<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK (ONE)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period
ended June 30, 1997
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period
from _________________ to ____________________
Commission file number 0-26096
THE UNIMARK GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2436543
(State of incorporation or organization) (I.R.S. Employer Identification No.)
UNIMARK HOUSE
124 MCMAKIN ROAD
BARTONVILLE, TEXAS 76226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 491-2992
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
----- -----
As of August 11, 1997, the number of shares outstanding of each
class of common stock was:
Common Stock, $.01 par value: 8,583,833 shares
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets,
December 31, 1996 and June 30, 1997................................................ 3
Condensed Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1996 and 1997......................................... 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1997..................................... 5
Notes to Condensed Consolidated Financial Statements - June 30, 1997.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
</TABLE>
<PAGE> 3
THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION> DECEMBER 31, JUNE 30,
1996 1997
-------------- -------------
(NOTE 2) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $4,268 $1,292
Accounts receivable -- trade, net of allowance of $142 in
1996 and $249 in 1997 . . . . . . . . . . . . . . . . . . 9,244 9,835
Accounts receivable -- other . . . . . . . . . . . . . . . 703 514
Receivable from related parties . . . . . . . . . . . . . . 687 755
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 19,411 32,620
Income and value added taxes receivable . . . . . . . . . . 1,418 2,348
Deferred income taxes . . . . . . . . . . . . . . . . . . . 196 196
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 771 1,052
-------------- -------------
Total current assets 36,698 48,612
Property, plant and equipment, net of accumulated depreciation
of $2,712 in 1996 and $3,924 in 1997 . . . . . . . . . . . 29,177 34,185
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 373 373
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . 6,787 6,697
Identifiable intangible assets . . . . . . . . . . . . . . . 2,320 2,150
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,328 2,485
-------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . $76,683 $94,502
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings . . . . . . . . . . . . . . . . . . . $12,604 $26,086
Current portion of long-term debt . . . . . . . . . . . . . 1,114 955
Accounts payable . . . . . . . . . . . . . . . . . . . . . 4,572 3,629
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 2,108 3,728
Deferred income taxes . . . . . . . . . . . . . . . . . . . 3,915 4,198
-------------- -------------
Total current liabilities . . . . . . . . . . . . . . . 24,313 38,596
Long-term debt, less current portion . . . . . . . . . . . . 4,332 8,680
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 238 238
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 8,561,333 in
1996 and 8,583,833 in 1997 . . . . . . . . . . . . . . . 86 86
Additional paid-in capital . . . . . . . . . . . . . . . . 45,287 45,366
Retained earnings . . . . . . . . . . . . . . . . . . . . . 2,427 1,536
-------------- -------------
Total shareholders' equity . . . . . . . . . . . . . . . 47,800 46,988
-------------- -------------
Total liabilities and shareholders' equity . . . . . . . $76,683 $94,502
============== =============
</TABLE>
See accompanying notes.
3
<PAGE> 4
THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1997 1996 1997
------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 18,673 $ 19,784 $ 29,951 $ 37,059
Cost of products sold 12,324 12,691 19,521 24,546
---------- ----------- ---------- -----------
6,349 7,093 10,430 12,513
Selling, general and administrative 4,643 6,589 7,382 12,411
expenses
---------- ----------- ---------- -----------
Income from operations 1,706 504 3,048 102
Other income (expense):
Interest expense (551) (749) (655) (1,292)
Interest income 114 52 298 154
Foreign currency transaction loss (70) (286) (121) (77)
Other (10) 8 (7) 12
---------- ----------- ---------- -----------
(517) (975) (485) (1,203)
---------- ----------- ---------- -----------
Income (loss) before income taxes 1,189 (471) 2,563 (1,101)
Income tax expense (benefit) (37) (82) 421 (71)
---------- ----------- ---------- -----------
Income (loss) before extraordinary gain 1,226 (389) 2,142 (1,030)
Extraordinary gain on forgiveness of debt,
net of applicable income taxes of $109 -- 139 -- 139
---------- ----------- ---------- -----------
Net income (loss) $ 1,226 $ (250) $ 2,142 $ (891)
========== =========== ========== ===========
Earnings (loss) per share:
Income (loss) before extraordinary item:
Primary $ 0.17 $ (0.05) $ 0.32 $ (0.12)
========== =========== ========== ===========
Fully diluted
$ 0.17 $ (0.05) $ 0.32 $ (0.12)
========== =========== ========== ===========
Net income (loss):
Primary $ 0.17 $ (0.03) $ 0.32 $ (0.10)
========== =========== ========== ===========
Fully diluted $ 0.17 $ (0.03) $ 0.32 $ (0.10)
========== =========== ========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 2,142 $ (891)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 669 1,599
Deferred income taxes . . . . . . . . . . . . . . . . . . . 646 283
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . (3,355) (1,400)
Inventories . . . . . . . . . . . . . . . . . . . . . . . (4,669) (13,209)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . (187) (281)
Payables and accrued expenses . . . . . . . . . . . . . . 243 677
------------ ------------
Net cash used in operating activities . . . . . . . . . . . . (4,511) (13,222)
INVESTING ACTIVITIES
Acquisition of Deli-Bon, GISE and Simply Fresh shares . . . . (2,900) --
Purchases of property, plant and equipment . . . . . . . . . (4,494) (6,220)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (357) (1,284)
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . (7,751) (7,504)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock . . . . . . . . . 22,901 79
Net increase (decrease) in short-term borrowings . . . . . . (402) 17,482
Proceeds from long-term debt . . . . . . . . . . . . . . . . -- 1,798
Payments of long-term debt . . . . . . . . . . . . . . . . . (156) (1,609)
------------ ------------
Net cash provided by financing activities . . . . . . . . . . 22,343 17,750
Net increase (decrease) in cash and cash equivalents . . . . 10,081 (2,976)
Cash and cash equivalents at beginning of period . . . . . . 6,286 4,268
------------ ------------
Cash and cash equivalents at end of period . . . . . . . . . $ 16,367 $ 1,292
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
THE UNIMARK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements at June 30, 1997, and for the
three month and six month periods ended June 30, 1996 and 1997 are unaudited
and reflect all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of
the financial position and operating results for the interim period. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contained in the Company's Annual Report on Form 10-K incorporated
herein by reference. The results of operations for the six months ended June
30, 1997 and for the year ended December 31, 1996 are not necessarily
indicative of future financial results.
NOTE 2 - YEAR END FINANCIAL STATEMENT
The condensed consolidated balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
NOTE 3 - EARNINGS PER SHARE
Earnings per share was calculated based on the weighted average number of
common and common equivalent shares outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an
increase in primary earnings per share for the second quarter ended June 30,
1996 of $.01 and to have no effect on primary earnings per share for the second
quarter ended June 30, 1997. The Company has not yet determined what the
impact of Statement No. 128 will be on the calculation of fully diluted
earnings per share.
NOTE 4 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
(IN THOUSANDS)
------------ -------------
<S> <C> <C>
Finished goods:
Cut fruits . . . . . . . . . . . . . . $10,536 $15,506
Juice and oils . . . . . . . . . . . . 1,796 7,560
------------ -------------
12,332 23,066
Advances to suppliers and orchards . . . . 4,134 5,850
Raw materials and supplies . . . . . . . . 2,945 3,704
------------ -------------
$19,411 $32,620
============ =============
</TABLE>
6
<PAGE> 7
NOTE 4 - GAIN ON FORGIVENESS OF DEBT
In May, 1997, ICMOSA retired certain outstanding long-term debt with Union de
Credito Allende, a Mexican credit union, at a discount of 50%. The discount was
granted pursuant to a Mexican government program, Acuerdo de Apoyo Financiero y
Fomento a la Micro, Pequena y Mediana Empresa ("FOPIME") and through the
participation of Nacional Financiera ("NAFINSA"), a Mexican development bank, to
help provide liquidity to the Mexican credit unions. The debt reduction
amounted to $2.0 million pesos or approximately US $248,000. Provisions for
Mexican income taxes and statutory employee profit sharing of 34% and 10%,
respectively, have been provided on this gain from debt forgiveness.
NOTE 5 - RELATED PARTY TRANSACTIONS
Effective January 1, 1995, UniMark 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, UniMark is obligated to pay IHMSA an
operating fee sufficient to cover the interest payments on IHMSA's existing
outstanding debt. Since, under the terms of the operating agreement, UniMark
would benefit from the reduction of IHMSA's debt, the Company elected to
advance funds to IHMSA to retire certain of its outstanding debt. In May,
1997, IHMSA retired its outstanding debt with Union de Credito Allende at a
discount of 50% through programs available in Mexico for debt reduction. At
June 30, 1997, advances to IHMSA of $915,000 are included in other assets.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Quarterly Report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. Actual consolidated results of
the UniMark Group, Inc. ("UniMark" or the "Company") could differ significantly
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Statements contained in this report that are not historical facts are
forward-looking statements that are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. A number of important factors
could cause the Company's actual results for 1997 and beyond to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, the Company. These factors include, without limitation: growth
and integration of new businesses; uncertainty of new product development and
market acceptance of new products; dependence upon availability and price of
fresh fruit; competition; dependence upon significant customers; seasonality
and quarterly fluctuations; risk related to product liability and recall;
limited intellectual property protection; government regulation; dependence on
key management; economic, political and social conditions in Mexico; exchange
rate fluctuations and inflation; and labor relations and costs. These factors
are listed under "Risk Factors" in the Company's Registration Statement on Form
S-1, Registration No. 333-3539, as filed with the Securities and Exchange
Commission on June 14, 1996.
CONVERSION TO U.S. GAAP
The Company conducts substantially all of its operations through its wholly
owned operating subsidiaries: UniMark Foods, Inc., UniMark International, Inc.,
Industrias Citricolas de Montemorelos, S.A. de C.V. ("ICMOSA"), Grupo
Industrial Santa Engracia, S.A. de C.V. ("GISE"), Agromark, S.A. de C.V.
("Agromark"), Simply Fresh Fruit, Inc. ("Simply Fresh") and Les Produits
Deli-Bon, Inc. ("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.
Agromark is a Mexican corporate entity under which the Company's agricultural
projects are reported. ICMOSA, GISE and Agromark 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,
GISE's and Agromark'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.
8
<PAGE> 9
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>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1997 1996 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 66.0 64.2 65.2 66.2
------ ------ ------ ------
Gross profit 34.0 35.8 34.8 33.8
Selling, general and administrative
expenses 24.9 33.3 24.6 33.5
------ ------ ------ ------
Income from operations 9.1 2.5 10.2 0.3
Other income (expense):
Interest expense (2.9) (3.8) (2.2) (3.5)
Interest income 0.6 0.3 1.0 0.4
Foreign currency transaction gain (loss) (0.4) (1.4) (0.4) (0.2)
------ ------ ------ ------
(2.7) (4.9) (1.6) (3.3)
------ ------ ------ ------
Income (loss) before income taxes 6.4 (2.4) 8.6 (3.0)
Income tax expense (benefit) (0.2) (0.4) 1.4 0.2
------ ------ ------ ------
Income (loss) before extraordinary gain 6.6 (2.0) 7.2 (2.8)
Extraordinary gain, net of income tax -- 0.7 -- 0.4
------ ------ ------ ------
Net income (loss) 6.6% (1.3)% 7.2% (2.4)%
====== ======= ====== =======
</TABLE>
Three Months Ended June 30, 1996 and 1997
Net sales increased 5.9% from $18.7 million in 1996 to $19.8 million in 1997
despite significant decreases in sales to Japan and citrus juice and oil sales.
This increase was primarily due to increases in retail sales, foodservice sales
and club sales. Retail sales increased 71.2% from $3.9 million in 1996 to $6.7
million in 1997. Foodservice sales increased 54.7% from $4.1 million in 1996 to
$6.3 million in 1997 while warehouse club sales increased 51.7% from $2.1
million in 1996 to $3.2 million in 1997. These increases are primarily the
result of increased distribution and demand for the Company's chilled fruit
product line as well as the expansion of the company's product line including
canned fruit, frozen fruit and fresh pineapple.
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 from $2.4 million in 1996 to $421,000 in 1997 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 is 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 experienced a decline in comparative sales of its specialty food
ingredient products to Japan during the second quarter of 1997, the Company
anticipates an increase in comparative quarterly sales during the remainder of
1997. Present indications are that inventory levels in Japan have been
reduced. Base upon present indications from Japan, the Company anticipates
selling approximately $5.5 million of specialty food ingredient products to
Japan during the 1997-98 citrus processing season. Regular shipments to Japan
are expected to resume in the fourth quarter of this year. In addition, the
Company has delivered its first container of IQF product to Japan for
evaluation. 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.
9
<PAGE> 10
The increase in net sales was also adversely impacted by a 46.8% decline in
citrus juice and oil sales from $5.0 million in 1996 to $2.6 million in 1997.
Citrus juice and oil sales were less than expected due to unexpected delays in
shipments to significant customers in Florida. These shipments were temporarily
delayed until a certification process was completed and a certain ratio juice
could be supplied. Shipments on existing contracts to supply approximately 7.0
million pounds solid of frozen concentrate orange juice to these Florida
customers began the last week of June and are expected to be completed in the
third quarter of 1997.
Gross profit as a percentage of net sales increased from 34.0% in 1996 to
35.9% in 1997. Gross profit on cut fruit sales increased from 35.2% in 1996 to
36.4% in 1997 while gross profit on citrus juice and oil sales increased from
30.8% in 1996 to 32.4% in 1997. The increase in gross profit on cut fruit sales
resulted from the product sales mix and decreased processing costs.
Gross profit on cut fruit sales in 1997 were adversely impacted by lower
than anticipated production volume resulting from the decline in Japanese sales
and operational inefficiencies associated with the integration of the
Company's new facilities into its existing operations. Although the loss of
Japanese production volume adversely impacted the Company's second quarter 1997
operating results, the Company is taking affirmative steps to replace the lost
production volume.
The Company has implemented significant changes in the operations of its
United States production facilities to reduce costs and improve profitability
and continues to evaluate and assess further changes to improve operational
efficiency.
Gross profit on citrus juice and oil sales in 1997 were adversely affected by
lower than expected market prices but benefited from improved raw material
costs. Frozen concentrate orange juice futures prices have remained depressed
and the Company does not expect favorable improvement over the remainder of
1997.
Selling, general and administrative expenses ("SG&A") as a percentage of net
sales increased from 24.9% in 1996 to 33.3% in 1997. This increase is primarily
the result of lower than anticipated sales to Japan, limited orange juice sales
and increased general and administrative expenses associated with recent
acquisitions.
Sales of the Company's specialty food ingredient products are facilitated
through independent Japanese trading companies primarily on an FOB ICMOSA plant
basis. Therefore, the Company does not typically incur delivery costs and
sales commissions with respect to these sales. Consequently, the decrease in
sales to Japan adversely impacted SG&A as a percentage of sales during the
second quarter of 1997. Further, SG&A as a percentage of sales was adversely
impacted by limited sales of orange juice during the second quarter of 1997.
Although no assurances can be given, the Company anticipates that improvements
in sales of orange juice during the remainder of 1997 should positively impact
SG&A as a percentage of sales. Also, SG&A as a percentage of sales was
adversely impacted by increases in general and administrative costs associated
with the Company's recent acquisitions. During the second quarter of 1997, the
Company completed consolidating and integrating the administrative and
accounting functions associated with its recent United States acquisitions.
Although no assurances can be given, this restructuring is expected to
positively impact SG&A in the second half of 1997.
Interest expense increased from 2.9% of net sales in 1996 to 3.8% in 1997.
Actual interest expense increased from $551,000 in 1996 to $749,000 in 1997.
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 $114,000 was earned in 1996 and $52,000 in 1997 primarily
from the temporary cash investment of excess cash balances.
10
<PAGE> 11
A foreign currency transaction net loss of $70,000 in 1996 and $286,000 in
1997 resulted primarily from the conversion of the Company's foreign
subsidiaries' financial statements to U.S. GAAP.
Income taxes. A consolidated income tax benefit of $37,000 in 1996 and
$82,000 in 1997 resulted from the recognition of future benefits from tax
losses generated.
Extraordinary gain. In May, 1997, ICMOSA retired certain outstanding
long-term debt with Union de Credito Allende, a Mexican Federal credit union,
at a discount of 50%. The discount was granted pursuant to a Mexican
government program, Acuerdo de Apoyo Financiero y Fomento a la Micro, Pequena y
Mediana Empresa ("FOPIME") and through the participation of Nacional Financiera
("NAFINSA"), a Mexican development bank, to help provide liquidity to the
Mexican Federal credit unions. The debt reduction amounted to approximately
$2.0 million pesos or approximately US $248,000. Provisions for Mexican
income taxes and statutory employee profit sharing of 34% and 10%,
respectively, have been provided on this gain from debt forgiveness.
As a result of the foregoing, the Company reported a net loss of $250,000 in
1997 while reporting net income of $1.2 million in 1996.
Six Months Ended June 30, 1996 and 1997
Net sales increased 23.7% from $30.0 million in 1996 to $37.1 million in
1997. This increase was primarily due to increases in foodservice sales, retail
sales and club sales. Foodservice sales increased 152.5% from $4.7 million in
1996 to $12.0 million in 1997. Retail sales increased 75.7% from $7.6 million
in 1996 to $13.3 million in 1997 and warehouse club sales increased 50.7% from
$3.8 million in 1996 to $5.7 million in 1997. These increases were positively
impacted primarily by the Company's acquisition of Simply Fresh effective March
31, 1996 and the addition of new customers, particularly in the Northeast U.S.
in August, 1996.
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 from $7.0 million in 1996 to $1.3 million in 1997 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 is 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 experienced a decline in comparative sales of its
specialty food ingredient products to Japan during the first half of 1997, the
Company anticipates an increase in comparative quarterly sales during the
remainder of 1997. Present indications are that inventory levels in Japan have
been reduced. Base upon present indications from Japan, the Company
anticipates selling approximately $5.5 million of specialty food ingredient
products to Japan during the 1997-98 citrus processing season. Regular
shipments to Japan are expected to resume in the fourth quarter of this year.
In addition, the Company has delivered its first container of IQF product to
Japan for evaluation. 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.
The increase in net sales was also adversely impacted by a 20.3% decline in
citrus juice and oil sales from $5.0 million in 1996 to $3.9 million in 1997.
The Company acquired GISE, a citrus juice and oil processor in Mexico effective
March 31, 1996, therefore the 1996 sales amount represents only three months of
operations. Citrus juice and oil sales were less than expected due to
unexpected delays in shipments to significant customers in Florida. These
shipments were temporarily delayed until a certification process was completed
and a certain ratio juice could be supplied. Shipments on existing contracts
to supply approximately 7.0 million pounds solid of frozen concentrate orange
juice to these Florida customers began the last week of June and are expected
to be completed in the third quarter of 1997.
11
<PAGE> 12
Gross profit as a percentage of net sales decreased from 34.8% in 1996 to
33.8% in 1997. Gross profit on cut fruit sales decreased from 35.6% in 1996 to
34.2% in 1997 while gross profit on citrus juice and oil sales decreased from
30.8% in 1996 to 30.3% in 1997. 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, fluctuations in raw materials costs and operational inefficiencies
associated with the integration of the Company's new facilities into its
existing operations. Although the loss of Japanese production volume adversely
impacted the Company's 1997 operating results, the Company is taking
affirmative steps to replace the lost production volume.
The Company has implemented significant changes in the operations of its
United States production facilities to reduce costs and improve profitability
and continues to evaluate and assess further changes to improve operational
efficiency.
Gross profit on citrus juice and oil sales in 1997 were adversely affected by
lower than expected market prices but benefited from improved raw material
costs. Frozen concentrate orange juice futures prices have remained depressed
and the Company does not expect favorable improvement over the remainder of
1997.
Selling, general and administrative expenses ("SG&A") as a percentage of net
sales increased from 24.6% in 1996 to 33.5% in 1997. This increase is primarily
the result of lower than anticipated sales to Japan, limited orange juice sales
and increased general and administrative expenses associated with recent
acquisitions.
Sales of the Company's specialty food ingredient products are facilitated
through independent Japanese trading companies primarily on an FOB ICMOSA plant
basis. Therefore, the Company does not typically incur delivery costs and
sales commissions with respect to these sales. Consequently, the decrease in
sales to Japan adversely impacted SG&A as a percentage of sales during the
first half of 1997. Further, SG&A as a percentage of sales was adversely
impacted by limited sales of orange juice during the first half of 1997.
Although no assurances can be given, the Company anticipates that improvements
in sales of orange juice during the remainder of 1997 should positively impact
SG&A as a percentage of sales. Also, SG&A as a percentage of sales was
adversely impacted by increases in general and administrative costs associated
with the Company's recent acquisitions. During the second quarter of 1997, the
Company completed consolidating and integrating the administrative and
accounting functions associated with its recent United States acquisitions.
Although no assurances can be given, this restructuring is expected to
positively impact SG&A in the second half of 1997.
Interest expense increased from 2.2% of net sales in 1996 to 3.5% in 1997.
Actual interest expense increased from $655,000 in 1996 to $1.3 million in
1997. 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 $298,000 was earned in 1996 and $154,000 in 1997 primarily
from the temporary cash investment of excess cash balances.
A foreign currency transaction net loss of $121,000 in 1996 and $77,000 in
1997 resulted primarily from the conversion of Company's foreign subsidiaries'
financial statements to U.S. GAAP.
Income taxes. The consolidated provision for income taxes was an expense of
$421,000 in 1996 and a benefit of $71,000 in 1997. The tax benefit resulted
from the recognition of future benefits from tax losses generated.
Extraordinary gain. In May, 1997, ICMOSA retired certain outstanding
long-term debt with Union de Credito Allende, a Mexican Federal credit union,
at a discount of 50%. The discount was granted pursuant
12
<PAGE> 13
to a Mexican government program, Acuerdo de Apoyo Financiero y Fomento a la
Micro, Pequena y Mediana Empresa ("FOPIME") and through the participation of
Nacional Financiera ("NAFINSA"), a Mexican development bank, to help provide
liquidity to the Mexican Federal credit unions. The debt reduction amounted to
approximately $2.0 million pesos or approximately US $248,000. Provisions for
Mexican income taxes and statutory employee profit sharing of 34% and 10%,
respectively, have been provided on this gain from debt forgiveness.
As a result of the foregoing, the Company reported a net loss of $891,000 in
1997 while reporting net income of $2.1 million in 1996.
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 sales in
supermarkets in North America. Management believes UniMark's quarterly net
sales will continue to be impacted by this pattern of seasonality.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, cash and cash equivalents totaled $1.2 million, a decrease
of $3.0 million from year end 1996. During 1997, operating activities utilized
cash of $13.2 million primarily to finance a $13.2 million increase in
inventories. The increase in inventories is the result of lower than expected
juice sales and seasonal citrus processing in Mexico.
At June 30, 1997, the Company had approximately 11 million pounds solid of
FCOJ in finished goods inventory of which approximately 6 million pounds solid
had been committed under existing contracts for delivery by the end of August,
1997. The Company anticipates completing this seasons orange juice production
in the middle of August and to begin early production of next seasons crop by
the middle of November. The Company expects to maintain approximately 2
million pounds solid of this seasons FCOJ inventory for blending with next
seasons early orange crop. In addition, the Company has just completed its
citrus processing season in Mexico and has processed and stored quantities of
grapefruit and orange sufficient to supply its growing sales demand until the
next processing season. The Company's inventory levels are anticipated to
decline over the remainder of 1997.
During 1997, UniMark utilized cash of $7.5 million in investing activities.
Of this amount, $6.2 million was expended on property, plant and equipment and
$1.3 million was expended on other assets. 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 August, 1997. Also during 1997,
the Company expended $3.5 million on plant facilities and improvements and
equipment in Mexico.
Effective January 1, 1995, UniMark 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, UniMark is obligated to pay IHMSA an
operating fee sufficient to cover the interest payments on IHMSA's existing
outstanding debt. Since, under the terms of the operating agreement, UniMark
would benefit from the reduction of IHMSA's debt, the Company elected to
advance funds to IHMSA to retire certain of its outstanding debt. In May,
1997, IHMSA retired its outstanding debt with Union de Credito Allende at a
discount of 50% through programs available in Mexico for debt reduction. At
June 30, 1997, advances to IHMSA of $915,000 are included in other assets.
The Company's financing activities provided net cash of $17.5 million from
additional short-term borrowings and $1.8 million from borrowings under the
warehouse construction loan, while cash was utilized to reduce long-term debt
by $1.6 million in 1997.
The Company received cash proceeds of $1.0 million from additional unsecured
short-term borrowings from Bancrecer in Mexico. In connection therewith, the
Company renegotiated the renewal term of its outstanding $4.0 million of
unsecured debt with Bancrecer from three months to eighteen months.
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 U.S. finished goods inventories and U.S. accounts receivable.
The agreement is guaranteed by the Company and its U.S. 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. At June 30, 1997, the Company had an outstanding loan
balance of $6.1 million
14
<PAGE> 15
under this agreement. Although no assurances can be given, the Company
anticipates renewing the above revolving credit agreement with Rabobank when it
expires on December 1, 1997.
In April, 1997, the Company entered into two additional revolving credit
agreements with Rabobank Nederland to provide up to an aggregate amount of
$15.0 million in short-term financing collateralized by Mexico finished goods
inventories and Mexico accounts receivable. The agreement is guaranteed by the
Company and its Mexico 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. At June 30, 1997,
the Company had outstanding loan balances aggregating $11.7 million under
these agreements.
In May, 1997, the Company entered into a loan agreement with Rabobank
Nederland to provide up to $10.0 million to partially finance investments in
plants, expansion and upgrading of facilities and agricultural operations. The
loan is collateralized by land and improvements and equipment in Mexico. The
agreement is guaranteed by the Company and its Mexico subsidiaries and requires
the Company to maintain certain financial performance levels relative to
tangible net worth, working capital, total debt and debt service. 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. At June 30, 1997, the Company had an outstanding
loan balance of $6.0 million under this agreement. Although no assurances can
be given, the Company anticipates extending the term of this bridge loan when
it expires on September 30, 1997, until the terms and conditions of permanent
long-term financing can be arranged.
In May, 1997, ICMOSA retired approximately $500,000 of outstanding long-term
debt with Union de Credito Allende, a Mexican credit union, at a
discount of 50%. The discount was granted pursuant to a Mexican government
program, Acuerdo de Apoyo Financiero y Fomento a la Micro, Pequena y Mediana
Empresa ("FOPIME") and through the participation of Nacional Financiera
("NAFINSA"), a Mexican development bank, to help provide liquidity to the
Mexican credit unions.
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.
15
<PAGE> 16
EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K
None
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE UNIMARK GROUP, INC.
---------------------------
Registrant
Date: August 13, 1997 /s/ Jorn Budde
---------------------- ----------------------------
Jorn Budde, President
(Principal Executive Officer)
Date: August 13, 1997 /s/ Keith Ford
---------------------- --------------------------------
Keith Ford, Vice President
(Principal Accounting Officer)
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------- ----------------------------------------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,292
<SECURITIES> 0
<RECEIVABLES> 10,084
<ALLOWANCES> 249
<INVENTORY> 32,620
<CURRENT-ASSETS> 48,612
<PP&E> 38,109
<DEPRECIATION> 3,924
<TOTAL-ASSETS> 94,502
<CURRENT-LIABILITIES> 38,596
<BONDS> 8,680
0
0
<COMMON> 86
<OTHER-SE> 46,902
<TOTAL-LIABILITY-AND-EQUITY> 94,502
<SALES> 37,059
<TOTAL-REVENUES> 37,059
<CGS> 24,546
<TOTAL-COSTS> 24,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,292
<INCOME-PRETAX> (1,101)
<INCOME-TAX> (71)
<INCOME-CONTINUING> (1,030)
<DISCONTINUED> 0
<EXTRAORDINARY> 139
<CHANGES> 0
<NET-INCOME> (891)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
