<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1998
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to _________
Commission File Number: 0-12177
DNAP HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2632242
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6701 San Pablo Avenue
Oakland, California 94608
(Address of principal executive offices) (Zip Code)
(510) 547-2395
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of August 12, 1998, 18,370,640 shares of common stock, par value
$0.01 per share, of DNAP Holding Corporation were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DNAP HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
THOUSANDS OF U.S. DOLLARS
<TABLE>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..............................................$ 7,351 $ 6,600
Accounts receivable.................................................... 26,337 32,777
Advances to growers.................................................... 12,547 5,311
Inventories............................................................ 7,828 17,779
Other current assets................................................... 1,474 618
-------- --------
Total current assets.............................................. 55,537 63,085
-------- --------
Property, plant and equipment, net..................................... 33,465 36,520
Patents and trademarks, net............................................ 12,641 13,258
Goodwill, net.......................................................... 30,399 30,792
Deferred income taxes.................................................. 3,279 3,279
Other assets........................................................... 515 315
-------- --------
Total assets......................................................$135,836 $147,249
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank loans..................................................$ 32,420 $ 51,217
Current portion of long-term debt...................................... 2,388 2,588
Accounts payable and accrued expenses.................................. 20,014 28,915
Accounts due to related parties........................................ 47,213 21,949
Deferred income taxes.................................................. 4,739 4,715
-------- --------
Total current liabilities......................................... 106,774 109,384
Long-term debt......................................................... 5,672 7,215
-------- --------
Total liabilities................................................. 112,446 116,599
-------- --------
Minority interest...................................................... 1,051 2,294
-------- --------
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 shares issued and outstanding............................. 184 184
Additional paid-in capital............................................. 78,720 78,720
Accumulated deficit.................................................... (56,280) (50,240)
Cumulative other comprehensive income.................................. (285) (308)
-------- --------
Total stockholders' equity............................................. 22,339 28,356
-------- --------
Total liabilities and stockholders' equity.............................$135,836 $147,249
-------- --------
-------- --------
The accompanying notes are an integral part of these financial statements.
</TABLE>
-2-
<PAGE>
DNAP HOLDING CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
THOUSANDS OF U.S. DOLLARS
(EXCEPT PER SHARE AMOUNTS)
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues.......................................... $ 77,020 $ 70,073 $ 147,503 $ 147,196
-------- -------- --------- ---------
Cost of sales........................................... (71,954) (71,199) (133,897) (139,563)
Selling and administrative expenses..................... (6,836) (7,011) (12,006) (11,989)
Research and development expenses....................... (1,430) (1,195) (2,801) (2,361)
Amortization of goodwill, patents and trademarks........ (732) (357) (1,464) (1,252)
-------- -------- --------- ---------
(80,952) (79,762) (150,168) (155,165)
-------- -------- --------- ---------
Operating income (loss)................................. (3,932) (9,689) (2,665) (7,969)
-------- -------- --------- ---------
Interest expense........................................ (1,838) (1,565) (3,588) (2,673)
Interest income......................................... 316 311 505 526
Exchange gain (loss), net............................... (1,150) 411 (964) 532
Other non-operating income.............................. 23 14 23 824
-------- -------- --------- ---------
(2,649) (829) (4,024) (791)
-------- -------- --------- ---------
Income (loss) before income tax......................... (6,581) (10,518) (6,689) (8,760)
Income tax benefit (expense)............................ 89 413 (190) (596)
-------- -------- --------- ---------
Net income (loss) before minority interest.............. (6,492) (10,105) (6,879) (9,356)
Minority interest in net loss (income) of subsidiaries.. 1,152 3,858 839 2,013
-------- -------- --------- ---------
Net income (loss) ...................................... $ (5,340) $ (6,247) $ (6,040) $ (7,343)
Other comprehensive income (expense) net of tax:
Foreign currency translation adjustments............ 25 (64) 23 (34)
-------- -------- --------- ---------
Comprehensive income (loss)............................. $ (5,315) $ (6,311) $ (6,017) $ (7,377)
-------- -------- --------- ---------
-------- -------- --------- ---------
Net income (loss) per share - basic and diluted......... $ (0.29) $ (0.34) $ (0.33) $ (0.40)
-------- -------- --------- ---------
-------- -------- --------- ---------
The accompanying notes are an integral part of these financial statements.
</TABLE>
-3-
<PAGE>
DNAP HOLDING CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF U.S. DOLLARS
<TABLE>
Six Months Ended June 30,
-------------------------
1998 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................. $ (6,040) $ (7,343)
Items not affecting cash:
Minority interest............................................... (839) (2,013)
Depreciation ................................................... 1,815 1,697
Amortization of goodwill, patents and trademarks................ 1,464 1,252
Deferred income taxes........................................... 24 --
Gain from sale of property, plant and equipment................. -- (321)
Net changes (exclusive of subsidiaries acquired or divested) in:
Accounts receivable and advances to growers, net................ (8,329) (4,252)
Inventories..................................................... 9,709 10,654
Accounts payable and accrued expenses........................... (2,757) (732)
Other assets.................................................... (189) (481)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............... (5,142) (1,539)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment........................ (1,943) (3,302)
Proceeds from sale of property, plant and equipment............... -- 920
Proceeds from divestiture of Van Namen, net of cash divested...... 637 --
Payment for purchase of companies................................. (476) (277)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............... (1,782) (2,659)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings............................... (17,477) 225
Repayments of long-term debt...................................... (112) 17
Accounts due to related parties................................... 25,264 (967)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............... 7,675 (725)
-------- --------
Net increase (decrease) in cash and cash equivalents.............. 751 (4,923)
Cash at beginning of year ...................................... 6,600 10,735
-------- --------
Cash at end of period............................................. $ 7,351 $ 5,812
-------- --------
-------- --------
The accompanying notes are an integral part of these financial statements.
</TABLE>
-4-
<PAGE>
DNAP HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 - BASIS OF PRESENTATION
DNAP Holding Corporation (together with its subsidiaries, "DNAP Holding" or
the "Company"), a subsidiary of Bionova, S.A. de C.V., a Mexican corporation
("Bionova Mexico"), 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 Mexico (the "Bionova
Subsidiaries") and, after consummation of a merger effective September 26,
1996, DNA Plant Technology Corporation, a Delaware corporation ("DNAP"), and
its subsidiaries. Today, the Company acts as a holding company for (i)
Agricola Batiz, S.A. de C.V., of which the Company owns 80% ("ABSA"), (ii)
International Produce Holding Company, of which the Company owns 100%
("IPHC"), (iii) DNA Plant Technology Corporation, of which the Company owns
100% ("DNAP"), and (iv) VPP Corporation, of which the Company owns 100%
("VPP").
NOTE 2 - NET LOSS PER COMMON SHARE
The weighted average number of common shares outstanding during the three
months ended June 30, 1997 and 1998 and for the first six months ended June
30, 1997 and 1998 was 18,370,640.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Finished produce................................... $2,381 $ 1,815
Growing crops ..................................... 1,080 9,974
Advances to suppliers.............................. 294 316
Spare parts and materials ......................... 3,816 4,821
Merchandise in transit and other................... 338 980
------ -------
7,909 17,906
Allowance for slow moving inventories ............. (81) (127)
------ -------
$7,828 $17,779
------ -------
------ -------
</TABLE>
NOTE 4 - CASH FLOWS
Cash flows for the first six months of 1998 reflect the elimination of the
Royal Van Namen account balances, which were still recorded on DNAP Holding's
balance sheet as of December 31, 1997.
NOTE 5 - RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE COMPANY
DNAP Holding Corporation, a Delaware corporation (together with its
subsidiaries, unless the context requires otherwise, "DNAP Holding" or the
"Company"), was formed in January 1996, and acts as a holding company for (i)
Agricola Batiz, S.A. de C.V., a corporation organized under the laws of the
United Mexican States, of which the Company owns 80% ("ABSA"), (ii)
International Produce Holding Company, a Delaware corporation, of which the
Company owns 100% ("IPHC"), (iii) DNA Plant Technology Corporation, a
Delaware corporation, of which the Company owns 100% ("DNAP"), and (iv) VPP
Corporation, a Delaware corporation, of which the Company owns 100% ("VPP").
The Company acquired majority interests in ABSA and IPHC on July 1, 1996, by
means of a capital
-5-
<PAGE>
contribution from Bionova S.A. de C.V. ("Bionova Mexico"), and on October 7,
1997, acquired all of the minority interests in IPHC and increased its
ownership interest in ABSA to 80%. DNAP became a wholly-owned subsidiary of
the Company on September 26, 1996, as a result of the merger (the "Merger")
of Bionova Acquisition, Inc., a Delaware corporation that was a wholly-owned
subsidiary of the Company, with and into DNAP. VPP was formed as a
wholly-owned subsidiary of the Company on August 18, 1997. Approximately 70%
of the outstanding common stock of the Company is indirectly owned by
Empresas La Moderna, S.A. de C.V. ("ELM").
ABSA engages in the business of growing fresh fruits and vegetables,
primarily tomatoes and peppers, in Mexico and exporting fresh produce to the
United States and other markets. ABSA owns a 50.01% interest in Interfruver
de Mexico, S.A. de C.V., a corporation organized under the laws of the United
Mexican States ("Interfruver"), which engages in the business of marketing
and distributing fresh produce in Mexico, including fruits and vegetables
produced by ABSA. IPHC is a holding company whose subsidiaries are in the
business of marketing and distributing fresh produce primarily in the United
States and Canada, including fruits and vegetables produced by ABSA. DNAP is
an agribusiness biotechnology company focused on the development and
application of genetic engineering and transformation technologies in plants
and, together with its subsidiaries (including FreshWorld Farms, Inc.), the
development and marketing of premium, differentiated, fresh and processed,
branded fruits and vegetables. VPP is an agribusiness biotechnology company
focused on the development and application of genetic engineering and
transformation technologies in vegetatively propagated plants.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997
Revenues increased from $70.1 million in the second quarter of 1997 to
$77.0 million in the second quarter of 1998. The largest contributor to this
increase was the U.S. distribution companies, which recorded an increase of
$18.5 million for the quarter (59% higher than prior year), which was due to
greater availability of product during the quarter. Sales also increased
significantly during the second quarter of 1998 in Canada and Mexico as
compared with the same quarter in 1997 ($2.7 and $3.8 million, respectively,
representing percentage gains of 45% and 26%). These gains were partially
offset by the divestiture of Royal Van Namen ("RVN") during the first quarter
of 1998, which recorded $18.1 million of sales during the second quarter of
1997.
Gross profit (sales less cost of sales) improved from a loss of $1.1
million in the second quarter of 1997 to a profit of $5.1 million in the same
quarter of 1998. While ABSA experienced a negative gross profit of $2.7
million in the second quarter of 1998, this represented an improvement of
$4.0 million over the same quarter in 1997. This improvement came about by
the elimination of $2.7 million in write offs taken during the second quarter
of 1997, and the higher level of production that resulted from better weather
conditions during the second quarter of 1998 as compared with 1997. In
conjunction with the higher sales levels and some reduction in expenses in
the U.S., Canadian, and Mexican distribution companies, the gross profit of
these companies increased by $3.0 million during the second quarter of 1998
as compared to the same quarter of 1997. The divestiture of RVN resulted in
a reduction of gross profit between the first quarters of 1997 and 1998 of
$0.8 million.
Selling and administrative expenses declined from $7.0 million in the
second quarter of 1997 to $6.8 million in the second quarter of 1998. This
$0.2 million decline was due primarily to the divestiture of RVN during the
first quarter of 1998 and a consequential reduction in selling and
administrative expenses in this quarter of $0.6 million, offset in part by a
$0.4 million increase in corporate overhead expenses.
The non-cash charge for amortization of goodwill, patents and trademarks
was $0.7 million in the second quarter of 1998, emanating from the goodwill
and patents relating to the DNAP merger, and the purchase of the IPHC and
ABSA minority interests.
Research and development expenses increased from $1.2 million in the
second quarter of 1997 to $1.4 million in the same quarter of 1998, which was
due to the increased level of activity at DNAP.
Interest expense increased by $0.3 million in the second quarter of 1998
as compared with the same quarter of 1997 due to the increase in the average
level of debt outstanding.
-6-
<PAGE>
In the second quarter of 1998, DNAP Holding experienced a net foreign
exchange loss of $1.2 million as compared to a gain of $0.4 million in the
same quarter of 1997. This exchange loss in the second quarter of 1998
occurred in conjunction with the volatility of the international currency
markets. As a consequence, an exchange loss was experienced by ABSA, whose
functional currency is the U.S. dollar, due to its net peso monetary position.
The Company recorded an income tax benefit of $0.1 million in the second
quarter of 1998 as compared with a benefit of $0.4 million for the same
quarter in 1997. This change was attributable to the lower earnings of the
Mexican subsidiaries and the elimination of the R.B. Packing companies' tax
liability (R.B. Packing, Inc., R.B. Packing of California, Inc., and R.B.
Packing of Texas, Inc.) due to their consolidation for tax purposes into DNAP
Holding beginning in the fourth quarter of 1997, following the Company's
acquisition of the minority interests in IPHC.
During the second quarter of 1998, the share of losses allocable to
minority interests was $1.2 million as compared with $3.9 million for the same
quarter in 1997. The 1998 and 1997 allocations of losses are consistent with
the minority positions held across the operating subsidiaries of the Company
and were affected significantly by the increase in the Company's interests in
ABSA and IPHC and the divestiture of its entire interest in RVN.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Revenues increased slightly from $147.2 million during the first six
months of 1997 to $147.5 million during the same period in 1998. The U.S.
distribution companies recorded an increase of $16.0 million for the first
six months (22% higher than prior year), which was due to greater
availability of product during the second quarter. Sales also increased
significantly during the first six months of 1998 in Canada and Mexico as
compared with the same period in 1997 ($6.1 and $6.9 million, respectively,
representing percentage gains of 56% and 23%). These gains were partially
offset by the divestiture of Royal Van Namen ("RVN") during the first quarter
of 1998, which recorded $29.7 million of sales during the first six months of
1997. The Company's revenues were also benefited by a $1.0 million increase
in royalties at DNAP during the first six months of 1998 as compared with the
same period in 1997.
Gross profit (sales less cost of sales) improved from $7.6 million
during the first six months of 1997 to $13.6 million during the same period
in 1998. While ABSA experienced a negative gross profit of $1.2 million
during the first six months of 1998, this represented an improvement of $3.0
million over the same period in 1997. This improvement came about by the
elimination of $2.7 million in write offs taken during the second quarter of
1997, and the higher level of production that resulted from better weather
conditions during the second quarter of 1998 as compared with 1997. In
conjunction with the higher sales levels and some reduction in expenses in
the U.S., Canadian, and Mexican distribution companies, the gross profit of
these companies increased by $3.8 million during the first six months of 1998
as compared to the same period of 1997. The divestiture of RVN resulted in
a reduction of gross profit between the first six months of 1997 and 1998 of
$1.8 million. The Company's gross profit also benefited by the $1.0 million
increase in royalties at DNAP during the first six months of 1998 as compared
with the same period in 1997.
Selling and administrative expenses remained flat at $12.0 million for
the first six months of 1997 and 1998. The reduction in selling and
administrative expenses of $1.2 million associated with the divestiture of
RVN during the first six months of 1998 was offset by an increase in
corporate overhead expenses of $1.2 million during the same period.
Research and development expenses increased from $2.4 million during the
first six months of 1997 to $2.8 million for the same period of 1998, which
was due to the increased level of activity at DNAP.
The non-cash charge for amortization of goodwill, patents and trademarks
was $1.5 million for the first six months of 1998, emanating from the
goodwill and patents relating to the DNAP merger, and the purchase of the
IPHC and ABSA minority interest.
Interest expense increased by $0.9 million during the first six months
of 1998 as compared with the same period of 1997 due to the increase in the
average level of debt outstanding.
During the first six months of 1998, DNAP Holding experienced a net
foreign exchange loss of $1.0 million as compared to a gain of $0.5 million
in the same quarter of 1997. This entire exchange loss occurred in the
second quarter of 1998 in conjunction with the volatility of the
international currency markets. As a consequence, an exchange loss was
experienced by ABSA, whose functional currency is the U.S. dollar, due to its
net peso monetary position.
-7-
<PAGE>
The Company recorded an income tax expense of $0.2 million for the first
six months of 1998 as compared with an expense of $0.6 million for the same
period in 1997. This variance was attributable to the lower earnings of the
Mexican subsidiaries and the elimination of the R.B. Packing companies' tax
liability (R.B. Packing, Inc., R.B. Packing of California, Inc., and R.B.
Packing of Texas, Inc.) due to their consolidation for tax purposes into DNAP
Holding beginning in the fourth quarter of 1997, following the Company's
acquisition of the minority interests in IPHC.
During the first six months of 1998, the share of losses allocable to
minority interests was $0.8 million as compared with $2.0 million for the same
period in 1997. The 1998 and 1997 allocations of losses are consistent with
the minority positions held across the operating subsidiaries of the Company
and were affected significantly by the increase in the Company's interest in
ABSA and IPHC and the divestiture of its entire interest in RVN.
CAPITAL EXPENDITURES
During the first six months of 1998, the Company made capital
investments of $1.9 million in property, plant and equipment. The majority
of the funds were spent on two investment projects at ABSA -- the
installation of new irrigation systems on agricultural land owned by the ABSA
and additional cooling room capacity required for product quality.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, the Company used $5.1 million
in cash in operating activities. Cash used in the results of operations
amounted to $3.6 million (i.e., net income, minority interest, depreciation,
amortization, deferred income taxes, and gain from sale of property, plant,
and equipment). Working capital requirements increased by $1.6 million
during the first six months of 1998. Accounts receivable and advances to
growers increased by $8.3 million in the first six months of 1998 as $7.2
million of financing was provided to joint ventures with growers for the
1998-1999 growing season and customer receivables increased by $1.1 million,
which was consistent with the sales of the distribution companies during the
last two months of the second quarter. Inventories and accounts payable
declined by $9.7 million and $2.8 million, respectively, as the harvest
season in Culiacan and Baja California Sur in Mexico came to an end.
In addition to the $1.9 million invested in purchases of property, plant
and equipment, cash flows used in investing activities reflected $0.9 million
of cash received on the divestiture of RVN during the first quarter of 1998,
reduced by the 1997 year-end cash balance of $0.3 million in the accounts of
RVN; and an earn-out payment made to the minority owners of Interfruver
associated with that company's performance in 1997.
Cash generated from financing activities during the first six months of
1998 was $7.7 million. ELM financed the retirement of certain bank debt and
certain requirements of ABSA's joint ventures for the 1998-99 growing season.
The Company recently received an investment proposal from Bionova
International, Inc., a subsidiary of Bionova Mexico, its controlling
stockholder, to invest up to $50 million in DNAP Holding. The cash
contributed by Bionova International, Inc. would be used to retire a portion
of the Company's debt, including amounts owed to ELM and/or other creditors.
In conjunction with this proposed capitalization, the Company has entered
into discussions with financial institutions to obtain as much as $100
million in long-term debt and credit lines which will enable it to
restructure the balance of its debt. The Company is continuing to receive
short-term financial support from ELM in anticipation of completing these
transactions.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this Form
10-Q, including without limitation statements contained in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, business strategy, prospects,
plans and objectives of management of the Company for future operations, and
industry conditions, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations
-8-
<PAGE>
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 1998, 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 has
undergone 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 exacerbates these issues.
HISTORICAL LOSSES AND ACCUMULATED DEFICITS. DNAP Holding sustained
losses in 1996, 1997. and the first six months of 1998. 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, marketers
and additional rights to technologies. Therefore, the ability to pursue such
acquisitions may be dependent upon the Company's ability to obtain additional
capital, which could result in the incurrence of additional debt or
potentially dilutive issuances of additional equity securities. There can be
no assurance that the Company will be successful in obtaining such capital
and, as a result, may be restricted in its pursuit of its future growth and
acquisition strategies.
RISKS ASSOCIATED WITH OWNERSHIP OF RURAL LAND IN MEXICO. ABSA owns a
substantial amount of rural land in Mexico. Historically, the ownership of
rural land in Mexico has been subject to legal limitations and claims by
residents of rural communities, which in some cases could lead to the owner
being forced to surrender such land. Though ABSA is in compliance with all
applicable legal limitations, ABSA has been, and continues to be, involved in
such proceedings as part of its ordinary course of business. ABSA has not
lost any land as a result of such proceedings.
GOVERNMENTAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN OPERATIONS.
Nearly all of the growing and approximately 25% of the Company's sales occur
in Mexico. Nearly 7% of the Company's sales occurs in Canada. 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 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.
-9-
<PAGE>
TRADE SANCTIONS. Notwithstanding the enactment of the North American
Free Trade Agreement, Mexico and the United States from time to time are
involved in trade disputes. On occasion, the United States has imposed
tariffs, quotas, and importation bans on products produced in Mexico. Such
actions, if taken, could subject the Company to an additional financial
burden, some or all of which may not be able to be passed on to consumers.
AGRIBUSINESS RISKS. A variety of risks are inherent in the agribusiness
industry, including, without limitation, the following:
SUPPLY AND DEMAND. The fresh produce business is particularly sensitive
to fluctuations in supply and demand. When the supply of produce in the
market exceeds the demand for such products, the market price for fresh
produce may be driven down significantly, in some instances below the cost of
harvesting and packing. In such situations it may be uneconomical to harvest
a crop, resulting in a total loss of the costs incurred in growing such crop.
Even when market prices are sufficient to permit recovery of direct
harvesting and packing costs, prices may not be high enough to permit
recovery of growing costs and/or overhead and other indirect costs. In
addition, oversupply can affect the prices obtained for premium quality
produce. Oversupply can result from, among other reasons, an increase in the
number of growers, an increase in the acreage allocated by growers to a
particular crop, 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 large 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.
-10-
<PAGE>
DEPENDENCE ON ONE SUPPLIER. One grower in Baja California, Santa Cruz
Empacadora, S. de R.L. de C.V., accounted in 1997 for approximately 11% of
the consolidated sales of the Company's subsidiaries. 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, the
Environmental Protection Agency, 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.
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
-11-
<PAGE>
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As described in the Company's Form 10-Q for the quarter ended March 31,
1998, DNA Plant Technology Corporation, a wholly-owned subsidiary of the
Company ("DNAP"), was named as a defendant in a lawsuit brought by U.A. Local
No. 467 Health and Welfare Trust Fund in the Superior Court of the State of
California, County of San Mateo. Since March 31, 1998, DNAP has been named
as a defendant in twenty-two additional cases brought on behalf of union
trust funds in the California state courts. All of these cases have been
brought against numerous defendants including DNAP and various manufacturers
and distributors of tobacco products. In each of the cases, the plaintiff
alleges that the defendants engaged in improper business and advertising
practices, committed fraud and deceit, made negligent misrepresentations, and
violated California's anti-trust laws in the course of manufacturing,
marketing, and distributing cigarettes. DNAP's involvement in these suits
arises from allegations regarding research it performed for a major tobacco
company from 1983 through 1994. The plaintiffs are seeking economic damages
and injunctive relief. DNAP denies any wrongdoing or liability in these
cases and intends to vigorously contest these lawsuits.
On May 19, 1998, Patricia Henley filed a lawsuit in the Superior Court
of the State of California, County of San Francisco, against six tobacco
companies and certain other defendants, including DNAP. In this lawsuit, the
plaintiff alleges that the defendants engaged in improper business and
advertising practices, committed fraud and deceit, and made negligent
misrepresentations in the course of manufacturing, marketing, and
distributing cigarettes. DNAP's involvement in this suit arises from
allegations regarding research it performed for a major tobacco company from
1983 through 1994. The plaintiff is seeking economic damages and injunctive
relief. On June 22, 1998, DNAP filed a demurrer (a motion to dismiss all of
the claims against it) and on July 22 the court sustained the demurrer, but
gave the plaintiff leave to amend her complaint. DNAP denies any wrongdoing
or liability in this matter and intends to vigorously contest this lawsuit.
ITEM 5. OTHER INFORMATION
CAPITALIZATION PROPOSAL
On July 16, 1998, the Company received a capitalization proposal from its
controlling stockholder, Bionova International, Inc. Bionova International
is an indirect wholly-owned subsidiary of Empresas La Moderna, S.A. de C.V.
("ELM"). The Company has appointed a committee of independent directors to
review and evaluate Bionova International's proposal. The committee has
retained Piper Jaffray Inc. as its financial advisors and Proskauer Rose as
its legal counsel.
In the proposal, Bionova International offers to invest up to $50 million in
the Company in exchange for 3,800,000 shares of common stock and shares of
preferred stock convertible into an additional 6,200,000 shares of common
stock, subject to certain conditions. Assuming all of the preferred shares
are converted into common shares, the price Bionova International is paying
for the common stock is $5.00 per share. If the capitalization is
consummated on these terms, Bionova International's ownership interest in the
Company would increase from 70% to 80.6% (assuming conversion of its
preferred stock). The cash contributed by Bionova International would be
used by the Company to retire a portion of the Company's debt, including
amounts owed to ELM and/or other creditors, and to provide funds for
operations and future acquisitions.
Consummation of the proposed capitalization also would enable the Company to
come back into compliance with the criteria for continued listing of its
shares on the Nasdaq National Market. Earlier this year, the Company was
advised by
-12-
<PAGE>
the Nasdaq Stock Market, Inc. it had fallen out of compliance with such
criteria and that its shares could be delisted from the Nasdaq National
Market unless it corrected its deficiency.
CONTROLLING STOCKHOLDER; CONFLICTS OF INTEREST
Approximately 70% of the outstanding shares of common stock of the
Company are owned of record by Bionova International, Inc., an indirect,
wholly-owned subsidiary of ELM. Pursuant to a Governance Agreement dated as
of September 26, 1996, between ELM and the Company, ELM (together with its
affiliates) may acquire additional shares of common stock of the Company so
long as their aggregate beneficial ownership of the Company's common stock
does not exceed 80.1%, subject to applicable law. Also, pursuant to the
Governance Agreement, ELM has the power to elect a majority of the Company's
board of directors and to determine the outcome of any action requiring the
approval of the holders of the Company's common stock. This ownership and
management structure will inhibit the taking of any action by the Company
which is not acceptable to the controlling stockholder.
Certain of the Company's directors and executive officers are also
currently serving as board members or executive officers of ELM or companies
related to ELM, and it is expected that each will continue to do so. Such
management interrelationships and intercorporate relationships may lead to
possible conflicts of interest.
The Company and other entities that may be deemed to be controlled by or
affiliated with ELM sometimes engage in (i) intercorporate transactions such
as guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds
on open account and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (ii) common
investment and acquisition strategies, business combinations,
reorganizations, recapitalizations, securities repurchases and purchases and
sales (and other acquisitions and dispositions) of subsidiaries, divisions or
other business units, which transactions have involved both related and
unrelated parties. The Company continuously considers, reviews and evaluates,
and understands that ELM and related entities consider, review and evaluate,
transactions of the type described above. Depending upon the business, tax
and other objectives then relevant, it is possible that the Company might be
a party to one or more of such transactions in the future in addition to
those currently in force, such as the Long Term Funded Research Agreement
dated September 26, 1996 between ELM and DNAP. In connection with these
activities the Company might consider issuing additional equity securities or
incurring additional indebtedness. The Company's acquisition activities may
in the future include participation in the acquisition or restructuring
activities conducted by other companies that may be deemed to be controlled
by ELM.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
3.1* Certificate of Incorporation of the Company
3.2** Certificate of Amendment to the Certificate of Incorporation of the
Company
3.3* Bylaws of the Company
27.1 Financial Data Schedule
</TABLE>
- ----------
* Filed as an exhibit to the Company's Registration Statement on Form
S-4 (No. 333-09975) and incorporated herein by reference.
** Filed as an exhibit to the Company's quarterly report on Form 10-Q for
the quarterly period ended June 30, 1996 and incorporated herein by
reference.
(b) Reports on Form 8-K
None
-13-
<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 12, 1998 By: /s/ ARTHUR H. FINNEL
-------------------------------------
Arthur H. Finnel,
Executive Vice President,
Treasurer and Chief Financial Officer
-14-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
3.1* Certificate of Incorporation of the Company
3.2** Certificate of Amendment to the Certificate of Incorporation
of the Company
3.3* Bylaws of the Company
27.1 Financial Data Schedule
</TABLE>
----------
* Filed as an exhibit to the Company's Registration Statement on
Form S-4 (No. 333-09975) and incorporated herein by reference.
** Filed as an exhibit to the Company's quarterly report on Form
10-Q for the quarterly period ended June 30, 1996 and
incorporated herein by reference.
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS AT AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998
INCLUDED IN THE COMPANY'S FORM 10-Q QUARTERLY REPORT FOR SUCH PERIOD AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,351
<SECURITIES> 0
<RECEIVABLES> 41,409
<ALLOWANCES> 2,525
<INVENTORY> 7,828
<CURRENT-ASSETS> 55,537
<PP&E> 43,325
<DEPRECIATION> 9,860
<TOTAL-ASSETS> 135,836
<CURRENT-LIABILITIES> 106,774
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> 22,155
<TOTAL-LIABILITY-AND-EQUITY> 135,836
<SALES> 147,503
<TOTAL-REVENUES> 147,503
<CGS> 133,897
<TOTAL-COSTS> 150,168
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,588
<INCOME-PRETAX> (6,689)
<INCOME-TAX> 190
<INCOME-CONTINUING> (6,879)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,040)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
