below)
During 1995, DNAP issued common stock with warrants that expire during the
third and fourth quarters of 2000, and which entitle the holders to purchase
an additional 407,018 shares of common stock at $25.00 per share. As part of
the compensation to the consultant who assisted DNAP in placing these
securities, DNAP granted the consultant unit purchase options to purchase
72,500 placement units at $17.50 per unit. Each placement unit consists of
one share of common stock and a warrant entitling the holder to purchase
during the year following the exercise of the unit purchase options, one half
share of common stock (36,250 in total if all unit purchase options are
exercised) for $17.50 per share.
NOTE 12 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES
ELM CREDIT LINE
The short-term accounts payable to related parties shown in the consolidated
balance sheet bears interest at variable rates comparable to those prevailing
in the market place. The debt with related parties arose from the long-term
credit line made available to affiliates of ELM and bears interest at variable
rates similar to those prevailing in the market place. At December 31, 1996,
$2.461 million was outstanding under this arrangement. During 1996 and 1995,
the Company incurred interest expense of $0.310 million and $0.223 million,
respectively.
INSURANCE AND FACTORING ARRANGEMENTS
The Company contracts for insurance and factoring services with a related
party. During 1996, 1995 and 1994 the Company incurred insurance expense of
$0.591 million, $0.339 million, and $0, respectively. Amounts due under
factoring arrangements were $1.2 million at December 31, 1996, and interest
expense incurred in connection with factoring arrangements was $0.123 million
in 1996.
LABOR AND ADMINISTRATIVE SERVICES
ABSA has entered into a contractual arrangement with Copropriedad Agricola
Batiz Hermanos (CABH) pursuant to which CABH provides labor and administrative
services to ABSA, and ABSA pays a fee to CABH based on CABH's costs incurred
in connection with providing such services. Both Raul Batiz G. and Guillermo
Batiz G. own in excess of 10% of CABH and are deemed, by virtue of their
positions with ABSA, to be executive officers of Bionova. In 1996, 1995 and
1994, ABSA paid a total of approximately $13.208 million, $7.558 million, and
$12.620 million, respectively to CABH under this arrangement.
30
<PAGE>
ADVANCES TO GROWERS
Advances to growers includes a balance due from a grower who is a relative of
the minority stockholders of ABSA. The balance with this grower amounted to
$1.642 million at both December 31, 1996 and 1995, and the interest earned on
this balance amounted to $0 and $21,000 during 1996 and 1995, respectively.
ADMINISTRATIVE SERVICES AGREEMENT
An Administrative Services Agreement between the Company and Bionova was
entered into on July 1, 1996. This agreement provides that Bionova will
render certain administrative and clerical services to the Company and its
direct and indirect subsidiaries in return for payment equivalent to the
compensation, benefits, and other overhead attributable to the employees of
Bionova performing these services, all of which will be performed in Mexico.
The initial term of the agreement was extended to December 31, 1996 and will
continue thereafter for successive one-year terms unless either the Company or
Bionova elects to terminate the agreement. Amounts billed in 1996 by Bionova
under this agreement were $616,000.
LOANS AND CAPITAL CONTRIBUTIONS
In connection with the Merger between Bionova and DNAP, Bionova loaned $5
million to the Company on January 26, 1996 and contributed $5 million to the
capital of the Company on July 1, 1996. The interest rate on the loan was
10.25% per annum. The loan was capitalized by Bionova in connection with the
merger on August 2, 1996. Interest expense for the period that the loan was
outstanding during 1996 amounted to $264,000. Pursuant to a loan agreement
dated January 26, 1996 between the Company and DNAP, the Company made two
loans to DNAP in equal amounts of $5 million on January 26, 1996 and July 1,
1996. These loans are secured by the assignment to the Company of DNAP's
right, title, and interest in the patents relating to DNAP's Transwitch gene
suppression technology, and the Company may require additional security under
certain circumstances. These loans remain outstanding with the balance plus
accrued interest due in full on January 26, 1999.
ABSA CREDIT FACILITY
Beginning in August, 1996, a credit facility was established between a
separate company owned by the Batiz family and ABSA to enable ABSA to fund a
large grower advance and some property, plant and equipment investments.
Loans made under this credit facility were in the form of demand loans bearing
interest at 15.3% per annum. As of December 31, 1996, the outstanding balance
under this credit facility was $1.479 million. Interest paid during 1996
under this facility was $89,319.
LICENSE AGREEMENTS
On January 26, 1996, DNAP and DNAP Holding entered into a non-exclusive
license agreement under which DNAP Holding was granted a license to use the
Transwitch patents with certain restrictions and exclusions. The
non-exclusive license agreement provided for the payment of royalties by DNAP
Holding to DNAP of $250,000 per calendar quarter, except that royalties for
the quarter ended March 31, 1996 were $50,000 and royalties for the quarter
ending June 30, 1996 were $125,000. During 1996, DNAP Holding accrued
$675,000 in royalty fees relating to this arrangement.
In January, 1996, the Company granted to a related party the option to obtain
a sublicense from the Company to use certain licensed patents in the field of
tobacco products and to make, have made, use and sell certain licensed
products related to the field of tobacco. The term of this option was for two
months ended March 31, 1996, extendable by the related party for an additional
six months. In exchange for the option the related party was obligated to pay
$50,000 to the Company for the initial two months and $5,000 per month for
each additional month. The Company accrued $80,000 during 1996 for this
option. The option agreement was terminated on September 30, 1996.
31
<PAGE>
LONG-TERM FUNDED RESEARCH AGREEMENT
On September 26, 1996, in connection with the merger, DNAP and Empresas La
Moderna, S.A. de C.V. (ELM), the parent company of Bionova, entered into a
long-term funded research agreement, which provided that ELM, directly or
through its affiliates, will use their best efforts to agree on research
projects to be conducted by DNAP for ELM or its affiliates and which will
result in payments to DNAP of $30 million over a 10-year period, with minimum
funding (subject to carryforwards) of $9 million in any three-year period.
Unless otherwise agreed by the parties, payments of at least $625,000 in
respect of ELM's obligation to fund research projects are to be paid at the
beginning of each calendar quarter. During the fourth quarter of 1996,
Seminis Vegetable Seed, Inc. ("Seminis"), a subsidiary of ELM, commenced a
limited amount of work under this long-term research agreement and paid to
DNAP $625,000. An additional payment of $625,000 was made by Seminis to DNAP
in January, 1997. Seminis and DNAP presently are engaged in discussions to
finalize the list of research projects that will be worked upon along with the
terms of their contract under this agreement. The final contract between
these two parties is expected to be signed in April, 1997. Several other
affiliates of ELM have entered into discussions with DNAP to identify
additional research projects that might be worked on under the long-term
funded research agreement.
LEGAL REPRESENTATION
The Secretary of the Company is a shareholder in the law firm which provides
legal services to the Company and several subsidiaries. During 1996 the law
firm billed approximately $100,000 to the Company.
NOTE 13 - OTHER
TOTAL REVENUES
Total revenues in 1996 and 1995 included $0.249 million and $3.160 million,
respectively, representing the income that arose from sales of seeds,
agrochemicals, spare parts and other materials to growers. In addition, in
1996 and 1995 total revenues included $0.527 million and $0.139 million,
respectively, of technical and support services provided to growers.
OTHER NON-OPERATING INCOME
During 1996, the Company recorded a gain upon sale of property, plant and
equipment of $0.325 million and received a subsidy of $1.733 million in
connection with a special incentive program sponsored by the various Mexican
government and banking institutions for companies in the agriculture, fishing,
and forestry industries. The subsidy received was determined using specified
formulas based on ABSA's debt outstanding as of June 30, 1996 and the
repayments of principal and interest made by ABSA from July 1 through December
31, 1996.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
CONTINGENCIES -
- - R.B. Packing, Inc., a subsidiary of IPHC, was audited by the Internal
Revenue Service for 1991, 1992, and 1993. The IRS has asserted that the
sales commissions charged to ABSA are too low. The company believes that
the sales commissions charged between related parties are reasonable and
supportable. The IRS also has asserted that certain travel and expense
charges lack substantiation and that insufficient business purpose has
been put forward for certain advertising and interest expenses. The
Company believes that these expenses also are reasonable and supportable.
The Appeals Division of the IRS recently filed a 30 day notice regarding
the three years under consideration and recited a proposed deficiency of
$941,000 in tax and $188,000 in penalties. This initial IRS proposal
disallows certain business expenses in full and adjusts commission rates
to amounts well in excess of market rates. The Company intends to defend
its position vigorously, and on
32
<PAGE>
the belief that any final tax and penalty that might ultimately be
assessed will be immaterial, no provision has been made to the financial
statements.
- - On January 21, 1997, a class action lawsuit was filed by Gordon K. Aaron
and Fay H. Aaron against ELM, Bionova, Alfonso Romo Garza, Bionova
International, Inc., the Company, Robert Serenbetz, Gerald Laubach, Evelyn
Berezin, and Douglas Luke, Jr. in the U.S. federal district court for the
Northern District of California. The plaintiffs allege that they were
owners of shares of DNAP's $2.25 convertible Exchangeable Preferred Stock
(Preferred Stock) prior to the Merger and that they were entitled to
receive more consideration for their Preferred Stock than was provided to
them under the Merger Agreement. Specifically, the plaintiffs allege that
(i) they were denied the rights they allegedly had under the terms of the
Preferred Stock to vote on the Merger; (ii) defendants Serenbetz, Laubach,
Luke, and Berezin (the "Individual Defendants"), each of whom was a
director of DNAP prior to the Merger and currently serves as a director of
the Company, breached fiduciary duties of loyalty, candor and care
allegedly owed to DNAP and its stockholders, (iii) all of the defendants
aided, knew of or recklessly disregarded, and all of the defendants
substantially assisted, the conduct giving rise to the alleged breaches of
fiduciary duty by the Individual Defendants; and (iv) each of ELM,
Bionova, the Registrant and Alfonso Romo Garza had knowledge of the
alleged contractual duties allegedly owed by DNAP to the plaintiffs and
each of such defendants intentionally caused DNAP to breach such alleged
duties. The plaintiffs claim to have been damaged by the alleged actions
of the defendants and therefore the plaintiffs seek unspecified actual and
punitive damages as well as reimbursement of their litigation costs and
expenses. The Company believes the claims of the plaintiffs are without
merit and intends to vigorously defend against these claims.
- - In a complaint dated August 5, 1996 and filed in the Superior Court for
the County of Los Angeles, California, the County of Los Angeles sued DNAP
and others, including several cigarette manufacturers, alleging breach of
express warranty, unlawful, deceptive and unfair business practices, fraud
and misrepresentation, and conspiracy, in connection with the manufacture,
promotion, distribution and sale of tobacco products. DNAP's involvement
in the suit arises from allegations regarding research it performed for a
major tobacco company. The County of Los Angeles is seeking economic
damages and injunctive relief. DNAP denies any wrongdoing or liability in
this matter and intends to vigorously contest this lawsuit.
- - A former executive of FreshWorld Farms, a subsidiary of DNAP, has
threatened to institute arbitration with respect to the termination of his
employment. The Company believes his allegations are without merit and
intends to vigorously defend itself if such a proceeding is commenced.
- - On September 25, 1996 a court in the state of Sinaloa, Mexico ruled that
Olga Elena Batiz Esquer did not have legal title to one hundred hectares
(approximately 247 acres) of land that she purported to transfer to ABSA
on June 2, 1990. This decision was made in concert with a ruling from a
petition originally presented in 1964 that the former owner of the subject
land owned rural land in excess of the maximum that was then allowed by
law in 1964, and that therefore the land rightfully belonged to the
petitioners. On October 23, 1996 Ms. Batiz filed a challenge to this
ruling. 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.
COMMITMENTS -
The Company leases certain facilities and land under non-cancelable operating
lease agreements. The leases expire at various dates through 2002 and provide
that the Company pay the taxes, insurance and maintenance expenses related to
the leased facilities. The monthly rental payments are subject to periodic
adjustments. Certain leases contain fixed escalation clauses, and rent under
these leases is charged ratably over the lease term.
33
<PAGE>
The aggregate future minimum lease obligations under capital and operating
leases are as follows:
($000's)
FOR THE YEAR ENDING ---------------------
DECEMBER 31, CAPITAL OPERATING
- ------------ ------- ---------
1997 . . . . . . . . . . . . . . . . . . . $ 680 $1,125
1998 . . . . . . . . . . . . . . . . . . . 284 1,138
1999 . . . . . . . . . . . . . . . . . . . 189 550
2000 . . . . . . . . . . . . . . . . . . . 44 29
2001 . . . . . . . . . . . . . . . . . . . 14 29
Thereafter . . . . . . . . . . . . . . . . - 25
------ ------
Total future minimum lease payments. . . . 1,211 2,896
Amount representing interest . . . . . . . (106) -
------ ------
$1,105 $2,896
====== ======
Rent expense incurred under the non-cancelable operating leases totaled
$0.304 million, $0.623 million and $0.606 million during the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 15 - OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
Information about the Company's operations by geographic area is summarized
below:
<TABLE>
($000's)
--------------------------------------------------------------
ADJUSTMENTS AND
MEXICO US OTHER ELIMINATIONS CONSOLIDATED
-------- -------- ------- --------------- ------------
<S> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated
customers $ 56,868 $117,504 $18,613 $192,985
Transfers 65,877 13,083 1,346 $(80,306) -
-------- -------- ------- -------- --------
Total revenue 122,745 130,587 19,959 (80,306) 192,985
======== ======== ======= ======== ========
Operating income (loss) 318 (12,535) (1,050) (1,148) (14,715)
======== ======== ======= ======== ========
Identifiable assets 63,185 79,985 13,883 (15,916) 141,137
======== ======== ======= ======== ========
1995
Sales to unaffiliated
customers 54,735 125,974 16,877 197,586
Transfers 57,972 12,630 - (70,602) -
-------- -------- ------- -------- --------
Total revenue 112,707 138,604 16,877 (70,602) 197,586
======== ======== ======= ======== ========
Operating income (loss) 1,248 3,966 (330) (327) 4,557
======== ======== ======= ======== ========
Identifiable assets 69,090 24,052 1,950 (6,984) 88,108
======== ======== ======= ======== ========
1994
Sales to unaffiliated
customers 38,851 25,261 - - 64,112
======== ======== ======= ======== ========
Operating income (loss) (11,101) (842) - 382 (11,561)
======== ======== ======= ======== ========
Identifiable assets $ 57,711 $ 14,949 $ 705 $ (1,683) $ 71,682
======== ======== ======= ======== ========
</TABLE>
34
<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: August 5, 1997 By: /s/ ARTHUR H. FINNEL
-------------------------------
Arthur H. Finnel,
Treasurer and Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS AT AND FOR THE YEAR ENDED DECEMBER 31, 1996 INCLUDED IN THE
COMPANY'S FORM 10-K/A ANNUAL REPORT FOR SUCH PERIOD AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,735
<SECURITIES> 0
<RECEIVABLES> 38,341
<ALLOWANCES> 2,019
<INVENTORY> 20,139
<CURRENT-ASSETS> 68,354
<PP&E> 46,689
<DEPRECIATION> 12,116
<TOTAL-ASSETS> 141,137
<CURRENT-LIABILITIES> 80,939
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> 48,506
<TOTAL-LIABILITY-AND-EQUITY> 141,137
<SALES> 192,985
<TOTAL-REVENUES> 192,985
<CGS> 176,353
<TOTAL-COSTS> 207,700<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,651
<INCOME-PRETAX> (15,570)
<INCOME-TAX> 2,738
<INCOME-CONTINUING> (17,034)<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,034)
<EPS-PRIMARY> (1.19)<F3>
<EPS-DILUTED> (1.19)
<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 14.286 million shares outstanding during the period which considers
the effect of the merger with DNA Plant Technology Corporation.
</FN>
</TABLE>
