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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Number: 0-12177
BIONOVA HOLDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 75-2632242
(State of incorporation) (I.R.S. Employer Identification No.)
6701 SAN PABLO AVENUE
OAKLAND, CALIFORNIA 94608
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 547-2395
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ___ No _X_
Aggregate market value of Common Stock held by nonaffiliates as of March 22,
2001: $ 7,164,550
Number of shares of Common Stock outstanding as of March 22, 2001: 23,588,031
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TABLE OF CONTENTS
PAGE
----
PART I................................................................... 3
ITEM 1. BUSINESS.................................................... 3
Overview........................................................ 3
Background...................................................... 4
Farming......................................................... 4
Distribution.................................................... 5
Research and Development........................................ 6
Proprietary Protection.......................................... 9
Governmental Regulation......................................... 10
Competition..................................................... 10
Employees....................................................... 10
Controlling Stockholder; Conflicts of Interest.................. 11
ITEM 2. PROPERTIES.................................................. 11
ITEM 3. LEGAL PROCEEDINGS........................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
PART II.................................................................. 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................. 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 16
Overview........................................................ 16
Results of Operations........................................... 16
Expected Effect of Discontinued Operations in 2001.............. 18
Quarterly Results of Operations................................. 18
Capital Expenditures............................................ 19
Liquidity and Capital Resources................................. 19
Disclosure Regarding Forward Looking Statements................. 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 26
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 51
PART III................................................................. 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............ 51
ITEM 11. EXECUTIVE COMPENSATION..................................... 52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS....... 56
PART IV.................................................................. 58
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K........................................ 58
FRESHWORLD FARMS(R), ENDLESS SUMMER(R), AND TRANSWITCH(R) ARE REGISTERED
TRADEMARKS OF DNAP OR ITS SUBSIDIARIES. MASTER'S TOUCH(R) AND SHOWCASE(R) ARE
REGISTERED TRADEMARKS OF CERTAIN AFFILIATES OF BIONOVA HOLDING. PREMIER
SELECCION(R) IS A REGISTERED TRADEMARK THAT HAS BEEN LICENSED TO CERTAIN
SUBSIDIARIES BY AN AFFILIATE.
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Bionova Holding Corporation, a Delaware corporation (together with its
subsidiaries, unless the context requires otherwise, "Bionova Holding" or the
"Company"), was formed in January 1996, and acts as a holding company for (i)
Agrobionova, S.A. de C.V., a corporation organized under the laws of the United
Mexican States, of which the Company owns 80% ("ABSA"), (ii) International
Produce Holding Company, a Delaware corporation, of which the Company owns 100%
("IPHC"), (iii) DNA Plant Technology Corporation, a Delaware corporation, of
which the Company owns 100% ("DNAP"), and (iv) VPP Corporation, a Delaware
corporation, of which the Company owns 100% ("VPP"). The Company acquired
majority interests in ABSA and IPHC on July 1, 1996, by means of a capital
contribution from Bionova, S.A. de C.V. ("Bionova Mexico"), and on October 7,
1997, acquired all of the minority interests in IPHC and increased its ownership
interest in ABSA to 80%. DNAP became a wholly-owned subsidiary of the Company on
September 26, 1996, as a result of the merger (the "Merger") of Bionova
Acquisition, Inc., a Delaware corporation that was a wholly-owned subsidiary of
the Company, with and into DNAP. VPP was formed as a wholly-owned subsidiary of
the Company on August 18, 1997. Approximately 76.6% of the outstanding common
stock of the Company is indirectly owned by Savia, S.A. de C.V. ("Savia").
ABSA engages in the business of growing fresh fruits and vegetables,
primarily tomatoes and peppers, in Mexico and exporting fresh produce to the
United States and other markets. ABSA owns a 50.01% interest in Interfruver de
Mexico, S.A. de C.V., a corporation organized under the laws of the United
Mexican States ("Interfruver"), which engages in the business of marketing and
distributing fresh produce in Mexico, including fruits and vegetables produced
by ABSA. ABSA also owns 98.0% of Siembra Cultivo y Cosecha del Noroeste, S.A. de
C.V., a corporation organized under the laws of the United Mexican States
("Siembra"), which provides labor and administrative services to ABSA. IPHC is a
holding company whose subsidiaries are in the busness of marketing and
distributing fresh produce primarily in the United States and Canada, including
fruits and vegetables produced by ABSA. DNAP and VPP are agribusiness
biotechnology companies focused on the development and application of genetic
engineering and transformation technologies in plants.
Approximately 76.6% of the outstanding Common Stock of the Company is
indirectly owned by Savia ("Savia"). In addition, Savia indirectly owns 200
shares of Series A Convertible Preferred Stock, which, if converted, would
result in Savia owning 87.9% of the outstanding Common Stock of the Company. The
record owner of all of these shares of common and preferred stock is Bionova
International, Inc. ("BII"), a wholly-owned subsidiary of Savia. Savia is a
Mexican corporation which acts as a holding company for several companies,
including (i) Seminis, Inc. the leading manufacturer of fruit and vegetable
seeds in the world, (ii) Seguros Commercial America, the largest insurance
company in Mexico, and (iii) Empaques Ponderosa, a leading Mexican producer of
folding boxboard made from recycled fibers.
On December 28, 2000 Bionova Holding and Savia entered into two agreements
which will substantially change the business and financial structure of the
Company. The Purchase Agreement ("Purchase Agreement"), to which Savia's
subsidiary Bionova International, Inc. is also a party, contains four major
components. First, Bionova Holding will sell its fresh produce farming and
distribution business (including all of the debt and liabilities of the fresh
produce business) to Savia for $48 million. In acquiring the fresh produce
business Savia will purchase 100% of the shares held by Bionova Holding in ABSA
and IPHC. The purchase price for the fresh produce business will be paid by the
application of $48 million of advances previously made by Savia to Bionova
Holding. Second, on December 29, 2000 Bionova Holding issued 200 shares of
convertible preferred stock to Bionova International for $63.7 million, which
was paid through the application of all of the remaining outstanding advances
previously made by Savia to Bionova Holding (other than the $48 million which
will be applied to the sale of the fresh produce business). The 200 shares of
preferred stock are convertible into 23,156,116 shares of common stock (a
conversion ratio based on $2.75 per share) at any time after adoption and filing
by the Company of a charter amendment increasing the authorized number of shares
of Common Stock to at least 70,000,000.
Third, Savia committed to enter into sublicense agreements whereby it or
its affiliates will license to Bionova Holding certain technology rights that
are important for Bionova Holding to move forward in its business.
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Bionova Holding will be able to utilize these rights for research purposes
without cost. Upon commercialization of products utilizing these technology
rights the Company will be obligated to pay royalties to Savia and/or the owner
of the technology. Fourth, the Purchase Agreement provides that in lieu of the
rights offering previously contemplated by the 1998 Stock Purchase Agreement
between Bionova International and Bionova Holding, Bionova Holding will issue to
each of its stockholders rights to purchase two shares of Bionova Holding common
stock for each share they own as of the date the registration statement relating
to the rights offering is declared effective or such other record date as may be
set by Bionova Holding's Board of Directors. The exercise price for the rights
will be $2.50 per share. The rights will expire 60 days after issuance or at
such other time as Savia and Bionova Holding's Special Committee of Independent
Directors may agree. Each of Savia and Bionova International has agreed to
surrender all of the rights it receives to Bionova Holding without exercising
them. Therefore, after giving effect to the conversion of the preferred stock,
Savia's beneficial interest in Bionova Holding will increase from 76.6% to
87.9%, and may increase further under the Cash Support Agreement described
below.
Bionova Holding and Savia also entered into a Cash Support Agreement for
2001. This agreement provides that, during 2001, Savia will advance funds to
Bionova Holding as requested to finance Bionova Holding's technology business.
These advances will be applied to the purchase by Savia (i.e., exchanged for) of
additional common shares when the sale of the fresh produce business is closed
and thereafter through December 31, 2001. The purchase price to be paid by Savia
for the additional shares under this Cash Support Agreement will be $2.50 per
share prior to the expiration of the rights offering, and thereafter will be the
higher of $2.50 per share or the average market price of Bionova Holding common
stock. Bionova Holding currently has budgeted cash requirements for the calendar
year 2001 in a range of $7 to $8 million. The Cash Support Agreement also
acknowledges that if additional funds are required by Bionova Holding's fresh
produce business prior to completion of the sale, Savia will be responsible for
providing or arranging the financing.
These transactions were and are being undertaken by Bionova Holding so
the Company could (i) concentrate on its technology business and (ii)
disengage itself from the fresh produce business, which has experienced large
losses over the past several years and whose future earnings or losses are
expected to continue to be exposed to sharp volatility due to the commodity
nature of this business. Also, by completing these transactions the Company
will eliminate $111.7 million of advances due to Savia in 2002 along with the
debt obligations of the fresh produce business.
Financial information relating to each of the Company's industry segments
is set forth in Note 16 to the Company's financial statements contained in this
report. Financial information relating to foreign and domestic operations and
export sales is set forth in Note 16 to the Company's financial statements.
The corporate headquarters of the Company are located at 6701 San Pablo
Avenue, Oakland, California 94608, and the telephone number is (510) 547-2395.
BACKGROUND
For operating and financial reporting purposes, the Company historically
has classified its business into three fundamental areas: (1) FARMING, which
consists principally of interests in 100% Company-owned fresh produce production
facilities and joint ventures or contract growing arrangements with other
growers; (2) DISTRIBUTION, consisting principally of interests in sales and
distribution companies in Mexico, the United States, and Canada; and (3)
RESEARCH AND DEVELOPMENT (OR TECHNOLOGY), consisting of business units focused
on the development of fruits and vegetables and intellectual properties
associated with these development efforts. IF THE SALE OF THE FRESH PRODUCE
BUSINESS IS APPROVED, THE COMPANY WILL SELL THE SUBSIDIARIES ENGAGED IN THE
FARMING AND DISTRIBUTION BUSINESSES AND WILL RETAIN ONLY THE RESEARCH AND
DEVELOPMENT BUSINESS. The consolidated financial statements included elsewhere
in this Form 10-K present the Farming and Distribution businesses as
discontinued operations. Each business segment is described below.
FARMING
ABSA is a leading grower of fresh produce in Mexico, primarily tomatoes and
peppers, and, to a lesser extent, cucumbers, grapes and other fruits and
vegetables. Most of ABSA's farming operations are located in the Mexican states
of Sinaloa, Sonora and Baja California. Advanced technology is used to ensure
consistent quality and yields, including special hybrid varieties, integrated
pest management control, and computerized drip irrigation. ABSA's produce is
distributed in the United States, Mexico and Canada under the "Master's Touch"
and "Premier Seleccion" brands as well as other labels, depending on produce
grades.
4
ABSA's supply derives from (i) produce grown on land owned or leased by
ABSA, (ii) produce grown by producers with whom ABSA enters into a distribution
contract and (iii) produce grown by producers with whom ABSA enters into both a
production association agreement and a distribution contract. When ABSA enters
into a distribution contract only, it agrees to provide the grower limited
financial assistance for harvesting and/or packing in exchange for exclusive
distribution rights. When ABSA enters into a production association agreement,
ABSA finances up to 100% of the production cost in a joint venture with the
grower. ABSA provides technical support and agrees to handle the distribution.
Net proceeds are shared according to the terms of the association agreement
after ABSA recoups its investment.
In 2000 approximately 92% of ABSA's supply came from land owned or leased
by ABSA. ABSA owns approximately 3,183 acres in Sinaloa, Sonora and Baja
California Sur, and ABSA leases approximately 2,641 acres in Sinaloa and Baja
California Sur. During 2000, a very limited amount of produce was sourced
through production associations with growers and through distribution contracts.
In 2000, approximately 60% of ABSA's sales were tomatoes, 19% were peppers,
13% were cucumbers, 5% were grapes and the remaining 3% were mixed vegetables.
In 1999 and 1998, respectively, ABSA's sales were allocated approximately as
follows: tomatoes - 68% and 54%, peppers - 13% and 30%, cucumbers - 4% and 6%,
and grapes, melons and mixed vegetables (including eggplant and squash) - 15%
and 10%.
In 2000, 1999, and 1998, the Farming segment suffered operating losses of
$10.0 million, $16.8 million, and $5.6 million, respectively.
DISTRIBUTION
The Company's marketing and distribution activities are carried out by a
network of national and regional distributors. The Company's national
distributors in the United States are Bionova Produce, Inc., R.B. Packing of
California, Inc. and Bionova Produce of Texas, Inc., each of which is a
wholly-owned subsidiary of IPHC, and referred to collectively as "Bionova
Produce", and Interfruver de Mexico, S.A. de C.V. ("Interfruver") in Mexico. The
Company's regional distributors are Premier Fruits and Vegetables BBL Inc. in
Montreal, Quebec ("Premier") and Premier Fruits and Vegetables (USA), Inc. in
Philadelphia, Pennsylvania. As described below, the Company sold its interest in
another regional distributor, Tanimura Distributing, Inc. ("TDI"), on February
19, 2001.
NATIONAL DISTRIBUTORS
Bionova Produce, Inc and R.B. Packing of California, Inc. had revenues of
$57.0 million in 2000. The majority of these sales were made by Bionova Produce,
Inc., which is located in Nogales, Arizona, a major point of entry for Mexican
produce into the United States. Approximately 47% of the produce distributed by
Bionova Produce, Inc. is provided by ABSA (including produce grown by ABSA and
produce grown by growers with whom ABSA enters into distribution contracts
and/or production arrangements). No other single customer accounted for more
than 10% of Bionova Produce, Inc.'s sales in 2000. In 2000, its sales were 51%
to supermarkets, 27% to wholesalers and 22% to brokers. Its main selling season
is December through May.
R.B. Packing of California, Inc. is located in San Diego, California and
distributes produce grown in California and the Mexican states of Baja
California Norte and Baja California Sur. In 2000, its sales were 26% to
supermarkets, 42% to wholesalers, and 32% to brokers. Its main selling season is
July through November. R.B. Packing of Texas, Inc. is a distributor located in
McAllen, Texas that began operations in the Fall of 1995. Bionova Produce of
Texas, Inc. distributes produce grown in Mexico and currently is concentrating
on the importation and distribution of mango, papaya, and melons.
Interfruver is one of Mexico's largest fresh produce distributors. Based in
Guadalajara, Interfruver distributes produce from ABSA and other Mexican
producers. Interfruver also imports produce from the United States and other
countries. Approximately 76% of its sales is to wholesalers and other
intermediaries and 24% is to supermarkets. Interfruver's sales totaled $99.5
million in 2000.
REGIONAL DISTRIBUTORS.
5
TDI was a 75%-owned subsidiary of IPHC. In 2000, TDI's sales of $30.4
million were 38% to supermarkets, 24% to food service, 24% to wholesalers, and
14% to brokers. On February 19, 2001, IPHC sold its entire interest in TDI back
to TDI, and IPHC agreed to consulting, non-competition and licensing
arrangements with TDI, in exchange for a note obligating TDI to pay IPHC $1.2
million, plus interest at 10.5% per annum, over the next three years. This
payment obligation is secured by a portion of TDI's accounts receivable and is
guaranteed in part by Kirby Tanimura. As a result of the transaction, Mr.
Tanimura became the sole stockholder of TDI.
Premier Fruits & Vegetables, BBL Inc. is an 80%-owned subsidiary of IPHC.
Premier distributes produce throughout eastern Canada and its sales were
approximately 48% to supermarkets, 24% to independent retailers, and 28% to
wholesalers in 2000. Sales in 2000 were approximately U.S. $39.4 million.
Premier Fruits and Vegetables (USA), Inc., an 80%-owned subsidiary of IPHC,
was formed in February 2000 to market tomatoes and other vegetables, including
the Company's branded line of cherry tomatoes and peppers, in the eastern United
States. Premier Fruits and Vegetables (USA), Inc. sources its products through
and operates under the direction of Premier in Canada.
In 2000 and 1999 this segment experienced operating losses of $4.3
million and $1.7 million, respectively. In 1998 the Distribution segment
earned $0.5 million in operating profit.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are carried out by DNAP,
a wholly owned subsidiary acquired in September 1996 as a result of the Merger.
DNAP is an agricultural biotechnology company focused on the development and
application of genetic engineering in fruits and vegetables. In 2000, the
Company spent approximately $3.2 million on Company-sponsored research and
development activities and approximately $3.0 million on customer-sponsored
research and development activities.
Since the Company acquired DNAP in 1996 and formed VPP in 1997, the
Research and Development segment has concentrated on four principal activities:
(i) the development of fruits and vegetables with improved agronomic and quality
traits using plant breeding and modern biotechnology techniques, (ii) the
development of a proprietary business based on the use of modern biotechnology
in certain vegetatively propagated crops, in particular strawberries and
bananas, (iii) research and development activities in support of the Company's
fresh produce business, and (iv) the pursuit of research contracts with third
party companies, particularly when the knowledge gained from these activities
created opportunities in internal strategic research and development programs.
In 2000, the Company decided to focus its future technology efforts on
plant genomics and on developing a trait genomics platform for plant
agriculture. In anticipation of the sale of its fresh produce business, the
Company took steps to align its research and development activities with this
new business direction. Specifically, DNAP discontinued all research and
development in support of the Company's fresh produce business, including its
plant breeding, food science and biotechnology activities directed toward fresh
produce. DNAP also reorganized its research and development activities funded by
Seminis Vegetable Seeds, Inc., an affiliate of the Company, and initiated
discussions to optimize future value to the Company from these projects. The
research program for Seminis includes plant genetic engineering developments in
viral disease, nematode, insect and herbicide resistance, hybrid breeding, and
product quality. In the latter half of 2000, VPP began to wind down its
biotechnology research activities involving banana. DNAP continues to pursue
research contracts with third party companies, particularly when the knowledge
gained from these activities will create opportunities in internal strategic
research and development programs.
DNAP's research and development facility is located in Oakland, California.
The research and development staff of 50 scientists, including 18 with Ph.D.
degrees, includes scientists in the fields OF cell biology, plant genetic
engineering, plant genetics, plant pathology and biochemistry. DNAP's scientists
have published over 300 articles in peer-reviewed scientific literature and are
named inventors on more than 60 United States patents owned by DNAP or FWF.
The Company's current and planned future research and development
activities are described below.
6
THE TRAIT GENOMICS PLATFORM
The Company seeks to become the leading independent developer of novel crop
traits for two major sectors of the global food economy: crop protection and
human nutrition. The Company is working to industrialize the process of trait
development by combining gene profiling and pathway analysis in model plants
with its expertise in plant biology. The Company uses low-cost model plants and
is beginning to implement highly efficient, rapid screening methods to
streamline the processes of evaluating candidate genes, identifying elements to
express selected genes, and assembling optimal gene configurations that deliver
commercial traits. The Company calls this process ADVANCED TRAIT GENOMICS.
The Company is targeting its ADVANCED TRAIT GENOMICS technologies toward
multi-billion dollar markets that include agricultural production and human
nutrition. Within the agricultural production market, the Company is directing
its research to increase crop yield through improved resistance to fungal
diseases and nematode pests in high-value fruits and vegetable crops and
high-acreage commodity crops. In the future, the Company intends to apply its
ADVANCED TRAIT GENOMICS technologies to enhance the composition of food for
optimum health.
TRAIT GENOMICS TECHNOLOGY VISION
Modern understanding of cellular biology teaches that traits are controlled
not by individual cellular components, but by sets of cellular components
organized into pathways. Like other organisms, plants process information about
their environment and their age, and respond through the integrated control of
many pathways. In order to improve commercial crop performance, it will be
necessary to alter and control the expression of one or more plant pathways
without compromising crop yield.
The products of modern agricultural biotechnology in commerce today have
all been created by expressing unique functions at high levels (e.g., herbicide
tolerant, insect resistant, and virus resistant crops). Yet this approach has
not solved two of the most significant problems in production agriculture,
fungal disease and nematodes. The Company believes that to successfully address
these problems through improved genetics, future product development will
require precise intervention and control of plant biology.
The Company's ADVANCED TRAIT GENOMICS platform seeks to integrate the
processes of gene discovery, trait development and early product development.
The Company's key objectives are to delineate and control selected plant
pathways in order to provide customers with measurable improvements in plant
performance through improved genetics. The Company employs advanced transcript
profiling tools, cutting-edge bioinformatics and information management systems
to differentiate between genes that control target traits and genes that detract
from plant performance (its PATHWAY CIRCUIT ANALYSIS). The Company also uses
these techniques to identify plant gene promoters that will consistently drive
desirable pathways on demand (its PROMOTER PIPELINE). The Company combines this
knowledge to assemble optimal promoter-gene combinations that can be rapidly
screened for effectiveness in model plants (its COMBINATORIAL TRAIT ENGINE).
Once validated in a model plant such as ARABIDOPSIS THALIANA, the Company can
create transgenic alleles and constructs that offer demonstrable trait value for
seed and foundation plant customers (PROTOTYPE AND COMMERCIAL TRAITS).
TRAIT GENOMICS BUSINESS STRATEGY
The Company's goal is to be the leading independent developer of novel crop
traits in the fields of crop protection and human nutrition. The key elements of
its strategy are to:
o Create an ADVANCED TRAIT GENOMICS platform to (a) identify key genes
that control target traits and genes that detract from plant
performance (PATHWAY CIRCUIT ANALYSIS); (b) identify plant gene
expression signals (promoters) to consistently drive pathways on
demand (PROMOTER PIPELINE), and (c) assemble optimal promoter-gene
combinations to deliver prototype and commercial traits (COMBINATORIAL
TRAIT ENGINE);
o Create high-value commercial traits for use in seed and foundation
plants for which the Company will seek to receive brand recognition
and revenues. Develop multiple products and services in crop
protection and human nutrition to generate revenues near- and
long-term. The Company expects to
7
generate a royalty stream from the sale of commercial products that
may be developed and commercialized by the Company's customers and
partners;
o Establish collaborations to co-fund prototype trait development for
specific crops, while retaining rights to the underlying core
information and technology for application in all other crops. The
Company will aggressively pursue grants from U.S. government agencies
to fund its technology development where the Company determines it to
be advantageous. The Company will invest its own funds in selected
areas and product opportunities with the aim of capturing a higher
percentage of profits on product sales;
o Actively pursue intellectual property protection covering the products
and services of the Company's ADVANCED TRAIT GENOMICS platform.
TRAIT GENOMICS PRODUCTS AND SERVICES
The Company's products will be genetic constructs (e.g., promoter and
target gene combinations) that confer durable resistance to fungal diseases or
nematode pests when added to the genetic makeup of a crop plant. The Company has
chosen disease and nematode targets that are economically significant in both
high-value fruits and vegetables and large acreage commodities. Additionally,
the Company is exploring novel strategies to control insect pests on high-value
specialty crops. The Company looks to license the products it develops to
foundation plant and seed companies under agreements that would typically
provide royalty-based revenues from our customers' variety development programs.
The process of validating and deploying genes for pest and disease
resistance creates new information about the underlying genetic pathways in
plants and plant-pathogen interactions. With this knowledge the Company believes
it will be well positioned to be a leader in fungal disease and nematode control
through improved genetics. After establishing essential capabilities and
developing initial prototype traits in model systems, the Company may then offer
collaborative research services in the field of fungal disease and nematode
control for a broad range of crops. These collaborations typically provide
current revenues, milestone payments for successful projects and royalty-based
revenues from the Company's partners' development programs. Services may also
include regulatory and business consultation on licensed traits. The Company
intends to market these services to companies that lack the internal technical
ability or resources in return for milestone payments and royalty-based revenues
from our partners' development programs.
VEGETATIVELY PROPAGATED PLANTS
Consistent with the Company's strategy to build a global business in the
development and sale of vegetatively propagated fruit species, including berries
differentiated through modern biotechnology, Bionova Holding acquired, through
its subsidiary, VPP, Monsanto Company's strawberry development program on
December 30, 1998. The acquisition included exclusive rights to certain of
Monsanto's enabling and trait technologies for berry development, and a
non-exclusive right to future Monsanto berry technology for strawberries,
cranberries, raspberries, blackberries, boysenberries, and blueberries. The
acquisition also included a breeding program, from which two strawberry
varieties were placed in commercial fruit production in the United States in
2000. Three or four new strawberry varieties are planned for commercial
introduction over the next three to four years. This acquisition complements the
research that DNAP had been conducting since 1995 in the area of genetic
modifications of strawberries to improve various traits.
VPP's product opportunities include biotechnology-derived strawberry
varieties that offer growers simplified weed control options during nursery
plant and fruit production through over-the-top application of Roundup(R)
herbicide. VPP, through its affiliate, DNAP, is researching novel strategies to
control fungal disease on strawberry fruit, as well as to control fungal disease
and nematode pests oN strawberry plants in nursery and fruit production. VPP is
also researching novel strategies to control black sigatoka disease, a fungal
disease that infects banana plants in tropical climates and causes devastating
yield losses. This research project was funded under a collaborative research
agreement with a major banana company. In the latter half of 2000, VPP began to
wind down its research in this area.
8
PROPRIETARY PROTECTION
In order to develop and maintain its competitive position, the Company and
its subsidiaries seek to protect their intellectual property through patent
filings in the United States and abroad, maintenance of trade secrets and
ongoing technological innovation The Company selectively licenses its
intellectual property to third parties where licensing brings significant value
to the Company in a way consistent with preserving its competitive position.
The Company and its subsidiaries have received over 60 United States
patents, including patents that protect its Transwitch gene suppression
technology; gene isolation through transposon tagging;
transformation/regeneration methods; promoter systems; selectable marker
systems; gene expression technologies and genes directed to control of disease,
softening, sweetness, color and acidity. The Company and its subsidiaries have a
number of pending applications on gene suppression improvements, transformation
method improvements, hybrid breeding methods and trait technologies.
One of DNAP's most significant technological developments in the area of
plant genetic engineering is the Company's proprietary Transwitch gene
suppression technology. DNAP has received three United States patents and a
European patent directed to methods of using this technology for suppressing
plant genes.
As a Savia affiliate, the Company has access to technologies that are
important to delivering on its technology vision. Through Savia's agreement with
Monsanto Company, the Company has certain research and commercialization rights
to enabling technologies, including promoters, marker genes, and plant
transformation methods. Through Savia's agreement with Mendel Biotechnology,
Inc., the Company has certain research and commercialization rights to
transcription factor genes from ARABIDOPSIS THALIANA. Through Savia's agreement
with the John Innes Centre, the Company has certain research and
commercialization rights to a range of trait technologies. The Company is
currently negotiating with other parties for technologies that it believes
contribute to its technology vision.
DNAP has pursued patents and plant variety protection ("PVP") certificates
specific to certain DNAP products. DNAP has filed patent applications in the
United States claiming certain FWF parent and hybrid tomato lines, resulting in
two issued U.S. patents. In addition, DNAP has received United States patents
directed to ripening controlled cherry tomato lines and a ripening controlled
tomato line, and has a pending patent application directed to ripening
controlled cherry tomato lines. DNAP has also received a United States patent
directed to the method of somaclonal variation in tomato. DNAP has been granted
a United States patent covering a broad class of low seed peppers, including the
FWF sweet mini-pepper. FWF additionally has four issued United States patents
directed to the method of processing carrots. PVP certificates, which are issued
by the USDA, have also been pursued for specific fruit and vegetable varieties.
DNAP was issued two PVP certificates for tomato varieties and two for pepper
varieties. FWF has two issued PVP certificates for watermelon varieties
developed by DNAP. In addition, DNAP's affiliate, VPP, has two pending United
States patent applications directed to strawberry varieties.
DNAP has strengthened its proprietary position by obtaining license rights
from third parties, either to secure freedom to operate via non-exclusive
licenses or to create additional areas of exclusivity through exclusive
licenses. DNAP has obtained license rights from several third parties under
patent filings related to plant molecular biology methods. These license rights
include non-exclusive rights from the Max Planck Institute under patent filings
directed to certain methods of plant transformation using Agrobacterium
(although the rights of the Max Planck Institute under certain of these patent
filings are in dispute), and from Mogen International N.V. under filings also
directed to certain methods of plant transformation using Agrobacterium. DNAP
also has license rights from the USDA under patent filings directed to the ACC
synthase gene. Suppression of this gene, e.g. with Transwitch technology, has
been shown by DNAP to permit control of the ripening process. DNAP's license
from the USDA is co-exclusive for tomato, and exclusive for 25 other crops
including peppers, bananas, peas, strawberries, grapes, pineapples and
watermelons. As a result of the agreement between Savia and Monsanto Company
dated January 31, 1997, DNAP also has access to key enabling technologies,
including promoters, marker genes and transformation methods, as well as genes
for agronomic and quality traits, held by Monsanto Company.
IF THE SALE OF THE FRESH PRODUCE BUSINESS IS APPROVED, CERTAIN PATENTS,
PATENT RIGHTS AND TRADEMARKS OF THE COMPANY OR ITS SUBSIDIARIES RELATED TO THE
FRESH PRODUCE BUSINESS WILL BE ACQUIRED BY A SAVIA AFFILIATE IN ACCORDANCE WITH
THE PURCHASE AGREEMENT.
9
GOVERNMENTAL REGULATION
Regulation by federal, state and local government authorities in the United
States and foreign countries will be a significant factor in the future
production and marketing of plants and plant products containing the Company's
biotechnology-derived trait technologies. The process of obtaining government
approvals can be costly and time consuming, and there can be no assurance that
necessary approvals will be granted to the Company or its customers in a timely
manner, if at all. The extent of government regulation of biotechnology that
might arise from future legislative or administrative actions and the potential
consequences to the Company or its customers are not known and cannot be
predicted with certainty.
The U.S. federal government has implemented a coordinated policy for
regulating biotechnology research and products in the United States. The USDA
has jurisdiction over specific research and pre-commercial activities involving
biotechnology-derived plants, in particular the growing and interstate shipment
of biotechnology-derived plants and plant products. The FDA has jurisdiction
over plant products that are used for human or animal food. The EPA has
jurisdiction over large-scale field testing and commercial use of plants
bioengineered to resist pests and diseases, as well as administering various
federal environmental quality statutes. Failure to comply with applicable
regulatory requirements could result in enforcement action, including withdrawal
of marketing approval, seizure or recall of product, injunction or criminal
prosecution.
COMPETITION
There are several companies engaged in research and development activities
based on model plant genomics and trait development. Competitors include
genomics-based gene discovery and specialized biotechnology firms, as well as
major pharmaceutical and agricultural chemical companies that have
genomics-based gene discovery or biotechnology divisions. Many of these
companies have considerably greater financial, technical, and marketing
resources than Bionova Holding. Competition may intensify as technological
developments occur at a rapid rate in the agricultural biotechnology industry.
EMPLOYEES
The Company and its subsidiaries, have a total of 374 employees. This total
of 374 includes the discontinued operations of the fresh produce business in
addition to the research and development business.
ABSA has no employees. Siembra provides labor and administrative services
to ABSA pursuant to a contractual agreement, and ABSA pays a fee to Siembra
based on Siembra's costs incurred in connection with providing such services.
The number of persons providing such services through Siembra to ABSA ranges
from a minimum of 1,100 to a maximum during the harvesting season
(January-April) of approximately 4,000. The 40 employees of Siembra that are
full-time are not unionized. All of the other Siembra employees are temporary
workers, and they are represented by a labor union. No other employees in
Bionova Holding are represented by a union.
The labor union contracts for the temporary employees are reviewed on an
annual basis. Both the union and ABSA may terminate the contract at any time
upon 60 days notice to the other party.
10
CONTROLLING STOCKHOLDER; CONFLICTS OF INTEREST
Approximately 76.6% of the outstanding shares of common stock of the
Company are owned of record by Bionova International, Inc., an indirect,
wholly-owned subsidiary of Savia. Savia has the power to elect a majority of the
Company's board of directors and to determine the outcome of any action
requiring the approval of the holders of the Company's common stock. This
ownership and management structure will inhibit the taking of any action by the
Company which is not acceptable to the controlling stockholder.
Certain of the Company's directors and executive officers are also
currently serving as board members or executive officers of Savia or companies
related to Savia, and it is expected that each will continue to do so. Such
management interrelationships and intercorporate relationships may lead to
possible conflicts of interest.
The Company and other entities that may be deemed to be controlled by or
affiliated with Savia sometimes engage in (i) intercorporate transactions such
as guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties and (ii) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties. The
Company continuously considers, reviews and evaluates, and understands that
Savia and related entities consider, review and evaluate transactions of the
type described above. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more of
such transactions in the future in addition to those currently in force, such as
the Long Term Funded Research Agreement dated January 1, 1997, between Seminis
and DNAP. In connection with these activities the Company might consider issuing
additional equity securities or incurring additional indebtedness. The Company's
acquisition activities may in the future include participation in the
acquisition or restructuring activities conducted by other companies that may be
deemed to be controlled by Savia.
ITEM 2. PROPERTIES
ABSA owns approximately 3,675 acres of agricultural land in Sinaloa,
Sonora, and Baja California Sur. ABSA leases approximately 2,641 acres of land
in Sinaloa and Baja California Sur. See "Legal Proceedings." The agricultural
land owned by ABSA is part of the assets that are being sold to Savia in
conjunction with the sale of the fresh produce business.
Bionova Produce, Inc. and Bionova Properties, Inc. own warehouse and office
space in Nogales, Arizona. The other subsidiaries of IPHC lease office and
warehouse space. Interfruver leases office and warehouse space in Jalisco.
Interfruver also leases warehouse space in Mexico City, Sinaloa, Sonora,
Chihuahua and Nuevo Leon. The warehouse and office space of Bionova Produce,
Inc. and Bionova Properties, Inc. also is part of the assets being sold to Savia
DNAP leases 46,000 square feet of laboratory and office space and 7,500
square feet of greenhouse space in Oakland, California. DNAP also owns 12,700
square feet of greenhouse and warehouse space, including farm land for field
trials, in Brentwood, California. DNAP also leases 800 square feet of office
space and 6,000 square feet of greenhouse space in Watsonville, California for
strawberry research and development. VPP has contracts for nursery production
and field evaluation of strawberry varieties that it is developing in locations
throughout the United States, Canada and Europe. DNAP does not anticipate
requiring any additional space to execute its new plant genomics platform.
ITEM 3. LEGAL PROCEEDINGS
On January 21, 1997, a class action lawsuit styled GORDON K. AARON ET AL.
V. EMPRESAS LA MODERNA, S.A. DE C.V., ET AL. was filed in the U.S. federal
district court for the Northern District of California. The plaintiffs allege
that, prior to the merger (the "Merger") of DNAP with a subsidiary of Bionova
Holding on September 26, 1996, they owned shares of DNAP's $2.25 Convertible,
Exchangeable Preferred Stock ("Preferred Stock"). In connection with the Merger,
all of the shares of common stock and Preferred Stock of DNAP were converted
into the number of shares of common stock of Bionova Holding specified in the
Merger Agreement. The plaintiffs allege that they
11
were denied certain rights they allegedly had under the terms of the Preferred
Stock and that certain individuals (the "Individual Defendants"), each of whom
was a director of DNAP prior to the Merger and in some cases later served as a
director of Bionova Holding, breached fiduciary duties of loyalty, candor and
care allegedly owed to DNAP and its stockholders. The plaintiffs claim to have
been damaged by the alleged actions of the defendants and therefore the
plaintiffs seek unspecified actual and punitive damages as well as reimbursement
of their litigation costs and expenses. On August 27, 1997, the court granted
motions to dismiss all of the claims pending against all of the defendants,
except the claims of breach of the fiduciary duty of loyalty against the
Individual Defendants. On January 14, 1999, the court reinstated the plaintiffs'
claims that the preferred stockholders were denied their contractual right to
vote on the Merger, then on March 13, 2000, the court dismissed these claims
with prejudice. On December 22, 2000, the court dismissed all of the remaining
claims against all of the defendants. The plaintiffs have appealed this judgment
to the U.S. Court of Appeals for the Ninth Circuit. Bionova Holding and DNAP
deny any wrongdoing or liability in this matter and intend to vigorously contest
this lawsuit.
On August 29, 1997, a lawsuit styled GRACE BROTHERS, LTD. V. DNAP HOLDING
CORPORATION, DNA PLANT TECHNOLOGY CORPORATION AND DOES 1 THROUGH 20 INCLUSIVE
was filed in the Superior Court of the State of California, County of Alameda.
This claim arose out of the Merger on September 26, 1996 of DNAP with a
wholly-owned subsidiary of Bionova Holding. In the Merger, shares of DNAP's
Preferred Stock were converted into the right to receive shares of common stock
of Bionova Holding. The plaintiff alleged that it owned shares of Preferred
Stock and that DNAP breached its contractual obligations to the plaintiff by,
among other things, not providing special conversion privileges to the preferred
stockholders. The plaintiff also alleged that the former holders of DNAP common
stock were unjustly enriched by DNAP's alleged breach of the Certificate of
Designation. On February 17, 1999, the Court granted Bionova Holding's and
DNAP's Motion for Summary Judgment and dismissed all of the plaintiff's claims.
The plaintiff then appealed the judgment to the California Court of Appeals, and
on January 30, 2001, the Court of Appeals reversed the trial court's entry of
judgment in favor of Bionova Holding and DNAP and remanded the matter to the
trial court for further proceedings. Bionova Holding and DNAP have filed a
Petition for Review with the California Supreme Court. DNAP denies any
wrongdoing or liability in this matter and intends to vigorously contest this
lawsuit.
On January 7, 1999, a class action lawsuit styled GORDON K. AARON ET AL. V.
EMPRESAS LA MODERNA, S.A. DE C.V., ET AL. was filed in the U.S. federal district
court for the Northern District of California. On January 28, 1999, a
substantially identical class action lawsuit styled ROBERT KACZAK V. EMPRESAS LA
MODERNA, S.A. DE C.V., ET AL. was filed in the U.S. federal district court for
the Northern District of California, and these two cases were then consolidated.
The plaintiffs allege that, prior to the Merger of DNAP with a subsidiary of
Bionova Holding on September 26, 1996, they owned shares of DNAP's Preferred
Stock. In connection with the Merger, all of the shares of common stock and
Preferred Stock of DNAP were converted into the number of shares of common stock
of Bionova Holding specified in the Merger Agreement. The plaintiffs allege that
the Proxy Statement/Prospectus distributed to DNAP's stockholders in connection
with the merger contained material misrepresentations and omitted to state
material facts. Both DNAP and Bionova Holding, as well as certain former and
current directors of DNAP and Bionova Holding, have been named as defendants in
this matter. The plaintiffs claim to have been damaged by the alleged actions of
the defendants and therefore the plaintiffs seek unspecified actual damages,
reimbursement of their litigation costs and expenses, and equitable relief,
including rescission of the Merger. The plaintiffs also allege that they were
entitled to receive, and seek specific performance of, special conversion
privileges under the terms of the Certificate of Designation that established
the Preferred Stock. On March 8, 2000, the court dismissed nearly all of the
plaintiffs' claims, and subsequently the plaintiffs filed an amended complaint
with respect to some of the dismissed claims. On September 19, 2000, the court
ruled in favor of the Bionova Holding and DNAP and dismissed all of the
plaintiffs' claims. The plaintiffs have appealed this judgment to the U.S. Court
of Appeals for the Ninth Circuit. Bionova Holding and DNAP deny any wrongdoing
and liability in this matter and intend to vigorously contest this lawsuit.
DNAP has been named as a defendant in several lawsuits asserting claims
against DNAP relating to research DNAP performed from 1983 through 1994 for
Brown & Williamson Tobacco Company ("B&W"). In general, the cases allege that
DNAP engaged in unfair business practices under California law and/or
participated in an alleged conspiracy among cigarette manufacturers to deceive
the public regarding the hazards of smoking. All of the pending cases are in
California state courts. In December, 1999 B&W agreed to indemnify DNAP against
all costs (including costs of defense and of costs of any judgment or
settlement) incurred by DNAP in connection with these cases and any similar
cases in the future. Therefore, management no longer believes that these cases
could
12
have a material adverse effect on the Company's financial condition or results
of operations. DNAP denies any wrongdoing or liability in these matters and
intends to vigorously contest these lawsuits.
ABSA owns fifty-one hectares (approximately 126 acres) of rural land in the
State of Sinaloa, Mexico, which is the subject of a judicial proceeding pending
in Mexico initiated by a group of campesinos. The petitioners requested that
ownership of the land be transferred to them based on the fact that, at some
time prior to ABSA's ownership of the land, the land was not cultivated for more
than two consecutive years without good reason. The court previously upheld the
petition and ordered the land transferred to the petitioners, and ABSA filed a
challenge to that ruling. On May 14, 1999, the appellate court agreed with ABSA
and ordered that a new judgment be entered in ABSA's favor. On September 15,
2000, a new judgment was entered in ABSA's favor, and the petitioners have now
filed a challenge to that ruling. If ABSA is ultimately required to transfer the
subject land, which constitutes approximately 3.4% of the total agricultural
land owned by ABSA, Mexican law gives ABSA limited indemnification rights
against the State of Sinaloa.
ABSA owns one hundred hectares (approximately 247 acres) of rural land in
the State of Sinaloa, Mexico, which is the subject of a judicial proceeding
pending in Mexico initiated by a group of campesinos. The petitioners asserted
that a previous owner of the subject land, Miguel Angel Suarez, owned rural land
in excess of the maximum that was then allowed by law and that therefore the
land rightfully belonged to them. On September 25, 1996, the court upheld the
petition and ordered the land turned over to the petitioners. The court also
ruled that the transfer of the property to Olga Elena Batiz Esquer on June 2,
1990 was null and void, which would mean that the transfer of the land by Ms.
Batiz to ABSA in 1993 was ineffective. On October 23, 1996, Ms. Batiz, who was a
party to the trial court proceeding, filed a challenge to the judicial
determination based on alleged violations of her constitutional rights and
procedural and substantive errors in the trial court proceedings. If ABSA is
ultimately required to transfer the subject land, which constitutes
approximately 6.7% of the total agricultural land owned by ABSA, Mexican law
gives ABSA limited indemnification rights against the State of Sinaloa and Ms.
Batiz.
ABSA owns two hundred seventy-four hectares (approximately 677 acres) of
rural land in the State of Sinaloa, Mexico, which is the subject of a
judicial proceeding pending in Mexico initiated by a group of campesinos. The
petitioners asserted that a previous owner of the subject land owned rural
land in excess of the maximum that was then allowed by law and that therefore
the land rightfully belonged to them. On August 27, 1997, the court denied
the petition and ruled in favor of ABSA. On May 25, 1998, the petitioners
filed a challenge to the judicial determination based on alleged violations
of their constitutional rights, and on August 11, 2000, the appellate court
ordered the trial court to reconsider its judgment. On December 14, 2000, the
trial court entered a new judgment in favor of ABSA. The petitioners' right
to appeal from that judgment has expired, so the judgment in favor of ABSA is
now considered final.
On June 16, 2000, a lawsuit styled SANTA CRUZ EMPACADORA, S. DE R.L. DE
C.V., V. R.B. PACKING OF CALIFORNIA, INC . was filed in the United States
District Court for the Southern District of California. R.B. Packing of
California, Inc., a subsidiary of Bionova Holding, is the United States
distributor of fresh produce sold by the plaintiff. The plaintiff alleges that
R.B. Packing of California, Inc. sold Santa Cruz produce to related companies at
below market prices and thereby engaged in unfair conduct, fraud and breach of
statutory and fiduciary duties. The plaintiff seeks an unspecified amount of
compensatory and punitive damages. R.B. Packing of California, Inc. denies any
wrongdoing or liability in this matter and intends to vigorously contest this
lawsuit.
In 2000, ABSA filed a lawsuit against Santa Cruz Empacadora, S. de R.L. de
C.V., in the Civil Court for the First Judicial District of the State of Nuevo
Leon, Mexico. In this proceeding, ABSA is seeking to enforce an Agreement dated
December 31, 1999 in which Santa Cruz Empacadora expressly acknowledged its debt
to ABSA and granted a security interest in land and equipment to ABSA to secure
the debt. ABSA is seeking to recover $10.1 million in principal and interest and
to compel Santa Cruz to comply with the terms of the Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock currently is quoted on the American Stock
Exchange under the symbol "BVA."
Public trading of the Company's Common Stock commenced on September 27,
1996, the date after the Company acquired DNAP and from that date through
November 3, 1999 was listed on the Nasdaq National Market. Prior to that date,
there was no public market for the Common Stock. On November 4, 1999 Bionova
Holding Corporation's common stock began trading on the American Stock Exchange.
The following table sets forth the high and low trading prices per share
for the Common Stock as reported on the American Stock Exchange or the Nasdaq
National Market for the periods indicated.
HIGH LOW
---- ---
2000
First Quarter $ 4 3/8 $ 1 3/16
Second Quarter 3 5/8 3/4
Third Quarter 3 5/16 1 3/8
Fourth Quarter 2 5/8 3/4
1999
First Quarter $ 4 $ 3
Second Quarter 3 13/16 2 1/2
Third Quarter 3 1/2 1 15/16
Fourth Quarter 3 1
================================================================================
On March 22, 2001 the last reported sale price of the Common Stock on the
American Stock Exchange was $1.30 per share. As of March 22, 2001 there were
1,527 shareholders of record of the Common Stock.
On December 29, 2000 Bionova Holding issued 200 shares of convertible
preferred stock to Bionova International for $63.7 million, which was paid
through the application of outstanding advances previously made by Savia to
Bionova Holding. The 200 shares of preferred stock are convertible into
23,156,116 shares of Bionova Holding common stock (a conversion ratio based on
$2.75 per share of common stock). This transaction did not involve a public
offering, and therefore the issuance of these shares was not registered under
the Securities Act of 1933 pursuant to the exemption provided by Section 4(2) of
that act.
The Company has never paid cash dividends. Management intends to retain any
future earnings for payment of outstanding indebtedness and for the operation
and expansion of the Company's business and does not anticipate paying any cash
dividends in the foreseeable future.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for each of the
years in the five year period ended December 31, 2000, are derived from the
consolidated financial statements of Bionova Holding. The consolidated
balance sheets as of December 31, 2000 and 1999, and the consolidated
statement of operations for the three years in the period ended December 31,
2000, are included elsewhere in this Form 10-K, and the selected consolidated
financial information set forth below should be read in conjunction with such
financial statements and related notes.
Income and expense items in the following statement of operations data
reflect only those from continuing operations for the years ended December 31,
2000, 1999, 1998, 1997, and 1996.
(Thousands of U.S. dollars, except share and per share data)
Year ended December 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Total revenues ................................... $ 3,467 $ 5,532 $ 8,049 $ 4,704 $ 1,106
Gross profit ..................................... 3,467 5,532 7,740 4,525 1,106
Selling and administrative expenses .............. (6,483) (5,611) (4,851) (5,484) (984)
Write-off of purchased research and
development .................................... -- -- -- (2,815) (12,900)
Research and development expenses ................ (6,200) (6,442) (5,846) (5,072) (1,244)
Amortization of goodwill, patents and
trademarks ..................................... (2,008) (1,925) (1,704) (1,508) (396)
Operating loss ................................... (11,224) (8,446) (4,661) (10,354) (14,418)
Interest expense, net ............................ (14,095) (11,550) (1,479) (214) 344
Exchange (loss) gain, net ........................ -- -- 286 140 (3)
Other non-operating income ...................... -- -- -- 17 --
Loss from continuing operations before
discontinued operations and
extraordinary items .......................... (25,319) (19,996) (5,854) (10,411) (14,077)
Loss from operations of fresh produce business ... (14,879) (18,653) (9,751) (9,901) (2,957)
Extraordinary loss on retirement of floating
rate notes ..................................... (1,917) -- -- -- --
Net loss ......................................... (42,115) (38,649) (15,605) (20,312) (17,034)
Net loss per common share - basic and
diluted ....................................... $ (1.79) $ (1.64) $ (0.80) $ (1.11) $ (1.19)
Weighted average number of common shares
outstanding .................................... 23,588,031 23,588,031 19,603,320 18,370,640 14,286,318
15
Balances for the Balance Sheet Data for the year ended December 31, 2000 in
the table below reflect balances for the continuing operations only. Balances as
of December 31, 1999, 1998, 1997, and 1996 are consistent with the continuing
operations ongoing at that time (i.e., inclusive of the produce business).
December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 233 $ 4,510 $ 15,405 $ 6,600 $ 10,735
Accounts receivable and advances to
grower, net .................................... 1,683 33,650 40,406 38,088 36,322
Net assets of discontinued operations ............. 60,552 -- -- -- --
Inventories, net .................................. 352 17,218 16,478 17,779 20,139
Total current assets .............................. 63,035 57,149 74,052 63,085 68,354
Total assets ...................................... 86,941 161,953 167,686 147,249 141,137
Bank loans and current portion of
long-term debt .................................. -- 25,903 81,309 53,805 41,214
Advances towards sale of discontinued
operations ...................................... 60,552 -- -- -- --
Total current liabilities ......................... 64,417 56,728 120,095 109,384 80,939
Long-term debt .................................... -- 100,252 4,225 7,215 2,423
Stockholders' equity .............................. 22,524 3,384 42,117 28,356 48,690
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the selected
financial information of Bionova Holding and the financial statements and
related notes of Bionova Holding included elsewhere in this Form 10-K.
OVERVIEW
For operating and financial reporting purposes, the Company historically
has classified its business into three fundamental areas: (1) FARMING, which
consists principally of interests in 100% Company-owned fresh produce production
facilities and joint ventures or contract growing arrangements with other
growers; (2) DISTRIBUTION, consisting principally of interests in sales and
distribution companies in Mexico, the United States, and Canada; and (3)
RESEARCH AND DEVELOPMENT (OR TECHNOLOGY), consisting of business units focused
on the development of fruits and vegetables and intellectual properties
associated with these development efforts. IF THE SALE OF THE FRESH PRODUCE
BUSINESS IS APPROVED, THE COMPANY WILL SELL THE SUBSIDIARIES ENGAGED IN THE
FARMING AND DISTRIBUTION BUSINESSES AND WILL RETAIN ONLY THE RESEARCH AND
DEVELOPMENT BUSINESS. Therefore, the Farming and Distribution segments have been
reclassified as discontinued operations. The Company's sole business segment now
consists of its Research and Development business.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues of RESEARCH AND DEVELOPMENT declined from $5.5 million in 1999 to
$3.5 million in 2000. The revenue decline was attributable to the termination of
(i) certain research contracts and (ii) extra revenue payments received from
Savia in 1999 to cover prior-year obligations under Savia's long-term funded
research agreement with DNA Plant Technology.
Selling and administrative expenses increased by $0.9 million from 1999 to
2000 due to higher legal expenses associated with shareholder litigation and
expenses incurred to begin the business and financial restructuring of the
Company.
16
Research and development expenses decreased by $0.2 million from 1999 to
2000 due to a reduction in supervisory personnel.
Interest expense increased from $12.4 million in 1999 to $14.3 million in
2000. This $1.9 million increase was due to a higher overall level of debt
outstanding and the higher interest rates in the first quarter of 2000
associated with the Senior Guaranteed Floating Rate Notes issued on March 22,
1999 as compared with the first quarter of 1999.
Interest income declined from $0.8 million in 1999 to $0.2 million in 2000.
This decline was due to lower average balances maintained in the interest
reserve account associated with the Floating Rate Notes after these Notes were
retired in April 2000.
The decline in the losses associated with the discontinued operations of
the fresh produce business from $18.7 million in 1999 to $14.9 million in
2000 was due to the termination of joint ventures in the farming business and
production contracts awarded by Bionova Produce, Inc. which caused large
write offs in 1999.
An extraordinary loss of $1.9 million was recorded in the second quarter of
2000 to recognize the write-off of the remaining balance of up front fees paid
for the Floating Rate Note facility that was retired on April 13, 2000.
For the year 2001, the Company expects revenues will decline from the 2000
level due to the termination of research contracts with unaffiliated parties and
a renegotiation of the Seminis research contract, which is expected to be at a
lower level of activity. Research and development and direct administrative
expenses associated with these projects will be reduced accordingly. The overall
impact on operating results of this reduced level of funded project work will be
unfavorable, as the reduction in expenses will not be sufficient to offset the
fixed overhead that has been allocated to these projects, such as the rental and
maintenance expenses on the facilities and general administrative overheads.
Management has been, and is continuing to adjust its research and development
and administrative resources and expense base to refocus resources on the new
Trait Genomics Platform. The Company will not bear any interest expense in 2001
due to the Cash Support Agreement between Bionova Holding and Savia, under which
all funding provided by Savia in 2001will be capitalized.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues declined from $8.0 million for the year ended December 31, 1998 to
$5.5 million for the year ended December 31, 1999. The decline in revenues was
due to lower third party licensing and contract revenues, offset in part by
additional contract revenues stemming from the long-term funded research
agreement with Savia signed at the time of the Merger in 1996. Savia was
obligated to fund DNAP at least $9 million over the three year period that ended
on September 30, 1999, and Savia paid an incremental $0.9 million in 1999 to
meet this obligation.
Administrative expenses increased from $5.8 million in 1998 to $6.4
million in 1999 due to higher legal costs incurred in connection with the
Company's defense against shareholder suits and other general corporate
expenses.
The non-cash charge for amortization of goodwill, patents and trademarks
increased by $0.2 million in 1999 as compared with 1998 due to the recognition
of a complete year of patents and trademarks amortization related to VPP's
acquisition of Monsanto Company's strawberry assets.
17
Interest expense associated with the continuing operations of the business
as reflected in this year's financial statements shows a $10.7 million increase
from $1.7 million in 1998 to $12.4 million in 1999. The primary reason for the
magnitude of this change emanated from the issuance of the Company's Senior
Guaranteed Floating Rate Notes issued on March 22, 1999. Prior to this time the
majority of the Company's consolidated debt was held in the fresh produce
subsidiary companies. This debt was consolidated at the Bionova Holding
corporate level when the Floating Rate Notes were issued. In 1998, interest
expense for the fresh produce companies was $6.3 million. Therefore, the "real"
change in interest expense between 1998 and 1999 was $4.4 million. This "real"
higher level of interest expense in 1999 was due to a higher overall level of
debt outstanding and the higher interest rates associated with the Floating Rate
Notes as compared with the rates the Company experienced in 1998.
Interest income increased from $0.2 million in 1998 to $0.8 million in
1999. This increase was due to higher balances resulting from the interest
reserve account established in conjunction with the Floating Rate Notes after
these notes were issued in March 1999.
The increase in the losses associated with the discontinued operations of
the fresh produce business from 1998 to 1999 was due to the termination of joint
ventures in the farming business and production contracts awarded by Bionova
Produce, Inc. which caused large write offs in 1999.
EXPECTED EFFECT OF DISCONTINUED OPERATIONS IN 2001
As Savia has agreed to assume all obligations of the fresh produce business
upon the sale, the Company does not believe there are any material risks of
these discontinued operations on the liquidity or the financial condition of
the Company.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected items from our statements of
operations for each of the four quarters ended December 31, 2000 and each of the
four quarters ended December 31, 1999. This data has been derived from unaudited
financial statements that, in the opinion of our management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information when read in conjunction with our audited
financial statements and notes thereto appearing elsewhere in this Form 10-K.
The operating results for any quarter are not necessarily indicative of results
for any future period.
THOUSANDS OF U.S. DOLLARS
(EXCEPT PER SHARE AMOUNTS)
Dec. 31, Sept. 30, June 30, Mar. 31 Dec. 31, Sept. 30, June 30, Mar. 31
2000 2000 2000 2000 1999 1999 1999 1999
-----------------------------------------------------------------------------------------------
Sales 713 634 626 1,494 449 2,188 1,051 1,844
Gross profit 713 634 626 1,494 449 2,188 1,051 1,844
Net loss (8,258) (9,827) (14,350) (9,680) (14,235) (11,197) (8,296) (4,921)
Net loss
per share (0.35) (0.42) (0.61) (0.41) (0.60) (0.48) (0.35) (0.21)
18
CAPITAL EXPENDITURES
During 2000, the Company made capital investments of $0.5 million. Nearly
two-thirds of these expenditures were directed towards the Trait Genomics
Platform to purchase gene chip, sequencing, and information processing
technology.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2000, the Company used $22.1 million of
cash in operating activities. The net loss for the Company of $42.1 million
was offset in part by (i) add backs of non-cash items of which the two most
significant were $4.2 million of amortization and $9.9 million associated
with the interest on the advances from Savia and Bionova International, Inc.
that were subsequently reversed with the capitalization on December 29, 2000
and (ii) $5.7 million attributable to the decline in the net assets of the
fresh produce business in 2000.
Other than a $3 million payment made to Monsanto Company in the third
quarter of 2000 for certain intellectual property rights associated with
strawberry assets acquired by VPP in December 1998, cash flows from investing
activities and financing activities were attributable to (i) the retirement of
the Company's Floating Rate Notes in April 2000, (ii) the capitalization that
was completed on December 29, 2000, and (iii) the agreement by Bionova Holding
to sell its fresh produce business to Savia. The first of these events
transpired on April 13, 2000 when the Company retired all of the $100 million of
Senior Guaranteed Floating Rate Notes then outstanding. Financing for the early
retirement of these notes was provided by Savia. Savia agreed to provide this
$100 million of financing on terms no less favorable than the terms of the
Floating Rate Notes. Savia also agreed that Bionova Holding could defer all
interest payments until the final maturity date of March 23, 2002, and that
Bionova Holding would not be required to maintain any funds in an interest
reserve account. The elimination of the interest reserve account freed up $9.5
million in restricted cash.
On December 28, 2000 Bionova Holding entered into a Purchase Agreement with
Savia. Bionova International, Inc., which is both a wholly owned subsidiary of
Savia and the direct parent of Bionova Holding, also is a party to this
agreement. The Purchase Agreement provides that Bionova Holding will sell its
fresh produce farming and distribution business (including all of the debt and
liabilities of the fresh produce business) to Savia for $48 million. In
acquiring the fresh produce business Savia will purchase 100% of the shares held
by Bionova Holding in ABSA and IPHC. The purchase price for the fresh produce
business will be paid by the application of $48 million of advances previously
made by Savia to Bionova Holding. This transaction is expected to close during
the summer of 2001.
A second transaction stemming from the Purchase Agreement, which was
completed on December 29, 2000, was the issuance of 200 shares of Bionova
Holding convertible preferred stock to Bionova International for $63.7 million,
which was paid through the application of all of the remaining outstanding
advances previously made by Savia to Bionova Holding (other than the $48 million
which will be applied to the sale of the fresh produce business). The 200 shares
of preferred stock are convertible into 23,156,116 shares of common stock (a
conversion ratio based on $2.75 per share) at any time after adoption and filing
by the Company of a charter amendment increasing the authorized number of shares
of Common Stock to at least 70,000,000.
These transactions were and are being undertaken by Bionova Holding so
the Company could (i) concentrate on its technology business and (ii)
disengage itself from the fresh produce business, which has experienced large
losses over the past several years and whose future earnings or losses are
expected to continue to be exposed to sharp volatility due to the commodity
nature of this business. Also, by completing these transactions the Company
will eliminate $111.7 million of advances due to Savia in 2002 along with the
debt obligations of the fresh produce business. Also, by completing these
transactions the Company will eliminate $111.7 million of advances due to
Savia in March 2002, an obligation the Company believed it probably would not
be able to meet. In addition, the Company will be freed of all debt
obligations associated with the fresh produce business. When the sale of the
fresh produce business is completed, and in conjunction with the Cash Support
Agreement described below, the Company will have no outstanding related party
advances or third party debt.
For accounting purposes, the sale of the fresh produce business and the
sale of the Series A convertible preferred stock were accounted for as
transactions between entities under common control. No gain or loss is
recognized on the transactions as any differences between cash received and
assets transferred to the parent are treated as capital contributions or
distributions. Accordingly, the Company accounted for the $111.7 million
in cash received (in the form of advances retired) from Savia and its
subsidiary, Bionova International, Inc. as follows:
1. The sale of the fresh produce business was accounted for at
historical cost, and $60.6 million of the proceeds have been
included as advances towards the sale of discontinued operations
on the balance sheet.
2. The sale of Series A convertible preferred stock was recorded at
$34.7 million, which represents the market value of the common
stock on December 29, 2000, the date of the transaction, into which
the Series A convertible preferred shares may be converted.
3. The remaining $16.4 million was accounted for as an additional
capital contribution.
In addition, the Company accrued interest expense totaling $9.9 million
related to the advances from Savia and its subsidiary, Bionova International,
Inc., from April 13 through December 29, 2000. As a result of these
transactions, the interest is not payable and the reversal of accrued
interest was accounted for as an additional capital contribution.
Concurrent with the sale of the fresh produce business, the Company
reviewed the remaining goodwill, patents and trademarks for possible
impairment. The Company reviewed cash flow projections related to the
intangible assets. Based on the Company's analysis, the Company believes that
such goodwill, patents and trademarks are fully recoverable provided the
Company remains a going concern.
Bionova Holding and Savia also entered into a Cash Support Agreement for
2001. This agreement provides that, during 2001, Savia will advance funds to
Bionova Holding as requested to finance Bionova Holding's technology business.
These advances will be applied (i.e., exchanged for) to the purchase by Savia of
additional common shares when the sale of the fresh produce business is closed,
and thereafter, through December 31, 2001. The purchase price to be paid by
Savia for the additional shares under this Cash Support Agreement will be $2.50
per share prior to the expiration of the rights offering, and then will be the
higher of $2.50 per share or the average
19
market price of Bionova Holding common stock. Bionova Holding currently has
budgeted cash requirements for the calendar year 2001 in a range of $7 to $8
million. The Cash Support Agreement also acknowledges that if additional funds
are required by Bionova Holding's fresh produce business prior to completion of
the sale, Savia will be responsible for providing or arranging the financing.
As a result of the Company's operating losses during the past three years
and management's anticipation that the Company will incur a net loss and an
operating cash flow deficiency for the year ending December 31, 2001, there is
substantial doubt about the Company's ability to continue as a going concern.
Management has been and is continuing to address the Company's financial
condition by selling assets, exiting the fresh produce business, and by entering
into the Cash Support Agreement with Savia. There can be no assurance that these
actions will result in sufficient working capital to significantly improve the
Company's current financial position or its results of operations. The Company
also is dependent on Savia to meet its commitments under the Cash Support
Agreement, which is in doubt due to recent declines in Savia's financial
position and the significant debt obligations it must service. While the Company
is actively seeking to develop alternative sources of funding, there can be no
assurance the Company will be able to meet its obligations in 2001 nor secure
funds beyond the 2001 calendar year. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K includes "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. All statements, including without limitation
statements contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" other than statements of historical facts
included in this Form 10-K, including statements regarding our financial
position, business strategy, prospects, plans and objectives of our management
for future operations, and industry conditions, are forward-looking statements.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we can give you no assurance that these expectations
will prove to be correct. In addition to important factors described elsewhere
in this report, the following "Risk Factors," sometimes have affected, and in
the future could affect, our actual results and could cause these results during
2001 and beyond, to differ materially from those expressed in any
forward-looking statements made by us or on our behalf. When we use the terms
"Bionova," "we," "us," and "our," these terms refer to the Company and its
subsidiaries.
IF WE DO NOT COMPLETE THE SALE OF THE FRESH PRODUCE BUSINESS, WE MAY NOT BE ABLE
TO FIND THE FINANCING TO OPERATE OUR BUSINESS OR TO MEET OUR FINANCIAL
OBLIGATIONS IN 2001 AND 2002
If this transaction is not completed, the Company probably will not have
enough money to pay the $48 million it will owe to Savia on March 23, 2002 (this
obligation would be satisfied as part of the sale of the fresh produce
business). The Company may also have difficulty meeting debt obligations to
banks or other sources of financing it establishes.
While Bionova International, Inc. ("BII") has agreed to vote its shares
in favor of the transaction to sell the Company's fresh produce business to
Savia, any disruptions which would cause BII to withhold its vote or vote no
to this transaction or any failure to achieve other approvals, such as those
required of certain regulatory authorities in the United States and Mexico,
could result in a failure to complete this transaction. If the transaction is
not completed, then the Company's debt and/or other financial obligations
will continue to increase due to the funding that Savia is required to
provide during 2001 for operations and accruing interest expense on these
advances. It is highly unlikely the Company will be able to generate the
necessary funds to pay these advances debt when they become due in 2002.
The Company is likely to be constrained in efforts it is pursuing to
develop partnerships or other types of collaboration arrangements in its
technology business and in raising new capital required to carry on the
technology business after 2001 with the high level of debt it will be carrying.
EVEN IF WE DO COMPLETE THE SALE OF THE FRESH PRODUCE BUSINESS, WE MAY NOT BE
ABLE TO OBTAIN THE FINANCING NECESSARY TO IMPLEMENT OUR BUSINESS PLAN
20
The Company has sustained losses in 1998, 1999 and 2000. While most of
these losses arose in the fresh produce business, the Company's technology
business also lost money in each of those years. Moreover, we do not expect the
technology business to become profitable for at least three years, and it may
never become profitable. Therefore, the Company will need additional financing
to achieve its growth and technology objectives and to fund working capital
requirements, capital expenditures and the purchase and development of new
technologies.
For 2001, Savia has agreed to provide financing to the Company in exchange
for stock, but Savia may not have the resources to fulfill this commitment. For
2002 and later, the Company will need to find additional debt or equity
financing, which may not be available. Furthermore, additional financing may
dilute or otherwise adversely affect the rights of existing stockholders, cause
the Company to relinquish rights to its technologies or cause it to grant
licenses on unfavorable terms.
WE MAY NOT BE ABLE TO FORM THE STRATEGIC ALLIANCES NECESSARY TO IMPLEMENT OUR
BUSINESS PLAN
Development and commercialization of the Company's technologies depends on
customer relationships and strategic alliances with other companies. If the
Company cannot find customers or strategic partners in the future, or if the
Company cannot maintain existing strategic alliances, the Company may not be
able to develop its technologies or products. If the Company does not develop
commercially successful products, its business may be significantly harmed.
Since the Company's technologies have many potential applications and it has
limited resources, our focus on any particular area may result in a failure to
capitalize on more profitable areas.
WE MAY NOT BE ABLE TO ACQUIRE OR MAINTAIN THE INTELLECTUAL PROPERTY RIGHTS
NECESSARY TO IMPLEMENT OUR BUSINESS PLAN
For our business plan to succeed, we will need to develop new technology
and to acquire rights to technology owned by third parties. We may not be able
to negotiate agreements to use all of the technology we will need, leaving us
unable to grow the company in accordance with our projections.
The Company may not be successful in obtaining patents on new technology,
protecting its trade secrets and conducting its business without infringing on
the rights of others, which could adversely affect its business.
The Company's success depends, in part, on its ability to obtain and
enforce patents, maintain trade secret protection, and conduct its business
without infringing the proprietary rights of others. If others develop competing
technologies and market competing products, the Company's sales could be
adversely affected. If the Company is not able to maintain its trade secrets or
to enforce its patents, the Company's competitive position could be adversely
affected. In addition, the Company licenses technology from third parties. If
the Company cannot maintain these licenses, or if it cannot obtain licenses to
other useful technology on commercially reasonable terms, its research efforts
could be adversely affected.
Any inability to adequately protect the Company's proprietary technologies
could harm its competitive position. Furthermore, litigation or other
proceedings or third party claims of intellectual property infringement could
require the Company to spend time and money and could shut down some of its
operations. Because the Company may not be able to obtain appropriate patents or
licenses, it may not be able to successfully operate its business. The Company
intends to conduct proprietary research programs, and any conflicts with its
strategic partners could harm its business.
WE MAY NOT BE ABLE TO KEEP UP WITH ADVANCES IN TECHNOLOGY
Rapid technological development by the Company or others may result in
products or technologies becoming obsolete before it recovers the expenses it
incurs in connection with their development.
Genomic technologies have undergone and are expected to continue to undergo
rapid and significant change. The Company's future success will depend in large
part on maintaining a competitive position in the integration of functional
genomics with plant transformation and evaluation. Rapid technological
development by the Company or others may result in products or technologies
becoming obsolete before it recovers the expenses incurred in connection with
their development. Products offered by the Company, its customers or its
strategic partners could be made obsolete by less expensive or more effective
crop enhancement and nutrition enhancement
21
technologies, including technologies that may be unrelated to genomics. The
Company may not be able to make the enhancements to its technology necessary to
compete successfully with newly emerging technologies.
WE MAY LOSE THE SCIENTISTS AND MANAGEMENT PERSONNEL NECESSARY TO IMPLEMENT OUR
BUSINESS PLAN
The Company depends on the services of a number of key personnel, and a
loss of any of these personnel could disrupt operations and result in reduced
revenues.
The realization of the Company's new business strategy depends on, among
other things, its ability to adapt management information systems and controls
and to hire, train and retain qualified employees to allow operations to be
effectively managed.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY
The Company faces significant competition in its chosen fields: novel crop
production traits and specialized technology services. The Company may not be
able to compete effectively, which could cause its business to suffer.
Both traditional and specialized agricultural chemical firms offer
competing technology (e.g., traditional chemicals and biopesticides) that can be
deployed against fungal disease and nematodes pests. Several agricultural
chemical firms offer novel crop protection traits through biotechnology as well.
Several specialized biotechnology research firms offer pesticide target
discovery of target pathogens, pests or weed species. These biotechnology
research firms may also compete with us in providing specialized technology
services.
There are also many companies engaged in research and product development
activities based on agricultural biotechnology. Competitors include specialized
biotechnology firms, as well as major pharmaceutical, food and chemical
companies that have biotechnology divisions, many of which have considerably
greater financial, technical, and marketing resources than the Company.
Competition may intensify as technological developments occur at a rapid rate in
the agricultural biotechnology industry.
WE MAY NOT COMPLETE THE DEVELOPMENT OF, OR BE ABLE TO SUCCESSFULLY
COMMMERCIALIZE NEW TECHNOLOGY PRODUCTS AND SERVICES
If the products the Company develops and markets are not commercial
successes, it will not recoup its development and production costs, which will
hurt its financial condition.
The Company is currently in the early stages of research and development,
and there can be no assurance that any of its projects will be successful or
will produce significant revenues or profits. The success of these and future
products depends on many variables, including technical risks associated with
using genetic engineering for crop protection and nutrition, business risks
associated with selecting commercial targets and capturing value from customers.
The Company may be sued for product liability, which, if a suit were
successful, could cause it to face substantial liabilities that exceed its
resources.
The Company may be held liable if any product it develops, or any product
that is made using its technologies, causes injury or is found unsuitable during
product testing, manufacturing, marketing or sale. These risks are inherent in
the development of agricultural and food products. The Company currently does
not have product liability insurance. If it chooses to obtain product liability
insurance, but cannot obtain sufficient insurance coverage at an acceptable cost
or otherwise protect against potential product liability claims, the
commercialization of products that the Company's customers, strategic partners,
or that it develops may be prevented. If the Company is sued for any injury
caused by its products, its liability could exceed its total assets.
WE MAY NOT GAIN PUBLIC ACCEPTANCE FOR OUR GENETICALLY-ENGINEERED
PRODUCTS
If the public is unwilling to accept genetically engineered products, the
Company will not recoup its development and production costs, which will hurt
its financial condition. Social and environmental concerns may limit the
acceptance of genetically engineered products.
22
Most of the Company's products are being developed through the use of
genetic engineering. The commercial success of these products will depend in
part on public acceptance of the cultivation and consumption of genetically
engineered products. The Company cannot assure you that these products will gain
sufficient public acceptance to be profitable, even if these products obtain the
required regulatory approvals.
Public debate surrounding food and fiber crops enhanced through
biotechnology has recently intensified in the United States and internationally.
Technology critics have urged U.S. regulatory agencies to tighten their
regulation of biotechnology crops, including withdrawal of certain product
registrations, implementation of product labeling, and stricter pre-market
approval procedures. Internationally, agricultural biotechnology issues are
being debated within the World Trade Organization, the United Nations Convention
on Biological Diversity, the Codex Alimentarius, and on several regional fronts.
The Company believes that progress has been made to ensure that science-based
rules form the basis for international trade of agricultural biotechnology
products. However, the extent of government regulation that might arise from
future legislative or administrative actions and the potential consequences to
the business is not known and cannot be predicted with certainty.
GOVERNMENT REGULATION
Government regulation can cause delays and increased costs, which may
decrease the Company's revenues and profitability. Stringent laws may limit the
market for genetically engineered agricultural products that it may develop.
Business opportunities and products developed using technology developed by the
Company may be subject to a lengthy and uncertain government regulatory process
that may not result in the necessary approvals, may delay the commercialization
of its customers' products or may be costly, which could harm its business.
The Company's activities in the United States are extensively regulated by
the Food and Drug Administration, the United States Department of Agriculture,
the Environmental Protection Agency, and other federal and state regulatory
agencies in the United States. Also, the Company's genetically engineered
products may require regulatory approval or notification in the United States or
in other countries in which they are tested, used or sold. The regulatory
process may delay research, development, production, or marketing and require
more costly and time-consuming procedures, and there can be no assurance that
requisite regulatory approvals or registration of the Company's current or
future genetically engineered products will be granted on a timely basis.
SAVIA AND BIONOVA INTERNATIONAL, INC. HAVE SUBSTANTIAL CONTROL OVER THE COMPANY
AND CAN AFFECT VIRTUALLY ALL DECISIONS MADE BY ITS STOCKHOLDERS AND DIRECTORS
BII beneficially owns 18,076,839 shares of our common stock accounting for
76.6% of all issued and outstanding shares. As a result, BII has the requisite
voting power to significantly affect virtually all decisions made by the Company
and its stockholders, including the power to elect all directors and to block
corporate actions such as an amendment to most provisions of the Company's
certificate of incorporation. This ownership and management structure will
inhibit the taking of any action by the Company that is not acceptable to BII.
WE MAY INCUR SIGNIFICANT LIABILITY AS A RESULT OF STOCKHOLDER LAWSUITS
The Company and its subsidiary, DNA Plant Technology Corporation, have been
sued in several lawsuits relating to the 1996 merger transaction (the "Merger")
in which DNAP became a subsidiary of the Company. In some of those lawsuits, the
former preferred stockholders of DNAP alleged they should have received much
more consideration for their shares in the Merger than they did. Though the
trial courts in these cases dismissed all of the claims, the appellate court
reversed the trial court in one case and a second case is still pending before a
different appellate court. If the Company is ultimately found to be liable in
these cases, the value of the potential judgment could be far more than the
Company could afford to pay.
AGRIBUSINESS RISKS
Extreme weather conditions, disease and pests can materially and adversely
affect the quality and quantity of strawberry starter plants of the Company's
products. There can be no assurance that these factors will not affect a portion
of the Company's revenues in any year and have a material adverse effect on its
business. Defective starter
23
plants could result in warranty claims and negative publicity, and the insurance
covering warranty claims may become unavailable or be inadequate, which could
have a material adverse effect on the Company's business.
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements disclosed in this section and otherwise in
this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The table below provides information about the Company's derivative
financial instruments consisting primarily of debt obligations that are
sensitive to changes in interest rates. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contracts. Weighted average
variable rates are based on implied forward rates in the yield curve on December
31, 2000. The information is presented in U.S. dollar equivalents, which is the
Company's reporting currency. The instrument's actual cash flows are denominated
in both U.S. dollars and Mexican pesos, and are indicated accordingly in the
tables below.
- --------------------------------------------------------------------------------
EXPECTED MATURITY DATE
- --------------------------------------------------------------------------------
Fair
2001 2002 Total Value
- --------------------------------------------------------------------------------
Short-term debt:
($US equivalent
in millions)
- --------------------------------------------------------------------------------
U.S. dollar variable rate............ $ 19.6 $ 19.6 $ 19.6
- --------------------------------------------------------------------------------
Average interest rate.............. 9%
- --------------------------------------------------------------------------------
Peso variable rate (in $US).......... 1.6 1.6 1.6
- --------------------------------------------------------------------------------
Average interest rate.............. 26%
- --------------------------------------------------------------------------------
Long-term debt:
- --------------------------------------------------------------------------------
U.S. dollar fixed rate............... $ 0.6 $ 0.6 $ 0.6
- --------------------------------------------------------------------------------
Average interest rate.............. 10%
- --------------------------------------------------------------------------------
U.S. dollar variable rate............ $ 0.2 $ 0.1 $ 0.3 $ 0.3
- --------------------------------------------------------------------------------
Average interest rate.............. 12% 12%
- --------------------------------------------------------------------------------
The Company tries to use the most cost-effective means to fund its
operating and capital needs. Fixed or variable debt will be borrowed in both
U.S. dollars and Mexican pesos. The Company borrows Mexican pesos to provide for
its working capital needs in its Mexican operations. To minimize exchange risk
associated with the importation of products, the Company will enter into forward
exchange contracts where the functional currency to be used in the transaction
is dollars. At December 31, 2000, approximately 75% of the Company's long-term
debt is fixed rate debt and 25% is variable rate debt. All of the fixed rate
long-term debt is denominated in U.S. dollars. All of the long-term variable
rate debt is denominated in U.S. dollars.
EXCHANGE RATE RISK
The table below provides information about the Company's financial
instruments by functional currency that are subject to exchange risk. This
information is presented in U.S. dollar equivalents. The table summarizes
information on instruments that are sensitive to foreign currency exchange
rates, including peso-denominated debt obligations. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates.
24
- --------------------------------------------------------------------------------
Fair
2001 Total Value
- --------------------------------------------------------------------------------
On-Balance sheet
Financial Investments
($US equivalent in millions)
- --------------------------------------------------------------------------------
Peso short-term debt:
- --------------------------------------------------------------------------------
Variable rate (in $US).................. $ 1.6 $ 1.6 $ 1.6
- --------------------------------------------------------------------------------
Average interest rate.................... 26%
- --------------------------------------------------------------------------------
Expected maturity or
Transaction date........................ Dec. 31
- --------------------------------------------------------------------------------
The Company had no firmly committed forward sales contracts in Mexican
pesos as of December 31, 2000.
The Company is exposed to U.S. dollar-to-Mexican peso currency exchange
risk due to revenues and costs denominated in Mexican pesos associated with its
Mexican subsidiaries, ABSA and Interfruver. The Company expects it will continue
to be exposed to currency exchange risks in the near future.
COMMODITY PRICE RISK
The table below provides information about the Company's fresh produce growing
crops inventory and fixed price contracts that are sensitive to changes in
commodity prices. For inventory, the table presents the carrying amount and fair
value at December 31, 2000. For the fixed price contracts, the table presents
the notional amounts in Boxes, the weighted average contract prices, and the
total dollar contract amount by expected maturity dates, the latest of which
occurs within one year from the reporting date. Contract amounts are used to
calculate the contractual payments and quantity of fresh produce to be exchanged
under futures contracts.
- --------------------------------------------------------------------------------
AT DECEMBER 31, 2000
- --------------------------------------------------------------------------------
Carrying Fair
Amount Value
- --------------------------------------------------------------------------------
On-balance sheet commodity position:
Fresh produce crops in process inventory ($US in millions).... $6.3 $6.3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fixed price contracts:
Contract volumes (2,169,628 boxes)
Weighted average unit price (per 2,169,628 boxes)............. $8.53 $8.53
Contract amount ($US in millions)............................. $18.5 $18.5
- --------------------------------------------------------------------------------
In order to manage the exposure to commodity price sensitivity associated
with fresh produce products, the Company enters into fixed price contracts with
certain customers which guarantee specified volumes for the growing season or
the year at a fixed price. The Company believes that its efforts to assure a
high level of product quality along with efforts to develop and market
differentiated, added value products also reduce to some extent its exposure to
commodity price sensitivity.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants, and the consolidated financial
statements of the Company and the notes thereto appear on the following pages.
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Bionova Holding Corporation:
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 58 present fairly, in all
material respects, the financial position of Bionova Holding Corporation and
its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item
14(a)(2) on page 58 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has incurred
significant losses from operations and operating cash flow deficiencies for
each of the three years in the period ended December 31, 2000. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 9, 2001
27
BIONOVA HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
THOUSANDS OF U.S. DOLLARS
(EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31,
--------------------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 233 $ 4,510
Accounts receivable, net ............................................................ 1,683 30,499
Advances to growers, net ............................................................ -- 3,151
Net assets of discontinued operations (see note 3) .................................. 60,552 --
Inventories, net .................................................................... 352 17,218
Other current assets ................................................................ 215 1,771
--------- ---------
Total current assets ................................................................ 63,035 57,149
Property, plant and equipment, net .................................................... 932 38,379
Patents and trademarks, net ........................................................... 14,765 15,374
Goodwill, net ......................................................................... 8,144 28,210
Deferred income taxes ................................................................. -- 611
Other assets .......................................................................... 65 22,230
--------- ---------
Total assets .......................................................................... $ 86,941 $ 161,953
========= =========
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................................... $ 3,388 $ 20,899
Accounts due to related parties ..................................................... 477 8,413
Short-term bank loans ............................................................... -- 22,653
Current portion of long-term debt ................................................... -- 3,250
Advances towards sale of discontinued operations (see note 3) ....................... 60,552 --
Deferred income taxes ............................................................... -- 1,513
--------- ---------
Total current liabilities ........................................................... 64,417 56,728
Long-term debt with third parties ..................................................... -- 100,252
--------- ---------
Total liabilities .................................................................. 64,417 156,980
--------- ---------
Minority interest ..................................................................... -- 1,589
--------- ---------
Commitments and contingencies (see note 15)
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000 shares authorized, 200 and 0 shares
issued and outstanding at December 31, 2000 and 1999,
respectively, liquidation value of $10,000 per share ................................ -- --
Common stock, $0.01 par value, 50,000,000 shares authorized,
23,588,031 shares issued and outstanding ............................................ 236 236
Additional paid-in capital .......................................................... 168,897 107,918
Accumulated deficit ................................................................. (146,609) (104,494)
Accumulated other comprehensive loss ................................................