BIONOVA HOLDING CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002
	or
o	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 or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
9255 Customhouse Plaza, Suite I San Diego, California,		92154
(Address of principal executive offices)		(Zip Code)
(877) 393-7118 (Registrant's telephone number, including area code)
6701 San Pablo Avenue Oakland, California		94608
(Former address, if changed since last report)		(Zip Code)

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 ý No o

As of August 14, 2002, 23,480,408 shares of common stock, par value $0.01 per share, of Bionova Holding Corporation were outstanding.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

BIONOVA HOLDING CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEET
Thousands of U.S. Dollars
(except share and per share amounts)

			June 30, 2002			December 31, 2001
ASSETS
Current assets:
		Cash and cash equivalents	$	3,381		$	2,177
		Accounts receivable, net		18,954			19,978
		Advances to growers, net		6,339			8,999
		Net assets of discontinued operations (see Note 8)		3,322			3,325
		Inventories, net		9,886			12,785
		Assets held for sale (see Note 5)		4,245			4,245
		Other current assets		1,095			931

		Total current assets		47,222			52,440
Property, plant and equipment, net				32,527			32,995
Other assets				10,840			10,729

Total assets			$	90,589		$	96,164

LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS' DEFICIT
Current liabilities:
	Accounts payable and accrued expenses		$	20,610		$	18,528
	Accounts due to related parties			91,411			89,184
	Short-term bank loans			6,230			9,389
	Current portion of long-term bank debt			675			161

		Total current liabilities		118,926			117,262
Long-term bank debt				—			558

		Total liabilities		118,926			117,820

Minority interest				312			164

Contingencies (see Note 9)
Stockholders' deficit:
	Preferred stock, $0.01 par value, 5,000 shares authorized, 200 shares issued and outstanding at both June 30, 2002 and December 31, 2001, liquidation value of $10,000 per share			—			—
	Common stock, $0.01 par value, 50,000,000 shares authorized, 23,480,408 and 23,588,031 shares issued and outstanding on June 30, 2002 and December 31, 2001, respectively			235			236
	Additional paid-in capital			171,598			171,597
	Accumulated deficit			(200,324	)		(193,499	)
	Accumulated other comprehensive loss			(158	)		(154	)

		Total stockholders' deficit		(28,649	)		(21,820	)

Total liabilities, minority interest, and stockholders' deficit			$	90,589		$	96,164

The accompanying notes are an integral part of these unaudited consolidated financial statements.

BIONOVA HOLDING CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME AND LOSS
Thousands of U.S. Dollars
(except share and per share amounts)

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Total revenues		$	42,447		$	61,739		$	88,334		$	127,137

Cost of sales			42,961			58,374			82,035			114,625
Selling and administrative expenses			3,921			5,378			7,733			9,483
Amortization of goodwill, patents and trademarks			—			322			—			637

			46,882			64,074			89,768			124,745

Operating profit (loss)			(4,435	)		(2,335	)		(1,434	)		2,392

Interest expense			(2,427	)		(343	)		(4,693	)		(1,338	)
Interest income			299			432			621			925
Exchange gain (loss), net			208			55			341			(255	)
Other non-operating income (expense), net			(308	)		29			64			(275	)

			(2,228	)		173			(3,667	)		(943	)

Income (loss) from continuing operations before discontinued operations			(6,663	)		(2,162	)		(5,101	)		1,449
Discontinued operations (see Note 8):
Loss from operations of research and development business segment			(394	)		(3,542	)		(898	)		(5,525	)

Loss before income taxes			(7,057	)		(5,704	)		(5,999	)		(4,076	)
Income tax expense			488			656			681			1,083

Loss before minority interest			(7,545	)		(6,360	)		(6,680	)		(5,159	)
Minority interest in net (income) loss of subsidiaries, net			57			(202	)		145			243

Net loss			(7,602	)		(6,158	)		(6,825	)		(5,402	)
Other comprehensive expense net of tax:
	Foreign currency translation adjustment		(80	)		(32	)		(4	)		(157	)

Comprehensive loss		$	(7,682	)	$	(6,190	)	$	(6,829	)	$	(5,559	)

Basic and diluted loss per common share		$	(0.32	)	$	(0.26	)	$	(0.29	)	$	(0.23	)

Weighted average number of common shares outstanding			23,480,408			23,588,031			23,480,408			23,588,031

The accompanying notes are an integral part of these unaudited consolidated financial statements.

BIONOVA HOLDING CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of U.S. Dollars

		Six Months Ended June 30,
		2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(6,825	)	$	(5,402	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Minority interest		191			243
	Depreciation		1,431			1,539
	Amortization of goodwill, patents and trademarks		—			614
	Loss on divestiture of subsidiaries		—			1,331
	Other non-cash items		(4	)		(157	)
Net changes (exclusive of subsidiaries acquired or divested) in:
	Accounts receivable and advances to growers, net		3,641			(6,064	)
	Inventories		2,899			6,372
	Net assets of discontinued operations		3			3,460
	Other assets		(275	)		131
	Accounts payable and accrued expenses		2,082			(1,178	)

NET CASH PROVIDED BY OPERATING ACTIVITIES			3,143			889

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment			(963	)		(4,244	)
Proceeds from sale of property, plant and equipment			—			(30	)

NET CASH USED IN INVESTING ACTIVITIES			(963	)		(4,274	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowing			(3,159	)		(14,226	)
Net change in long-term borrowing			(44	)		22
Accounts due to related parties			2,227			17,155

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			(976	)		2,951

Net increase (decrease) in cash and cash equivalents			1,204			(434	)
Cash at beginning of period			2,177			3,466

Cash at end of period		$	3,381		$	3,032

The accompanying notes are an integral part of these unaudited consolidated financial statements.

BIONOVA HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002

Note 1—Basis of Presentation

For operating and financial reporting purposes, Bionova Holding Corporation (together with its subsidiaries, unless the context requires otherwise, "Bionova Holding" or 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 technology development of fruits and vegetables and intellectual properties associated with these development efforts.

As discussed in Note 8 to these unaudited consolidated financial statements, the Technology business has been shut-down and the Company expects to transfer certain assets to Bionova Holding in partial satisfaction of outstanding indebtedness. The Technology business has been presented as discontinued operations in the balance sheet and statements of operations for all periods presented.

In management's opinion, the accompanying unaudited consolidated financial statements for Bionova Holding for the three and six month periods ended June 30, 2002 and 2001 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q of Regulation S-X, and include all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of its financial position, results of operations, and cash flows for such periods. However, the accompanying unaudited consolidated financial statements do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto presented in its 2001 10-K for the fiscal year ended December 31, 2001. Footnotes which would substantially duplicate disclosures in the Company's audited consolidated financial statements for the fiscal year ended December 31, 2001 contained in the 2001 10-K report have been omitted. The interim consolidated financial information contained herein is not necessarily indicative of the results to be expected for any other interim period or the full fiscal year ending December 31, 2002.

Going Concern

The Company incurred a net loss of $56.6 million and an operating cash flow deficiency of $3.5 million for the year ended December 31, 2001. The Company also sustained significant operating losses and operating cash flow deficiencies from 1997 through 2001. At June 30, 2002 the Company had a negative working capital position of $71.7 million and has incurred a net loss of $7.6 million for the six-months ended June 30, 2002. Additionally, at July 31, 2002, the Company was in default of certain bank covenants. All outstanding borrowings under the bank debt agreement, amounting to $6.9 million, may be called by the bank at any time.

Management has been and is continuing to address the Company's financial condition by postponing the sale of its fresh produce business and selling non-core assets of the fresh produce business. The Company also decided during the first week of May 2002 to close down its research and development operations to eliminate the ongoing expense involved in this segment of the business (see Note 8). The Company still must find a solution to the $91.4 million of debt plus additional interest accruing from June 30, 2002 that is due to Savia and its subsidiaries during 2002 as well as cure the covenant violations on the existing bank debt. 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 nor can there be any assurance the Company will be able to meet its obligations

in 2002 nor secure or generate the funds to take it beyond the 2002 calendar year. This raises substantial doubt about the Company's ability to continue as a going concern.

The unaudited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 2—Bank Debt

There are three primary components to the bank debt, each of which is guaranteed by Savia. The first component of the bank debt is a term loan in an amount of $3.3 million which was due and paid in full on June 30, 2002. The second component of the debt is a five-year loan secured by real property, with principal and interest payable monthly through August 30, 2006. The third component of the bank debt is a $6 million revolving line of credit, of which the principal is due in full on September 30, 2002. As of July 31, 2002, the Company was in default of certain bank covenants. Management has been working with the bank to cure the defaults; however, the bank has the right at any time to demand that the Company pay the loans in full or to exercise other remedies under the loan agreements. All outstanding borrowings under the bank debt agreements have been reclassified as current on the June 30, 2002 balance sheet.

Note 3—Net Loss per Common Share

The weighted average number of common shares outstanding during the six month periods ended June 30, 2002 and 2001 was 23,480,408 and 23,588,031, respectively. On a diluted basis, assuming Savia were to convert the 200 shares of preferred stock it currently holds into common, the weighted average number of common shares outstanding at June 30, 2002 and 2001 would have been 46,636,524 and 46,744,147, respectively.

The following table sets forth the potential shares of common stock related to stock options that are not included in the diluted net income or loss per share attributable to common stockholders because to do so would be anti-dilutive for the periods indicated:

		June 30
		2002	2001
		(Thousands of Shares)
Potential Shares of Common Stock:
	Convertible preferred stock outstanding	23,156	23,156
	Stock options outstanding	216	326

Note 4—Inventories

Inventories were comprised of the following:

	June 30, 2002			December 31, 2001
	(Thousands of U.S. Dollars)
Finished produce	$	546		$	844
Growing crops		2,686			5,691
Advances to suppliers		1,124			727
Spare parts and materials		1,816			2,875
Merchandise in transit and other		3,904			2,836

		10,076			12,973
Allowance for slow moving inventory		(190	)		(188	)

	$	9,886		$	12,785

Note 5—Assets Held for Sale

Assets held for sale were comprised of the following:

	June 30, 2002		December 31, 2001
	(Thousands of U.S. Dollars)
Agricultural land in Sinaloa, Mexico	$	3,255	$	3,255
Agricultural land in Guerrero, Mexico		825		825
Land and greenhouse facilities in Brentwood, California		165		165

	$	4,245	$	4,245

In July 2002, the land and greenhouse facilities in Brentwood, California were sold for $0.4 million (net of commission). The Company will record a gain of $0.2 million in its third quarter financial statements.

Note 6—Goodwill and Intangible Assets

The Company conducted a comprehensive impairment review at the end of 2001. Based on the review significant impairment charges were recorded in the fourth quarter of 2001, which reduced the Company's goodwill to zero and the net value of its patents and trademarks to $3.0 million at December 31, 2001. The patents and trademarks are included in net assets of discontinued operations.

Annual amortization expense on the Company's patents and trademarks is expected to be approximately $0.5 million in 2002. Pro forma net loss and pro forma net loss per share, excluding goodwill amortization, were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
	(Thousands of U.S. Dollars)
Net loss, as reported	$	(7,602	)	$	(6,158	)	$	(6,825	)	$	(5,402	)
Add back: goodwill amortization		—			2,441			—			2,868

Pro forma net loss	$	(7,602	)	$	(3,717	)	$	(6,825	)	$	(2,534	)

Basic and diluted net loss per share, as reported	$	(0.32	)	$	(0.26	)	$	(0.29	)	$	(0.23	)
Add back: goodwill amortization per share		—			0.10			—			0.12

Pro forma basic and diluted net loss per share	$	(0.32	)	$	(0.16	)	$	(0.29	)	$	(0.11	)

Note 7—Segment Reporting

The Company classifies its business into three fundamental areas: Farming, which consists principally of interests in Company-owned fresh produce production facilities and joint ventures with other growers; Distribution, consisting principally of interests in sales and distribution companies in Mexico, the United States, and Canada; and Research and Development, consisting of business units focused on the Technology development of fruits and vegetables and intellectual properties associated with these development efforts.

Information pertaining to the operations of these different business segments is set forth below. The Company evaluates performance based on several factors. The most significant financial measure used to evaluate business performance is business segment operating income. Inter-segment sales are accounted for at fair value as if the sales were to third parties. Segment information includes the allocation of corporate overhead to the various segments, as looked at from the point of view of the

segment presidents. All acquired goodwill prior to December 31, 2001 was pushed down to the companies and segments that had made the acquisitions. At December 31, 2001 Bionova Holding determined its goodwill had become impaired and a charge was recorded to write off all of the goodwill of the Company as of that date.

	Farming			Distribution		Research and Development (Discontinued Operations)			Total of Reportable Segments
	(Thousands of U.S. Dollars)
January 1—June 30, 2002
Revenues from unaffiliated customers	$	9,529		$	78,805	$	1,920		$	90,254
Inter-segment revenues		33,454			—		—			33,454

Total revenues	$	42,983		$	78,805	$	1,920		$	123,708

Operating profit (loss)	$	(1,252	)	$	2,245	$	(264	)	$	729

Depreciation and amortization		1,251			180		305			1,736
Identifiable assets(1)		66,937			28,471		15,657			111,065
Acquisition of long-lived assets		846			117		—			963
January 1—June 30, 2001
Revenues from unaffiliated customers	$	596		$	127,041	$	942		$	128,579
Inter-segment revenues		43,507			—		—			43,507

Total revenues	$	44,103		$	127,041	$	942		$	172,086

Operating profit (loss)	$	(2,385	)	$	6,137	$	(5,526	)	$	(1,774	)

Depreciation and amortization		1,554			228		3,313			5,095
Identifiable assets (1)		97,756			30,693		33,787			162,236
Acquisition of long-lived assets		2,688			1,464		92			4,244

1.: Identifiable assets for segments are defined as total assets less cash in banks, deferred income taxes and investment in shares.

Reconciliation of the segments to total consolidated amounts is set forth below:

	January 1—June 30
	2002			2001
	Thousands of U.S. Dollars
Revenues
Revenues from unaffiliated customers	$	123,708		$	172,086
Inter-segment revenues		(33,454	)		(43,507	)
Revenues from discontinued operations		(1,920	)		(1,442	)

Total revenues	$	88,334		$	127,137

Loss before taxes
Total operating profit (loss) from reportable segments	$	729		$	(1,774	)
Total operating loss from Bionova Holding Corporation (1)		(2,927	)		(1,363	)
Interest income (expense), net		(4,072	)		(413	)
Exchange gain (loss), net		341			(255	)
Other non-operating (expense) income, net		(70	)		(271	)

Consolidated loss before taxes	$	(5,999	)	$	(4,076	)

Assets
Total segment identifiable assets	$	111,065		$	162,236
Unallocated and corporate assets(2)		3,779			3,154
Eliminations(3)		(24,255	)		(17,839	)

Consolidated assets	$	90,589		$	147,551

Notes:

1.: Certain expenses, such as shareholder litigation, investor relations, and Board and professional fees have not been allocated to the segments. Management determined that these types of expenses have not been associated with, nor did the results of these activities benefit the operating segments.
2.: Includes Bionova Holding's and segments' cash in banks, deferred income taxes and other corporate assets.
3.: Consists principally of inter-segment intercompany balances.