<PAGE> 1
[THE UNIMARK GROUP, INC. LOGO]
The UniMark Group, Inc.
ANNUAL REPORT
1996
[THE UNIMARK GROUP, INC. LOGO]
The UniMark Group, Inc.
P.O. BOX 229
Argyle, Texas 76226
817/491-2992
Fax 817/491-1272
<PAGE> 2
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
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<S> <C> <C> <C> <C> <C>
Net Sales $14,278 $18,893 $25,346 $36,866 $65,238
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Gross profit 4,603 5,952 7,403 12,674 18,626
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Income from operations 737 633 1,530 4,251 1,027
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Net income 267 73 1,015 2,947 543
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Net income per common share (Fully diluted) $ 0.09 $ 0.02 $ 0.28 $ 0.51 $ 0.07
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Weighted average common and common (Fully diluted)
equivalent shares outstanding 3,000 3,000 3,642 5,805 7,645
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Total assets $ 2,566 $ 4,007 $11,176 $26,498 $76,683
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Long-term debt 369 296 919 699 4,332
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Stockholders' equity 369 459 6,392 14,978 47,800
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Capital expenditures $ 490 $ 143 $ 1,218 $ 5,209 $13,158
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</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Business .............................................................. 1
Chairman's Letter ........................................................ 2
Properties and Facilities ................................................. 4
Products .................................................................. 6
Marketing, Sales & Distribution ........................................... 8
Management's Discussion and Analysis ...................................... 11
Consolidated Balance Sheets ............................................... 15
Consolidated Statements of Income ......................................... 16
Consolidated Statements of Shareholders' Equity ........................... 17
Consolidated Statements of Cash Flows ..................................... 18
Notes to Consolidated Financial Statements ................................ 19
Report of Independent Auditors ............................................ 31
Common Stock Price Ranges and Dividends ................................... 31
Board of Directors ........................................................ 32
</TABLE>
GENERAL COUNSEL
Jordaan, Howard & Pennington, PLLC
Dallas, Texas
REGISTRAR AND TRANSFER AGENT
Harris Trust & Savings Bank
311 West Monroe Street
Chicago, Illinois 60606
(312) 461-3361
INDEPENDENT AUDITORS
Ernst & Young LLP
Dallas, Texas
COMMON STOCK TRADING
The Company's stock is traded on the
NASDAQ National Market System under the
symbol UNMG.
ANNUAL MEETING
The Annual Meeting of Shareholders will be
held at 10:00 AM on June 6, 1997 at
the Double Tree Hotel at Lincoln Center,
5410 LBJ Freeway, Dallas, TX 75240
FORM 10-K
Copies of the Company's 1996 Form 10-K as filed
with the Securities and Exchange Commission are
available without charge by calling or writing
the Company at:
UniMark House
PO Box 229
Argyle, Texas 76226
(817) 491-2992
Company Contact:
Jim Drewitz
Investor Relations
CORPORATE OFFICE
(Shipping)
124 McMakin Road
Bartonville, Texas 76226
(Mailing)
PO Box 229
Argyle, Texas 76226
<PAGE> 3
[SUNFRESH(R) LOGO]
[FLAVOR FRESH(TM) LOGO]
[FRUITS OF FOUR SEASONS(R) LOGO]
[SIMPLY FRESH FRUIT(R) LOGO]
[JALAPENO SAM(R) LOGO]
[KLEDOR(R) LOGO]
THE BUSINESS
The UniMark Group, Inc. a Texas corporation ("UniMark" or the "Company"), is a
vertically integrated citrus and tropical fruit growing, processing, marketing
and distribution company with operations in Mexico, the United States and
Canada. The UniMark Group, Inc. was organized in 1992 to combine the operations
of Industrias Citricolas de Montemorelos, S.A. de C.V. ("ICMOSA"), a Mexican
citrus and tropical fruit processor which commenced operations in 1974, with
UniMark Foods, Inc. ("UniMark Foods"), a company that marketed and distributed
ICMOSA's products in the United States. The Company focuses on niche citrus and
tropical fruit products including fresh, chilled, frozen and canned cut fruits
and other specialty food ingredients. In addition, as a result of its
acquisition of Grupo Industrial Santa Engracia, S.A. de C.V. ("GISE"), UniMark
is a major Mexican producer of citrus concentrate, oils and juices. The Company
processes and packages its products at ten plants in Mexico, one in California,
one in Massachusetts and one in Quebec, Canada. The Company's Mexican and
Californian plants are strategically located in major fruit growing regions.
The Company utilizes food brokers and distributors to market and distribute its
cut fruit products, under the brand names Sunfresh(R), Fruits of Four
Seasons(R), Flavor Fresh (TM) and Kledor(R) and under various private labels to
supermarket chains, foodservice distributors, wholesale clubs, specialty
grocery stores and industrial users throughout the United States and Canada.
Under the Jalapeno Sam(R) brand name, the Company also produces guacamole for
distribution in the United States. In addition, the Company has developed and
utilizes a unique processing method that separates cold-peeled citrus fruit
into individual juice-containing "cell-sacs." These cell-sac products are sold
to food and soft drink manufacturers in Japan to enhance the flavor and texture
of fruit juices and desserts. Sales to the Company's Japanese consumers are
facilitated through Japanese trading companies. The Company's citrus
concentrate and single strength citrus juices are sold directly to major juice
importers and distributors in North America, Europe and the Pacific Rim.
<PAGE> 4
CHAIRMAN'S LETTER
During 1996, we made significant strides in implementing our long-term
strategic plan to become the leading vertically-integrated grower, processor,
marketer and distributor of niche fruit and other selected agricultural
products. During the past year, we encountered several unexpected challenges
including a substantial decrease in sales to Japan, higher than anticipated
integration and start-up costs associated with our new plant facilities in
California and Massachusetts, the drought in Mexico and a substantial decline
in orange juice market prices in the fourth quarter. Nevertheless, we have
responded positively to these challenges and remain confident in achieving our
long-term objectives.
1996 was not only challenging but also very rewarding. We significantly
expanded our business, particularly in the foodservice market, through our
California and Canada acquisitions and the establishment of operations in the
northeast United States. We introduced a new canned product line and made
substantial progress in bringing to market our cryogenic individual quick
frozen ("IQF") citrus and tropical fruit line as well as a new line of chilled
fruit snacks incorporating cell-sacs as a key ingredient. We have continued to
expand our pineapple, lemon and Rio Red grapefruit agricultural programs in
Mexico and have begun harvesting our first crops of fresh pineapple. We also
have become a significant juice and citrus oil processor in Mexico with our
acquisition of GISE and the subsequent expansion of its operations.
1996 was indeed a challenging year, but we believe facing these challenges head
on has made us stronger and puts us in more control of our future. The key
elements of our operating strategy remain as follows:
EXPAND VERTICAL INTEGRATION OF GROWING, PROCESSING, MARKETING AND DISTRIBUTION
OPERATIONS. We intend to continue our vertical integration strategy. We believe
that by vertically integrating our growing, processing, marketing and
distribution operations, we can effectively control the availability, cost and
quality of our products.
EXPAND FRUIT GROWING OPERATIONS IN MEXICO. To ensure the availability of the
highest quality raw materials, we intend to expand our fruit growing operations
in Mexico, utilizing advanced agricultural practices. We believe that Mexico's
favorable climate and soil conditions, coupled with competitive labor and land
costs, offer significant opportunities to grow high quality fruits in a cost
effective manner.
CAPITALIZE ON BRAND AWARENESS AND MARKET PENETRATION. In the retail market, we
intend to capitalize on the brand awareness and market penetration attained by
Sunfresh(R) brand name products. Utilizing our "Fruit Made Easy(R)" concept, we
plan to expand our line of specialty chilled, frozen and canned "ready-to-eat"
pre-cut fruit that offers the benefits of healthy, low-fat foods with a
multitude of vitamins to the increasingly health conscious consumer. We have
developed a line of chilled fruit snack products incorporating citrus cell-sacs
as a key ingredient and plan to commence test marketing of this product line in
the second quarter of 1997. We have targeted this planned line of fruit snacks
toward North American retail and foodservice customers.
EXPAND CUT FRUIT PRODUCTS UTILIZING A CRYOGENIC INDIVIDUAL QUICK FREEZE ("IQF")
PROCESS. We have expanded our foodservice and wholesale club businesses by
introducing products utilizing a cryogenic IQF process. We believe this
cryogenic IQF process allows us to process citrus and tropical fruit at the
peak of the season, to preserve the fresh-like texture and taste of the fruit
and to distribute these products at a later date.
INTRODUCE CUT FRUIT PRODUCTS UTILIZING A CRYOGENIC INDIVIDUAL QUICK FREEZE
PROCESS TO THE JAPANESE MARKET. In 1996, our Japanese sales represented
approximately 11.3% of total sales, compared with 32.9% in 1995. While sales to
Japan decreased significantly in 1996, we believe that there are significant
opportunities in Japan for frozen citrus and tropical fruit products as such
products do not contain additives or preservatives, an important feature for
entry into the Japanese market.
EXPAND SPECIALTY FOOD INGREDIENTS. We believe that new market opportunities
exist in providing customers with specialty food ingredient products that can
be derived from processing citrus and tropical fruits. In particular, we intend
to maximize the utilization of our raw materials by identifying secondary food
ingredient products, such as citrus oils.
2
<PAGE> 5
EXPAND POSITION AS A LEADING MEXICAN JUICE EXPORTER TO U.S., EUROPEAN AND ASIAN
MARKETS. With the acquisition of GISE, the Company is a major Mexican producer
of citrus concentrate. Our goal is to expand our position as a leading exporter
of high quality Mexican citrus juices to the U.S., European and Asian markets.
Because of the high quality of Mexican citrus juice, it is often blended with
juices from other citrus producing regions to enhance the quality of these
other juices.
Presently, we are spending substantial management time on completing the
integration of our 1996 acquisitions and on introduction of our new products.
In this regard, we do not anticipate any significant acquisitions in the
foreseeable future. Nevertheless, our acquisition strategy remains clearly
defined:
ACQUIRE PRODUCTIVE ASSETS IN MEXICO THAT CAN BENEFIT FROM UNIMARK'S
INTERNATIONAL DISTRIBUTION AND MARKETING EXPERTISE. Most of our processing
facilities are strategically located in Mexico's various fruit growing regions.
Our plans are to expand growing and processing operations in Mexico because of
Mexico's competitive labor and land costs, ideal climatic conditions for
growing citrus and other fruits and vegetables, geographic proximity to the
United States and the favorable trade benefits of the North American Free Trade
Agreement ("NAFTA"). We believe that present economic conditions in Mexico,
particularly high prevailing interest rates and limited availability of equity
capital, afford the Company significant acquisition opportunities. In this
regard, our acquisition strategy targets processing facilities, agricultural
opportunities and other productive assets in Mexico that can benefit from our
international distribution and marketing expertise.
ACQUIRE FOOD PROCESSING COMPANIES THAT POSSESS FAVORABLE OPERATING OR
DISTRIBUTION SYNERGIES. Our acquisition strategy also targets food processing
companies that possess favorable operating or distribution synergies. We
believe that by acquiring food processing companies, we can expand our
distribution and utilize our low cost source of Mexican fruit and labor.
The future is exciting and challenging. We face it with confidence and
determination.
/s/ JORN BUDDE
Jorn Budde
Chairman, C.E.O.
<PAGE> 6
PROPERTIES & FACILITIES
1. Corporate Headquarters (UniMark)
o Bartonville, Texas
o 13,000 square feet
2. ICMOSA Plant
o Montemorelos, Nuevo Leon
o 80,000 square feet
o estimated output -- 19 million lbs.
o chilled products in all sizes in glass and plastic
o canned products in #10 and 5 gallon
o storage and repacking facility with a capacity of
10 million pounds of semi-processed and
finished product
3. IHMSA Plant
o Montemorelos, Nuevo Leon
o 40,000 square feet
o estimated output -- 17 million lbs.
o chilled products in plastic
o frozen products in all presentations
o avocado products
4. Simply Fresh Plant
o Los Angeles, California
o 45,000 square feet
o estimated output -- 9.1 million lbs.
o chilled and pre-cut products of all sizes
in plastic jars
o frozen citrus and grapes
5. San Rafael Plant
o San Rafael, Veracruz
o 28,500 square feet
o estimated output -- 10 million lbs.
o chilled products in plastic (as raw materials)
6. Villa Azueta Grove
o Villa Azueta, Veracruz
o 660 acres
o located between Isla and Loma Bonita
o development center for pineapple seedlings
7. Hidalgo Distribution Center
o Hidalgo, Texas
o 22,000 square feet
o products distributed across the U.S. & Canada
o 1.12 million lbs. storage capacity
8. UniMark Tech Center
o Cape Coral, Florida
o 13,000 square feet
o design, engineering and manufacturing
of stainless steel machinery
[GRAPH]
4
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GROWING OPERATIONS
The Company processes and packages its products at ten plants in Mexico, one in
California, one in Massachusetts and one in Quebec, Canada. The Company's
Mexican and Californian plants are strategically located in major fruit growing
regions. To ensure the availability of the highest quality raw materials,
UniMark intends to expand its fruit growing operations in Mexico, utilizing
advanced agricultural practices. UniMark believes that Mexico's favorable
climate and soil conditions, coupled with competitive labor and land costs,
offer significant opportunities to grow high quality fruits in a cost effective
manner.
9. Deli-Bon Plant
o Quebec City, Quebec-Canada
o 16,800 square feet
o estimated output -- 6 million lbs.
o chilled products in all sizes of plastic
10. Puebla Plant
o Tlatlauquitepec, Puebla, Mexico
o 50,000 square feet
o estimated output -- 4 million lbs.
o canned products in all sizes
11. Isla Plant
o Isla, Veracruz
o 32,000 square feet
o estimated output -- 8 million lbs.
o chilled products in plastic (as raw materials)
o frozen products (as raw materials)
12. Loma Bonita I Grove
o Loma Bonita, Oaxaca
o 190 acres
o 10,000 white grapefruit trees
13. Las Tunas Grove
o Isla, Veracruz
o 120 acres
o 15,000 grapefruit trees --
70% white, 30% pink
14. Azteca Grove
o Montemorelos, Nuevo Leon
o 144 acres
o 13,000 grapefruit trees --
75% white, 25% Rio Red
15. Loma Bonita II Grove
o Loma Bonita, Oaxaca
o 625 acres
o 10,000 existing pink grapefruit trees
o 10,000 additional rio red grapefruit trees
to be planted in 1997
o 350 acres of pineapple to be planted
16. Azteca Plant
o Montemorelos, Nuevo Leon
o 50,000 square feet
o estimated output -- 6.5 million lbs.
o chilled products in all sizes of glass and plastic
17. Victoria Juice Plant
o Cd. Victoria, Tamaulipas
o 65,740 square feet
o concentrated citrus juice,
citrus single strength juice,
citrus oils
18. Veracruz Juice Plant
o Poza Rica, Veracruz
o 22,900 square feet
o concentrated citrus juice
19. Victoria Groves I and II
o Cd. Victoria, Tamaulipas
o 360 total acres
o 8% orange trees,
o 92% lemon trees
20. Zamora Plant
o Zamora, Michoacan
o 41,000 square feet
o canned products
o chilled products in plastic
(as raw materials)
21. GISE Conference Center
o Cd. Victoria, Tamaulipas
o 90,000 square feet
o 10 acres
22. Flavor Fresh Plant
o Lawrence, MA
o 60,000 square feet
o estimated output -- 10 million lbs.
o chilled and pre-cut products of all
sizes in plastic jars
23. Frutalamo Juice Plant
o Alamo, Veracruz, Mexico
o 27,710 square feet
o Concentrated citrus juice
5
<PAGE> 8
PRODUCTS
The Company's principal products are derived from citrus and tropical fruits.
The Company has focused on applying its knowledge of fruit growing and
processing with its international marketing and distribution capabilities to
develop key product categories. These categories include cut fruits, juices,
specialty food ingredients, fresh fruit and other products. The following is a
description of each of these categories and their specific products:
[PICTURE]
CUT FRUITS
Under the brand names of Sunfresh(R), Fruits of Four Seasons(R), Kledor(R),
Flavor Fresh(TM) and under various private labels, UniMark markets:
CHILLED FRUIT. The chilled fruit line includes mango slices, grapefruit
segments, orange segments, pineapple chunks, sliced papaya and a variety of
fruit salads. These products are packed for retail, wholesale club and
foodservice customers.
IQF CITRUS AND TROPICAL FRUIT. UniMark is expanding its retail and foodservice
business by marketing citrus and tropical fruit products utilizing its IQF
process. UniMark believes that this IQF process allows it to process citrus and
tropical fruit at the peak of the season while preserving the fresh-like
texture and taste of the fruit. Using IQF, the frozen line of fruit includes
melon, mango, orange, grapefruit, lemon, lime, papaya and pineapple products
packed for foodservice and industrial customers.
CANNED FRUIT (SHELF-STABLE). The canned fruit line includes orange segments and
grapefruit segments packed for retail, foodservice and industrial customers.
JUICES
The Company, through GISE, markets directly to major industrial users a full
line of citrus juice products including citrus concentrates and single strength
juices:
CITRUS CONCENTRATE. Citrus juice concentrates are produced from oranges,
grapefruits, tangerines, Persian limes and lemons.
SINGLE STRENGTH JUICES. Citrus juices are produced from oranges, grapefruits,
tangerines, Persian limes and lemons.
SPECIALTY FOOD INGREDIENTS
UniMark believes that significant market opportunities exist in providing
customers with specialty food ingredient products that can be derived from
processing citrus and tropical fruits. Presently, UniMark's specialty food
ingredients include:
CITRUS CELL-SACS. The Company has developed and utilizes a unique processing
method that separates cold-peeled citrus fruit into individual juice-containing
cell-sacs. These cell-sac products are sold to food and soft drink
manufacturers in Japan to enhance the flavor and texture of fruit juices and
desserts.
CITRUS OILS. Citrus oils are extracted from oranges, grapefruits, tangerines,
Persian limes and lemons. These oils are primarily used by the Company's
customers in beverages, perfumes and other scented products.
FRESH FRUIT
In 1997, the Company began marketing of fresh pineapple under the Simply
Fresh(R) brand name.
6
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OTHER
UniMark also produces the following products:
AVOCADO PRODUCTS. Avocado products, including avocado chunks, pulp and
guacamole, are packed for sale to retail, wholesale club and foodservice
customers under the brand names Jalapeno Sam(R), Sunfresh(R), and Fruits of
Four Seasons(R).
CATTLE FEED. The Company recycles citrus by-products, such as peel and pulp, as
cattle feed.
NEW PRODUCTS
The Company's new product strategy is to apply its processing expertise to
introduce new products as well as extend the line of its existing citrus and
tropical fruit products. UniMark has completed development of its chilled fruit
snack product line and intends to commence test marketing of this product in
the second quarter of 1997. UniMark has targeted this planned line of fruit
snacks toward retail and foodservice customers.
[PICTURE]
7
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MARKETING, SALES & DISTRIBUTION
MARKETING
UniMark's marketing department develops brand strategies for the Company's
products, including product development, pricing strategy, consumer and trade
promotion, advertising, publicity and package design. This department's
responsibilities include determining the allocation of resources between
consumer and trade spending programs, pricing and profitability analysis, as
well as product and packaging designs. UniMark's marketing team is led by a
senior vice president and three product managers.
In the retail market, the Company's primary focus has been on the chilled fruit
category. UniMark intends to capitalize and strengthen the brand awareness and
market penetration attained by its Sunfresh(R) and Flavor Fresh (TM) brands in
the United States, the Kledor(R) brand in Canada and the Jalapeno Sam(R) brand
with respect to Mexican guacamole dip products.
Under its "Fruit Made Easy(R)" slogan, UniMark's marketing strategy includes
continued expansion of its comprehensive line of brand name chilled, frozen and
canned "ready-to-eat" pre-cut fruit that offers the benefits of healthy,
low-fat foods with a multitude of vitamins to the increasingly health conscious
consumer. The Company's marketing objectives include increasing "impulse
buying" of its retail products by building greater product visibility through
"eye-catching" package designs, innovative rack systems and trial package
promotions. In addition, the Company utilizes trade promotions, such as
quarterly price allowances, to generate "feature promotion activity" for its
products. The Sunfresh(R) product line also receives substantial advertising
support in trade publications and national food shows throughout the year.
In the foodservice and wholesale club markets, the focus is on securing market
leadership in the chilled fruit category, primarily through private label
programs with major foodservice distributors, and a strong branded approach
utilizing the Sunfresh(R) and Fruits of Four Seasons(R) labels in the United
States, the Kledor(R) brand in Canada and the Jalapeno Sam(R) brand for the
Company's guacamole products. Marketing efforts in these channels are directed
toward trade usage programs and yearly trade rebates.
[PICTURE]
SALES
UniMark's sales organization consists of five sales management teams primarily
focusing on the management of independent food brokers or international
representatives that directly interface with the customer. These teams are:
retail sales, Japanese sales, wholesale club sales, foodservice sales and
Canadian sales. The sales department is led by a senior vice president of
sales.
The retail team is led by a senior vice president and consists of four regional
managers, each with geographic responsibility for approximately 25 percent of
the United States. The Company's Japanese exports are directed by an export
sales manager located in Mexico City who deals with agents primarily from
Japanese trading companies. In addition, relationships with the Company's
Japanese customers are handled by the Company's senior executives. The
wholesale club market has one sales
8
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manager interfacing directly with key wholesale club distributors. The
foodservice team is guided by a vice president of foodservice sales and four
regional managers. In addition, the Company employs a national sales manager
that handles individual key accounts in foodservice and retail. The Company's
Canadian sales team operates out of Les Produits Deli-Bon, Inc. ("Deli-Bon")
and is led by the president of Deli-Bon and two district sales managers.
Deli-Bon uses a system of independent food brokers throughout Canada, although
its primary focus is within the Province of Quebec.
Without giving pro forma effect to the Company's 1996 acquisitions, the
following table shows, for the last three years, the amount and percentage of
net sales contributed by the various market segments for the Company's
products:
===============================================================================
YEAR ENDED DECEMBER 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1994 1995 1996
Net Sales Percent Net sales Percent Net Sales Percent
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Retail sales $ 9,961 39.3% $12,537 35.0% $18,190 27.9%
-----------------------------------------------------------
Foodservice sales 962 3.8 861 2.3 15,122 23.2
-----------------------------------------------------------
Citrus juice and oil sales -- -- -- -- 12,376 19.0
-----------------------------------------------------------
Japan sales 5,985 23.6 12,116 32.9 7,367 11.3
-----------------------------------------------------------
Wholesale club sales 5,073 20.0 7,061 19.2 7,894 12.1
-----------------------------------------------------------
Industrial and other sales 3,365 13.3 4,291 11.6 4,289 6.5
-----------------------------------------------------------
Total $ 25,346 100.0% $36,866 100.0% $65,238 100.0%
===========================================================
</TABLE>
===============================================================================
RETAIL SALES. UniMark markets its products to more than 200 regional and
national supermarket chains and wholesalers throughout the United States and
Canada. In conjunction with its own national sales force, UniMark utilizes over
50 independent food brokers and distributors to sell its products.
FOODSERVICE SALES. Sales to the United States government, fast food chains,
restaurants, hospitals and other foodservice customers are made either directly
to or through foodservice distributors by the Company's foodservice sales
force. UniMark intends to expand its foodservice business by introducing
additional products utilizing its IQF process, as well as new canned products.
The Company believes that the foodservice business segment represents an
opportunity for significant future growth.
JAPANESE SALES. UniMark exports a line of pasteurized citrus products and
juice-containing citrus cell-sac products to Japan for use in the food and
beverage industries. Although sales to industrial customers in Japan are
facilitated through Japanese trading companies, the Company maintains direct
relationships with its industrial customers. During 1994, 1995 and 1996 sales
to the Company's Japanese customers, through Mitsui Foods, Inc., a Japanese
trading company, accounted for approximately 19.5%, 27.5% and 8.9%,
respectively, of the Company's net sales (without giving pro forma effect to
the Company's 1996 acquisitions). UniMark believes that a significant market
opportunity exists in Japan for frozen citrus and tropical fruit products
because such products do not contain additives or preservatives.
WHOLESALE CLUB SALES. UniMark indirectly sells products to Sam's Wholesale
Clubs and other wholesale clubs throughout the United States. During 1994 ,1995
and 1996 indirect sales to Sam's Wholesale Clubs accounted for approximately
18.5%, 17.6% and 8.3%, respectively, of the Company's net sales.
INDUSTRIAL AND OTHER SALES. Industrial and other sales consist primarily of IQF
melon ball sales to industrial users in the United States for repacking or
further processing. UniMark utilizes an independent food broker to sell its
products to industrial users in the United States.
DISTRIBUTION
UniMark operates its own trucking fleet to transport finished cut fruit
products from its Mexican processing facilities to its distribution center in
Hidalgo, Texas. Deliveries are made to UniMark's customers by independent
trucking companies from its distribution center and U.S. and Canada plant
facilities. Products exported to Japan are shipped directly from Mexico. GISE
transports finished product by common carrier to North American customers.
Products to overseas customers are shipped directly in containers.
9
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PROCUREMENT
Currently, a substantial quantity of the fruit processed by the Company is
purchased from third parties. However, the Company's Mexican grapefruit growing
operations supply over 80% of the Company's grapefruit demand. In addition, the
Company purchases grapefruit from growers in the Texas Rio Grande Valley for
processing at its ICMOSA plant. For the 1997 growing season, the Company has
entered into operating agreements with Mexican growers of melons to supply the
Company's anticipated demand for melons. Pursuant to these agreements, the
Company supplies the seeds, fertilizer and insecticides and manages the growing
operations. The Company has entered into similar agreements with Mexican
growers of mangos to supply the Company's anticipated demand for mangos.
Substantially all of the oranges and all of the avocados used in the Company's
operations are purchased from third-party growers throughout Mexico. In 1996,
UniMark purchased "Grade A" pineapple from growers throughout Mexico. UniMark
has commenced a significant pineapple growing project. Initial production from
this project began in 1997 and UniMark intends to expand this project until
2,400 acres are under cultivation. UniMark believes that production from this
project not only will provide UniMark with a high quality supply of pineapples
for processing but also will produce a significant amount of pineapple for the
North American fresh fruit market.
The Company purchases citrus from growers throughout Mexico. GISE's juice
plants are located in the States of Tamaulipas and Veracruz in the heart of
Mexico's two major citrus growing regions.
The State of Veracruz, located along the east coast of Mexico, is Mexico's
largest orange producing state followed by the neighboring states of Tamaulipas
and San Luis Potosi. Citrus from this region is available for processing at
GISE's Veracruz facilities early in the season because of this region's
southern location. GISE's Cd. Victoria, Tamaulipas plant processes fruit grown
primarily in the northeastern region of Mexico. The fruit is transported by
common carrier to GISE's plants located in Mexico.
PROCESSING
CUT FRUIT. Upon arrival at the Company's processing plants, the fruit is
inspected and washed. On the production line, the fruit is peeled and cut into
various presentations (slices, sections, chunks, balls). Following this
process, some fruits are further processed into juice-containing cell-sacs. In
addition, some processed fruits are frozen utilizing the Company's IQF process.
Other processed fruits are transferred directly into bulk storage or final
product packaging (pails, jars and cans). After further processing, the
juice-containing cell-sacs are canned while the frozen products are packaged in
plastic bags or trays. The ICMOSA plant is the Company's main plant and serves
as the hub for the Company's other Mexican processing plants, which primarily
produce semi-processed product. At the ICMOSA plant, products are labeled and
packaged for final shipment. ICMOSA also delivers bulk raw materials to the
Company's U.S. and Canada plant facilities for packing into final
presentations. Only limited processing takes place at the Canada and
Massachusetts facilities. While the Company's California facility relies mostly
on raw materials from local growing regions, some raw materials are provided by
ICMOSA. The Company cans fruit at its ICMOSA and Puebla plants.
JUICE. GISE's operations are substantially automated. Once the fruit arrives at
a plant, it is unloaded onto rollers. The fruit is then washed and inspected.
Bruised and damaged fruit is removed by hand and the remaining fruit is then
routed to rollers with short needles which extract the oil from the peel. Once
the oil is removed, the fruit is sorted by size and sent to slicing and
squeezing machines. These machines slice the fruit and squeeze the juice and
pulp completely from the peel. The juice is then separated from the pulp and
the water is extracted from the juice. Upon further processing, the juice and
juice concentrate are stored on site until it is shipped directly to customers.
[PICTURE]
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
CONVERSION TO U.S. GAAP
The Company conducts substantially all of its operations through its
wholly owned operating subsidiaries: UniMark Foods, UniMark International,
Inc., ICMOSA, GISE, Simply Fresh and Deli-Bon. ICMOSA is a Mexican corporation
with its headquarters located in Montemorelos, Nuevo Leon, Mexico, whose
principal activities consist of operating seven citrus processing plants and
various citrus groves throughout Mexico. GISE is a Mexican corporation with its
headquarters located in Victoria, Tamaulipas, Mexico, whose principal
activities consist of operating three citrus juice and oil processing plants.
ICMOSA and GISE maintain their accounting records in Mexican pesos and in
accordance with Mexican generally accepted accounting principles and are
subject to Mexican income tax laws. ICMOSA's and GISE's financial statements
have been converted to United States generally accepted accounting principles
("U.S. GAAP") and U.S. dollars. Deli-Bon maintains its accounting records in
Canadian dollars and in accordance with Canadian generally accepted accounting
principles and is subject to Canadian income tax laws.
Unless otherwise indicated, all dollar amounts included herein are set
forth in U.S. dollars in accordance with U.S. GAAP. The functional currency of
UniMark and its subsidiaries is the U.S. dollar.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data
expressed as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
-------------------------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Products Sold 70.8 65.6 71.4
-------------------------
Gross profit 29.2 34.4 28.6
Selling, general and administrative expenses 23.2 22.9 27.0
-------------------------
Income from operations 6.0 11.5 1.6
Other income (expense):
Interest expense (1.9) (0.9) (2.2)
Interest income -- 1.3 0.8
Other 0.3 0.6 (0.3)
-------------------------
Income (loss) before income taxes and
extraordinary gain 4.4 12.5 (0.1)
Income tax expense (benefit) 0.4 4.5 (0.4)
-------------------------
Income before extraordinary gain 4.0 8.0 0.3
Extraordinary gain, net of applicable income taxes -- -- 0.5
-------------------------
Net income 4.0% 8.0% 0.8%
=========================
</TABLE>
YEARS ENDED DECEMBER 31, 1995 AND 1996
NET SALES increased 76.7% from $36.9 million in 1995 to $65.2 million in
1996. This increase was primarily due to increases in foodservice sales, the
commencement of citrus juice and oil sales and growth in retail sales.
Foodservice sales increased from $861,000 in 1995 to $15.1 million in 1996.
This increase was primarily a result of the Simply Fresh Acquisition and the
addition of new customers. Also in 1996, the Company acquired GISE, a citrus
juice and oil processor in Mexico. Citrus juice and oil sales totaled $12.3
million in 1996. Retail sales increased 45.6% from $12.5 million in 1995 to
$18.2 million in 1996 primarily as a result of increased distribution and
demand for the Company's retail chilled fruit product line.
11
<PAGE> 14
The increase in net sales was adversely impacted by a decline in sales of
the Company's specialty food ingredient products in the Japanese market. Sales
to Japan decreased 38.8% from $12.1 million in 1995 to $7.4 million in 1996
primarily as a result of decreased demand in Japan for the Company's specialty
food ingredient products. The Company believes that this decrease in demand was
due to a decline in sales of the Japanese products containing the Company's
specialty food ingredients and resulting higher than anticipated inventory
levels of the Company's specialty food ingredients held by distributors in
Japan. Although the Company anticipates a continued decline in sales of its
specialty food ingredient products to Japan during fiscal 1997, the Company
believes there are significant opportunities in the Japanese market for frozen
citrus and tropical fruit products because such products do not contain
additives or preservatives, an important feature for entry into the Japanese
market.
GROSS PROFIT as a percentage of net sales decreased from 34.4% in 1995 to
28.6% in 1996. Gross profit on cut fruit sales decreased from 34.4% in 1995 to
31.0% in 1996 while gross profit on citrus juice and oil sales was 18.1% in
1996. The decline in gross profit on cut fruit sales resulted primarily from
increased processing costs due to, among other things, lower than anticipated
production volume resulting from the decline in Japanese sales, increased raw
materials costs and operational inefficiencies associated with the delay in
integrating the Company's new facilities into its existing operations. Although
the loss of Japanese production volume is anticipated to adversely impact the
Company's first quarter 1997 operating results, the Company is taking
affirmative steps to replace the lost production volume. In addition, the
Company believes that the integration of its newly acquired United States
production facilities with its existing operations will be completed in 1997.
Gross profit on citrus juice and oil sales in 1996 was adversely affected
by a significant decline in market prices and increased production costs.
During the fourth quarter of 1996, frozen concentrate orange juice futures
prices declined approximately 30% primarily as a result of favorable production
forecasts from Brazil and Florida. In addition, the Company experienced
increased fruit prices and reduced production yields as a result of the drought
in northern Mexico in the summer of 1996. While the Company's increased costs
of inventories is estimated to adversely impact operations in the first quarter
of 1997, citrus juice and oil operating profits are anticipated to improve over
the remainder of 1997 because of improved raw material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") as a percentage of
net sales increased from 22.9% in 1995 to 27.0% in 1996. This increase is
primarily the result of increased sales and marketing expenses associated with
the commencement of operations in Massachusetts, and increased general and
administrative expenses associated with the Acquisitions. Presently, the
Company is consolidating and integrating its United States administrative and
accounting functions. This restructuring is expected to positively impact SG&A.
INTEREST EXPENSE increased from 0.9% of net sales in 1995 to 2.2% in 1996.
Actual interest expense increased from $318,000 in 1995 to $1.4 million in
1996. This increase was primarily the result of increased levels of debt
necessary to support increased levels of inventory and trade receivables
associated with the increase in sales volume and distribution centers.
INTEREST INCOME of $470,000 was earned in 1995 primarily from the
temporary cash investment of proceeds from the exercise of warrants and excess
cash balances generated from operations, while $548,000 of interest income was
earned in 1996 primarily from the temporary cash investment of proceeds from
the Company's secondary public offering .
A FOREIGN CURRENCY TRANSACTION net gain of $124,000 in 1995 and a net loss
of $248,000 in 1996 resulted from the conversion of ICMOSA's and GISE's Mexican
financial statements to U.S. GAAP.
AN EXTRAORDINARY GAIN recognized on the forgiveness of debt in Mexico, net
of applicable income and employee profit sharing taxes of $289,000, resulted in
a net gain of $330,000 in 1996.
NET INCOME, as a result of the foregoing, decreased from $2.9 million in
1995 to $543,000 in 1996.
YEARS ENDED DECEMBER 31, 1994 AND 1995
NET SALES increased 45.5% from $25.3 million in 1994 to $36.9 million in
1995. This increase was due primarily to a 102.4% increase in export sales to
Japan from $6.0 million in 1994 to $12.1 million in 1995. The increase in sales
to Japan resulted primarily from an expansion of UniMark's Japanese customer
base and product lines. In addition, North American retail sales increased
25.9% from $10.0 million in 1994 to $12.5 million in 1995 and wholesale club
sales increased 39.2% from $5.1 million in 1994 to $7.1 million in 1995. These
increases resulted from, among other things, increased distribution of existing
products, the success of its red grapefruit products and the introduction of a
one gallon mixed fruit product to the wholesale club market in 1995.
12
<PAGE> 15
GROSS PROFIT as a percentage of net sales increased from 29.2% in 1994 to
34.4% in 1995. This increase resulted from reduced processing costs obtained
through greater efficiencies and volume. In addition, prices of certain
products sold to Japan were increased during 1995 and import duties between
Mexico and the U.S. decreased as a result of NAFTA.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") as a percentage of
net sales decreased from 23.2% in 1994 to 22.9% in 1995. This reduction is
primarily the result of the increased sales volume in 1995. Actual SG&A
expenses increased $2.5 million from $5.9 million in 1994 to $8.4 million in
1995. This increase resulted from increased delivery, storage and personnel
expenses required to handle the increased sales volume.
INTEREST EXPENSE decreased from 1.9% of net sales in 1994 to 0.9% in 1995.
Actual interest expense decreased $151,000 from $469,000 in 1994 to $318,000 in
1995. This decrease was primarily the result of lower levels of debt and lower
interest rates in 1995.
INTEREST INCOME of $470,000 was earned in 1995 primarily from the
temporary cash investment of proceeds from the exercise of warrants and excess
cash balances generated from operations.
OTHER INCOME, net of other expenses was $69,000 in 1994 and $222,000 in
1995. Included in this net total are a foreign currency transaction loss of
$16,000 in 1994 and a gain of $124,000 in 1995 resulting from the conversion of
ICMOSA's Mexican financial statements to U.S. GAAP.
NET INCOME, as a result of the foregoing, increased 190% from $1.0 million
in 1994 to $2.9 million in 1995.
STATUTORY EMPLOYEE PROFIT SHARING
All Mexican companies are required to pay their employees, in addition to
their agreed compensation benefits, profit sharing in an aggregate amount equal
to 10% of net income, calculated for employee profit sharing purposes, of the
individual corporation employing such employees. All of UniMark's Mexican
employees are employed by its subsidiaries, each of which pays profit sharing
in accordance with its respective net income for profit sharing purposes. Tax
losses do not affect employee profit sharing. Statutory employee profit sharing
expense is reflected in the Company's cost of goods sold and selling, general
and administrative expenses, depending upon the function of the employees to
whom profit sharing payments are made. The Company's net income on a
consolidated basis as shown in the Consolidated Financial Statements is not a
meaningful indication of net income of the Company's subsidiaries for profit
sharing purposes or of the amount of employee profit sharing.
EXCHANGE RATE FLUCTUATIONS
The Company procures and processes substantially all of its products in
Mexico, through its wholly owned subsidiaries ICMOSA and GISE, for export to
the United States, Canada, Europe and Japan. Generally, the cost of citrus
procured in Mexico reflects the spot market price for citrus in the United
States. All of UniMark's sales are denominated in U.S. dollars. As such,
UniMark does not anticipate sales revenues and raw material expenses to be
materially affected by changes in the valuation of the peso. Labor and certain
other production costs are peso denominated. Consequently, these costs are
impacted by fluctuations in the value of the peso relative to the U.S. dollar.
The Company's consolidated results of operations are affected by changes
in the valuation of the Mexican peso to the extent that ICMOSA or GISE has peso
denominated net monetary assets or net monetary liabilities. In periods where
the peso has been devalued in relation to the U.S. dollar, a gain will be
recognized to the extent there are peso denominated net monetary liabilities
while a loss will be recognized to the extent there are peso denominated net
monetary assets. In periods where the peso has gained value, the converse would
be recognized.
The Company's consolidated results of operations are also subject to
fluctuations in the value of the peso as they affect the translation to U.S.
dollars of ICMOSA's net deferred tax assets or net deferred tax liabilities.
Since these assets and liabilities are peso denominated, a falling peso results
in a transaction loss to the extent there are net deferred tax assets or a
transaction gain to the extent there are net deferred tax liabilities.
SEASONALITY
Demand for UniMark's citrus and tropical fruit products is strongest
during the fall, winter and spring when seasonal fresh products such as mangos,
peaches, plums, and nectarines are not readily available for sale in
supermarkets in North America. In addition, a substantial portion of UniMark's
exports to Japan is processed and shipped during the first and fourth quarter
each year. Management believes UniMark's quarterly net sales will continue to
be impacted by this pattern of seasonality.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, cash and cash equivalents totaled $4.3 million, a
decrease of $2.0 million from year end 1995. During 1996, operating activities
utilized cash of $13.3 primarily to (i) finance an $8.9 million increase in
inventories, (ii) finance a $3.9 million increase in receivables and (iii)
decrease accounts payable and accrued expenses by $2.3 million. These increases
in inventories and receivables are largely a result of the increased sales
volume in 1996.
During 1996, UniMark utilized net cash of $17.9 million in investing
activities. Of this amount $13.1 million was expended on plant, equipment and
capital improvements. These expenditures primarily consisted of constructing a
refrigerated warehouse at ICMOSA, acquiring GISE's leased juice processing
facility in Poza Rica, Veracruz, Mexico, installing a new IQF freezing line in
Simply Fresh and acquiring additional fruit processing equipment. Further, $2.6
million was utilized in the acquisitions of Deli-Bon, Simply Fresh and GISE.
Also, the Company invested approximately $3.0 million in agricultural
development.
In June, 1996, the Company completed a secondary public offering in which
it sold 1,677,000 shares of its common stock at $14.50 per share with net
proceeds to the Company of approximately $22.2 million. During 1996, UniMark
retired its $3.0 million U.S. line of credit with Bank of America and ICMOSA
obtained additional, unsecured short-term financing in Mexico with Bancrecer
for $3.0 million. At the time of acquisition, GISE had an established $6.0
million short-term line of credit with Rabobank Nederland which has remained in
place. The $6.3 million net increase in short-term borrowings in 1996 resulted
from utilization of the Rabobank Nederland and Bancrecer credit facilities.
The Company received cash proceeds of $1.2 million from long-term debt
financing in 1996, of which $800,000 was obtained from five year bank financing
of the equipment at its Massachusetts plant facility. Cash was utilized to make
regularly scheduled payments of long-term debt of $828,000 in 1996.
In October, 1996, GISE and The Coca-Cola Export Corporation ("Coca-Cola"),
an affiliate of The Coca-Cola Company, entered into a ten year Supply Contract,
with a ten year renewal option, for the production of Italian lemons. Pursuant
to the terms of this Supply Contract, GISE will plant and grow approximately
12,000 acres of Italian lemons for sale to Coca-Cola at pre-determined prices.
The Supply Contract requires Coca-Cola to provide, free of charge, 750,000
lemon trees, enough to plant approximately 7,200 acres. In addition, the Supply
Contract requires Coca-Cola to purchase all the production from the project.
The planting program began in November, 1996 and is scheduled to be completed
in February, 2000 with harvesting of the first crops to begin in late 1998. The
Company estimates that this project will require capital expenditures of $4.7
million in 1997. The total capital requirements for the project is estimated to
be approximately $27.0 million over the next four years. Presently, the Company
is exploring various financing alternatives for this project. There can be no
assurances that financing for this project can be obtained on acceptable terms,
or at all. Although UniMark believes that it could finance the project with
anticipated cash flow from operations, the inability to internally finance the
project or to obtain third party financing for the project could have a
material adverse effect on the Company.
The Company's future cash requirements for 1997 and beyond will depend
primarily upon the level of sales, expenditures for capital equipment and
improvements, investments in agricultural projects, the timing of inventory
purchases and new product introductions. UniMark believes that anticipated
revenue from operations and existing capital resources will be adequate for its
working capital requirements for at least the next twelve months.
14
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1996
-----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,286 $ 4,268
Accounts receivable--trade, net of allowance of $70 in
1995 and $142 in 1996 4,298 9,244
Accounts receivable--other 134 703
Receivable from related parties 90 632
Due from shareholders 52 55
Inventories 6,182 19,411
Income and value added taxes receivable 824 1,418
Deferred income taxes 81 196
Prepaid expenses 300 771
-----------------
Total current assets 18,247 36,698
Property, plant and equipment, net of accumulated
depreciation of $1,449 in 1995 and $2,712 in 1996 7,689 29,177
Deferred income taxes 338 373
Goodwill -- 6,787
Identifiable intangible assets -- 2,320
Other assets 224 1,328
-----------------
Total assets $26,498 $76,683
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 3,545 $12,604
Current portion of long-term debt 183 1,114
Accounts payable--trade 4,356 4,466
Payable to related parties -- 106
Accrued expenses 943 2,108
Income taxes payable 13 --
Deferred income taxes 1,726 3,915
-----------------
Total current liabilities 10,766 24,313
Long-term debt, less current portion 699 4,332
Deferred income taxes 55 238
Commitments
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares--20,000,000
Issues and outstanding shares--5,918,050 in 1995 and
8,561,333 in 1996 59 86
Additional paid-in capital 13,035 45,287
Retained earnings 1,884 2,427
-----------------
Total shareholders' equity 14,978 47,800
-----------------
Total liabilities and shareholders' equity $26,498 $76,683
=================
</TABLE>
See accompanying notes.
15
<PAGE> 18
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1994 1995 1996
--------------------------------
<S> <C> <C> <C>
Net sales $ 25,346 $ 36,866 $ 65,238
Cost of products sold 17,943 24,192 46,612
--------------------------------
7,403 12,674 18,626
Selling, general and administrative expenses 5,873 8,423 17,599
--------------------------------
Income from operations 1,530 4,251 1,027
Other income (expense):
Interest expense (469) (318) (1,407)
Interest income -- 470 548
Foreign currency transaction gain (loss) (16) 124 (248)
Other income 85 98 21
--------------------------------
(400) 374 (1,086)
--------------------------------
Income (loss) before income taxes and
extraordinary gain 1,130 4,625 (59)
Income tax expense (benefit) 115 1,678 (272)
--------------------------------
Income before extraordinary gain 1,015 2,947 213
Extraordinary gain on forgiveness of debt, net of
applicable income taxes of $259 -- -- 330
--------------------------------
Net income $ 1,015 $ 2,947 $ 543
================================
Earnings per share
Income before extraordinary gain:
Primary $ 0.28 $ 0.53 $ 0.03
================================
Fully diluted $ 0.28 $ 0.51 $ 0.03
================================
Net income:
Primary $ 0.28 $ 0.53 $ 0.07
================================
Fully diluted $ 0.28 $ 0.51 $ 0.07
================================
</TABLE>
See accompanying notes.
16
<PAGE> 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 3,000,000 $ 30 $ 2,192 $ (2,078) $ 144
Shares issued for cash in intial public offering, net of
offering expenses 1,650,000 17 5,216 -- 5,233
Net income -- -- -- 1,015 1,015
----------------------------------------------------------------
Balance at December 31, 1994 4,650,000 47 7,408 (1,063) 6,392
Exercise of warrants and options, net of
offering expenses 1,268,050 12 5,627 -- 5,639
Net income -- -- -- 2,947 2,947
----------------------------------------------------------------
Balance at December 31, 1995 5,918,050 59 13,035 1,884 14,978
Exercise of warrants and options 64,250 1 305 -- 306
Shares issued for cash in secondary public offering, net
of offering expenses 1,677,000 17 22,175 -- 22,192
Shares issued in acquisitions of GISE, Simply Fresh and
Deli-Bon 902,033 9 9,772 -- 9,781
Net income -- -- -- 543 543
----------------------------------------------------------------
Balance at December 31, 1996 8,561,333 $ 86 $ 45,287 $ 2,427 $ 47,800
================================================================
</TABLE>
See accompanying notes.
17
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,015 $ 2,947 $ 543
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 252 495 1,751
Deferred income taxes (325) 1,406 408
Extraordinary gain -- -- (589)
Changes in operating assets and liabilities:
Receivables (1,577) (1,615) (3,887)
Inventories 668 (3,280) (8,927)
Prepaid expenses (81) (192) (351)
Accounts payable and accrued expenses (1,559) 3,615 (2,263)
Income taxes payable 132 (112) (16)
--------------------------------
Net cash (used in) provided by operating activities (1,475) 3,264 (13,331)
INVESTING ACTIVITIES
Acquisition of Deli-Bon, GISE and Simply Fresh Shares,
net of cash acquired -- -- (2,590)
Net decrease (increase) in amounts due from shareholders 71 21 (3)
Purchases of property, plant and equipment (1,218) (5,209) (13,158)
Increase in identifiable intangible assets -- -- (919)
Net increase in other assets (72) (14) (1,194)
--------------------------------
Net cash used in investing activities (1,219) (5,202) (17,864)
FINANCING ACTIVITIES
Net proceeds from the issuance of stock 5,233 5,639 22,498
Net (decrease) increase in short-term borrowings (1,535) 2,305 6,303
Proceeds from long-term debt -- -- 1,204
Payments of long-term debt (511) (523) (828)
--------------------------------
Net cash provided by financing activities 3,187 7,421 29,177
--------------------------------
Net increase (decrease) in cash and cash equivalents 493 5,483 (2,018)
Cash and cash equivalents at beginning of year 310 803 6,286
--------------------------------
Cash and cash equivalents at end of year $ 803 $ 6,286 $ 4,268
================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 473 $ 289 $ 1,049
================================
Income taxes paid (received) $ 74 $ 521 $ (98)
================================
</TABLE>
See accompanying notes.
18
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: The Company is in the business of growing,
processing, marketing and distributing niche citrus and tropical fruit
products, including chilled and canned cut fruits, citrus juices and oils and
other specialty food ingredients.
During 1996, the Company acquired Les Produits Deli-Bon Inc. (Deli-Bon), a
Quebec, Canada fruit processor; Grupo Industrial Santa Engracia, S.A. de C.V.
(GISE), a Mexican citrus juice and oil processor; and Simply Fresh Fruit, Inc.
(Simply Fresh), a Los Angeles, California fruit processor and distributor. See
Note 2 - Acquisitions.
The UniMark Group, Inc. ("the Company") was incorporated in the state of
Texas on January 3, 1992. During the period from January 3, 1992 (inception)
through December 31, 1992, 3,000,000 shares of the Company's common stock were
exchanged for the issued and outstanding common shares of UniMark Foods, Inc.,
which was owned by the same shareholders as the Company. Since the companies
were under common control, the transaction was accounted for using historical
costs. Additionally, 800 shares of common stock of UniMark International, Inc.
were acquired for $800 during that same period, giving the Company an 80%
interest which was increased to a 100% interest with the acquisition of the
remaining 200 shares during 1994. On August 11, 1994, 1,300,950 shares of the
Company's common stock were exchanged for all of the issued and outstanding
common shares of Industrias Citricolas de Montemorelos, S.A. de C.V.
("ICMOSA"), a Mexican corporation. The transaction was accounted for in a
manner similar to a pooling-of-interests using historical costs and,
accordingly, the accompanying financial statements include the accounts and
operations of ICMOSA for all periods prior to the stock exchange.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of The UniMark Group, Inc. and its subsidiaries, all of which are
wholly owned. All significant intercompany accounts and transactions have been
eliminated.
FOREIGN OPERATIONS: A significant portion of the Company's operations are
located in Mexico and a significant portion of the Company's fruit is procured
in Mexico. In addition, substantially all of the Company's Mexican employees
are affiliated with labor unions. As is typical in Mexico, wages are
renegotiated every year while other terms are negotiated every two years.
Recently, Mexico has faced turbulent political and economic times. Should
political unrest spread or political leadership or other causes vastly change
economic conditions in Mexico, the Company's operations could be adversely
affected.
USE OF ESTIMATES: The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
CASH EQUIVALENTS: The Company considers all highly liquid investments with
original maturities of three months or less when purchased to be cash
equivalents.
CONCENTRATION OF CREDIT RISK: The Company manufactures and sells niche
citrus and tropical fruit products, citrus juices and oils and other specialty
food ingredients to customers in the foodservice and retail industries in the
United States, Europe, Canada and Japan. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. Trade receivables generally are due within 30 days. Credit
losses have been within management's expectations. A significant portion of
sales is made to two customers. One customer accounted for 19.5%, 27.5% and
8.9% and another customer accounted for 18.5%, 17.6% and 8.3% of the Company's
net sales for the years ended December 31, 1994, 1995 and 1996, respectively.
ADVERTISING COSTS: The Company expenses advertising costs as incurred.
Advertising expense was $108,000, $137,000 and $528,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
INVENTORIES: Inventories held in the United States and Canada are carried
at the lower of cost or market using the first-in, first-out method. Mexican
inventories are valued at the lower of cost or market using average cost.
19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is computed by the straight-line method over the following
lives:
<TABLE>
<S> <C>
Building 20 years
Machinery and equipment 5-12.5 years
Transportation equipment 5-7 years
Computer equipment 4-7 years
Office equipment 5-10 years
Automobiles 3-5 years
</TABLE>
The Company reviews its property, plant and equipment and other
non-current assets for impairment when changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Impairment is measured
as the amount by which the carrying amount of the asset exceeds the estimated
fair value of the asset less disposal costs.
FOREIGN CURRENCY TRANSACTIONS: The functional currency of the Company and
its subsidiaries is the United States dollar. Transactions in foreign currency
are recorded at the prevailing exchange rate on the day of the related
transaction. Assets and liabilities denominated in foreign currency are
remeasured to dollars at the prevailing exchange rate as of the balance sheet
date. Exchange rate differences are reflected in the current year's operations.
INCOME TAXES: Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
EARNINGS PER SHARE: Earnings per share are calculated based on the
weighted average number of common and common equivalent shares outstanding
during each period. In 1995, the modified treasury stock method was utilized to
measure the dilutive effect of options and warrants.
In 1994, outstanding stock options and warrants were antidilutive and the
weighted average number of common shares used in this calculation was
3,642,000. In 1995 and 1996, the weighted average number of common and common
equivalent shares used in the primary and fully diluted calculations were
5,609,000 and 5,805,000, and 7,643,000 and 7,645,000, respectively. For
purposes of the 1995 net income per share computation, net income was adjusted
for the pro forma reduction of interest expense, net of income taxes, resulting
from the assumed use of warrant and option proceeds to reduce outstanding debt.
Part of the proceeds from the Company's initial public offering were
applied to retire $1,535,000 of short-term debt. Had the retirement taken place
at the beginning of 1994, net income per common share for 1994 would have been
$0.27, based upon a weighted average number of shares of common stock
outstanding of 3,938,000.
NOTE 2 ACQUISITIONS
On January 3, 1996, the Company acquired, in a purchase transaction, all
of the outstanding shares of capital stock of Les Produits Deli-Bon, Inc.
(Deli-Bon), a Quebec corporation that principally processes and sells fruit
salads to the food service industry in Canada. The total consideration given
for the purchase of the shares included approximately (i) $787,000 in cash,
(ii) a $49,000 six month promissory note and (iii) 28,510 shares of common
stock for an aggregate purchase price of $1.5 million. The Company's
consolidated statement of operations for the year ended December 31, 1996
includes the results of operations of Deli-Bon since the date of the
acquisition. The excess purchase price over the estimated fair value of the
net assets acquired was $303,000 and is being amortized using the straight-line
method over twenty years. Accumulated amortization was $14,000 at December 31,
1996.
20
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 ACQUISITIONS (continued)
On May 9, 1996, the Company acquired all of the outstanding shares of
capital stock of Simply Fresh Fruit, Inc. (Simply Fresh), in exchange for (i)
$2,500,000 cash, (ii) 90,909 shares of Unimark common stock and (iii) five-year
covenants not to compete totaling $1,000,000 in a purchase transaction for an
aggregate purchase price of $5.0 million. Simply Fresh is a fruit processing
and distribution company located in Los Angeles, California. The Company's
consolidated statement of operations for the year ended December 31, 1996
includes the results of operations of Simply Fresh since April 1, 1996, the
effective date of the acquisition. The excess purchase price over the
estimated fair value of the net assets acquired was $3,359,000 and is being
amortized using the straight-line method over forty years. Accumulated
amortization was $63,000 at December 31, 1996.
In addition, price protection exists on the shares issued in the Deli-Bon
and Simply Fresh acquisitions whereby the Company is required to issue
additional shares (or cash at its discretion) to the sellers in the event of a
decline in the public market value of the UniMark shares below an established
level during the period in which the sellers' shares are restricted from
trading.
Also on May 9, 1996, the Company acquired all of the outstanding shares of
capital stock of Grupo Industrial Santa Engracia, S.A. de C.V. (GISE), in
exchange for 782,614 shares of common stock in a purchase transaction
representing a purchase price of $12 million. In addition, Unimark agreed to
pay up to an additional $8.0 million during the next four years if GISE
achieves certain financial operating targets. GISE operates three juice plants
in the heart of major citrus growing regions in Mexico. The Company's
consolidated statement of operations for the year ended December 31, 1996
includes the results of operations of GISE since April 1, 1996, the effective
date of the acquisition. The excess purchase price over the estimated fair
value of the net assets acquired was $3,264,000 and is being amortized using
the straight-line method over forty years. Accumulated amortization was
$61,000 at December 31, 1996.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the GISE and Simply Fresh
acquisitions had occurred at the beginning of each year (in thousands, except
for per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
--------------------------
(UNAUDITED)
<S> <C> <C>
Revenue $ 62,374 $ 70,743
Income before extraordinary gain 4,502 649
Net Income 4,502 979
Net income per share (fully diluted) $ .67 $ .12
</TABLE>
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable. The pro forma results do not necessarily
represent results which would have occurred if acquisitions had actually taken
place at the date and on the basis assumed above.
In August, 1996, the Company commenced plant operations in Lawrence,
Massachusetts after purchasing certain assets in a secured party sale from
Fleet National Bank and entering into a lease agreement with Gato Realty Trust
for a fruit processing facility. The Company purchased certain inventory,
equipment, vehicles and intangible assets for a total cash consideration of
approximately $2.4 million. In addition, the Company entered into a lease
agreement for a plant facility with an initial lease term of six years and
monthly rental payments of $18,000. The Company also paid initial lease costs
of approximately $337,000 in cash.
NOTE 3 INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
--------------------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods $ 4,594 $ 12,332
Advances to suppliers and orchards 703 4,134
Raw materials and supplies 885 2,945
--------------------------
Total $ 6,182 $ 19,411
==========================
</TABLE>
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-----------------
(IN THOUSANDS)
<S> <C> <C>
Land $ 256 $ 1,084
Construction in progress 2,243 2,775
Buildings and improvements 2,621 9,364
Machinery and equipment 4,018 18,666
-----------------
Finished goods 9,138 31,889
Accumulated depreciation 1,449 2,712
-----------------
Total $ 7,689 $ 29,177
=================
</TABLE>
Depreciation expense was $196,000, $431,000 and $1,263,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
NOTE 5 IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1996
--------------
(IN THOUSANDS)
<S> <C>
Covenants not to compete $1,508
Tradename 704
Other 486
------
2,698
Less accumulated amortization 378
------
$2,320
======
</TABLE>
The covenants not to compete relate to the agreements with the former
owners of acquired businesses and are being amortized on a straight-line basis
over the five-year terms of the agreements. The tradename relates to the
Flavor Fresh brand name and is being amortized on a straight-line basis over
twenty years.
NOTE 6 SHORT-TERM BORROWINGS
ICMOSA has a revolving line-of-credit arrangement with a bank for
short-term dollar denominated debt in Mexico of up to $6.0 million
collateralized by accounts receivable from export sales to Japan and
inventories. This line of credit commitment, which had an outstanding balance
of $5.1 million at December 31, 1996, has no scheduled maturity but is reviewed
annually for renewal. In addition, ICMOSA has unsecured short-term bank loans
outstanding of $3.0 million at December 31, 1996.
GISE has a revolving line-of-credit arrangement with a bank for short-term
dollar denominated debt in Mexico of up to $6.0 million collateralized by
accounts receivable from export sales and inventories. This line of credit
commitment, which had an outstanding balance of $3.9 million at December 31,
1996, has no scheduled maturity but is reviewed annually for renewal. GISE has
additional short-term bank loans outstanding of approximately $583,000 at
December 31, 1996.
The weighted average interest rate on short-term borrowings as of December
31, 1996 was 8.6%.
22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------------------
(IN THOUSANDS)
<S> <C> <C>
Non-compete covenant obligations totaling $1.5 million, discounted at 9% $ -- $1,327
Note payable to bank, collateralized by plant and equipment in Mexico; principal and interest
at 18.5% payable monthly; unpaid principal and interest due November 25, 2004 -- 1,243
Note payable to bank, collateralized by machinery and equipment in the United States; principal
and interest at 8.66% payable in monthly installments of $16,475; unpaid principal and interest
due January 1, 2002 -- 800
Note payable to bank, collateralized by plant and equipment in Mexico; principal and interest at
Libor 8% payable monthly; unpaid principal and interest due December 30, 2001 -- 759
Note payable to bank, collateralized by land and building and improvements in Mexico; principal
payable semi-annually, interest at 13.25% to 15.5% payable monthly; unpaid principal due
May 17, 2005 635 546
Note payable to bank, collateralized by machinery and equipment in the United States; principal and
interest at prime plus 1.5% payable in monthly installments of $6,250; unpaid principal and interest
due May 1, 2000 -- 250
Note payable to bank, collateralized by machinery and equipment in the United States; principal and
interest at prime plus 1.5% payable in monthly installments of $6,250; unpaid principal and interest
due May 15, 1999 -- 145
Other notes payable 247 376
---------------------
882 5,446
183 1,114
---------------------
Less current portion $699 $4,332
=====================
</TABLE>
Certain of the loan contracts establish restrictions and obligations with
respect to the application of funds and require maintenance of insurance of the
assets and timely presentation of financial information.
All long-term debt at December 31, 1996 is U.S. dollar denominated except
for $1,243,000 which is Mexican peso denominated and $91,000 which is Canadian
dollar denominated.
Based on interest rates provided by the Company's long-term debt and the
floating rates provided on its short-term borrowings, the Company believes the
carrying amounts of its short and long-term debt approximate their fair value.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997 $1,114
1998 1,094
1999 943
2000 921
2001 696
Thereafter 678
--------------
$5,446
==============
</TABLE>
NOTE 8 RELATED PARTY TRANSACTIONS
Effective January 2, 1995, the Company entered into a five year operating
agreement with Industrias Horticolas de Montemorelos, S.A. de C.V. ("IHMSA") to
operate a freezing plant located in Montemorelos, Nuevo Leon, Mexico. Pursuant
to the terms of the operating agreement, the Company is obligated to pay IHMSA
an operating fee sufficient to cover the interest payments on IHMSA's existing
outstanding debt (approximately $4.6 million). The Company is responsible for
all raw material and operating costs and the sale of the finished goods
produced at the IHMSA plant. Payments made pursuant to the operating agreement
were $347,000 and $116,000 during the years ended December 31, 1995 and 1996,
respectively. The Vaquero family owns collectively an approximate 8% interest
in IHMSA. Certain members of the Vaquero family are officers, shareholders and
directors of the Company. During the five year term of the operating agreement,
the Company has the right of first refusal to buy the IHMSA facility at its
then fair market value.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 RELATED PARTY TRANSACTIONS (continued)
Effective July 1, 1995, the Company entered into a ten year operating
agreement with Empacadora de Naranjas Azteca, S.A. de C.V. ("Azteca"), to
operate a processing plant in Montemorelos, Nuevo Leon, Mexico. The operating
agreement provides for payments in the amount of (i) interest on existing debt
of approximately $220,000 with credit institutions, (ii) asset tax and (iii)
annual property tax. Prior to this time, Azteca "co-packed" chilled grapefruit
sections and mango slices for the Company. During the six-month period ended
June 30, 1995, Azteca co-packed approximately $1.4 million of fruit for the
Company. The Vaquero family owns collectively an approximate 14.3% interest in
Azteca. Payments made pursuant to the operating agreement were $143,000 and
$1,000 during the years ended December 31, 1995 and 1996, respectively. During
the term of the operating agreement, the Company has the right of first refusal
to buy the Azteca facility at its then fair market value.
The Company purchased certain of its products and services directly from
Azteca and other entities affiliated with its shareholders. The receivable from
related parties at December 31, 1996 is for goods purchased by the Company on
behalf of IHMSA and Azteca.
Transactions with related parties are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
----------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales $ 304 $ 379 $ --
============================
Purchases $4,704 $2,016 $ --
============================
</TABLE>
In November, 1995, the Company entered into a lease agreement with Loma
Bonita Partners, a Texas general partnership, for approximately 200 hectares
(494 acres) of land located in Loma Bonita, Veracruz, Mexico for the
development of citrus groves. The lease commenced in December, 1995 and expires
in ten years. Loma Bonita Partners is owned equally by two officers, who are
also directors and shareholders of the Company. The Company believes that said
lease agreement is on terms no less favorable to the Company than would be
available from unrelated third parties. Rent expense on this lease was $5,670
and $68,870 for the years ended December 31, 1995 and 1996, respectively.
P&C Services, Inc. (P&C) is a California corporation owned by officers and
management of Simply Fresh that leases the hourly plant employees to Simply
Fresh. Payments made to P&C during 1996 amounted to approximately $1.0
million. The balance payable to P&C at December 31, 1996 represents
non-interest bearing cash advances from P&C to Simply Fresh.
Receivable and payable balances with related parties are as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1995 1996
----------------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Empacadora de Naranjas Azteca, S.A. de C.V. (Azteca) $-- $221
Industrias Horticolas de Montemorelos, S.A. de C.V. (IHMSA) 90 320
Other -- 91
----------------
Accounts payable:
P&C Services, Inc. $90 $632
================
Industrias Horticolas de Montemorelos, S.A. de C.V. (IHMSA) $-- $103
-- 3
----------------
$-- $106
================
</TABLE>
The balance due from shareholders at December 31, 1996 represents
unsecured advances and unsecured notes receivable made to shareholders. These
advances and notes receivable are payable on demand and bear interest at 0% and
10%, respectively.
The Company operates a 144 acre grapefruit grove located close to the
ICMOSA plant in Montemorelos pursuant to a ten year operating agreement that
expires in 2000. Per the agreement, the Company operates the grove and
purchases all the grapefruit produced at a formula price tied to purchases from
unrelated third parties. The grove is owned by a partnership that consists
primarily of shareholders of Azteca. The Vaquero family owns a 14.3% interest
in this partnership. The Company believes that said arrangement is on terms no
less favorable to the Company than would be available from unrelated third
parties.
24
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 RELATED PARTY TRANSACTIONS (continued)
The Company leases its corporate office facility from a company owned by
the Company's president, who is also a shareholder of the Company. Rent expense
on this lease was $36,000, $36,000 and $98,250 for the years ended December 31,
1994, 1995 and 1996, respectively.
During 1994, 1995 and 1996, the Company paid Jordaan, Howard and
Pennington, PLLC amounts of $84,546, $106,145 and $299,723, respectively, for
legal services rendered. Mr. Jordaan, a director of the Company, is a member of
Jordaan, Howard & Pennington, PLLC.
NOTE 9 LEASES
The Company leases buildings, various plant facilities, certain equipment
and citrus groves under operating leases. The Isla plant lease is for a period
of ten years, expiring in 2005, and contains a purchase option through July 1,
1998 for $850,000. The San Rafael plant lease is for a period of nine years,
expiring in 2003, and contains the right of first refusal to purchase the
facility at its then fair market value. The Simply Fresh plant lease is for a
period of ten years, expiring in 2004, and contains a purchase option
exercisable from August 15, 1996 through August 14, 1998 for $4.5 to $4.75
million. The plant lease for the Lawrence, MA facility is for an initial
period of six years, expiring in 2002, and contains a purchase option
exercisable during the term of the lease for the then fair market value of the
property. The Company has under lease approximately 926 acres of citrus groves
in Mexico for periods of ten to fifteen years expiring in 2005 and 2010.
As described in Note 7, the Company leases its corporate office facility
and a 494 acre citrus grove from related parties. The related party building
lease expires in 2000, but its term may be renewed for a five-year period. The
related party 494 acre citrus grove lease expires in 2005.
Future minimum payments under non-cancelable operating leases with initial
terms of one year or more at December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER TOTAL
-------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
1997 $189 $ 922 $1,111
1998 189 864 1,053
1999 189 796 985
2000 189 806 995
2001 78 667 745
Thereafter 312 1,825 2,137
</TABLE>
Rent expense was $120,000, $670,000 and $1,159,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1995
and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
----------------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carry forwards $ -- $1,132
Inventories 140 200
Asset tax credit 111 975
Credit available to offset Mexican tax -- 192
Accrued expenses -- 156
Other 168 171
----------------
Total deferred tax assets $ 419 $2,826
================
Deferred tax liabilities:
Depreciation $ 40 $2,251
Inventories 1,726 4,003
Other 15 156
----------------
Total deferred tax liabilities $1,781 $6,410
================
</TABLE>
Income before income taxes relating to operations in the United States and
Mexico is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
----------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
United States $ 656 $ 364 $(2,749)
Mexico 474 4,261 2,690
----------------------------------
$1,130 $4,625 $ (59)
==================================
</TABLE>
The components of the provision for income taxes include the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
----------------------------------
<S> <C> <C> <C>
(IN THOUSANDS)
U.S. federal - current $ 180 $ 198 $(386)
U.S. state - current 25 31 (48)
U.S. deferred 36 (32) (488)
----------------------------------
241 197 (922)
----------------------------------
Foreign - current -- 43 127
Foreign - deferred (126) 1,438 523
----------------------------------
(126) 1,481 650
----------------------------------
$ 115 $1,678 $(272)
==================================
</TABLE>
Principal reconciling items from income tax computed at the U.S. statutory rate
of 34% are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
----------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision at 34% statutory rate $ 384 $1,573 $ (20)
State income tax (net of federal benefit) 16 21 (103)
Permanent differences -- -- (438)
Effect of foreign rates (287) 273 3
Other 2 22 286
Decrease in valuation allowance -- (211) --
---------------------------------
$ 115 $1,678 $(272)
=================================
</TABLE>
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 INCOME TAXES (continued)
The Company has a net operating loss carryforward in the United States of
$1,056,000 which expires in 2011 and in Mexico of $2,166,000 which begin to
expire in 2006. The Mexican subsidiaries have asset tax credits totaling
$975,000 available to offset Mexican income tax which begin to expire in 1999.
One Mexican subsidiary also has a job creation credit of $192,000 available to
offset income tax in Mexico, which will expire in 2006.
NOTE 11 STOCK OPTIONS
In 1994, the Company adopted an employee stock option plan and an outside
director stock option plan ("the Plans"). The Plans authorize the Board of
Directors to grant options to employees and consultants of the Company and to
outside directors of the Company to purchase up to 480,000 shares of common
stock under the employee stock option plan and 100,000 shares for the outside
directors stock option plan. The terms and the vesting period of any option
granted under the Plans is fixed by the Board of Directors at the time the
option is granted, provided that the exercise period may not be greater than 10
years from the date of grant. The exercise price of any option granted under
the employee stock option plan shall not be less than 100% and 85% of the fair
market value of the stock on the date of the grant for Incentive Stock Options
and Nonstatutory Stock Options, as defined, respectively. The exercise price of
any option granted under the outside directors stock option plan shall not be
less than 100% of the fair market value of the stock on the date of the grant.
The Company reserved 480,000 and 100,000 shares for issuance pursuant to the
employee stock option plan and the outside directors stock option plan,
respectively.
<TABLE>
<CAPTION>
EMPLOYEE STOCK OUTSIDE DIRECTORS STOCK
OPTION PLAN OPTION PLAN
---------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Granted during 1994 220,000 $ 3.50 60,000 $ 3.50
--------- -----------
Options outstanding, December 31, 1994 220,000 3.50 60,000 3.50
Granted 163,000 4.61 7,500 7.13
Exercised (5,000) 3.50 -- --
--------- -----------
Options outstanding, December 31, 1995 378,000 3.98 67,500 3.90
Granted 12,500 11.30 7,500 17.00
Exercised (23,500) 3.50 (7,000) 3.50
Forfeited
Options outstanding, December 31, 1996 (5,000) 3.50 -- --
--------- -----------
Exercisable at December 31, 362,000 4.27 68,000 5.39
========= ===========
1994 -- -- 60,000 $ 3.50
1995 50,000 $ 3.50 67,500 $ 3.90
1996 117,250 $ 3.89 68,000 $ 5.39
Weighted - average fair value of options granted during years ended:
December 31, 1995 $ 1.87 $ 2.60
December 31, 1996 $ 4.51 $ 6.27
</TABLE>
Exercise prices for employee options outstanding as of December 31, 1996
ranged from $3.50 to $12.25. The weighted-average remaining contractual life
of those options is 2.5 years. Exercise prices for outside directors options
outstanding as of December 31, 1996 ranged from $3.50 to $17.00. The
weighted-average remaining contractual life of those options is 2.3 years. All
options granted under the outside directors stock option plan are immediately
exercisable and the options issued to employees during 1995 and 1996 vest
ratably over four years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee and outside director stock
options because, as discussed below, the alternative fair value accounting
provided for under Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" (FASB 123), requires use of option
valuation models that were not developed for use in valuing stock options.
Under APB 25, because the exercise price of the Company's stock options equals
or exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 STOCK OPTIONS (continued)
Pro forma information regarding net income and earnings per share is
required by FASB 123 and has been determined as if the Company had accounted
for its stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 7.0%
and 5.7%; dividend yields of 0% and 0%; volatility factors of the expected
market price of the Company's common stock of .45 and .45; and a
weighted-average expected life of the option of 3.9 and 3.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except for per share
amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Pro forma net income $2,872 419
Pro forma earnings per share:
Primary $ 0.51 $ 0
Fully diluted $ 0.50 $0.06
</TABLE>
Because FAS 123 is applicable only to options and stock-based awards
granted subsequent to December 31, 1994, its proforma effect will not be fully
reflected until 1998.
NOTE 12 CAPITAL STOCK
On August 11, 1994, the Company completed an initial public offering of
550,000 units consisting of a total of 1,650,000 shares of its common stock and
1,100,000 Redeemable Common Stock Purchase Warrants ("the Warrants"). The
Warrants were transferable separately from the common stock and entitled the
holder to purchase one share of the Company's common stock at an exercise price
of $4.50 per share at any time until the fifth anniversary of the offering.
Commencing February 11, 1995, the Company could redeem some or all of the
Warrants at a call price of $0.05 per Warrant upon 30 days prior notice when
the closing bid quotation of the common stock had equaled or exceeded $6.75 for
ten consecutive trading days. The Company reserved 1,100,000 shares for
issuance upon the exercise of the Warrants.
On June 8, 1995 the Company notified all registered holders of the
Warrants of its intention to redeem all of the outstanding Warrants by July 21,
1995. The Company issued 1,099,990 shares of common stock on the exercise of a
like amount of the Warrants with gross proceeds to the Company of $4,949,955.
In conjunction with the initial public offering on August 11, 1994, the
Company issued warrants to its underwriting representatives ("the
Representatives' Warrants") to purchase up to 55,000 units consisting of a
total of 165,000 shares of its common stock and 110,000 Redeemable Common Stock
Purchase Warrants. The Representatives' Warrants are exercisable for a period
of five years from the offering date at a price per unit of $15.00. The Company
reserved 275,000 shares for issuance upon the exercise of the Representatives'
Warrants and the underlying Redeemable Common Stock Purchase Warrants. During
1995, the Company issued 163,060 shares of common stock on the exercise of
32,612 Representatives' Warrants and the 65,224 underlying Redeemable Common
Stock Purchase Warrants with gross proceeds to the Company of $782,688. During
1996, the Company issued 33,750 shares of common stock on the exercise of 6,750
Representatives' Warrants and the 13,500 underlying Redeemable Common Stock
Purchase Warrants with gross proceeds to the Company of $162,000. At December
31, 1996 there were 15,638 Representatives' Warrants outstanding.
On June 14, 1996, the Company completed its second public offering whereby
it sold 1,677,000 shares of its common stock at $14.50 per share with net
proceeds to the company of $22.2 million.
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 RESTRICTIONS ON RETAINED EARNINGS
Under Mexican Commercial Law, 5% of each year's Mexican income must be
allocated to a legal reserve until such reserve reaches 20% of the Company's
capital stock amounts. ICMOSA's and GISE's capital stock amounts were
$2,151,000 and $1,823,000, respectively, at December 31, 1996. This reserve
cannot be distributed to the shareholders except in the form of stock
dividends.
Under the terms of the U.S. line of credit agreement with a bank, the
Company may not declare or pay any dividends on its shares without the bank's
prior written consent.
NOTE 14 SEGMENT AND GEOGRAPHIC INFORMATION
The Company's operations involve a single industry segment; growing,
processing, marketing and distributing citrus and tropical fruit products,
including chilled and canned cut fruits, citrus juices and oils, and other
specialty food ingredients. Financial information, summarized by geographic
location, is as follows:
<TABLE>
<CAPTION>
UNITED STATES
AND CANADA MEXICO ELIMINATIONS CONSOLIDATED
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1994:
Sales to unaffiliated customers $19,101 $ 6,245 $ -- $25,346
Transfers between geographic areas -- 7,574 (7,574) --
-----------------------------------------------------
Total revenue $19,101 $13,819 $ (7,574) $25,346
=====================================================
Operating profit $ 656 $ 497 $ (23) $ 1,130
=====================================================
Identifiable assets $ 4,976 $ 6,277 $ (77) $11,176
=====================================================
Year ended December 31, 1995:
Sales to unaffiliated customers $23,898 $12,968 -- $36,866
Transfers between geographic areas -- 12,937 $(12,937) --
-----------------------------------------------------
Total revenue $23,898 $25,905 $(12,937) $36,866
=====================================================
Operating profit $ 364 $ 4,410 $ (149) $ 4,625
=====================================================
Identifiable assets $ 9,679 $17,165 $ (226) $26,618
=====================================================
Year ended December 31, 1996:
Sales to unaffiliated customers $44,118 $21,120 -- $65,238
Transfers between geographic areas 2,733 24,161 $(26,894) --
-----------------------------------------------------
Total revenue $46,851 $45,281 $(26,894) $65,238
=====================================================
Operating profit (loss) $(2,594) $ 2,939 $ (404) $ (59)
=====================================================
Identifiable assets $29,132 $39,215 $ 8,336 $76,683
=====================================================
</TABLE>
NOTE 15 EXTRAORDINARY GAIN
In July, 1996, the Mexican government enacted a new program, Acuerdo Para
El Financiamiento del Sector Attropecuario y Pesquero ("FINAPE"), whereby
certain agricultural and commercial enterprises were eligible for a one time
reduction in their existing debt obligations with Mexican banks as a means of
stimulating the economy and supporting the Mexican banking system. Pursuant to
the provisions of FINAPE, GISE obtained a reduction in its debt principal with
Banamex of $4,000,000 pesos or approximately US $532,000.
In August, 1996, the Mexican government enacted a second program, Acuerdo
de Apoyo Financiero y Fomento a la Micro, Pequena y Mediana Empresa ("FOPIME"),
of debt reduction for other commercial enterprises. Pursuant to the provisions
of FOPIME, ICMOSA obtained a reduction in its debt principal with Union de
Credito Allende of approximately US $57,000.
Provisions for Mexican income taxes and statutory employee profit sharing
of 34% and 10%, respectively, have been provided on these gains from debt
forgiveness.
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16 SUBSEQUENT EVENTS
In February, 1997, the Company entered into a revolving credit agreement
with Rabobank Nederland to provide up to $8.5 million in short-term financing
collateralized by US finished goods inventories and US accounts receivable.
The agreement is guaranteed by the Company and its US subsidiaries and requires
the Company to maintain certain financial performance levels relative to
tangible net worth, working capital and total debt. In addition, the agreement
contains restrictions on the issuance of additional shares of stock and the
payment of dividends, among other things, without the prior written consent of
the bank.
In March, 1997, the Company purchased a warehouse and distribution
facility located in McAllen, Texas for a total cash consideration of
approximately $1.2 million. In connection therewith, the Company entered into
a construction loan agreement with Texas State Bank for approximately $2.1
million collateralized by the property and improvements and guaranteed by the
Company. The Company plans on expending approximately $1.6 million on capital
improvements to the property with operations to commence from the property in
July, 1997.
Subsequent to year end, the previous owners of Simply Fresh Fruit, Inc.
requested that the common stock price protection provisions of the May 9, 1996
acquisition agreement be satisfied by the Company. The Company had previously
issued 90,909 shares of its common stock in consideration of $1.5 million of
the acquisition purchase price. The actual number of additional shares to be
issued by the Company has yet to be determined.
NOTE 17 COMMITMENTS
In October, 1996, GISE and The Coca-Cola Export Corporation ("Coca-Cola"),
an affiliate of The Coca-Cola Company, entered into a ten year Supply Contract,
with a ten year renewal option, for the production of Italian lemons. Pursuant
to the terms of this Supply Contract, GISE will plant and grow approximately
12,000 acres of Italian lemons for sale to Coca-Cola at pre-determined prices.
The Supply Contract requires Coca-Cola to provide, free of charge, 750,000
lemon trees, enough to plant approximately 7,200 acres. In addition, the
Supply Contract requires Coca-Cola to purchase all the production from the
project. The Company estimates that this project will require capital
expenditures of $4.7 million in 1997. The total capital requirements for the
project is estimated to be approximately $27.0 million over the next four
years. Presently, the Company is exploring various financing alternatives for
this project.
30
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
THE UNIMARK GROUP, INC.
We have audited the accompanying consolidated balance sheets of The
UniMark Group, Inc. (the Company) as of December 31, 1995 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of The UniMark Group, Inc. at December 31, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG L.L.P.
Dallas, Texas
February 28, 1997
COMMON STOCK PRICE RANGES AND DIVIDENDS
UniMark's common stock is quoted on the Nasdaq National Market under the
symbol "UNMG". Through May 19, 1995, the common stock was quoted on the Nasdaq
Small-Cap Market under the symbol "UNMG." The following table sets forth, for
the periods indicated, the high and low bid prices of the common stock as
reported on the Nasdaq Small-Cap Market through May 19, 1995 and the high and
low sale prices as reported on the Nasdaq National Market since May 22, 1995.
<TABLE>
<CAPTION>
HIGH LOW
-----------------
<S> <C> <C>
Year Ended December 31, 1995:
First Quarter $ 5.75 $ 3.13
Second Quarter (through May 19,1995) 7.25 5.38
Second Quarter (since May 22, 1995) 7.25 6.63
Third Quarter 10.63 6.88
Fourth Quarter 12.25 7.75
Year Ended December 31, 1996
First Quarter 16.63 11.88
Second Quarter 17.88 13.75
Third Quarter 17.75 10.63
Fourth Quarter $12.50 $ 7.00
</TABLE>
The Company has not paid any cash dividends since its inception and for
the foreseeable future intends to follow a policy of retaining all of its
earnings, if any, to finance the development and continued expansion of its
business.
31
<PAGE> 34
BOARD OF
DIRECTORS
[No Picture Available] Jorn Budde
President, Chief Executive
Officer and Director
(Principal Executive Officer)
[No Picture Available] Rafael Vaquero Bazan
Chief Operating Officer and
Director
[Picture] Jose Martinez Brohez
Director
[Picture] Eduardo Vaquero Bazan
Director
[Picture] Pedro Vaquero Garcia
Director (Honorary Chairman)
[Picture] Fernando Camacho Casas
Director
[Picture] Jakes Jordaan
Director
[Picture] Edward A. Stone
Director
32
