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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 September 30, 1998
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________________ to ____________________
Commission file number 0-26096
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 November 12, 1998, the number of shares outstanding of each class
of common stock was:
Common Stock, $.01 par value: 11,938,326 shares
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<TABLE>
<CAPTION>
INDEX
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets,
December 31, 1997 and September 30, 1998............................................. 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended September 30, 1997 and 1998............... 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997 and 1998................................ 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 8
PART II. OTHER INFORMATION
Item 2. Sale of Unregistered Securities........................................................ 14
Item 6. Exhibits and Reports on Form 8-K....................................................... 14
SIGNATURES....................................................................................... 15
</TABLE>
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THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(NOTE 1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 1,237 $ 2,033
Accounts receivable -- trade, net of allowance of $685 in
1997 and $858 in 1998 ............................................... 11,599 10,395
Accounts receivable - other ........................................... 716 1,226
Inventories ........................................................... 25,726 26,709
Income and value added taxes receivable ............................... 2,312 2,259
Prepaid expenses ...................................................... 1,605 1,320
-------- --------
Total current assets ............................................. 43,195 43,942
Property, plant and equipment, net of accumulated depreciation
of $5,227 in 1997 and $7,008 in 1998 .................................... 38,130 38,718
Deferred income taxes ..................................................... 1,847 1,847
Goodwill .................................................................. 6,606 6,470
Identifiable intangible assets ............................................ 1,823 1,639
Due from related parties .................................................. 1,678 1,669
Other assets .............................................................. 1,337 1,304
-------- --------
Total assets ..................................................... $ 94,616 $ 95,589
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ................................................. $ 31,452 $ 19,259
Current portion of long-term debt ..................................... 1,655 4,789
Accounts payable ...................................................... 4,087 7,246
Accrued expenses ...................................................... 4,439 2,725
Income taxes payable .................................................. 40 21
Deferred income taxes ................................................. 6,050 5,438
-------- --------
Total current liabilities ........................................ 47,723 39,478
Long-term debt, less current portion ...................................... 8,626 4,089
Deferred income taxes ..................................................... 15 15
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 8,598,833 in
1997 and 11,938,326 in 1998 ...................................... 86 119
Additional paid-in capital ............................................ 45,419 58,811
Retained earnings (deficit) ........................................... (7,253) (6,923)
-------- --------
Total shareholders' equity ....................................... 38,252 52,007
-------- --------
Total liabilities and shareholders' equity ....................... $ 94,616 $ 95,589
======== ========
</TABLE>
See accompanying notes.
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THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1998 1997 1998
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales ....................................................... $ 21,982 $ 19,911 $ 59,041 $ 69,952
Cost of products sold ........................................... 14,859 15,068 39,405 48,595
-------- -------- -------- --------
7,123 4,843 19,636 21,357
Selling, general and administrative expenses .................... 6,532 5,697 18,943 17,587
-------- -------- -------- --------
Income (loss) from operations ................................... 591 (854) 693 3,770
Other income (expense):
Interest expense ............................................ (964) (841) (2,256) (3,220)
Interest income ............................................. 48 69 202 163
Foreign currency transaction loss ........................... (270) (440) (347) (448)
Other ....................................................... 20 60 32 120
-------- -------- -------- --------
(1,166) (1,152) (2,369) (3,385)
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item ............................................ (575) (2,006) (1,676) 385
Income tax expense (benefit) .................................... (70) (855) (141) 55
-------- -------- -------- --------
Income (loss) before extraordinary item ......................... (505) (1,151) (1,535) 330
Extraordinary gain on forgiveness of debt,
net of applicable income taxes ................................ -- -- 139 --
-------- -------- -------- --------
Net income (loss) ............................................... $ (505) $ (1,151) $ (1,396) $ 330
======== ======== ======== ========
Earnings (loss) per share:
Income (loss) before extraordinary item:
Basic ................................................... $ (0.06) $ (0.10) $ (0.18) $ 0.03
======== ======== ======== ========
Diluted ................................................. $ (0.06) $ (0.10) $ (0.18) $ 0.03
======== ======== ======== ========
Net income (loss):
Basic ................................................... $ (0.06) $ (0.10) $ (0.16) $ 0.03
======== ======== ======== ========
Diluted ................................................. $ (0.06) $ (0.10) $ (0.16) $ 0.03
======== ======== ======== ========
</TABLE>
See accompanying notes.
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THE UNIMARK GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................................... $ (1,396) $ 330
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................... 2,436 2,448
Deferred income taxes ........................................... 327 (612)
Extraordinary gain .............................................. (248) --
Other ........................................................... -- 101
Changes in operating assets and liabilities:
Receivables .................................................. (2,882) 747
Inventories .................................................. (12,727) (983)
Prepaid expenses ............................................. (606) 285
Payables and accrued expenses ................................ 246 1,426
-------- --------
Net cash provided by (used in) operating activities .................. (14,850) 3,742
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........................... (8,999) (2,695)
Increase in identifiable intangible assets ........................... (69) (122)
Decrease (increase) in amounts due from related parties .............. (1,149) 9
Decrease (increase) in other assets .................................. (424) 33
-------- --------
Net cash used in investing activities ................................ (10,641) (2,775)
FINANCING ACTIVITIES
Net proceeds from sale of common stock ............................... 132 13,425
Net increase (decrease) in short-term borrowings ..................... 24,139 (12,193)
Proceeds from long-term debt ......................................... 2,549 240
Payments of long-term debt ........................................... (1,546) (1,643)
-------- --------
Net cash provided by (used in) financing activities .................. 25,274 (171)
-------- --------
Net increase (decrease) in cash and cash equivalents ................. (217) 796
Cash and cash equivalents at beginning of period ..................... 4,268 1,237
-------- --------
Cash and cash equivalents at end of period ........................... $ 4,051 $ 2,033
======== ========
</TABLE>
See accompanying notes.
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THE UNIMARK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business: At September 30, 1998, the Company has several
projects and commitments requiring substantial capital. Although the Company is
exploring various financing options and believes sufficient capital will
ultimately be available, there can be no assurances that adequate financing or
capital can be obtained on acceptable terms or at all. The inability to obtain
sufficient debt or equity capital for these projects and commitments could have
a material adverse effect on the Company and its projects including the
realization of the amounts capitalized and costs deferred related to these
projects and commitments.
Additionally, the Company has recently relied upon bank financing to finance
its working capital and certain of its capital expenditure needs. Although the
principal loan facilities have been extended until January 1, 1999, no
assurances can be given that the lender will continue to renew such loan
facilities. The Company's cash requirements for the remainder of 1998 and beyond
will depend primarily upon the level of sales, expenditures for capital
equipment and improvements, investments in agricultural projects, the level of
inventories, the success of newly introduced products and necessary reductions
of debt. Presently, the Company is in discussions with its primary lender and
other financial institutions regarding extending or replacing its existing debt
facilities. Although no assurances can be given, the Company believes it will be
able to obtain such debt facilities on terms acceptable to the Company. The
failure to obtain such debt facilities would have a material adverse affect on
the Company. For additional information see Note 2.
Interim Financial Statements: The condensed consolidated financial
statements at September 30, 1998, and for the three month and nine month periods
then ended 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 for
the year ended December 31, 1997. The results of operations for the three and
nine months ended September 30, 1998 and for the year ended December 31, 1997
are not necessarily indicative of future financial results.
Year End Financial Statement: The condensed consolidated balance sheet at
December 31, 1997 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.
Reclassifications: Certain prior year items have been reclassified to
conform to the current year presentation in the accompanying financial
statements.
NOTE 2 - CAPITAL STOCK
On July 17, 1998, the Company sold 3,305,500 newly issued shares of common
stock at a purchase price of $4.5375 per share, for an aggregate purchase price
of $14,998,706, to M & M Nominee L.L.C. ("M & M"). In connection with the
transaction, the Company granted M & M options to acquire an additional
2,000,000 shares of common stock at a purchase price of $4.5375 per share,
representation on the Company's Board of Directors and certain veto rights
regarding financial and corporate matters. The Company subsequently retired $10
million in short-term debt and intends to utilize the remaining net proceeds to
help finance its lemon project and for working capital purposes.
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On June 29, 1998 an arbitration award was issued against the Company in its
proceedings with the former shareholders of Simply Fresh Fruit, Inc. ("Simply
Fresh") regarding the price protection provisions of the May 9, 1996 acquisition
agreement and related issues. Pursuant to the award, on August 5, 1998 the
Company paid in cash the former Simply Fresh shareholders (i) $1,005,036 in
settlement of the common stock price protection issues, (ii) $67,391 in interest
on the price protection settlement amount and (iii) $110,000 in settlement of
related employment contract issues.
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share for income (loss) from continuing operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
1997 1998 1997 1998
--------- --------- -------- ------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
NUMERATOR
Net income (loss) before extraordinary gain ..................... $ (505) $ (1,151) $ (1,535) $ 330
DENOMINATOR
Denominator for basic earnings per share -
weighted average shares outstanding ........................... 8,599 11,363 8,587 9,528
Effect of dilutive securities:
Stock options ................................................. -- -- -- 40
Warrants ...................................................... -- -- -- 1
--------- --------- -------- ------
Dilutive potential common shares ................................ -- -- -- 41
--------- --------- -------- ------
Denominator for diluted earnings per share -
Weighted average shares outstanding adjusted for
assumed conversions ........................................... 8,599 11,363 8,587 9,569
========= ========= ======== ======
Basic earnings (loss) per share ................................. $ (0.06) $ (0.10) $ (0.18) $ 0.03
========= ========= ======== ======
Diluted earnings (loss) per share ............................... $ (0.06) $ (0.10) $ (0.18) $ 0.03
========= ========= ======== ======
</TABLE>
Of the total stock options and warrants outstanding as of September 30,
1998, options and warrants covering approximately 959,000 weighted average
shares of common stock were not included in the computation of diluted earnings
per share for the nine months ended September 30, 1998 because the option and
warrant exercise prices were greater than the average market price of the common
stock for the period, and therefore the effect would have been anti-dilutive.
NOTE 4 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods:
Cut fruits .................................................. $12,983 $13,332
Juice and oils .............................................. 2,592 1,876
------- -------
15,575 15,208
Orchards and advances to suppliers .............................. 5,718 7,312
Raw materials and supplies ...................................... 4,433 4,189
------- -------
$25,726 $26,709
======= =======
</TABLE>
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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 1998 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 prospectus dated
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 five 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.
RECENT DEVELOPMENTS
On July 17, 1998, the Company sold 3,305,500 newly issued shares of common
stock at a purchase price of $4.5375 per share, for an aggregate purchase price
of $14,998,706, to M & M Nominee L.L.C. ("M & M"). In connection with the
transaction, the Company granted M & M options to acquire an additional
2,000,000 shares of common stock at a purchase price of $4.5375 per share,
representation on the Company's Board of Directors and certain veto rights
regarding financial and corporate matters. With the assistance of M & M, the
Company is redirecting its focus to develop and market value-added brand-name
products. Although no assurances can be given that its efforts will be
successful, the Company anticipates either divesting certain segments of its
operations (such as orange juice concentrate) or adding value to such products
through strategic partnerships with larger
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industry participants. Further, the Company also anticipates achieving
significant cost savings by further consolidating operations, eliminating less
profitable items, and streamlining on-going operations with improved production
technologies. These efforts are aimed at increasing production volume in certain
existing facilities to achieve improved operating efficiencies and lower unit
costs.
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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales .................................................. 100.0% 100.0% 100.0% 100.0%
Cost of products sold ...................................... 67.6 75.7 66.7 69.5
----- ----- ----- -----
Gross profit ............................................... 32.4 24.3 33.3 30.5
Selling, general and administrative expenses ............... 29.7 28.6 32.1 25.1
----- ----- ----- -----
Income (loss) from operations .............................. 2.7 (4.3) 1.2 5.4
Other income (expense):
Interest expense ....................................... (4.4) (4.2) (3.8) (4.6)
Interest income ........................................ 0.2 0.3 0.3 0.2
Foreign currency transaction gain (loss) ............... (1.2) (2.2) (0.6) (0.6)
Other .................................................. 0.1 0.3 0.1 0.2
----- ----- ----- -----
(5.3) (5.8) (4.0) (4.8)
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item ....................................... (2.6) (10.1) (2.8) 0.6
Income tax expense (benefit) ............................... (0.3) (4.3) (0.2) 0.1
----- ----- ----- -----
Income (loss) before extraordinary item .................... (2.3) (5.8) (2.6) 0.5
Extraordinary gain, net of income tax ...................... -- -- 0.2 --
----- ----- ----- -----
Net income (loss) .......................................... (2.3)% (5.8)% (2.4)% 0.5%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 1997 and 1998
Net sales decreased 9.4% from $22.0 million in 1997 to $19.9 million in
1998. This decrease was primarily due to the limited availability of certain
tropical fruits and melons for processing as a result of the recent El Nino
weather pattern that produced unusual weather conditions in certain fruit
growing regions of Mexico and the United States. See "Dependence Upon
Availability and Price of Fresh Fruit". Due to the limited supply of raw
materials, the Company's cut fruit facilities processed approximately four
million pounds of fruit less than anticipated resulting in higher product costs.
In addition, the Company was unable to provide certain made-to-order finished
products, delayed shipments on certain contracts until the fourth quarter of
1998 and turned down certain new business opportunities.
Club sales decreased 48.0% from $2.9 million in 1997 to $1.5 million in 1998
as they were also impacted by discontinued production of the Company's avocado
products in the first quarter of 1998 and increased competition, particularly on
mixed fruit items. Foodservice sales decreased 20.4% from $6.4 million in 1997
to $5.1 million in 1998 as they were also impacted by increased competition and
the Company's decision to close its plant facility in the Northeastern United
States in the fourth quarter of 1997. See "Restructuring Initiatives". Retail
sales increased 10.0% from $6.2 million in 1997 to $6.8 million in 1998
primarily as the result of continued growth in the Company's 26 oz. chilled
product line, success of the new branded canned products and increased
distribution and demand. Citrus juice and oil sales decreased from $5.6 million
in 1997 to $5.0 million in 1998 as more product was shipped earlier in 1998 than
in 1997.
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<PAGE> 10
Gross profit as a percentage of net sales decreased from 32.4% in 1997 to
24.3% in 1998. Gross profit on cut fruit sales decreased from 37.4% in 1997 to
26.1% in 1998 primarily as a result of increased product costs due to decreased
production volume and higher than anticipated fruit costs as a result of the
recent El Nino weather pattern. Gross profit on citrus juice and oil sales
increased from 17.8% in 1997 to 19.1% in 1998 primarily as the result of
increases in average selling prices driven by escalating frozen concentrate
orange juice futures prices.
Selling, general and administrative expenses ("SG&A") as a percentage of net
sales decreased from 29.7% in 1997 to 28.6% in 1998. This decrease is primarily
the result of cost savings realized from the Company's reorganization of its cut
fruit operations notwithstanding the overall decrease in sales volume. See
"Restructuring Initiatives".
Interest expense decreased from 4.4% of net sales in 1997 to 4.2% in 1998.
Actual interest expense decreased from $964,000 in 1997 to $841,000 in 1998.
This decrease was primarily the result of lower outstanding indebtedness.
Interest income of $48,000 in 1997 and $69,000 in 1998 was earned primarily
from the temporary investment of excess cash balances.
A foreign currency transaction net loss of $270,000 in 1997 and $440,000 in
1998 resulted primarily from the conversion of Company's foreign subsidiaries'
financial statements to U.S. GAAP.
Income taxes. A consolidated income tax benefit of $70,000 in 1997 and
$855,000 in 1998 resulted from the recognition of future benefits from tax
losses generated. In 1998, significant tax losses were generated in Mexico from
exchange losses on U.S. dollar denominated debt which is recognized for Mexican
income tax purposes. An increase in U.S. dollar denominated debt combined with a
significant peso devaluation contributed to the recognition of this tax benefit.
As a result of the foregoing, the Company reported a net loss of $505,000 in
1997 and $1,151,000 in 1998.
Nine Months Ended September 30, 1997 and 1998
Net sales increased 18.5% from $59.0 million in 1997 to $70.0 million in
1998. This increase was primarily due to increases in citrus juice and oil sales
and sales to Japan. Citrus juice and oil sales increased 101.5% from $9.5
million in 1997 to $19.2 million in 1998 and sales to Japan increased 62.7% from
$1.7 million in 1997 to $2.8 million in 1998. Due to favorable raw materials
costs and improved market prices the Company increased its citrus juice and oil
production and expanded its sales to Europe. Sales to Japan have increased as
the Company has broadened its customer base in Japan.
Retail sales of the Company's cut fruit products increased 17.8% from $19.5
million in 1997 to $23.0 million in 1998 as the result of continued growth in
the Company's 26 oz. chilled product line, success of the new branded canned
products and increased distribution and demand for the Company's products. This
increase was largely offset by decreases in foodservice and club sales due to
increased competition, discontinued production of the Company's avocado products
in the first quarter of 1998, the Company's decision to close its plant facility
in the Northeastern United States in the fourth quarter of 1997 and the limited
availability of certain fruits in the third quarter of 1998 as a result of the
recent El Nino weather pattern.
Gross profit as a percentage of net sales decreased from 33.3% in 1997 to
30.5% in 1998. Gross profit was negatively impacted by the relative increase in
citrus juice and oil sales as compared to cut fruit sales since citrus juice and
oil sales generally yield lower margins.
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<PAGE> 11
Gross profit on cut fruit sales decreased from 35.2% in 1997 to 32.9% in
1998. This decrease is primarily the result of increased product costs due to
decreased production volume and higher than anticipated fruit costs in the third
quarter of 1998 as a result of the recent El Nino weather pattern. Gross profit
on citrus juice and oil sales increased from 23.0% in 1997 to 24.9% in 1998
primarily as the result of lower product costs due to increased production
volume and improved market prices.
Selling, general and administrative expenses ("SG&A") as a percentage of net
sales decreased from 32.1% in 1997 to 25.1% in 1998. This decrease is primarily
the result of the relative increase in juice and oil sales that do not require
significant sales and marketing expenditures, cost savings realized from the
Company's reorganization of its cut fruit operations and the increase in sales
volume. See "Restructuring Initiatives".
Interest expense increased from 3.8% of net sales in 1997 to 4.6% in 1998.
Actual interest expense increased from $2.3 million in 1997 to $3.2 million in
1998. This increase was primarily the result of increased levels of debt
necessary to support increased levels of inventory associated with the increase
in sales volume and to support the development of the lemon project.
Interest income of $202,000 in 1997 and $163,000 in 1998 resulted primarily
from the temporary investment of excess cash balances.
A foreign currency transaction net loss of $347,000 in 1997 and $448,000 in
1998 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 a benefit of
$141,000 in 1997 and an expense of $55,000 in 1998. The tax benefit resulted
from the recognition of future benefits from tax losses generated.
Extraordinary gain. In 1997, the Company reported a gain from the
forgiveness of debt of $139,000 net of applicable taxes.
As a result of the foregoing, the Company reported a net loss of $1.4
million in 1997 while reporting net income of $330,000 in 1998.
RESTRUCTURING INITIATIVES
During the second half of 1997, the Company began implementing an internal
operating reorganization plan that involved consolidating fruit processing
operations in Mexico and distribution functions in the United States. In this
regard, the Company ceased operations at its plant in the Northeastern United
States. Also, the Company consolidated production from the San Rafael and Zamora
plants with the main Montemorelos plants. In addition, the Company began
originating all US distribution from the McAllen, Texas warehouse facility.
Although no assurances can be given, this internal reorganization is expected to
result in a number of benefits including increasing operating efficiencies at
existing plants, streamlining organizational structure and reducing overhead and
administrative costs. Implementation of the reorganization plan was
substantially completed during the first quarter of 1998.
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
11
<PAGE> 12
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.
DEPENDENCE UPON AVAILABILITY AND PRICE OF FRESH FRUIT
As a result of the El Nino weather pattern, certain regions of Mexico
recently experienced drought conditions during the third quarter of 1998. The
Company obtains a substantial amount of its raw materials from third-party
suppliers throughout various growing regions in Mexico, Texas and California. A
crop reduction or failure in any of these fruit growing regions resulting from
factors such as weather, pestilence, disease or other natural disasters, could
increase the cost of the Company's raw materials or otherwise adversely affect
the Company's operations. Competitors may be affected differently depending upon
their ability to obtain adequate supplies from sources in other geographic
areas. If the Company is unable to pass along the increased raw materials cost,
the financial condition and results of operations of the Company could be
materially adversely affected.
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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, cash and cash equivalents totaled $2.0 million, an
increase of $0.8 million from year-end 1997. During 1998, operating activities
have provided net cash of $3.7 million. Cash was utilized to finance a $1.0
million increase in inventories primarily associated with the development of the
Company's orchards.
During 1998, UniMark utilized cash of $2.8 million in investing activities.
Of this amount, $2.7 million was expended on property, plant and equipment
primarily related to the Company's lemon project in Mexico.
12
<PAGE> 13
The Company's financing activities provided net cash of $13.4 million from
the sale of common stock and $240,000 from additional long-term borrowings,
primarily equipment financing. Cash was utilized to reduce short-term borrowings
by $12.2 million and long-term debt by $1.6 million in 1998.
On July 17, 1998, the Company sold 3,305,500 newly issued shares of common
stock at a purchase price of $4.5375 per share, for an aggregate purchase price
of $14,998,706, to M & M Nominee L.L.C. ("M & M"). In connection with the
transaction, the Company granted M & M options to acquire an additional
2,000,000 shares of common stock at a purchase price of $4.5375 per share,
representation on the Company's Board of Directors and certain veto rights
regarding financial and corporate matters. The Company subsequently retired its
$10 million short-term bridge loan with Rabobank Nederland and intends to
utilize the remaining net proceeds to help finance its lemon project and for
working capital purposes.
The Company has existing loan agreements with Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland") to provide short-term
dollar denominated debt of up to $24.5 million. These agreements are as follows:
(i) a revolving credit agreement to provide up to $9.5 million collateralized by
finished goods inventories in the US and accounts receivable from US customers
and (ii) revolving credit agreements to provide up to $15.0 million
collateralized by finished goods inventories in Mexico and accounts receivable
from export sales by the Company's Mexican subsidiaries.
These agreements are cross-collateralized and guaranteed by the Company and
its subsidiaries and require the Company to maintain certain consolidated
financial performance levels relative to tangible net worth, working capital,
and total debt. In addition, the agreements contain 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 September 30, 1998, the
Company had outstanding loan balances under the revolving credit agreements of
$15.3 million. These agreements are scheduled to mature on January 1, 1999.
During 1998, the Company has relied upon bank financing, principally short
term, to finance its working capital and certain of its capital expenditure
needs. Although these loan facilities with Rabobank Nederland have been extended
until January 1, 1999, no assurances can be given that Rabobank Nederland will
continue to renew such loan facilities. Presently, the Company is in discussions
with Rabobank Nederland and other financial institutions to extend or replace
existing working capital facilities and to establish a permanent long-term debt
facility. Although no assurances can be given, the Company believes it will be
able to obtain such working capital and long-term debt facilities on terms
acceptable to the Company. The failure to obtain such facilities would have a
material adverse affect on the Company and its ability to continue as a going
concern.
In April, 1998, GISE and The Coca-Cola Export Corporation ("Coca-Cola"), an
affiliate of The Coca-Cola Company, entered into a new twenty year Supply
Contract, with a ten year renewal option, for the production of Italian lemons.
Pursuant to the terms of the new Supply Contract, which supersedes all previous
agreements, GISE will plant and grow 3,500 hectares (approximately 8,650 acres)
of Italian lemons within the next three years for sale to Coca-Cola at
pre-determined prices. The Supply Contract requires Coca-Cola to provide, free
of charge, up to 875,000 lemon trees, enough to plant approximately 2,800
hectares. In addition, the Supply Contract requires Coca-Cola to purchase all
the production from the project. The planting program began in November, 1996
and harvesting of the first crops is now projected to begin in late 2000 with
full production scheduled for 2013. Total capital requirements for the project
including land acquisition, seedlings, capital equipment and planting costs are
estimated to be approximately $17.5 million over the next four years of which
$5.3 million will be required in 1998. 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. The
inability to obtain third party financing for the project could have a material
adverse effect on the Company.
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<PAGE> 14
On June 29, 1998 an arbitration award was issued against the Company in its
proceedings with the former shareholders of Simply Fresh Fruit, Inc. ("Simply
Fresh") regarding the price protection provisions of the May 9, 1996 acquisition
agreement and related issues. Pursuant to the award, on August 5, 1998 the
Company paid in cash the former Simply Fresh shareholders (i) $1,005,036 in
settlement of the common stock price protection issues, (ii) $67,391 in interest
on the price protection settlement amount and (iii) $110,000 in settlement of
related employment contract issues
The Company's cash requirements for the remainder of 1998 and beyond will
depend primarily upon the level of sales, expenditures for capital equipment
and improvements, investments in agricultural projects, the level of
inventories, the success of newly introduced products and necessary reductions
of debt. Presently, the Company is in discussions with Rabobank Nederland and
other financial institutions regarding extending or replacing its existing debt
facilities. Although no assurances can be given, the Company believes it will
be able to obtain such debt facilities on terms acceptable to the Company. The
failure to obtain such debt facilities would have a material adverse affect on
the Company. UniMark believes that anticipated revenue from operations and
existing and future debt facilities will be adequate for its working capital
requirements for at least the next twelve months.
SALE OF UNREGISTERED SECURITIES
On July 17, 1998, the Company sold 3,305,500 newly issued shares of Common
Stock, par value $.01 per share, for a purchase price of U.S. $4.5375 per
share, or an aggregate purchase price of U.S. $14,998,706.25 in cash, to
M & M Nominee L.L.C. ("M & M"). The sale of securities was made in reliance
upon Section 4(2) of the Securities Act of 1933, as amended, and Regulation D,
promulgated thereunder, as an offering only to an accredited investor.
In connection with the transaction, the Company granted options to acquire
2,000,000 shares of Common Stock to M & M as follows: (i) an option pursuant to
which M & M shall have the right, for a period of one year from July 17, 1998,
to acquire up to 1,000,000 authorized and unissued shares of Common Stock at a
price per share equal to $4.5375 payable in cash, and (ii) an option pursuant to
which M & M shall have the right, for a period of three years from July 17,
1998, to acquire up to 1,000,000 authorized and unissued shares of Common Stock,
at a price per share equal to $4.5375 payable in cash.
EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K
On July 22, 1998 the Company filed Amendment No. 1 to Current
Report on Form 8-K/A announcing that on July 17, 1998 the Company had
sold 3,305,500 newly issued shares of common stock to M & M Nominee
L.L.C.
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<PAGE> 15
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: November 12, 1998 /s/ Soren Bjorn
----------------- -------------------------------------
Soren Bjorn, President
(Principal Executive Officer)
Date: November 12, 1998 /s/ Keith Ford
----------------- -------------------------------------
Keith Ford, Vice President
(Principal Accounting Officer)
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------------- ---------------------------------------------------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,033
<SECURITIES> 0
<RECEIVABLES> 11,253
<ALLOWANCES> 858
<INVENTORY> 26,709
<CURRENT-ASSETS> 43,942
<PP&E> 45,726
<DEPRECIATION> 7,008
<TOTAL-ASSETS> 95,589
<CURRENT-LIABILITIES> 39,478
<BONDS> 4,089
0
0
<COMMON> 119
<OTHER-SE> 51,888
<TOTAL-LIABILITY-AND-EQUITY> 95,589
<SALES> 69,952
<TOTAL-REVENUES> 69,952
<CGS> 48,595
<TOTAL-COSTS> 48,595
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 178
<INTEREST-EXPENSE> 3,220
<INCOME-PRETAX> 385
<INCOME-TAX> 55
<INCOME-CONTINUING> 330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 330
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
