<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, 2000
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 18, 2000, the number of shares outstanding of each class of
common stock was:
Common Stock, $.01 par value: 13,938,326 shares
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INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets,
December 31, 1999 and June 30, 2000........................................................ 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1999 and 2000.................................. 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 2000............................................ 5
Notes to Condensed Consolidated Financial Statements - June 30, 2000......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................21
Item 2. Sale of Unregistered Securities..............................................................21
Item 3. Defaults Upon Senior Securities..............................................................22
Item 4. Submission of Matters to a Vote of Security Holders..........................................22
Item 5. Other Information...........................................................................22
Item 6. Exhibits and Reports on Form 8-K.............................................................22
SIGNATURES.............................................................................................22
</TABLE>
2
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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, JUNE 30,
1999 2000
------------ --------
(NOTE 1) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 4,068 $ 2,156
Accounts receivable - trade, net of allowance of $378 in
1999 and $391 in 2000 ...................................... 7,273 5,604
Accounts receivable - other .................................. 478 448
Notes receivable ............................................. 762 770
Inventories .................................................. 15,521 19,943
Income and value added taxes receivable ...................... 1,478 1,586
Prepaid expenses ............................................. 1,011 558
-------- --------
Total current assets ................................... 30,591 31,065
Property, plant and equipment, net .............................. 41,387 43,008
Deferred income taxes ........................................... 2,788 2,788
Goodwill, net ................................................... 2,958 2,917
Identifiable intangible assets .................................. 166 130
Due from related parties ........................................ 1,602 1,558
Notes receivable, less current portion .......................... 1,060 902
Other assets .................................................... 1,800 282
-------- --------
Total assets ........................................... $ 82,352 $ 82,650
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ........................................ $ 21,551 $ 21,566
Current portion of long-term debt ............................ 898 1,670
Accounts payable - trade ..................................... 3,209 3,687
Accrued liabilities .......................................... 4,359 4,756
Income taxes payable ......................................... 104 --
Deferred income taxes ........................................ 5,333 4,402
-------- --------
Total current liabilities .............................. 35,454 36,081
Long-term debt, less current portion ............................ 6,207 10,365
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 13,938,326 in
1999 and in 2000 ......................................... 139 139
Additional paid-in capital ................................... 63,766 63,766
Accumulated deficit .......................................... (23,214) (27,701)
-------- --------
Total shareholders' equity ............................. 40,691 36,204
-------- --------
Total liabilities and shareholders' equity ............. $ 82,352 $ 82,650
======== ========
</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,
1999 2000 1999 2000
-------- -------- -------- --------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Net sales ...................................................... $ 19,588 $ 12,729 $ 35,841 $ 27,186
Cost of products sold .......................................... 19,270 11,008 30,904 21,777
-------- -------- -------- --------
Gross profit ................................................... 318 1,721 4,937 5,409
Selling, general and administrative expenses ................... 4,269 3,232 7,822 6,240
-------- -------- -------- --------
Loss from operations ........................................... (3,951) (1,511) (2,885) (831)
Other income (expense):
Interest expense ............................................ (474) (842) (1,322) (1,617)
Interest income ............................................. 24 156 46 269
Provision for losses on abandonment
of leased facility ..................................... -- (2,490) -- (2,490)
Foreign currency translation loss ........................... (330) (434) (641) (308)
-------- -------- -------- --------
(780) (3,610) (1,917) (4,146)
-------- -------- -------- --------
Loss before disposal of certain
operations and income taxes ................................. (4,731) (5,121) (4,802) (4,977)
Operating results of certain operations disposed of during 1999:
Net sales .............................................. 5,008 -- 9,085 --
Costs and expenses ..................................... (4,984) -- (9,358) --
-------- -------- -------- --------
Operating income (loss) ................................ 24 -- (273) --
-------- -------- -------- --------
Loss before income taxes ....................................... (4,707) (5,121) (5,075) (4,977)
Income tax expense (benefit) ................................... (546) (619) 316 (490)
-------- -------- -------- --------
Net loss ....................................................... $ (4,161) $ (4,502) $ (5,391) $ (4,487)
======== ======== ======== ========
Basic and diluted loss per share ............................... $ (0.30) $ (0.32) $ (0.42) $ (0.32)
======== ======== ======== ========
</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,
--------------------
1999 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss .................................................................. $(5,391) $(4,487)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation .......................................................... 1,763 1,307
Amortization of intangible assets ..................................... 908 77
Deferred income taxes ................................................. 415 (931)
Provision for losses on abandonment of leased facility ................ -- 1,490
Cash provided by (used in) operating working capital:
Receivables ....................................................... (3,109) 1,583
Inventories ....................................................... (81) (4,422)
Prepaid expenses .................................................. 565 453
Accounts payable and accrued liabilities .......................... 1,022 771
------- -------
Net cash used in operating activities ..................................... (3,908) (4,159)
INVESTING ACTIVITIES
Purchases of property, plant and equipment ................................ (3,019) (2,928)
Decrease (increase) in amounts due from related parties ................... (1,373) 44
Decrease (increase) in other assets ....................................... (58) 186
------- -------
Net cash used in investing activities ..................................... (4,450) (2,698)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock ................................ 4,975 --
Increase in short-term and current portion of long-term debt .............. 5,056 787
Proceeds from long-term debt .............................................. 186 4,523
Payments of long-term debt ................................................ (271) (365)
------- -------
Net cash provided by financing activities ................................. 9,946 4,945
------- -------
Net increase (decrease) in cash and cash equivalents ...................... 1,588 (1,912)
Cash and cash equivalents at beginning of period .......................... 4,247 4,068
------- -------
Cash and cash equivalents at end of period ................................ $ 5,835 $ 2,156
======= =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
THE UNIMARK GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of Business: The Company is a producer and marketer of
Sunfresh(R) brand citrus and tropical fruit products.
The UniMark Group, Inc. ("UniMark" or the "Company") conducts substantially
all of its operations through its wholly-owned operating subsidiaries: UniMark
Foods, Inc. ("UniMark Foods"), UniMark International, Inc. ("UniMark
International"), Industrias Citricolas de Montemorelos, S.A. de C.V. ("ICMOSA"),
AgroMark, S.A. de C.V. ("AgroMark"), Flavorfresh Limited ("Flavorfresh",
formerly UniMark Foods Europe Limited) and Grupo Industrial Santa Engracia, S.A.
de C.V. ("GISE").
Going Concern Considerations: As of June 30, 2000 the Company has several
projects and commitments requiring substantial capital. The Company's cash
requirements for 2000 and beyond will depend primarily upon the level of sales
and gross margins, expenditures for capital equipment and improvements,
investments in agricultural projects, the timing of inventory purchases,
increased acceptance of recently introduced products and necessary reductions of
debt. The Company has, in recent years, relied upon sales of its common stock to
its principal shareholder and bank financing to finance its working capital and
certain of its capital expenditure needs. Management believes that it will not
generate sufficient cash flow from future operations in 2000 to service its
debt obligations and capital expenditures and current levels of financing are
insufficient to meet the Company's current cash requirements for the remainder
of 2000 and beyond. As a result, the Company is currently in final negotiations
with a branded processed foods producer and distributor regarding a strategic
transaction, which if consummated, could provide the Company with sufficient
cash to continue operations for the remainder of 2000. The future success of the
Company depends on its ability to obtain additional debt, raise additional
equity through the sale of unregistered securities and finalize the strategic
transaction previously discussed. There can be no assurances that the Company's
efforts to raise such additional financing or the strategic transaction will be
successful, and accordingly, the Company may be required to limit its
operations, dispose of certain assets and take other actions as considered
necessary to continue as a going concern.
As of December 31, 1999 and March 31, 2000, the Company was not in
compliance with certain covenants of its loan agreements with its primary lender
and its revolving credit facilities were scheduled to mature on March 31, 2000.
In a commitment letter dated April 13, 2000, the lender (the amendment was
signed on June 1, 2000) agreed to extend the maturity to January 1, 2001, waive
the existing defaults and make certain modifications and amendments to the
agreements covenants and conditions. In addition to extending the maturity date,
the amendment eliminated the fixed charge and interest coverage ratios,
increased the tangible net worth covenant and modified the current ratio and
total liabilities to tangible net worth ratio to reduce required levels. The
amendment also required the Company to obtain at least $2.5 million in new
equity by July 1, 2000, increased the interest rates associated with the
outstanding borrowings effective June 1, 2000 and slightly modified the
borrowing base formulas. As of June 30, 2000, the Company was not in compliance
with the current ratio covenant and had not obtained the new equity by July 1,
2000. The Company has received a letter from the primary lender indicating their
intent to waive these noncompliance defaults. Although the Company's revolving
credit facilities are being extended until January 1, 2001, no assurances can be
given that the lender will continue to renew such loan facilities and, perhaps
the Company's ability to continue as a going concern.
The Company obtains a substantial amount of its raw materials from
third-party suppliers throughout various growing regions in Mexico and Texas. 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 material or otherwise adversely affect
the Company's operations. Competitors may be affected differently upon their
ability to obtain adequate supplies from sources in other
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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.
Interim Financial Statements: The condensed consolidated financial
statements at June 30, 2000, and for the three and six 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, 1999 filed with the Securities and Exchange
Commission. The results of operations for the three and six months ended June
30, 2000 are not necessarily indicative of future financial results.
Year End Balance Sheet: The condensed consolidated balance sheet at
December 31, 1999 has been derived from the audited consolidated 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: In prior periods, the Company classified freight expense
and discounts and allowances associated with customer invoicing as operating
expenses. In connection with the Company's further automation of its order entry
and pricing systems to customers and in improving changes in controls over these
costs, these expenses are now being classified differently in the financial
statements. Discounts and allowances are now classified as a reduction in net
sales and freight expense as a charge to cost of products sold. All prior and
current year operating results have been reclassified to conform to the new
presentation.
As discussed in Note 2 below, the Company disposed of several operations in
1999. The condensed consolidated statements of operations have been reclassified
for all periods presented to disclose separately the operating results of the
disposed operations.
New Accounting Pronouncements: In June 1998, Statements of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("FAS 133") was issued, and was amended by FAS 137 and FAS 138 to be
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
This pronouncement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
financial statements and measure them at fair value. The Company has not yet
adopted or completed its assessment of the implications of this statement. In
December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 (SAB 101) "Revenue Recognition in Financial Statements", and
provides guidance on revenue recognition. The Company does not anticipate the
effect of the adoption to have a material impact on either financial position or
results of operations in 2000. Additionally, the Company is evaluating the
effects of FASB Interpretation 44, "Accounting for Certain Transactions
Involving Stock Options". The Company has not yet adopted or completed its
assessment of this interpretation on its current practices.
NOTE 2 - DISPOSAL OF CERTAIN OPERATIONS
In September 1999, the Board of Directors of the Company approved a
strategic plan for its packaged fruit segment designed to maximize shareholder
value by leveraging the Company's manufacturing facilities in Mexico with its
Sunfresh(R) brand and distribution network in the United States. Two of the
Company's subsidiaries, Les Produits Deli-Bon Inc. ("Deli-Bon") and Simply Fresh
Fruit, Inc. ("Simply Fresh") primarily sold private label fruit salads to the
food service industry and non-branded fresh cut fruit. Because the Company
believed that these lines of business offered less attractive growth
opportunities and lower operating margins than its Sunfresh(R) brand product
lines and did not further the Company's strategic objectives, the decision was
reached to divest these subsidiaries.
7
<PAGE> 8
During October 1999, the Company completed the sale of its Canadian
subsidiary, Deli-Bon, in a transaction valued at approximately $1.4 million, and
sold substantially all the assets of its California based subsidiary, Simply
Fresh, in a transaction valued at approximately $3.6 million. Both transactions
included cash payments at closing and short and long-term secured notes. In
addition, the Simply Fresh sale included the forgiveness of the remaining
payments under a certain covenant-not-to-compete and the return to the Company
of 68,182 shares of UniMark common stock owned by the principal buyer.
These transactions resulted in the Company recording losses of
approximately $1.5 million in 1999. The results of operations for both Deli-Bon
and Simply Fresh for the three and six months ended June 30, 1999 have been
reclassified from sales and expenses and included in the condensed consolidated
statements of operations as "Operating results of certain businesses disposed of
during 1999". Additionally, the reportable segment information for packaged
fruit in Note 8 has been restated to reflect the above reclassifications.
NOTE 3 - LIQUIDITY AND CAPITAL RESOURCES
The Company has existing loan agreements with Cooperative Centrale
Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland"), its primary lender, to
provide short-term dollar denominated debt of up to $15.9 million at June 30,
2000. These agreements are as follows: (i) a revolving credit agreement to
provide up to $8.0 million of committed funds collateralized by finished goods
inventories in the U.S. and accounts receivable from U.S. customers and (ii)
revolving credit agreements to provide discretionary uncommitted lines up to
$7.9 million collateralized by finished goods inventories in Mexico and accounts
receivable from export sales by the Company's Mexican subsidiaries. At June 30,
2000 the Company had outstanding loan balances under the revolving credit
agreements of $12.8 million.
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 prior written consent of the bank.
A discussion of the Company's compliance with its primary lenders loan
agreements and its future financing requirements is included in Note 1 above.
On February 21, 2000, the Company entered into a $5.1 million (48,000,000
Mexican pesos) nine year term financing agreement (the "Agreement") with Fondo
de Capitalizacion e Inversion del Sector Rural ("FOCIR"), a public Trust of the
Mexican Federal Government that invests in agricultural projects with long-term
viability. Under the terms of the Agreement, FOCIR will provide up to $5.1
million to fund additional Lemon Project costs, which will include land
preparation, planting, equipment, irrigation systems and grove maintenance. This
financing represents the purchase of an equity interest in GISE of approximately
17.6%. Amounts advanced under this Agreement will be classified outside equity
due to mandatory redemption provisions. As of June 30, 2000, advances under the
Agreement were $4.5 million (43,116,000 Mexican pesos).
The terms of the Agreement provide for the calculation and accrual of
annual accretion using one of two alternative methods. The first method
determines accretion by multiplying the year's Mexican inflation index rate plus
4.2% by the FOCIR balance. The second method determines annual accretion by
multiplying GISE's shareholders equity, using Mexican generally accepted
accounting principles, at the end of the year by a factor of 1.036 and then
multiplying by the FOCIR equity interest percent. The calculation that results
in the greater amount will be the annual accretion amount. Accretion accumulates
annually over the nine-year period of the Agreement and is paid only upon
expiration or early termination of the Agreement. As of June 30, 2000, accretion
accrued under the Agreement amounted to $123,000. The Agreement also contains,
among other things, certain provisions relating to GISE's future financial
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performance, the establishment of an irrevocable trust guaranteeing the FOCIR
loan, which includes transferring to the trust GISE common shares that represent
33.4% of GISE's outstanding shares and the governance of GISE.
NOTE 4 - RELATED PARTY TRANSACTIONS
Effective January 1, 1995, the Company entered into a five year operating
agreement with Industrias Horticolas de Montemorelos, S.A. de C.V. ("IHMSA") to
operate a freezing plant located in Montemorelos, Nuevo Leon, Mexico. Pursuant
to the terms of the operating agreement, the Company is obligated to pay IHMSA
an operating fee sufficient to cover the interest payments on IHMSA's $3.4
million of outstanding debt. The Company is responsible for all raw material and
operating costs and the sale of the finished goods produced at the IHMSA plant.
The Vaquero family owns collectively an approximate 24% interest in IHMSA.
Certain members of the Vaquero family are officers, shareholders and directors
of the Company. Under the agreement, which has been extended, to January 1,
2001, the Company has the option to buy the IHMSA facility for $4.5 million.
The Company has elected to advance funds to IHMSA to retire certain of its
outstanding debt since, under the terms of the operating agreement, the Company
would benefit from the IHMSA debt reduction. At June 30, 2000 amounts due from
IHMSA of $1,555,000 includes $1,481,000 that was a cash advance used to reduce
IHMSA's outstanding debt. This amount will be applied to the purchase price when
the Company purchases the facility pursuant to its purchase option, which is
expected to occur during 2000.
Effective July 1, 1995, the Company entered into a ten-year operating
agreement with Empacadora de Naranjas Aztec, S.A. de C.V. ("Azteca"), to operate
a processing plant in Montemorelos, Nuevo Leon, Mexico. The operating agreement
provides for payments in the amount of (i) interest on existing debt of
approximately $220,000 with credit institutions, (ii) asset tax, and (iii)
annual property tax. Prior to this time, Azteca "co-packed" chilled grapefruit
sections and mango slices for the Company. The Vaquero family owns collectively
an approximate 14.3% interest in Azteca. During the term of the operating
agreement, the Company has the right of first refusal to buy the Azteca facility
at its then fair market value.
In November 1995, the Company entered into a lease agreement with Loma
Bonita Partners, a Texas general partnership, for approximately 260 hectares
(642 acres) of land in Loma Bonita, Oaxaca, Mexico for the development of citrus
groves. The lease commenced in December 1995 and expires after ten years. Loma
Bonita Partners is 50% owned by an officer, who is also a director and
shareholder of the Company. The Company believes that said lease agreement is on
terms no less favorable to the Company than would be available from unrelated
third parties.
The Company operates a 144 acre grapefruit grove located close to the
ICMOSA plant in Montemorelos pursuant to a ten-year operating agreement that
expires in 2000. Per the agreement, the Company operates the grove and purchases
all the grapefruit produced at a formula price tied to purchases from unrelated
third parties. The grove is owned by a partnership that consists primarily of
shareholders of Azteca. The Vaquero family owns a 14.3% interest in this
partnership. The Company believes that said arrangement is on terms no less
favorable to the Company than would be available from unrelated third parties.
NOTE 5 - CAPITAL STOCK
On March 29, 1999, the Company sold 2,000,000 newly issued shares of common
stock at a purchase price of $2.50 per share, for an aggregate purchase price of
$5,000,000 to M & M Nominee L.L.C. ("M & M"). In connection with the
transaction, M & M surrendered options to acquire an additional 2,000,000 shares
of common stock at a purchase price of $4.5375 per share issued to them in July
1998.
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NOTE 6 - NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 2000 1999 2000
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
NUMERATOR
Net loss ................................. $ (4,161) $ (4,502) $ (5,391) $ (4,487)
DENOMINATOR
Denominator for basic earnings per share -
weighted average shares outstanding .... 13,938 13,938 12,977 13,938
======== ======== ======== ========
Basic and diluted loss per share ......... $ (0.30) $ (0.32) $ (0.42) $ (0.32)
======== ======== ======== ========
</TABLE>
The Company had options and warrants outstanding of 497,000 at June 30,
1999 and had options outstanding of 538,000 at June 30, 2000 that were not
included in their respective periods per share calculations because their effect
would have been anti-dilutive.
Loss per basic and diluted share for the six months ended June 30, 1999,
calculated as if the Deli-Bon and Simply Fresh dispositions had occurred on
January 1, 1999, would have been $(0.39).
NOTE 7 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods:
Cut fruits ............... $ 6,750 $ 8,721
Juice and oils ........... 2,814 5,819
------- -------
9,564 14,540
Pineapple orchards ........... 1,717 1,885
Raw materials and supplies ... 2,995 2,400
Advances to suppliers ........ 1,245 1,118
------- -------
Total ............. $15,521 $19,943
======= =======
</TABLE>
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NOTE 8 - SEGMENT INFORMATION
The Company has two reportable segments: packaged fruit and juice and oil.
<TABLE>
<CAPTION>
PACKAGED JUICE
FRUIT & OIL TOTAL
-------- -------- --------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Revenues from external customers ....... $ 16,273 $ 3,315 $ 19,588
Inter-segment revenues ................. 156 -- 156
Segment loss ........................... (3,216) (945) (4,161)
THREE MONTHS ENDED JUNE 30, 2000
Revenues from external customers ....... $ 8,545 $ 4,184 $ 12,729
Inter-segment revenues ................. 31 -- 31
Segment loss ........................... (1,979) (223) (2,202)
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers ....... $ 30,410 $ 5,431 $ 35,841
Inter-segment revenues ................. 301 -- 301
Segment loss ........................... (2,675) (1,115) (3,790)
SIX MONTHS ENDED JUNE 30, 2000
Revenues from external customers ....... $ 20,141 $ 7,045 $ 27,186
Inter-segment revenues ................. 87 -- 87
Segment loss ........................... (1,290) (393) (1,683)
</TABLE>
The following are reconciliations of reportable segment loss to the
Company's consolidated totals.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total loss for reportable segments .......... $(4,161) $(2,202) $(3,790) $(1,683)
Amortization of subsidiary acquisition costs
recognized in consolidation ............... (70) (70) (140) (140)
Unallocated corporate expenses
- General and administrative .............. (500) (359) (872) (664)
- Provision for losses on abandonment
of leased facility .................. -- (2,490) -- (2,490)
------- ------- ------- -------
Loss before disposal of certain operations
and income taxes .......................... (4,731) (5,121) (4,802) (4,977)
Operating income (loss) of certain operations
disposed of in 1999 ....................... 24 -- (273) --
------- ------- ------- -------
Loss before income taxes .................... $(4,707) $(5,121) $(5,075) $(4,977)
======= ======= ======= =======
</TABLE>
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NOTE 9 - PROVISION FOR LOSSES ON ABANDONMENT OF LEASED PROPERTY
In December 1996, the Company entered into a deposit, operating and stock
purchase agreement with the owners of Frutalamo, S.A. de C.V. ("Frutalamo") for
the operation of a juice processing facility. Pursuant to the terms of the
agreement, the Company paid non-refundable deposits amounting to $1.9 million,
of which $1.5 million were included in other assets on the consolidated balance
sheet as of December 31, 1999, for the right to purchase all the issued and
outstanding shares of stock of Frutalamo from its existing shareholders. The
agreement also required the Company to pay a contractual penalty of $1.0 million
in the event a purchase of the shares is not exercised. This agreement expired
on October 31, 1999. Subsequent to October 31, 1999, the Company and the
shareholders of Frutalamo entered into a letter of intent to purchase the
shares, apply the deposits previously paid as a down payment and waive the
contractual penalty of $1.0 million.
As of June 30, 2000 the Company and Frutalamo had been unsuccessful in
finalizing a definitive agreement for the purchase of the shares. In addition,
the Company has experienced a general decline in the worldwide market prices of
frozen concentrate orange juice and determined that it is not feasible at this
time to increase its production capacity. Due to not having completed the
transaction, the Company has received a notice from Frutalamo demanding the
payment of the contractual penalty, rent for the use of the facility from
November 1, 1999 and the vacating of the processing facility. As result of the
Company's decision not to purchase the shares of Frutalamo, the non-refundable
deposit was written-off and the contractual penalty recorded at June 30, 2000.
These charges are included in the consolidated statements of operations as
"Provision for losses on abandonment of leased facility". The Company is in the
process of negotiating a settlement with the Frutalamo shareholders.
NOTE 10 - CONTINGENCIES
In June 2000, a suit was filed in the State Court, Monterrey, Nuevo Leon,
Mexico against the Company's subsidiary, ICMOSA and three guarantor employees
(two of which are directors of the Company), by Bancrecer, S.A., Institucion de
Banca Multiple ("Bancrecer"). The suit claims, among other things, that ICMOSA
failed to make a scheduled payment of $ .8 million, including interest at the
default rate from the due date of September 1999, on a term note that expires in
March 2002. ICMOSA has filed a response, along with a request for dismissal
claiming the suit contains material errors, including the official recording of
the loan with the Official Bank of Mexico. The court has not ruled on ICMOSA's
response, and consequently, it cannot be determined at this time whether
ICMOSA's response will ultimately lead to a dismissal of the action. However,
ICMOSA and the Company believe that this litigation will be resolved without
material effect on the Company's consolidated financial condition, results of
operations or cash flow. Long-term debt at June 30, 2000 of $10.4 million
includes additional amounts owing to Bancrecer of $3.0 million that are not
included in the suit.
12
<PAGE> 13
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. 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 2000 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: dependence upon availability
and price of fresh fruit; competition; dependence upon significant customers;
uncertainty of new product development and market acceptance of new products;
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. ICMOSA is a Mexican corporation with its
headquarters located in Montemorelos, Nuevo Leon, Mexico, whose principal
activities consist of operating 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, as well as managing the
Company's Lemon Project. ICMOSA and GISE maintain their accounting records in
Mexican pesos and in accordance with Mexican generally accepted accounting
principles and are subject to Mexican income tax laws. ICMOSA's and GISE's
financial statements have been converted to United States generally accepted
accounting principles ("U.S. GAAP") and U.S. dollars. Flavorfresh Limited
maintains its accounting records in British pounds sterling and in accordance
with United Kingdom generally accepted accounting principles and is subject to
United Kingdom income tax laws.
Unless otherwise indicated, all dollar amounts included herein are set
forth in U.S. dollars. The functional currency of UniMark and its subsidiaries
is the U.S. dollar.
RESULTS OF OPERATIONS
The following table sets forth certain condensed consolidated financial
data, after reflecting 1) disposition of certain operations disposed of during
1999, and 2) the reclassifications of customer discounts and allowances and
freight expenses (which are more fully discussed in Notes 1 and 2 to the
condensed consolidated financial statements), expressed as a percentage of net
sales for the periods indicated:
13
<PAGE> 14
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of products sold ............................ 98.4 86.5 86.2 80.1
------ ------ ------ ------
Gross profit ..................................... 1.6 13.5 13.8 19.9
Selling, general and administrative expenses ..... 21.8 25.4 21.8 23.0
------ ------ ------ ------
Loss from operations ............................. (20.2) (11.9) (8.0) (3.1)
Other income (expense):
Interest expense ............................. (2.4) (6.6) (3.7) (5.9)
Interest income .............................. 0.1 1.2 0.1 1.0
Provision for losses on abandonment
of leased facility ........................ -- (19.6) -- (9.2)
Foreign currency translation loss ............ (1.7) (3.4) (1.8) (1.1)
------ ------ ------ ------
(4.0) (28.4) (5.4) (15.2)
------ ------ ------ ------
Loss before disposal of certain operations
and income taxes .............................. (24.2) (40.3) (13.4) (18.3)
Operating income (loss) of certain operations
disposed of during 1999 ....................... 0.1 -- (0.7) --
------ ------ ------ ------
Loss before income taxes ......................... (24.1) (40.3) (14.1) (18.3)
Income tax expense (benefit) ..................... (2.8) (4.9) 0.9 (1.8)
------ ------ ------ ------
Net loss ......................................... (21.3)% (35.4)% (15.0)% (16.5)%
====== ====== ====== ======
</TABLE>
Three Months Ended June 30, 1999 and 2000
Net sales consist of sales of packaged fruit and citrus juice and oil.
Packaged fruit sales decreased $7.7 million from $16.3 million in 1999 to $8.5
million in 2000, or 47.4%. This sales decrease was primarily caused by a 69.4%
decrease in food service sales from $2.5 million in 1999 to $0.8 million in
2000, a decrease in retail sales of 17.2% from $7.7 million in 1999 to $6.3
million in 2000, a decrease in wholesale club sales of 57.5% from $2.2 million
in 1999 to $0.9 million in 2000 and a decrease in sales to Japan of 89.7% from
$3.3 million in 1999 to $0.3 million in 2000. Food service and retail sales
decreases were impacted by reduced product line and product offerings as part of
the Company's previously announced cost cutting efforts, which were made in the
second half of 1999. The decrease in wholesale club sales was caused by the
discontinuation of certain of the Company's products by several customers in
2000. The decrease in sales to Japan was caused by reduced demand for these
products in the second quarter of 2000.
Citrus juice and oil sales increased 26.1% from $3.3 million in 1999 to
$4.2 million in 2000. This increase resulted from a slight improvement in the
market prices of frozen concentrate orange juice in the 2000 second quarter
compared to the 1999 period, as well as an improvement in the availability of
raw materials.
As a result of the foregoing, net sales decreased 35.0% from $19.6 million
in 1999 to $12.7 million in 2000 due to the reduced sales in packaged fruit
being less than offset by the increase in citrus juice and oil sales.
Gross profit on packaged fruit sales increased from 5.4% in 1999 to 19.0%
in 2000. This increase was primarily the result of improved raw material costs
and controls over allowances and discounts given to customers, as well as the
elimination of less profitable product lines and product offerings.
14
<PAGE> 15
Citrus juice and oil sales gross profit increased from a loss of 16.9% in
1999 to a gross profit of 2.3% in 2000. This increase was primarily caused by
favorable raw material prices and a slight improvement in the market prices of
frozen concentrate orange juice in 2000 compared to 1999.
Overall, gross profit as a percentage of net sales increased from 1.6% in
1999 to 13.5% in 2000 primarily due to the improved margins on both packaged
fruit and citrus juice and oil.
Selling, general and administrative expenses decreased from $4.3 million in
1999 to $3.2 million in 2000. This decrease was primarily due to the
significantly lower sales volumes, as well as improved expense controls and
reduced selling expenses associated with the decrease in packaged fruit net
sales.
Interest expense increased as a percent of net sales from 2.4% in 1999 to
6.6% in 2000. Actual interest expense increased from $.5 million in 1999 to $.8
million in 2000. This increase was caused by the significantly higher cost of
the Company's debt in 2000 as compared to the 1999 period.
Foreign currency translation loss of $.3 million in 1999 and $.4 million in
2000 resulted from the effect of the devaluation of the Mexican peso on the
conversion of the Company's foreign subsidiaries' financial statements to U.S.
GAAP. These losses are due to translation losses on U.S. dollar denominated net
monetary liabilities in Mexico.
Provision for losses on abandonment of leased facility of $2.5 million in
the 2000 period represents a non-cash loss associated with the write-off of a
non-refundable deposit and the recording of a contractual penalty in connection
with management's decision not to exercise its option to purchase a certain
juice processing facility.
Income tax benefits of $.5 million and $.6 million were recorded in the
1999 and 2000 periods, respectively, on losses before income taxes of $4.7
million in 1999 and $5.1 million in 2000 and are due primarily to permanent
differences between book income, or loss, reported in Mexico (as stated in U.S.
dollars and U.S. GAAP) and Mexican taxable income, or loss, calculated in
Mexican pesos according to Mexican income tax laws. In addition, the Company has
provided valuation allowances for net operating losses generated at ICMOSA and
in the U.S. No income tax benefits from U.S. operating losses are recognized and
a partial valuation allowance has been provided for losses generated by ICMOSA.
As a result of the foregoing, the Company reported net losses of $4.2
million in 1999 and $4.5 million in 2000.
Six Months Ended June 30, 1999 and 2000
Net sales consist of sales of packaged fruit and citrus juice and oil.
Packaged fruit sales decreased from $30.4 million in 1999 to $20.1 million in
2000. This sales decrease was primarily caused by a 64.9% decrease in food
service sales from $4.4 million in 1999 to $1.5 million in 2000, a decrease in
retail sales of 13.3% from $14.9 million in 1999 to $12.9 million in 2000, a
decrease in wholesale club sales of 39.6% from $3.9 million in 1999 to $2.4
million in 2000 and a decrease in sales to Japan of 58.5% from $3.9 million in
1999 to $2.5 million in 2000. Food service and retail sales decreases were
impacted by reduced product line and product offerings as part of the Company's
previously announced cost cutting efforts, which were made in the second half of
1999. The decrease in wholesale club sales was caused by the discontinuation of
certain of the Company's products by several customers in the 2000 period. The
decrease in sales to Japan was caused by reduced demand in the first half of
2000.
Citrus juice and oil sales increased 29.7% from $5.4 million in 1999 to
$7.0 million in 2000. This increase was caused by a slight improvement in the
market prices of frozen concentrate orange juice in the first six months of 2000
compared to the 1999 period, as well as an improvement in the availability of
raw materials.
15
<PAGE> 16
As a result of the foregoing, net sales decreased 24.1% from $35.8 million
in 1999 to $27.2 million in 2000 due to the reduced packaged fruit sales being
less than offset by the increase in citrus juice and oil sales.
Gross profit on packaged fruit sales increased from 16.2% in 1999 to 25.6%
in 2000. This increase was primarily the result of improved raw material costs
and better controls over allowances and discounts given to customers, as well as
the elimination of less profitable product lines and product offerings.
Citrus juice and oil gross profit increased from 0.0% in 1999 to 3.6% in
2000. This increase was primarily caused by favorable raw material costs and a
slight improvement in the market prices for frozen concentrate orange juice in
2000 compared to 1999.
Overall, gross profit as a percentage of net sales increased from 13.8% in
1999 to 19.9% in 2000 primarily due to the margin improvements on both packaged
fruit and juice and oil.
Selling, general and administrative expenses decreased from $7.8 million in
1999 to $6.2 million in 2000, or 20.2%. This decrease was primarily due to the
significantly lower sales volumes, as well as improved expense controls and
reduced selling expenses associated with the decrease in packaged fruit sales.
Interest expense increased as a percent of net sales from 3.7% in 1999 to
5.9% in 2000. Actual interest expense increased from $1.3 million in 1999 to
$1.6 million in 2000. This increase was caused by the significantly higher cost
of the Company's debt in 2000 as compared to the 1999 period.
Provision for losses on abandonment of leased facility of $2.5 million in
the 2000 period represents a non-cash loss associated with the write-off of a
non-refundable deposit and the recording of a contractual penalty in connection
with management's decision not to exercise its option to purchase a certain
juice processing facility.
Foreign currency translation loss decreased from $.6 million in 1999 to $.3
million in 2000 and resulted primarily from the conversion of the Company's
foreign subsidiaries' financial statements in Mexican pesos to U.S. dollars in
accordance with U.S. GAAP. These losses are due to translation losses on U.S.
dollar denominated net monetary liabilities in Mexico.
Income tax expense (benefit) of $.3 million was recorded in 1999 on a loss
before income taxes of $5.1 million, and a benefit of $.5 million in 2000 on a
loss before income taxes of $5.0 million, were due primarily to permanent
differences between book income, or loss, reported in Mexico (as stated in U.S.
dollars and U.S. generally accepted accounting principles) and Mexican taxable
income, or loss, calculated in Mexican pesos according to Mexican income tax
laws. In addition, the Company has provided valuation allowances for net
operating losses generated at ICMOSA and in the U.S. No income tax benefits from
U.S. operating losses are recognized and a partial valuation allowance has been
provided for losses generated by ICMOSA.
As a result of the foregoing, the Company reported net losses of $5.4
million in 1999 and $4.5 million in 2000.
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. Statutory
employee profit sharing expense is reflected in the Company's cost of goods sold
and selling, general and administrative expenses, depending upon the
16
<PAGE> 17
function of the employees to whom profit sharing payments are made. The
Company's net income (loss) on a consolidated basis as shown in the Condensed
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's consolidated results of operations are affected by changes in
the valuation of the Mexican peso to the extent that ICMOSA or GISE have 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 translation loss to the extent there are net deferred tax assets or a
translation gain to the extent there are net deferred tax liabilities.
MARKET RISK FACTORS
A significant portion of the Company's operations consists of processing
and sales activities in foreign jurisdictions. The Company processes its
products in Mexico and sells the products in that market as well as the United
States, European and Japanese markets. As a result, the Company's financial
results could be significantly affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in the foreign markets in
which the Company distributes its products. The Company's operating results are
exposed to changes in exchange rates between the U.S. dollar and the Mexican
peso, the British pound sterling and the Japanese yen.
When the U.S. dollar strengthens against these foreign currencies, the
value of nonfunctional currency sales decreases. When the U.S. dollar weakens,
the functional currency amount of sales increases. Overall, the Company is a net
payer of currencies other than the U.S. dollar and, as such, benefits from a
stronger dollar.
The Company procures and processes substantially all of its products in
Mexico for export to the United States, Europe and Japan. The cost of citrus
procured in Mexico generally reflects the spot market price for citrus in the
United States and all of UniMark's export sales from Mexico 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
Mexican peso. Labor and certain other processing costs are Mexican peso
denominated and, consequently, these costs are impacted by fluctuations in the
value of the Mexican peso relative to the U.S. dollar.
The Company's juice and oil segment primarily produces and sells frozen
concentrate orange juice. The price the Company is able to sell this product for
is generally determined by reference to the commodity futures market price, over
which the Company has no control.
The Company's interest expense is most sensitive to changes in the general
level of U.S. interest rates and London interbank offered rates ("LIBOR"). In
this regard, changes in these interest rates affect the interest paid on the
Company's debt.
17
<PAGE> 18
DEPENDENCE UPON AVAILABILITY AND PRICE OF FRESH FRUIT
The Company obtains a substantial amount of its raw materials from
third-party suppliers throughout various growing regions in Mexico and Texas. 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 sale in
supermarkets in North America. In addition, a substantial portion of UniMark's
exports to Japan are processed and shipped during the first and fourth quarter
each year. Management believes UniMark's quarterly net sales will continue to be
impacted by this pattern of seasonality.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plan
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
POSSIBLE FAILURE TO QUALIFY FOR NASDAQ NATIONAL MARKET LISTING
The Company's common stock is listed on the Nasdaq National Market listing.
In order to qualify for continuous listing, the Company must comply with certain
minimum maintenance standards that include, among others things, a $5.0 million
market value of public float and a bid price of $1 per share, both over 30
consecutive trading days. Although the Company has, on occasion, failed to
maintain these criteria: the Company has subsequently met and maintained both
criteria for a minimum of 10 consecutive trading days. Failure to meet these
maintenance criteria may result in a discontinuation of the listing of the
Company's common stock on the Nasdaq National Market Listing.
If the Company is or becomes unable to meet the above referenced listing
criteria on a continued basis and is delisted therefrom, trading, if any, in the
common stock would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or, if then available, "Electric Bulletin Board"
administered by the National Association of Securities Dealers, Inc. In such an
event, the market price of the common stock may be adversely impacted and an
investor may find it difficult to dispose of or to obtain accurate quotations as
to the market value of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, cash and cash equivalents totaled $2.2 million, a
decrease of $1.9 million from year-end 1999. During 2000, operating activities
utilized cash of $4.2 million primarily due to operating losses and seasonal
increases in juice and oil inventories of $3.0 million and packaged fruit
inventories of $2.0 million.
18
<PAGE> 19
The Company has existing loan agreements with Cooperative Centrale
Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland") to provide short-term
dollar denominated debt of up to $15.9 million at June 30, 2000. These
agreements are as follows: (i) a revolving credit agreement to provide up to
$8.0 million of committed funds collateralized by finished goods inventories in
the U.S. and accounts receivable from U.S. customers and (ii) revolving credit
agreements to provide discretionary uncommitted lines up to $7.9 million
collateralized by finished goods inventories in Mexico and accounts receivable
from export sales by the Company's Mexican subsidiaries. At June 30, 2000, the
Company had outstanding loan balances under the revolving credit agreements of
$12.8 million.
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.
As of December 31, 1999 and March 31, 2000, the Company was not in
compliance with certain covenants of its loan agreements with its primary lender
and its revolving facilities were scheduled to mature on March 31, 2000. In a
commitment letter dated April 13, 2000, the lender (the amendment was signed on
June 1, 2000) agreed to extend the maturity to January 1, 2001, waive the
existing defaults and make certain modifications and amendments to the
agreements covenants and conditions. In addition to extending the maturity date,
the amendment eliminated the fixed charge and interest coverage ratios, increase
the tangible net worth covenant and modify the current ratio and total
liabilities to tangible net worth ratio to reduce required levels. The amendment
also required the Company to obtain at least $2.5 million in new equity by July
1, 2000, increased the interest rates associated with the outstanding borrowings
effective June 1, 2000 and slightly modifies the borrowing base formulas. As of
June 30, 2000, the Company was not in compliance with the current ratio covenant
and had not obtained the new equity by July 1, 2000. The Company has received a
letter from the primary lender indicating that these noncompliance defaults will
be waived.
In recent years, the Company has relied upon bank financing, principally
short term, to finance its working capital and certain of its capital
expenditure needs. Although these revolving credit facilities with Rabobank
Nederland are being extended until January 1, 2001, no assurances can be given
that Rabobank Nederland will continue to renew such loan facilities or that such
loans will not be called in the event of future defaults due to noncompliance
with the loan covenants during the year 2000. Presently, the Company is in
discussions with other financial institutions to 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 could have a material adverse
effect on the Company and its ability to continue as a going concern.
In December 1996, the Company entered into a deposit, operating and stock
purchase agreement with the owners of Frutalamo, S.A. de C.V. ("Frutalamo") for
the operation of a juice processing facility. Pursuant to the terms of the
agreement, the Company paid non-refundable deposits amounting to $1.9 million,
of which $1.5 million are included in other assets on the consolidated balance
sheet as of December 31, 1999, for the right to purchase all the issued and
outstanding shares of stock of Frutalamo from its existing shareholders. The
agreement also required the Company to pay a contractual penalty of $1.0 million
in the event a purchase of the shares is not exercised. This agreement expired
on October 31, 1999. Subsequent to October 31, 1999, the Company and the
shareholders of Frutalamo entered into a letter of intent to purchase the
shares, apply the deposits previously paid as a down payment and waive the
contractual penalty of $1.0 million.
As of June 30, 2000 the Company and Frutalamo had been unsuccessful in
finalizing a definitive agreement for the purchase of the shares. In addition,
the Company has experienced a general decline in
19
<PAGE> 20
the worldwide market prices of frozen concentrate orange juice and determined
that it is not feasible at this time to increase its production capacity. Due to
not having completed the transaction, the Company has received a notice from
Frutalamo demanding the payment of the contractual penalty, rent for the use of
the facility from November 1, 1999 and vacating the facility. As result of the
Company's decision not to purchase the shares of Frutalamo, the non-refundable
deposit was written-off and the contractual penalty recorded at June 30, 2000.
These charges are included in the consolidated statements of operations
as "Provision for losses on abandonment of leased facility". The Company is in
the process of negotiating a settlement with the Frutalamo shareholders.
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 (the "Lemon Project"), with a ten year renewal option, for the
production of Italian lemons. Pursuant to the terms of the Supply Contract, 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 projected to begin in late 2000 with full production scheduled for
2013. The status of the Lemon Project as of June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Hectares Acres
-------- -----
<S> <C> <C>
Land -
Acquired 3,032 7,489
Unpurchased or subcontracted 468 1,156
Preparation and Planting -
Prepared and planted 2,340 5,780
Prepared but not planted 460 1,136
Acquired land to be prepared and planted 232 573
Expenditures -
Total projected expenditures $18.5 million
Incurred since inception 13.1 million
Projected for year 2000 and beyond 5.4 million
</TABLE>
Effective January 1, 1995, the Company entered into a five year operating
agreement with Industrias Horticolas de Montemorelos, S.A. de C.V. ("IHMSA") to
operate a freezing plant located in Montemorelos, Nuevo Leon, Mexico. Pursuant
to the terms of the operating agreement, the Company is obligated to pay IHMSA
an operating fee sufficient to cover the interest payments on IHMSA's existing
outstanding debt. During the term of the operating agreement, which has been
extended, to January 1, 2001, the Company has the option to buy the IHMSA
facility for $4.5 million. Since, under the terms of the operating agreement,
the Company would benefit from the reduction of IHMSA's debt, the Company
elected to advance funds to IHMSA to retire certain of its outstanding debt. At
June 30, 2000 amounts due from IHMSA of $1,555,000 includes $1,481,000 that was
a cash advance used to reduce IHMSA's outstanding debt. This amount will be
applied to the purchase price when the Company elects to purchase the facility
pursuant to its purchase option, which is expected to occur during 2000. The
failure or inability of the Company to exercise its purchase option could have a
material adverse affect on the Company.
The Company's cash requirements for the remainder of 2000 and beyond will
depend primarily upon the level of sales and gross margins, expenditures for
capital equipment and improvements, investments in agricultural projects, the
timing of inventory purchases, increased acceptance of recently introduced
products and necessary reductions of debt. Management believes that it will not
generate sufficient cash flow from future operations in 2000 to service its debt
obligations and capital expenditures and current levels of financing are
insufficient to meet the Company's current cash requirements for the remainder
of 2000 and beyond. As a result, the Company is currently in final negotiations
with a branded processed foods producer and distributor regarding a strategic
transaction, which if consummated, could provide the Company with sufficient
cash to continue operations for the remainder of 2000. The future success of the
Company depends on its ability to obtain additional debt, raise additional
equity through the sale of unregistered securities and finalize the strategic
transaction previously discussed. There can be no assurances that the Company's
efforts to raise such additional financing or the strategic transaction will be
successful, and accordingly, the Company may be required to limit its
operations, dispose of certain assets and take other actions as considered
necessary to continue as a going concern.
20
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On February 21, 2000, the Company entered into a $5.1 million (48,000,000
Mexican pesos) nine year term financing agreement (the "Agreement") with Fondo
de Capitalizacion e Inversion del Sector Rural ("FOCIR"), a public Trust of the
Mexican Federal Government that invests in agricultural projects with long-term
viability. Under the terms of the Agreement, FOCIR will provide up to $5.1
million to fund additional Lemon Project costs, which will include land
preparation, planting, equipment, irrigation systems and grove maintenance. This
financing represents the purchase of an equity interest in GISE of approximately
17.6%. Amounts advanced under this Agreement will be classified outside equity
due to mandatory redemption provisions. As of June 30, 2000, advances under the
Agreement were $4.5 million (43,116,000 Mexican pesos).
The terms of the Agreement provide for the calculation and accrual of
annual accretion using one of two alternative methods. The first method
determines accretion by multiplying the year's Mexican inflation index rate plus
4.2% by the FOCIR balance. The second method determines annual accretion by
multiplying GISE's shareholders equity, using Mexican generally accepted
accounting principles, at the end of the year by a factor of 1.036 and then
multiplying by the FOCIR equity interest percent. The calculation that results
in the greater amount will be the annual accretion amount. Accretion accumulates
annually over the nine-year period of the Agreement and is paid only upon
expiration or early termination of the Agreement. As of June 30, 2000,
accretion accrued under the Agreement amounted to $123,000. The Agreement also
contains, among other things, certain provisions relating to GISE's future
financial performance, the establishment of an irrevocable trust guaranteeing
the FOCIR loan, which includes transferring to the trust GISE common shares that
represent 33.4% of GISE's outstanding shares and the governance of GISE.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2000, a suit was filed in the State Court, Monterrey, Nuevo Leon,
Mexico against the Company's subsidiary, ICMOSA and three guarantor employees
(two of which are Directors of the Company), by Bancrecer, S.A., Institucion de
Banca Multiple ("Bancrecer"). The suit claims, among other things, that ICMOSA
failed to make a scheduled payment of $ .8 million, including interest at the
default rate from the due date of September 1999, on a term note that expires in
March 2002. ICMOSA has filed a response, along with a request for dismissal
claiming the suit contains material errors, including the official recording of
the loan with the Official Bank of Mexico. The court has not ruled on ICMOSA's
response, and consequently, it cannot be determined at this time whether
ICMOSA's response will ultimately lead to a dismissal of the action. However,
ICMOSA and the Company believe that this litigation will be resolved without
material effect on the Company's consolidated financial condition, results of
operations or cash flow.
The Company is subject to legal actions arising in the ordinary course of
business. Management does not believe that the outcome of any such legal action
would have a material adverse effect on the Company's financial position or
results of operations.
ITEM 2. SALE OF UNREGISTERED SECURITIES
None
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K
None
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 18, 2000 /s/ Soren Bjorn
------------------ -----------------------------------------
Soren Bjorn, President
(Principal Executive Officer)
Date: August 18, 2000 /s/ Charles A. Horne
------------------ -----------------------------------------
Charles A. Horne, Chief Financial Officer
(Principal Accounting Officer)
22
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
