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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 (Fee required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No fee required)
For the transition period from ____________ to ___________
Commission File Number: 0-12177
DNAP 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: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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
18, 1997: $26,178,162
Number of shares of Common Stock outstanding as of March 18, 1997:
18,370,640
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
definitive proxy statement to be filed for its 1997 annual meeting of
stockholders.
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I................................................................... 1
ITEM 1. BUSINESS.................................................... 1
Overview........................................................ 1
Background...................................................... 1
Production...................................................... 2
Marketing and Distribution...................................... 2
Research and Development........................................ 4
Proprietary Protection.......................................... 7
Governmental Regulation......................................... 9
Competition..................................................... 9
Employees....................................................... 10
Controlling Stockholder; Conflicts of Interest.................. 10
ITEM 2. PROPERTIES.................................................. 11
ITEM 3. LEGAL PROCEEDINGS........................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
EXECUTIVE OFFICERS OF THE COMPANY.................................... 14
PART II.................................................................. 15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................. 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 17
Overview........................................................ 17
Results of Operations........................................... 17
Capital Expenditures............................................ 19
Liquidity and Capital Resources................................. 19
Disclosures Regarding Forward Looking Statements................ 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 24
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 48
PART III................................................................. 48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............ 48
ITEM 11. EXECUTIVE COMPENSATION..................................... 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS....... 48
PART IV.................................................................. 48
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K........................................ 48
FreshWorld Farms-Registered Trademark-, Endless Summer-Registered
Trademark-, and Transwitch-Registered Trademark- are registered trademarks
of DNAP or its subsidiaries. Master's Touch-Registered Trademark- is a
registered trademark of certain subsidiaries of DNAP Holding. Premier
Seleccion-Registered Trademark- is a registered trademark that has been
licensed to certain subsidiaries of DNAP Holding by an affiliate.
Petoseed-Registered Trademark-, Asgrow-Registered Trademark- and Royal
Sluis-Registered Trademark- are registered trademarks of Seminis Vegetable
Seeds, Inc.
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PART I
ITEM 1. BUSINESS
OVERVIEW
DNAP Holding Corporation, a Delaware corporation (together with its
subsidiaries, unless the context requires otherwise, "DNAP Holding" or the
"Company"), was formed in January 1996 and acts as a holding company for (i)
Agricola Batiz, S.A. de C.V., a corporation organized under the laws of the
United Mexican States, of which the Company owns 50.004% ("ABSA"), (ii)
International Produce Holding Company, a Delaware corporation, of which the
Company owns 57.7% ("IPHC"), and (iii) DNA Plant Technology Corporation, a
Delaware corporation, wholly-owned by the Company ("DNAP"). The Company
acquired its 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"). 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. Approximately 70% of the outstanding common stock of the Company is
owned by Empresas La Moderna, S.A. de C.V. ("ELM").
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. IPHC is a holding company whose subsidiaries are in the
business of marketing and distributing fresh produce in the United States,
Canada, Europe, the Middle East and the Far East, including fruits and
vegetables produced by ABSA. DNAP is an agribusiness biotechnology company
focused on the development and application of genetic engineering and
transformation technologies in plants and, together with its subsidiaries
(including FreshWorld Farms, Inc.), the development and marketing of premium,
differentiated, fresh and processed, branded fruits and vegetables.
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
ELM, the Company's 70% owner, is the leading producer and distributor of
cigarettes in Mexico through its subsidiary Cigarrera La Moderna, S.A. de
C.V. ("CLM"); the leading vegetable seed company in the world through its
majority-owned subsidiary, Seminis, Inc., which sells its seed products under
the Petoseed, Asgrow and Royal Sluis brand names; and the leading producer of
folding boxboard and folding and flexible packaging in Mexico through
Empaques Ponderosa, S.A. de C.V.
Through its Bionova Mexico subsidiary, ELM entered the fresh produce
industry in 1993 by agreeing to a series of business relationships with Raul
Batiz Echavarria and members of his family (the "Batiz Family"). In February
1993, Bionova Mexico and the Batiz Family established ABSA, to which the
Batiz Family transferred land and other assets used for growing and packing
fresh produce. Bionova Mexico and the Batiz Family then negotiated the
structure of their joint ownership of the Batiz Family's fresh produce
distribution business. In December 1994, this relationship was formalized
with the organization of IPHC. The Batiz Family own the 49.996% minority
interest in ABSA and the 42.3% minority interest in IPHC.
Significant market developments over the past four years have included
the continuation of market deregulation in Mexico, the passage of the North
American Free Trade Agreement which codifies low tariff levels for certain
goods traded among Mexico, the United States and Canada, and a growing market
for fresh produce in the United States. The Company believes there is
potential for growth in the U.S. market both for commodity fresh produce and
for branded produce that can command a premium price on a sustained basis,
provided it consistently meets consumer expectations for taste, appearance,
texture, freshness and quality. Product and regional
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diversification have enabled the Company to establish a strong commercial
offering of quality year-round supply under the "Master's Touch" and "Premier
Seleccion" trademarks.
PRODUCTION
ABSA is a leading grower of fresh produce in Mexico, primarily tomatoes
and peppers and, to a lesser extent, melons, cucumbers, grapes and other
fruits and vegetables. Most of ABSA's farming operations are located in the
Mexican states of Sinaloa, Sonora, Baja California and Jalisco. Advanced
technology is used to ensure consistent quality and yields, including special
hybrid varieties, integrated pest management control, greenhouse production
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.
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 packing in
exchange for exclusive distribution rights. ABSA does not share any of the
growing risk under these distribution contracts. 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 1996, approximately 60% of ABSA's supply was sourced from production
associations with growers. The majority of these growers are located in the
states of Baja California Norte, Jalisco and Sonora. Almost 40% of ABSA's
supply in 1996 came from land owned or leased by ABSA. ABSA owns
approximately 2,505 acres in Sinaloa and Sonora, and ABSA leases
approximately 1,870 acres in Sinaloa and Baja California Sur. During 1996, a
very limited amount of produce was sourced through distribution contracts.
In 1996, approximately 49% of ABSA's sales was tomatoes, 26% was peppers,
15% was cucumbers, 6% was grapes and the remaining 4% was mixed vegetables
and melons. In both 1994 and 1995, ABSA's sales were allocated approximately
as follows: tomatoes - 52%, peppers - 26%, cucumbers - 6%, melons - 3%, and
mixed vegetables (including eggplant and squash) - 10%.
MARKETING AND DISTRIBUTION
The Company's marketing and distribution activities are carried out by a
network of national and regional distributors. The Company's national
distributors are R.B. Packing in the United States (including R.B. Packing,
Inc., R.B. Packing of California, Inc. and R.B. Packing of Texas, Inc., each
of which is a wholly-owned subsidiary of IPHC, and referred to collectively
as "R.B. Packing"), Interfruver in Mexico and Royal Van Namen in Holland.
The Company's regional distributors are Tanimura Distributing, Inc. in Los
Angeles, California ("TDI"), Premier Fruits and Vegetables BBL Inc. in
Montreal, Quebec ("Premier"), and FreshWorld Farms, Inc. in Philadelphia,
Pennsylvania ("FreshWorld").
NATIONAL DISTRIBUTORS. The R.B. Packing companies had revenues of $76
million in 1996. Most of R.B. Packing's sales were made by R.B. Packing,
Inc. which is located in Nogales, Arizona, the main point of entry for
Mexican produce into the United States. Approximately 85% of the produce
distributed by R.B. Packing, 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 single customer
accounted for more than 8% of R.B. Packing, Inc.'s sales in 1996. In 1996
its sales were 55% to supermarkets, 35% to wholesalers and 10% 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 1996 its sales were 50%
2
to supermarkets, 40% to wholesalers, and 10% 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. R.B. Packing of Texas, Inc. distributes produce grown in Mexico.
R.B. Packing, Inc. and R.B. Packing of California, Inc. have a seasonal
contract program at fixed prices with major customers and are pursuing
similar programs with other customers. The objectives of contract pricing
are to improve margins and reduce distribution expenses by concentrating
volume and increasing the proportion of business done with large customers
with more progressive produce purchasing practices. Contract pricing also
avoids much of the risk associated with selling large volumes at spot prices.
Interfruver, together with its subsidiaries, 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. It is one of the largest
importers of Chilean produce in Mexico. Approximately 60% of its sales is to
wholesalers and other intermediaries and 40% is to supermarkets.
Interfruver's sales, which totalled $55 million in 1996, are denominated in
pesos.
In November 1996, IPHC completed its acquisition of 51% of Rijnhout Food
Group B.V., a Holland-based holding company whose subsidiaries include
Koninklijke Exporthandel Jac. Van Namen & Zonen B.V., and Rijnhout Groenten
B.V. (collectively, "Royal Van Namen"). Royal Van Namen is a fresh produce
distributor with 1996 sales of $57 million ($3.2 million in December, 1996
after the acquisition by IPHC), dealing primarily in tomatoes, peppers,
citrus and apples which it buys locally through auctions and importers. It
exports throughout Europe, the Middle East, the Far East and North America.
Sixty-five percent of Royal Van Namen's sales are to food service, 20% to
supermarkets, and 15% to wholesalers.
REGIONAL DISTRIBUTORS. TDI, a 75%-owned subsidiary of IPHC, is managed
by Kirby Tanimura, who has more than 10 years of experience in the fresh
produce industry and owns 25% of TDI. In 1996, TDI's sales of $36 million
were 50% to supermarkets, 30% to food service and 20% to other wholesalers.
Premier, an 80%-owned subsidiary of IPHC, is managed by Robert M. Levine,
who has more than 15 years of experience in the fresh produce industry and
owns 20% of Premier. Premier distributes produce throughout eastern Canada
and its sales were approximately 40% to supermarkets, 40% to independent
retailers, and 20% to wholesalers in 1996. Sales in 1996 were approximately
U.S. $16 million and are denominated in Canadian dollars.
FreshWorld Farms, Inc., a wholly-owned subsidiary of DNAP, sources
tomatoes and vegetables, including its branded line of cherry tomatoes and
peppers, from various growers in the eastern United States. Its 1996
revenues were $13 million.
Each of the regional distributors is working to enhance its value-added
programs with major customers. Such programs typically consist of repacking
and special packaging.
POTENTIAL ACQUISITION. The Board of Directors of Company has approved
the acquisition of all of the minority interests in ABSA and IPHC from the
Batiz Family, subject to the availability of financing on satisfactory terms.
This acquisition would be made under the terms of an agreement reached by
ELM and the Batiz Family in March 1997 providing that, subject to certain
conditions, ELM or its designee would purchase all of the minority interests
in ABSA and IPHC for a purchase price of $23.75 million, $11.75 million to be
paid in cash at the closing of the transaction and $12 million to be paid in
equal annual installments over the following three years, with interest on
the outstanding amount to be paid quarterly. The conditions include
satisfactory completion of due diligence and assurances from the Batiz Family
regarding continuity of operations. Raul Batiz G. and Guillermo Batiz G.,
the Director of Operations and Director of Administration of ABSA
respectively, have agreed to remain with ABSA in consulting roles. Pedro
Batiz G. has agreed to continue as an executive of IPHC. Raul Batiz E., the
President of IPHC, is expected to retire. The Company intends to seek bank
debt to finance this acquisition.
3
RESEARCH AND DEVELOPMENT
The Company's research activities are carried out by DNAP, a wholly-owned
subsidiary acquired in September 1996 as a result of the Merger. DNAP was
incorporated in Delaware in 1981 and is an agribusiness biotechnology company
focused on the development and application of genetic engineering and
transformation technologies in plants, as well as development and marketing
of premium, differentiated, fresh and processed, branded fruits and
vegetables. DNAP uses advanced breeding, genetic engineering, and other
biotechniques to achieve improvements in the taste, texture, product form,
color and shelf life of produce and to improve production characteristics,
such as disease resistance and production or processing yields. DNAP,
through its FreshWorld subsidiary, is engaged in the production and marketing
of branded, premium fruits and vegetables. It currently is marketing its
first generation of products developed through advanced biotechnological
techniques to supermarkets and institutions. DNAP is developing its second
generation products using genetic engineering.
DNAP's strategy in the fresh produce area is to focus its research and
development efforts on products which meet identified consumer needs not
satisfied by existing products. DNAP will seek to deliver consistently
superior products, thereby building brand name awareness, which DNAP believes
will enable it to sell its products at premium prices. Because it perceives
public dissatisfaction with the quality of tomatoes generally available in
supermarkets, DNAP is initially concentrating on marketing its FreshWorld
Farms tomato. DNAP believes that the success of this product will help to
establish consumer awareness of, and demand for, its other products.
Under the Long Term Funded Research Agreement between ELM and DNAP, DNAP
has initiated several research programs directed at improving agronomic
performance of vegetable seeds. These include programs aimed at developing
virus, fungal and nematode resistant plants.
PRODUCTS. DNAP is currently marketing products it developed through
advanced biotechnological techniques to supermarkets and food service
outlets. The products, which are marketed under the FreshWorld Farms brand
name, are:
PLANT PREMIUM BRANDED PRODUCT CURRENT CUSTOMERS
- ----- ----------------------- -----------------
Cherry Tomato FreshWorld Farms Cherry Tomatoes Distributors and supermarket
chains in the mid-Atlantic,
Northeast and Midwest regions
and Canada
Pepper FreshWorld Farms Mini-Peppers Distributors in several
states
The FreshWorld Farms cherry tomato is a proprietary hybrid with a deep
red color, sweet flavor and an extended shelf life of up to fifteen days.
The FreshWorld Farms sweet mini-pepper has a novel sweet taste, deep red
color and a low number of seeds. This new variety of pepper was developed
through anther culture, an advanced breeding technique that captures and
genetically stabilizes preferred characteristics such as taste, texture and
low seed count.
DNAP is using genetic engineering to develop its second generation of
products. Plant genetic engineering involves either the suppression of
specific genes, for example those that control ripening, or the
over-expression of certain genes controlling characteristics such as
sweetness. One of DNAP's most significant technological developments in this
area is its Transwitch gene suppression technology. DNAP has received three
issued United States patents and has made additional pending filings directed
to Transwitch technology. Using Transwitch technology, DNAP has grown
tomatoes with a shelf life of up to 90 days in the laboratory, while
preserving desirable characteristics such as taste, color and texture. DNAP
has received approval from the U.S. Department of Agriculture (the "USDA")
and the Food and Drug Administration (the "FDA") to grow and ship initial
varieties of its second generation tomatoes anywhere in the United States.
DNAP has also received the requisite government approvals in Canada. In the
first half of 1995, DNAP conducted a test market of delayed ripening tomatoes
developed by using the Transwitch gene suppression technology to switch off
the ACC synthase gene. These tomatoes were sold under the Endless Summer
tomato brand name and labeled as "farm grown from
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genetically-modified seed." The market test demonstrated that there was
consumer acceptance of these genetically-modified fresh market tomatoes and
validated the use of this technology for extending tomato shelf life both on
the vine and after harvest. After the test market was completed, sales of
Endless Summer tomatoes were suspended according to the terms of a settlement
agreement with Monsanto Company which related to patents covering a
particular promoter and a particular marker gene. DNAP now has access to
Monsanto's patented technology for the promoter and the marker as the result
of a January 31, 1997 technology agreement between Monsanto and ELM. DNAP
has also developed alternative genetic engineering approaches, based on
proprietary promoters and marker genes, for the suppression of ACC synthase
in tomatoes. Second generation products being developed by DNAP through
plant genetic engineering include cherry tomatoes, snap peas, peppers,
bananas, pineapples, grapes and strawberries.
Other products under development using plant genetic engineering are
described below:
PLANT TECHNOLOGY TARGETED BENEFIT
- ----- ---------- ----------------
Cherry Tomato Transwitch technology to suppress a Extended shelf life of up to three months;
gene responsible for ripening facilitates harvesting.
Snap Pea Transwitch technology to suppress a Improved taste compared to existing types; pea
gene responsible for the conversion of remains sweeter for a longer time. Increased
sugar to starch yield.
Pepper Transwitch technology to suppress a Extended shelf life compared to existing types;
gene responsible for softening peppers remain firmer for a longer time after
harvest.
Banana and Pineapple Transwitch technology to suppress a Extended shelf life compared to existing types.
gene responsible for rotting
Strawberry Addition of genes to prevent diseases Improved yield and post-harvest shelf life.
Some of DNAP's work in fruit crops is being supported by corporate
contracts including contracts with Alida Marine, Inc. for pineapple, Zeneca
PLC for bananas and United Agricorp, Inc. ("UAC") for strawberries.
RESEARCH AND TECHNOLOGY. DNAP believes that it is a leader in the
application of plant biotechnology to develop new and improved fruit and
vegetable varieties designed to appeal to the consumer. The research team of
33 scientists (including 16 with Ph.D. degrees) and support staff includes
scientists in the fields of cell biology, plant genetic engineering, plant
genetics, biochemistry, plant breeding, agronomy, plant pathology and food
science (the science of processing and packaging food). DNAP's scientists
have published over 300 articles in peer-reviewed scientific literature and
are named inventors on more than forty United States patents owned by DNAP or
FreshWorld.
DNAP's research and product development system involves a two-track
strategy employing advanced breeding methods to develop first generation
products, and genetic engineering coupled with breeding methods to develop
second generation products (which build on the varieties developed from the
first generation). The primary goal of the research effort is to develop
fruit and vegetable varieties which are differentiated in taste, appearance,
texture, and retention of freshness, attributes which are attractive to the
consumer. DNAP's secondary goal is to improve production characteristics such
as higher yield, disease resistance and more efficient harvesting
characteristics. Additionally, DNAP is working to develop improved processing
attributes for fruits and vegetables.
ADVANCED BIOTECHNOLOGICAL BREEDING. DNAP's scientists have pioneered the
use of advanced biotechnological breeding methods in commercial agriculture.
These methods take advantage of DNAP's ability to regenerate plants from
single cells in culture. One advanced breeding method used by DNAP's
scientists is anther culture, which captures and stabilizes preferred
characteristics from two separate varieties in a single step. Traditionally,
this process takes multiple generations of crossing between the two parental
lines and their progeny.
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Anther culture, in combination with plant breeding techniques, was used to
develop the small size and low seed trait of DNAP's sweet mini-pepper.
PLANT GENETIC ENGINEERING. DNAP believes that it is a leader in plant
genetic engineering which it is using to develop its second generation of
products. Genetic engineering involves the modification of a plant's
chromosomes, which are made up of DNA segments including genes encoding plant
characteristics. Genetic engineering enables the development of new
varieties by promoting specific traits in plants, such as extended freshness,
enhanced sweetness and disease resistance. The genetic engineering process
requires identification of genes responsible for certain characteristics: the
expression or suppression of such genes in plant cells using transformation
technology, vector systems and gene expression technology; the selection of
successfully engineered plant cells; and the regeneration of whole plants
from the engineered plant cells. The insertion of desired genes into plant
cells can either add a desired characteristic such as sweetness, to the plant
or, if inserted using DNAP's proprietary Transwitch gene suppression
technology, suppress an undesirable characteristic or process, such as
rotting. These technologies are described below:
GENE IDENTIFICATION TECHNOLOGIES are procedures for the identification
and characterization of genes. Genes are specific sequences of DNA that
control specific plant characteristics through the expression of certain
proteins which, in turn, initiate certain biological processes. For example,
there are genes that cause the expression of a certain protein that controls
the ripening process in tomatoes.
DNAP's scientists have extensive experience in chemically-based methods
for gene identification and have pioneered a method for gene identification
in plants called heterologous transposon technology. A United States patent
has been granted to DNAP for the use of certain aspects of transposon
technology to isolate genes. Transposons are genetic elements capable of
moving from one location on a plant's chromosome to another. The points at
which transposons insert themselves in the chromosome can be determined.
When a transposon inserts itself into a gene encoding a specific
characteristic, it alters the function of the host gene, causing detectable
changes in the characteristic. Tracing the location of the transposon leads
to the location of the host gene controlling the characteristic. The
advantage of this proprietary gene identification technique is that it allows
scientists to associate ultimate plant characteristics with specific genes
without the need for first developing an understanding of the intermediate
operative proteins and biological processes involved. DNAP's scientists were
the first to successfully use this method and have used it to isolate genes
affecting acidity in plants. Acidity is one of the major determinants of
flavor in fruits. A United States patent has been granted to DNAP for an
isolated acidity gene and its uses. DNAP's scientists have also used this
method to isolate genes that influence sugar production in plants and have
applied this proprietary technology to identify and isolate additional genes
that are responsible for traits such as freezing and dehydration tolerance,
and sweetness and flavor regulation.
TRANSFORMATION/REGENERATION TECHNOLOGY is a tissue culture-based method
by which new genes are stably incorporated into selected plant cells, which
are subsequently regenerated into whole plants. DNAP believes it is a leader
in the development and use of this technology and has used it to develop
efficient systems in commercially important varieties of tomatoes, peppers,
melons, peas, strawberries, carrots, potatoes, and lettuce. FreshWorld was
granted United States patents for certain transformation/regeneration methods
in peppers and peas developed by DNAP. DNAP and Du Pont were jointly granted
a United States patent for certain transformation methods in corn developed
by DNAP.
VECTOR SYSTEMS are means for inserting genes into plant cells. The
principal vector system is based on Agrobacterium tumefaciens, a soil
bacterium, which as part of its natural life cycle delivers DNA to plants.
DNAP has licenses from the Max Planck Institute, Monsanto Company and others
providing certain rights to this vector system. The rights of both the Max
Planck Institute and Monsanto Company to patent this technology are in
dispute. See "Proprietary Protection."
GENE EXPRESSION TECHNOLOGY is the manipulation of gene systems to ensure
successful, timely and specific expression of introduced genes in plant
cells. DNAP has developed promoter systems for enhancing gene expression in
plants and has been issued a United States patent for certain of those
promoter systems. Other promoter systems are the subject of pending United
States patent applications filed by DNAP.
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ENGINEERED PLANT CELL SELECTION technologies are techniques for
distinguishing plant cells which have been successfully engineered to
incorporate the desired genetic material from cells not so engineered. The
technique involves using a marker gene conferring resistance to a phytotoxic
compound, such as an antibiotic, which is inserted into cells along with the
gene encoding the desired plant characteristic. Cells are then treated with
the phytotoxic compound, and only successfully engineered cells survive.
These cells can then be used for plant regeneration.
DNAP's scientists have developed proprietary cell selection systems for
the selection of engineered plant cells. DNAP was issued two United States
patents directed to the use of certain marker genes which confer resistance
to the antibiotic spectinomycin. DNAP also has royalty-free license rights
to a sulfonylurea-resistance gene for use as a marker gene in developing new
plants.
TRANSWITCH GENE SUPPRESSION TECHNOLOGY, one of DNAP's most significant
technological developments, is a method for switching off gene expression in
plants. DNAP has received three United States patents and a European patent
directed to methods of using this technology for suppressing plant genes.
This technology is an effective alternative to antisense technology for gene
suppression.
As more fully described herein, DNAP's scientists are using plant genetic
engineering, including its proprietary Transwitch gene suppression
technology, to enhance DNAP's existing product line of fresh fruits and
vegetables and to develop new products. For example, the shelf life of
DNAP's FreshWorld Farms tomato has been extended from 10 to 14 days to up to
90 days under laboratory conditions by using Transwitch technology to switch
off the ACC synthase gene. This gene is responsible for the biosynthesis of
ethylene, which triggers the ripening process in tomatoes. On the basis of
its experience with the ACC synthase suppressed Endless Summer tomatoes test
marketed in 1995, DNAP believes that an ACC synthase suppressed tomato will
offer considerable cost savings in production and distribution. Transwitch
technology has also been used to turn off ethylene biosynthesis and extend
shelf life to 8 to 9 weeks in DNAP's cherry tomato varieties.
The texture of DNAP's mini-pepper is being further enhanced through the
use of Transwitch technology to inhibit the gene responsible for
hemicellulase. Hemicellulase causes the breakdown of the cell walls in
peppers, a process which triggers softening when peppers reach their maximum
sweetness. DNAP has also used Transwitch technology to enhance and maintain
the sweetness of snap peas and thereby extend their shelf life by inhibiting
the biosynthesis of ADPG pyrophosphorylase, an enzyme which causes the
conversion of sugar to starch. FreshWorld has an issued United States patent
directed to the use of the ADPG pyrophosphorylase gene in peas for sweetness
control.
DNAP is also developing tools to apply plant genetic engineering
technology to a range of additional crops, including tropical crops such as
bananas and pineapples. DNAP believes the application of its Transwitch
technology and its ripening control technology may have significant
commercial applications in controlling spoilage of these fruits during
transportation. For example, by inhibiting the production of ethylene in
bananas, rotting can be delayed so that fruits being shipped long distances
will arrive in better condition with less spoilage.
In other areas of plant genetic engineering, DNAP's scientists were the
first to demonstrate the ability to control fungal diseases affecting plants
by inserting a chitinase gene into plants. Chitinase is a naturally
occurring enzyme with anti-fungal activity. DNAP has been issued two United
States patents directed to plants transformed with chitinase genes.
PROPRIETARY PROTECTION
In order to develop and maintain its competitive position, DNAP seeks to
protect its intellectual property through patent filings in the United States
and abroad, maintenance of trade secrets and ongoing technological
innovation. DNAP and FreshWorld have over forty issued patents in the United
States. DNAP and FreshWorld have pursued proprietary protection across the
spectrum of their activities, including protection for basic tools of plant
genetic engineering and the protection of specific products.
7
DNAP has obtained United States patent protection for key plant genetic
engineering technologies in the areas of gene isolation through transposon
tagging; transformation/regeneration methods for pepper, pea and corn;
promoter systems; and selectable marker systems. DNAP has also established a
patent position for important gene systems developed by DNAP, including
issued U.S. patents directed to genes for control of disease, sweetness,
color and acidity.
One of DNAP's most significant technological assets in the area of plant
genetic engineering is its proprietary Transwitch gene suppression
technology. DNAP has received three United States patents and one European
patent directed to methods of using this technology for suppressing plant
genes. The European patent is in opposition. DNAP has made additional
pending filings in the United States and abroad directed to Transwitch
technology.
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 FreshWorld parent and
hybrid tomato lines, resulting in two issued U.S. patents. In addition, DNAP
has pending patent applications directed to ripening controlled tomato lines
and cherry tomato lines. DNAP also has a granted United States patent
directed to the method of somaclonal variation in tomato which was used to
create the FreshWorld Farms tomato. DNAP has been granted a United States
patent covering a broad class of low seed peppers, including the FreshWorld
Farms sweet mini-pepper. DNAP 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. FreshWorld has two pending PVP
applications for watermelon varieties developed by DNAP.
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 Stanford University
under the basic recombinant-DNA patent filings, 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 to one
of such patents is 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 ELM 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.
DNAP uses trade secret protection for certain innovations and technical
know-how on which new products may be based. DNAP also uses trade secret
protection for inbred parent lines of its hybrid plants. DNAP believes that
the use of hybrid seed (from which hybrid plants are grown) provides
additional protection for the FreshWorld Farms tomato, since seeds from the
tomatoes sold to consumers will not breed true. In addition, a hybrid seed
generally produces a heartier plant. In-house procedures are in place to
protect trade secrets, know how and inbred parent plant lines.
DNAP has ongoing programs to develop patentable processes, plant
varieties and products, and these programs are monitored by DNAP's patent
counsel to insure that timely and appropriate action is taken to seek patent
rights or to maintain trade secret protection. To gain further value from
its technology, DNAP may from time to time license its technology to others,
particularly in connection with corporate collaborations or instances in
which a financial or technology return may be earned without impacting its
competitive position.
IPHC's distribution companies market produce under the Master's Touch,
Premier Selecci n and Endless Summer brand names. ABSA and R.B. Packing,
Inc. have registered the Master's Touch name as a trademark in Mexico and the
United States, respectively. ELM has registered the Premier Seleccion name
in Mexico and has
8
licensed rights to such name on a royalty-free basis to various of IPHC's
subsidiaries. In addition, trademark registrations of the name "Master's
Touch" are pending in Great Britain, Ireland, Sweden, the Benelux countries
and Japan. FreshWorld Farms, Inc. has registered the Endless Summer name in
the United States.
GOVERNMENTAL REGULATION
The agribusiness industry saw continued growth in the number of U.S.
government approvals for genetically engineered plant products in 1996 and
the first approvals of genetically engineered products in Europe and Japan.
DNAP believes these events signal maturation of the regulatory approval
processes in the U.S. and growing opportunities for agricultural
biotechnology products in the United States and abroad.
Regulation by federal, state and local government authorities in the
United States and foreign countries will be a factor in the future production
and marketing of DNAP's genetically-engineered plants and plant products.
The process of obtaining government approvals can be costly and time
consuming, and there can be no assurance that necessary approvals will be
granted 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 DNAP 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 genetically engineered plants, in particular the growing and
interstate shipment of genetically engineered plants and plant products. The
FDA has jurisdiction over plant products that are used for human or animal
food. The EPA has asserted jurisdiction over the field testing and
commercial use of plants genetically engineered to resist pests and diseases,
so-called plant-pesticides, 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.
In January 1995, DNAP received USDA approval for unrestricted production
and distribution of the initial varieties of its genetically-engineered
Endless Summer tomato. That approval closely followed successful completion
in October 1994 of consultations with the FDA concerning the safety,
nutrition and composition of Endless Summer tomatoes. In 1995, DNAP also
received clearances from Agriculture and Agri-Food Canada and Health Canada
to import and sell Endless Summer tomatoes in Canada. Together, these
approvals allow DNAP to grow and ship initial varieties of Endless Summer
tomatoes anywhere in the U.S. and Canada in the same manner as conventionally
developed tomatoes. DNAP has also received approval from the Mexican
Secretaria de Agricultura y Recursos Hidraulicas to conduct field trials of
its Endless Summer tomatoes.
DNAP is continuing consultations with the FDA, begun in 1994, on
additional products, including delayed-ripening cherry tomatoes and peppers
with improved texture. DNAP has also received permission from the USDA to
field test genetically engineered grape plants.
To date, DNAP, to the best of its knowledge, has successfully functioned
within the scope of applicable laws and regulations, including rules
administered by the FDA, USDA and EPA. The company believes it is in
material compliance with all applicable laws and regulations pertaining to
the development and commercialization of its products. DNAP believes that
its current research and development activities and products will not be
subject to delays other than the ordinary delays associated with government
review and approvals for traditional products, when and if such review and
approvals are required. DNAP further believes that its experience in this
area enables it to deal effectively with the applicable regulatory processes.
COMPETITION
Though the fresh produce industry in general, and the tomato industry in
particular, are characterized by numerous competitors and low barriers to
entry at the production level, DNAP Holding believes that a small group of
participants produces over one-third of the tomatoes sold in the United
States. In the United States, the Company competes directly with the larger
tomato and pepper growers in Florida during the winter, and in California in
the
9
summer and fall. Both the Mexican and the U.S. tomato industries are
characterized by numerous competitors. Major Florida growers include Six
L's, DiMare and NTGargiulo, which was acquired by Monsanto. Meyer Tomatoes
is one of the largest growers in California.
ABSA believes it has advantages over its competitors because, among other
things, (i) the vine ripe tomato ABSA farms has different and generally more
desirable attributes than the gas-green tomato typically produced by most
U.S. growers and (ii) ABSA's production occurs in Mexico where the climate is
often more favorable and labor costs are lower than in the United States.
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 DNAP
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 382 employees.
ABSA has no employees. Copropriedad Agricola Batiz Hermanos, a Mexican
entity that is controlled by the Batiz Family ("CABH"), provides services to
ABSA pursuant to a contractual agreement. CABH provides services to ABSA,
and ABSA pays a fee to CABH based on CABH's costs incurred in connection
with providing such services. The number of persons providing such services
to ABSA ranges from a minimum of 60 to a maximum during the harvesting season
(January-April) of approximately 4,500.
CONTROLLING STOCKHOLDER; CONFLICTS OF INTEREST
Approximately 70% of the outstanding shares of common stock of the
Company are owned of record by Bionova International, Inc., an indirect,
wholly-owned subsidiary of ELM. Pursuant to a Governance Agreement dated as
of September 26, 1996, between ELM and the Company, ELM (together with its
affiliates) may acquire additional shares of common stock of the Company so
long as their aggregate beneficial ownership of the Company's common stock
does not exceed 80.1%, subject to applicable law. Also, pursuant to the
Governance Agreement, ELM 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 ELM or companies
related to ELM, 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 ELM 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 ELM 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 September 26, 1996 between ELM and DNAP. In connection with
these activities the Company might consider issuing additional equity
securities or incurring
10
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 ELM.
ITEM 2. PROPERTIES
ABSA owns approximately 2,505 acres of agricultural land in Sinaloa and
Sonora. ABSA leases approximately 1,870 acres of land in Sinaloa and Baja
California Sur. See "Legal Proceedings."
Interfruver leases office and warehouse space in Jalisco. Interfruver
and its subsidiaries also lease warehouse space in Mexico City, Sinaloa,
Sonora, Chihuahua and Nuevo Leon.
R.B. Packing, Inc. and Batiz and Sons, Inc. own warehouse and office
space in Nogales, Arizona. The other subsidiaries of IPHC lease office and
warehouse space.
DNAP's properties are more fully described below:
Acres of Lease
Location Ownership Facilities Land Expiration
- -------- --------- ---------- -------- ----------
Oakland, California...... Leased 41,000 square feet of laboratory --- 05/31/99
and office space
7,500 square feet of greenhouse
space
Brentwood, California.... Owned 12,700 square feet of greenhouse 10(1)
and warehouse space(1)
Eddystone, Pennsylvania.. Leased 2,300 square feet of office space --- 06/30/2000
Bonita Springs, Florida.. Leased 1,000 square feet of office space --- month-to-
month
- --------------------
(1) Includes farm land for field trials
DNAP also has arrangements in various locations throughout the United
States for field evaluations of improved plant varieties which DNAP is
developing. DNAP's current facilities are not adequate for large scale
growing, processing operations or distribution. Depending on the needs for
its products, DNAP contracts for the requisite facilities with third parties.
ITEM 3. LEGAL PROCEEDINGS
On January 21, 1997, a class action lawsuit styled GORDON K. AARON AND
FAY H. AARON V. EMPRESAS LA MODERNA, S.A. DE C.V., BIONOVA, S.A. DE C.V.,
ALFONSO ROMO GARZA, BIONOVA INTERNATIONAL, INC., DNAP HOLDING CORPORATION,
ROBERT SERENBETZ, GERALD LAUBACH, EVELYN BEREZIN, AND DOUGLAS LUKE, JR. was
filed in the U.S. federal district court for the Northern District of
California. The plaintiffs allege that they owned shares of DNAP's $2.25
Convertible, Exchangeable Preferred Stock ("Preferred Stock") prior to the
merger (the "Merger") of DNAP with a subsidiary of the Company on September
26, 1996. 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 the Company specified in the Merger Agreement. The
plaintiffs allege that they were owners of shares of DNAP's Preferred Stock
prior to the Merger and that they were entitled to receive more consideration
for their Preferred Stock than was provided to them under the Merger
Agreement. Specifically, the plaintiffs allege that (i) they were denied the
rights they allegedly had under the terms of the Preferred Stock to vote on
the Merger, to receive dividend payments, and to receive special conversion
privileges in connection with the Merger; (ii) defendants Serenbetz, Laubach,
Luke, and Berezin (the "Individual Defendants"), each of whom was a director
of DNAP prior
11
to the Merger and currently serves as a director of the Company, breached
fiduciary duties of loyalty, candor and care allegedly owed to DNAP and its
stockholders; (iii) all of the defendants aided, knew of or recklessly
disregarded, and all of the defendants substantially assisted, the conduct
giving rise to the alleged breaches of fiduciary duty by the Individual
Defendants; and (iv) each of ELM, Bionova Mexico, the Company and Mr. Romo
Garza had knowledge of the alleged contractual duties allegedly owed by DNAP
to the plaintiffs and each of such defendants intentionally caused DNAP to
breach such alleged duties. 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. The Company believes the claims of the
plaintiffs are without merit and intends to vigorously defend against these
claims.
R.B. Packing, Inc., a subsidiary of DNAP Holding, has received a "30-day
letter" from the U.S. Internal Revenue Service (the "IRS") proposing tax
adjustments for the fiscal years ended September 30, 1993, 1992 and 1991
totalling approximately $.9 million plus interest and penalties. The
proposed adjustments relate primarily to the sales commissions charged by
R.B. Packing, Inc. to ABSA, as well as to certain travel and entertainment
and other expenses. R.B. Packing, Inc. disagrees with the position taken by
the IRS and has appealed the IRS's determination.
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. The proceeding arose from a petition presented on
September 1, 1964, by a group of campesinos from the town of "La Eureka,"
Municipality of Culiacan, Sinaloa, to the Governor of the state of Sinaloa.
The petition 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 the petitioners. A
trial on this matter was instituted on August 4, 1993, in the TRIBUNAL
SUPERIOR AGRARIO in Sinaloa. In its judicial determination published in the
Mexican DIARIO OFICIAL DE LA FEDERACION 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 an "amparo"
before the TRIBUNAL COLEGIADO DEL PRIMER CIRCUITO EN MATERIA ADMINISTRATIVA
in Mexico City challenging 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 9% of the total land owned
by ABSA, Mexican law gives ABSA indemnification rights against Ms. Batiz.
DNAP Holding, through its subsidiaries, currently grows fresh or chilled
tomatoes in Mexico that it imports into the United States. On March 29,
1996, the Florida Tomato Growers Exchange, the Florida Fruit and Vegetable
Association, the Florida Farm Bureau Federation, the South Carolina Tomato
Association, Inc., the Gadsden County Tomato Growers Association, Inc., the
Accomack County Farm Bureau and the Florida Tomato Exchange filed a petition
before the United States Department of Commerce ("DOC") and the U. S.
International Trade Commission requesting the imposition of antidumping
duties on imports of fresh tomatoes from Mexico. ABSA is affected by this
dumping investigation because ABSA exports tomatoes from Mexico to the United
States. On October 28, 1996, the DOC issued a preliminary finding of dumping,
as required by law, finding a dumping rate of 17.56% for most Mexican
growers. On the same date, the DOC and representatives of Mexican tomato
producers signed a five-year Suspension Agreement discontinuing the dumping
investigation and suspending any dumping duties resulting from such
preliminary determination if certain conditions are met. The Suspension
Agreement requires that all tomatoes (other than greenhouse and cocktail
tomatoes) entering the United States be priced no lower than 20.68 cents per
pound ($5.17 per twenty-five pound box), which price may be adjusted from
time to time by the DOC in response to significant changes in the
relationship of domestic prices to import prices. The Suspension Agreement
does not affect the requirement under the North American Free Trade Agreement
that Mexican-grown tomatoes be accorded "national treatment," which means
that no limitations, quality standards or other restrictions can be applied
to Mexican-grown tomatoes unless such limitations, quality standards or other
restrictions are also applied to tomatoes grown in the United States. ABSA
supports and has signed the Suspension Agreement, in part because the
Suspension Agreement could lead to more price stability throughout the
growing season and more consistent sales practices in the industry.
Furthermore, counsel for the petitioners in the dumping proceeding has
indicated that the
12
petitioners do not intend to pursue further trade remedies or legislative
initiatives to restrict the importation of tomatoes from Mexico as long as
the Suspension Agreement remains in effect and is being complied with.
In addition to the foregoing, from time to time, the Company is involved
in various legal actions that arise in the ordinary course of its business.
Such legal actions are not expected, individually or in the aggregate, to
have a material adverse effect on DNAP's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
EXECUTIVE OFFICERS OF THE COMPANY
Information regarding DNAP Holding's executive officers including their
respective ages at March 1, 1997, is set forth below.
Name Age Position with Company
- ---- --- ---------------------
Carlos Herrera 56 Chief Executive Officer and Director
Robert Serenbetz 52 Chief Operating Officer and Director
Arthur H. Finnel 46 Treasurer and Chief Financial Officer
Raul Batiz E. 72 President of IPHC
Raul Batiz G. 47 Director of Operations of ABSA
Guillermo Batiz G. 44 Director of Administration of ABSA
Dr. John R. Bedbrook 47 Executive Vice President and
Director of Science of DNAP
Dr. David A. Evans 44 Executive Vice President - Business Development
of DNAP
Carlos Herrera has served as the Managing Director (Chief Executive
Officer) of Bionova, S.A. de C.V. since 1993. Prior to that time, he served
as the Director of Operations of Cigarrera La Moderna, S.A. de C.V., the
leading cigarette company in Mexico and a wholly-owned subsidiary of ELM.
Mr. Herrera is an alternate director of ELM.
Robert Serenbetz has been the Chief Operating Officer of the Company
since 1996. He served as Chairman of DNAP from 1994 to 1996, Chief Executive
Officer of DNAP from 1992 to 1996, and President of DNAP from 1991 to 1996.
Mr. Serenbetz was Chief Operating Officer of DNAP from 1991 to 1992. From
1989 to 1991, he was Group President of the American Chicle Division of
Warner Lambert Company, a manufacturer of pharmaceutical and consumer
products.
Arthur H. Finnel has been the Treasurer and Chief Financial Officer of
the Company since 1996. From 1995 to 1996 he was a financial planning
consultant to ELM and Bionova Mexico. From 1982-1995 he was an executive
with Mars, Incorporated, where he held positions of General Manager and
President of its Canadian pet food division and Vice President of Finance of
Uncle Ben's, Inc.
Raul Batiz E. is the President of IPHC and since 1984 has served as the
President of R.B. Packing, Inc.
Raul Batiz G. has served as the Director of Operations of ABSA since
1993. Prior to that time he acted for twenty years as the head of operations
of Agricola Batiz Hermanos, which was engaged in the fresh produce business
in Mexico. He is the son of Raul Batiz E.
Guillermo Batiz G. has served as the Director of Administration of ABSA
since 1993. Prior to that time, he acted for twenty years as head of
administration for Agricola Batiz Hermanos, which was engaged in the fresh
produce business in Mexico. He is the son of Raul Batiz E.
John R. Bedbrook, PhD has been Executive Vice President and Director of
Science of DNAP since November 1988.
David A. Evans, PhD became Executive Vice President-Business Development
of DNAP in January 1995 and previously had been the Vice President Business
Development of DNAP since 1990.
All executive officers of DNAP Holding, DNAP and IPHC are elected
annually by their respective Boards of Directors to serve until the next
annual meetings of such Boards and until their respective successors are
chosen and qualified. Officers of ABSA have been granted powers by the Board
of Directors of ABSA which may be revoked by the Board of Directors of ABSA
at any time.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "DNAP." Public trading of the Common Stock commenced on September
27, 1996, the date after the Company acquired DNA Plant Technology
Corporation. Prior to that date, there was no public market for the Common
Stock.
The following table sets forth the high and low closing sales prices per
share for the Common Stock as reported on the Nasdaq National Market for the
periods indicated.
HIGH LOW
---- ---
1996
Third Quarter (from September 27) $7 $6 1/2
Fourth Quarter 7 3 1/16
1997
First Quarter (through March 18) 6 1/8 3 1/2
-------------------------------------------------------------------
-------------------------------------------------------------------
On March 18, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $4 3/4 per share. As of March 18, 1996, there
were 1,570 record holders of the Common Stock.
The Company has never paid cash dividends. Management intends to retain
any future earnings for the operation and expansion of the Company's business
and does not anticipate paying any cash dividends in the foreseeable future.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for each of the
years in the four year period ended December 31, 1996 are derived from the
consolidated financial statements of DNAP Holding Corporation. The
consolidated financial statements and related notes as of December 31, 1996
and 1995 and the three years in the period ended December 31, 1996 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 notes. The selected consolidated financial data of DNAP
Holding include financial data for ABSA, IPHC, Interfruver, DNAP and Royal
Van Namen as from their respective dates of acquisition.
(THOUSANDS OF DOLLARS, EXCEPT SHARE AND
PER SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994 1993
-------- -------- -------- -------
STATEMENT OF OPERATIONS DATA:
Total revenues............................ $192,985 $197,586 $ 64,112 $ 164
Gross profit.............................. 16,632 20,510 (1,648) (3,638)
Selling and administrative................ (16,195) (14,397) (9,509) (915)
Write-off of purchased research
and development......................... (12,900) - - -
Research and development expenses......... (1,244) - - -
Amortization of goodwill, patents
and trademarks.......................... (1,008) (538) (404) (404)
Operating income (loss)................... (14,715) 5,575 (11,561) (4,957)
Interest expense, net..................... (3,482) (4,940) (1,254) 404
Exchange gain (loss), net................. 569 (4,748) (1,473) (7)
Other non-operating income................ 2,058 - - -
Loss before income taxes.................. (15,570) (4,113) (14,288) (4,560)
(Provision) benefit for income taxes...... (2,738) (2,320) 1,842 513
Minority interests........................ 1,274 3,049 5,673 1,770
Net loss.................................. (17,034) (3,384) (6,773) (2,227)
Net loss per common share (1)............. ($1.19)
Weighted average number of common
shares outstanding (1).................. 14,286,318
AT DECEMBER 31,
----------------------------------------------
1996 1995 1994 1993
-------- -------- -------- -------
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 10,735 $ 1,580 $ 2,540 $ 4,079
Accounts and notes receivable, net........ 37,129 33,333 22,649 3,246
Inventories............................... 20,139 14,730 10,450 10,758
Total current assets...................... 69,161 49,785 35,761 18,661
Total assets.............................. 142,155 89,126 71,682 45,428
Bank loans and current portion of
long-term debt.......................... 41,214 33,103 27,977 3,590
Total current liabilities................. 81,037 54,823 40,992 7,371
Long-term debt and payables............... 2,423 10,515 2,223 1,485
Stockholders' equity...................... 49,150 15,815 17,839 22,083
- ---------------------------------------------------------------------------------------------
(1) Comparative share and per share data for 1995, 1994, 1993 is not presented
because the information is not meaningful.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial information of DNAP Holding and the financial statements and related
notes of DNAP Holding included elsewhere in this Form 10-K.
OVERVIEW
DNAP Holding engages in the production, distribution, and sale of fresh
produce to wholesalers and retailers in Mexico, the United States, Canada,
Europe, the Middle East, and the Far East. Since 1993, the business strategy of
the Company and its predecessors has been (i) vertical integration within the
produce/agronomics industry, (ii) growth by acquisition of complementary
businesses and (iii) aggressive growth of the businesses acquired. While these
continue to be important components of the business strategy, DNAP Holding
wanted to improve its access to basic technology to separate itself from others
in the produce business by completing the Merger with DNAP.
DNAP, which was incorporated in Delaware in 1981, is an agribusiness
biotechnology company focused on the development and application of genetic
engineering and transformation technologies in plants, as well as development
and marketing of premium, differentiated, fresh and processed, branded fruits
and vegetables. DNAP uses advanced breeding, genetic engineering, and other
biotechniques to achieve improvements in the taste, texture, product form,
color, and shelf life of produce and to improve production characteristics, such
as disease resistance and production or processing yields.
DNAP Holding expects to capitalize on the combination of production,
distribution, and technology strengths by focusing its longer-term business
strategy on the development and commercialization of value-added, proprietary
differentiated products.
DNAP Holding is seeking to exercise greater control over its production and
distribution operations to facilitate and strengthen its ability to
commercialize new products that are developed with DNAP's technology. DNAP
Holding's recent announcement of its intent to acquire the minority interests in
ABSA and IPHC is part of this strategy. The purchase price of $23.75 million
($11.75 million due on closing and the balance paid in equal installments over
the next three years with interest), subject to adjustments from the due
diligence review, will require that the Company raise additional financing.
RESULTS OF OPERATIONS
YEAR-ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
DNAP Holding's total revenues declined from $197.6 million in 1995 to
$193.0 million in 1996. The primary components of this change were a $5.6
million decline in other service income, a $16.1 million decrease in IPHC's U.S.
and Canadian sales, partially offset by a $6.3 million increase in the sales of
Interfruver in Mexico, and the inclusion of $8.2 million in sales generated from
the partial year results of DNAP and Royal Van Namen following their acquisition
and merger into DNAP Holding. ABSA's revenues in 1996 and 1995 were $67.4
million and $61.7 million, respectively, of which $67.0 million and $57.8
million were intercompany sales (eliminated in consolidation). The decline in
U.S. and Canadian sales reflected the effect of lower average realized prices of
fresh produce sold during the first six months of the year and a reduction in
ABSA's production for the U.S. market during the third quarter. This reduction
in ABSA's production was a direct result of the Company's decision to terminate
relationships with some of its growers in 1996 to improve product quality, build
more stable relationships with its growers, and reduce credit losses.
Interfruver's sales volume increased from 1995 to 1996 due to the addition of
new commodities to the products sold by Interfruver, slightly higher prices due
to improved brand name recognition and quality, and additional sales to a major
Mexican retailer. Other service income from the sale of materials (seeds,
fertilizer, etc.) to contract growers, net of costs, included in total revenues
declined from 1995 to 1996 as a direct consequence of ABSA's decision to
terminate relationships with some of its growers in 1996, to whom such materials
are sold.
17
Gross profit (sales less cost of sales) declined from $20.5 million in 1995
to $16.6 million in 1996. The negative effects of the lower average selling
prices ($8.6 million) in the U.S. and Canada and the decline in service income
($5.6 million) in Mexico were offset to some extent by the incremental margin
contribution by DNAP and Royal Van Namen ($1.3 million and $.7 million,
respectively) and lower cost of sales ($8.3 million). Included in the change in
cost of sales is a reduction in the expense recorded in 1996 versus 1995
associated with the provisions for uncollectible grower and customer receivables
($2.0 million and $5.0 million in 1996 and 1995, respectively).
Selling and administrative expenses increased from $14.4 million in 1995 to
$16.2 million in 1996. This increase was primarily associated with expenses
incurred by DNAP and Royal Van Namen during the fourth quarter of 1996 after the
Merger and acquisition, respectively, and their incorporation into DNAP Holding.
Research and product development expenses appeared in DNAP Holding's
results of operations for the first time in the fourth quarter of 1996. This
$1.2 million expense item reflects DNAP's research and product development
overhead recorded in the fourth quarter.
In 1996, the Company wrote off $12.9 million of purchased research and
development resulting from the Merger. This one-time charge reflects the
value of in-process research and development programs ongoing at DNAP at the
time of the Merger, as estimated by an independent appraiser, which was part
of the purchase price in the transaction. These product programs were
considered in-process since the products being developed were in various
stages of development, have not been commercially introduced, and require
additional research and development before such products can be produced and
introduced to the marketplace. Accordingly, consistent with generally
accepted accounting principles, purchased research and development must be
charged off immediately to current income.
The non-cash charge for amortization of goodwill, patents and trademarks
increased in 1996 due to the first quarter of amortization charges (recorded in
the fourth quarter of 1996) emanating from the DNAP Merger and Royal Van Namen
acquisition, respectively.
Interest expense decreased by $2.8 million in 1996, or 33%, versus 1995.
This decrease was due to a decline in the average interest rate that DNAP
Holding paid on its short term debt during the year.
Interest income declined from $3.5 million in 1995 to $2.2 million in 1996.
This decline was due to a lower level of interest income generated by ABSA on
its short-term investments and a lower level of advances to growers on which
ABSA collected interest in 1996 versus 1995.
In 1996, DNAP Holding experienced a net foreign exchange gain of $.6
million as compared to a loss of $4.7 million in 1995. During 1996 the
peso/dollar exchange rate remained relatively stable throughout the year. At
the end of 1994 a significant devaluation of the Mexican peso took place with
further declines experienced throughout 1995. As a consequence, large exchange
losses were experienced in 1995 by ABSA, whose functional currency is the U.S.
dollar, due to its net peso monetary position.
Income tax expense increased from $2.3 million in 1995 to $2.7 million in
1996. This increase in expense was attributable to the recognition of a
deferred tax liability for ABSA arising from Mexican tax law which requires
expensing of inventory acquisition costs in the year of purchase. Because ABSA
had no income in 1996 against which to apply these expenses, the deductions
resulted in an increase in ABSA's net operating loss carry forward. Since
realization of such net operating loss carry forwards in their entirety is not
believed to be sufficiently assured, an increase in the valuation allowance
against deferred income tax assets was recorded commensurate with the increase
in deferred income tax assets.
Other non-operating income in 1996 included a gain on the sale of property,
plant and equipment of $.3 million and a subsidy of $1.7 million in connection
with a special incentive program sponsored by various Mexican government and
banking institutions for companies in the agriculture, fishing and forestry
industries.
18
During 1996 the share of losses allocable to minority interests was $1.3
million as compared with $3.0 million in 1995. The 1996 and 1995 allocations of
losses are consistent with the minority positions held across the operating
subsidiaries of the Company.
YEAR-ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues during 1995 increased 201% to $197.6 million from $64.1
million in 1994. The increase reflects the effect of the start-up of Premier
(1995 sales of $15.9 million), the acquisition of R.B. Packing by IPHC (1995
sales of $90.8 million) in December 1994, the acquisition of Interfruver by ABSA
in January 1995 (1995 sales of $48.8 million), the growth of TDI (1995 sales of
$32.3 million), and service income, net of costs ($5.9 million). ABSA's sales
in 1995 amounted to $61.7 million, of which $57.8 million represented
intercompany sales (and were eliminated in consolidation). In 1994 ABSA's sales
amounted to $27.0 million, including $20.9 million of sales to R.B. Packing
prior to its acquisition by IPHC. The balance of the sales in 1994 was
generated by IPHC after its acquisition in December, 1994.
Gross profit was negative in 1994. In 1995, gross profit was 10.4% of
total revenues, reflecting the effects of higher average sales prices, sales
volumes and harvest yields versus those in 1994.
Selling and administrative expenses increased 51.4% to $14.4 million from
$9.5 million, but decreased as a percentage of sales from 14.8% in 1994 to 7.3%
in 1995 reflecting higher sales volumes in 1995.
The non-cash charge for amortization of goodwill increased in 1995 due to
the acquisition of IPHC in December 1994 and Interfruver in January 1995.
Interest expense increased from $2.2 million in 1994 to $8.4 million in
1995 reflecting the higher average levels of borrowing outstanding during the
year and the higher average cost of borrowing during 1995 (16.4%) as compared to
1994 (12.1%). The increased borrowings were required to fund the higher working
capital requirements associated with the greatly expanding sales activities, and
advances provided to growers. Interest income increased from $.9 million in
1994 to $3.5 million in 1995 reflecting the increased level of financing
provided to growers and higher interest rates in Mexico during 1995. Exchange
losses relate primarily to the significant effects of the devaluation of the
Mexican peso on the net peso monetary position of ABSA, whose functional
currency is the U.S. dollar.
Income tax expense increased to $2.3 million in 1995 from a benefit of $1.8
million in 1994 due to income tax payable by IPHC's subsidiaries and the effects
of the devaluation of the Mexican peso, which reduced the effect of future tax
benefits from net operating loss carry-forwards in the Mexican subsidiaries.
CAPITAL EXPENDITURES
During 1996 the Company made capital investments of $7.1 million in
property, plant, and equipment. The majority of these investments were made to
expand ABSA's farming activities in Mexico, in particular, the new farming
operation in Baja California which became one of the sources of produce sold by
the Company beginning in the second quarter of 1996. ABSA also made a major
investment in temperature controlled storage space and equipment which it
believes will reduce spoilage and shrinkage and enhance the overall quality of
its products.
Capital expenditures during 1995 and 1994 were $4.4 million and $6.1
million, respectively, reflecting primarily the investment levels required to
acquire and develop ABSA's owned and leased acreage in Mexico.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had a working capital deficit position
of $5.0 million. The deficit position increased to $11.8 million at December
31, 1996. The primary reason for this increase is certain long-term debt which
is scheduled to mature in May 1997 and was therefore reclassified to current
liabilities. The Company
19
is beginning the process of negotiating long-term financing arrangements.
Cash provided by Bionova Mexico was predominantly used to make acquisitions
and acquire property, plant and equipment.
For the year ended December 31, 1996 the Company generated $5.8 million in
cash from operations, which was due primarily to changes in certain working
capital components. After adjusting for the impact of consolidating DNAP and
Royal Van Namen at the time of the Merger and acquisition, respectively,
accounts receivable reflected a decline due to lower sales in December of 1996
as compared with 1995, and advances to growers also declined due to the
Company's decision to discontinue relationships with some of its growers in
1996. After adjusting for the consolidation of DNAP and Royal Van Namen,
accounts payable and accrued expenses increased $5.6 million during 1996. A
primary driver of this was ABSA ($3.5 million), which invested heavily in
property, plant and equipment and its growing operations during the last few
months of 1996, resulting in a higher level of payables at December 31, 1996 as
compared with December 31, 1995. The second major contributor to the increase
in accounts payable was FreshWorld Farms, which ramped up its sourcing of
products at the end of 1996. Partially offsetting these two positive impacts on
cash flows was a $5.0 million increase in inventories, which derived entirely
from the increase in ABSA's growing operations at the end of 1996.
In addition to the capital expenditures discussed above, investment
requirements reflected in the cash flows include the Merger with DNAP and the
acquisition of Royal Van Namen. The Company made a net investment of $6.7
million in DNAP prior to the Merger. The Company advanced DNAP $10.5 million,
and DNAP provided $3.8 million of cash at September 26, 1996, the date of the
Merger. The Company made a net investment of $1.2 million in Van Namen. The
Company paid $1.5 million for the Van Namen acquisition, and Van Namen provided
$.3 million of cash on November 30, the date of acquisition.
Cash provided by financing activities during 1996 was $18.8 million. The
great majority of this cash was received in the form of a capital contribution
by Bionova Mexico in connection with the Merger.
As discussed elsewhere in this Form 10-K, the Company's Board of Directors
has authorized management to pursue the acquisition of the 49.99% interest in
ABSA and the 42.3% interest in IPHC currently held by the Batiz family. The
purchase price of $23.75 million is subject to adjustment based on the results
of the due diligence review. The Company currently is in the process of
beginning discussions with banks to obtain the necessary financing that will
permit the Company to complete this transaction and to continue the Company's
aggressive development and growth of its farming, distribution, and research
activities in the future.
DISCLOSURES 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, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-K, including
without limitation statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and under "Notes
to Audited Consolidated Financial Statements" located elsewhere herein
regarding the Company's financial position, business strategy, plans and
objectives of management of the Company for future operations, and industry
conditions, are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. In addition to important factors described elsewhere in this
report, the following significant factors, among others, sometimes have
affected, and in the future could affect, the Company's actual results and
could cause such results during the remainder of 1997, and beyond, to differ
materially from those expressed in any forward-looking statements made by or
on behalf of the Company:
MANAGEMENT INFORMATION SYSTEMS AND CONTROLS. The Company's business is
undergoing rapid growth. As a result of this rapid growth, significant strains
have been placed on the management, operations and financial resources of the
Company's subsidiaries. The realization of the business strategy for the
Company and its subsidiaries will be dependent upon, among other things, the
ability of the Company to adapt management information systems and controls and
to hire, train and retain qualified employees to allow the operations thereof
20
to be effectively managed. The geographic separation of the operations of
the Company's subsidiaries and their traditionally decentralized,
family-based management teams exacerbate these issues.
HISTORICAL LOSSES AND ACCUMULATED DEFICITS. IPHC and ABSA sustained losses
in 1994, 1995 and 1996. DNAP sustained losses in each year since its
incorporation in 1981. There is no assurance that some of the factors that
caused these historical losses will not be present in future periods or that the
Company will be profitable in the future.
POSSIBLE NEED FOR ADDITIONAL FINANCING. The projected cash flows from
operations and existing capital resources of the Company, including existing
credit lines, may not be sufficient to permit the Company to pursue proposed
business strategies to acquire additional producers, distributors or marketers
and related businesses. Therefore, the ability to pursue such acquisitions may
be dependent upon the Company's ability to obtain additional capital, which
could result in the incurrence of additional debt or potentially dilutive
issuances of additional equity securities. There can be no assurance that the
Company will be successful in obtaining such capital and, as a result, may be
restricted in its pursuit of its future growth and acquisition strategies.
GOVERNMENTAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN OPERATIONS. Nearly
all of the growing and approximately 25% of the Company's sales occur in Mexico.
Foreign operations such as those conducted by the Company, especially in
countries with volatile economies, are subject to political and economic risks,
including political instability, currency controls, currency devaluations,
exchange rate fluctuations, increased credit risks, inflation, foreign tax laws,
changes in import/export or other regulations and tariff and freight rates.
Political and other factors beyond the Company's control, including without
limitation those factors discussed below, could have a materially adverse effect
on the Company's operations.
CURRENCY FLUCTUATIONS AND INFLATION. The currency exchange rates in Mexico
have historically been volatile. For example, in December 1994, the Mexican
government announced its intention to float the Mexican peso against the United
States dollar and, as a result, the peso devalued over 40% relative to the
dollar during that month. Such exchange rate fluctuations impact the business
of the Company's subsidiaries. If the value of the peso decreases relative to
the value of the dollar, then (i) imports of Chilean and other produce into
Mexico for distribution by the Company's subsidiaries become more expensive in
peso terms and therefore more difficult to sell in the Mexican market and (ii)
inflation that generally accompanies reductions in the value of the peso reduces
the purchasing power of Mexican consumers, which reduces the demand for all
products including produce and, in particular, imported, branded or other
premium-quality produce. Conversely, if the value of the peso increases
relative to the value of the dollar, Mexican production costs increase in dollar
terms, which results in lower margins or higher prices with respect to produce
grown in Mexico and sold in the United States and Canada.
INTEREST RATES. Historically, interest rates in Mexico have been
volatile, particularly in times of economic unrest and uncertainty. High
interest rates restrict the availability and raise the cost of capital for the
Company's subsidiaries that are Mexican companies and for growers and other
Mexican parties with whom they do business, both for borrowings denominated in
pesos and for borrowings denominated in dollars. Costs of operations for these
Mexican entities are higher as a result.
TRADE SANCTIONS. Notwithstanding the enactment of the North American Free
Trade Agreement, Mexico and the United States from time to time are involved in
trade disputes. On occasion, the United States has imposed tariffs, quotas, and
importation bans on products produced in Mexico. Such actions, if taken, could
subject the Company to an additional financial burden, some or all of which may
not be able to be passed on to consumers.
AGRIBUSINESS RISKS. A variety of risks are inherent in the agribusiness
industry, including, without limitation, the following:
SUPPLY AND DEMAND. The fresh produce business is particularly sensitive to
fluctuations in supply and demand. When the supply of produce in the market
exceeds the demand for such products, the market price for fresh produce may be
driven down significantly, in some instances below the cost of harvesting and
packing. In such situations it may be uneconomical to harvest a crop, resulting
in a total loss of the costs incurred in growing
21
such crop. Even when market prices are sufficient to permit recovery of
direct harvesting and packing costs, prices may not be high enough to permit
recovery of growing costs and/or overhead and other indirect costs. In
addition, oversupply can affect the prices obtained for premium quality
produce. Oversupply can result from, among other reasons, an increase in the
number of growers, an increase in the acreage allocated by growers to a
particular crop, unusually favorable growing conditions or increased supply
from foreign competitors (which could be caused by a variety of economic and
climatic factors in such competitors' home countries).
LIMITED BARRIERS TO ENTRY. The relatively low capital requirements for
farming and produce distribution permit relatively easy entrance into the fresh
produce business, which in turn can result in oversupply.
WEATHER. Weather conditions greatly affect the amount of fresh produce
that is brought to market, and, accordingly, the prices received for such
produce. Storms, frosts, droughts, and particularly floods, can destroy a crop
and less severe weather conditions, such as excess precipitation, cold weather
and heat, can kill or damage significant portions of a crop, rendering much of
it unpackable and unsalable. Conversely, unusually favorable weather conditions
can result in oversupply that drives down the prices realized by producers,
including ABSA.
CROP DISEASE AND PESTILENCE. Crop disease and pestilence can be
unpredictable and can have a devastating effect on crops, rendering them
unsalable and resulting in the loss of all or a portion of the crop for that
harvest season. Even when only a portion of the crop is damaged, the profits a
grower could have made on the crop will be severely affected because the costs
to plant and cultivate the entire crop will have been incurred although only a
portion of it can be sold.
LABOR SHORTAGES AND UNION ACTIVITY. The production of fresh produce is
heavily dependent upon the availability of a large labor force to harvest crops.
The turnover rate among the labor force is high due to the strenuous work, long
hours, necessary relocation and relatively low pay. To the extent it becomes
necessary to pay more to attract labor to farm work, labor costs can be expected
to increase.
The Mexican farm work force retained by ABSA is unionized. If the union
attempted to disrupt production and were successful on a large scale, labor
costs would likely increase and there could be work stoppages, which would be
particularly damaging in an industry where harvesting crops at peak times and
getting them to market on a timely basis is critical.
The majority of fresh produce is shipped by truck. In Mexico, truck
deliveries are sometimes less reliable than in the United States due to, among
other factors, the unreliability of some Mexican trucking companies and drivers
to make deliveries on schedule, poorer quality and maintenance of the trucks
used by Mexican trucking companies and poor road conditions in some areas. In
the United States and in Mexico, the trucking industry is largely unionized and
therefore susceptible to labor disturbances. Delivery delays caused by labor
disturbances in the trucking industry or any other reason limit the ability to
get fresh produce to market before it spoils.
AVAILABILITY OF SUPPLY. ABSA relies on agricultural land leased from
others and production associations with other growers for a part of its supply.
If the other parties to these leases and other arrangements were to choose not
to renew their agreements with ABSA, ABSA would be required to locate alternate
sources of supply and/or land or, in some cases, to pay increased rents for
land. In addition to increased rental rates, increases in land costs could
result from increases in water charges, property taxes and related expenses.
DEPENDENCE ON ONE SUPPLIER. One grower in Baja California, Santa Cruz
Empacadora, S. de R.L. de C.V., accounted in 1996 for approximately 10% of the
consolidated sales of the Company's subsidiaries (excluding DNAP). ABSA has
entered into one-year production association agreements with this grower for
each of the past two years and expects to continue to do so, but there can be no
assurance that the grower will continue to be willing to enter into such
agreements with ABSA on terms satisfactory to ABSA.
GOVERNMENTAL REGULATION. The U.S. activities of the Company's subsidiaries
are subject to extensive regulation by the Food and Drug Administration, the
United States Department of Agriculture, and other federal and state regulatory
agencies in the United States. Similarly, the Mexican activities of the
Company's
22
subsidiaries are subject to extensive regulation by the Secretaria de
Agricultura, Ganaderia y Desarrollo Rural, the Secretaria de Salud, and other
federal and state regulatory agencies in Mexico. Also, certain of the
Company's 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
certain of its current or future genetically engineered products will be
granted on a timely basis.
PRODUCT LIABILITY. Certain of the products being marketed and developed by
the Company entail a risk of product liability. While the Company has taken
what it believes are adequate precautions, there can be no assurance that it
will avoid significant product liability exposure.
NUMEROUS COMPETITORS. The fresh produce industry in general, and the
tomato industry in particular, are characterized by a large number of
competitors at both the production and distribution levels. In the past some of
these competitors have sought to limit the importation of Mexican-grown tomatoes
and peppers into the United States. DNAP is one of 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, many of which have substantial
financial, technical and marketing resources.
MARKETING OF PREMIUM QUALITY PRODUCE. The Company's subsidiaries are
currently producing and distributing premium quality fresh fruits and
vegetables. The success of these and future products depends on many variables,
including the ability to produce and make available to the market consistent,
premium quality fruits and vegetables on a year-round basis, consumers'
willingness to pay higher prices for premium quality fruits and vegetables, and
retailers' willingness to carry such fruits and vegetables.
NO ASSURANCE OF COMMERCIAL SUCCESS OF PRODUCTS BEING DEVELOPED AND
MARKETED. Marketing of several products currently developed by DNAP is in the
early stages, and there can be no assurance that any of these products will be
successful or will produce significant revenues or profits. In addition, a
number of DNAP's product development projects are in the early stages, and there
can be no assurance that these projects will be successful or that any resulting
products will be commercially successful or profitable. In particular, although
DNAP has produced and sold a limited amount of its products, there can be no
assurance that it will be able to produce or market such products on a larger
scale.
NO ASSURANCE OF PUBLIC ACCEPTANCE OF GENETICALLY ENGINEERED PRODUCTS.
DNAP's second generation 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. There can be no assurance that such products will gain sufficient
public acceptance to be profitable, even if such products obtain the required
regulatory approvals.
POSSIBLE DEVELOPMENT OF SUPERIOR TECHNOLOGY BY COMPETITORS. The
application of recombinant DNA and related technologies to plants is complex and
subject to rapid change. A number of companies are engaged in research related
to plant biotechnology, including companies that rely on the use of recombinant
DNA as a principal scientific strategy and companies that rely on other
technologies. Technological advances by others could render the Company's
products less competitive. Some of these companies, as well as competitors that
supply non-genetically-engineered products, have substantial resources.
PROPRIETARY PROTECTION. The Company's success will depend, in part, on its
ability to obtain patents, maintain trade secret protection, and conduct its
business without infringing the proprietary rights of others. There can be no
assurance that others will not develop competing technologies and market
competing products or that DNAP will be able to enforce the patents which it
currently possesses or will be able otherwise to obtain or enforce any patents
for which it has filed an application. DNAP also relies upon unpatented
proprietary and trade secret technology.
23
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 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.
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DNAP Holding Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated results of operations, changes in stockholders' equity and
cash flows present fairly, in all material respects, the consolidated financial
position of DNAP Holding Corporation at December 31, 1996 and 1995, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of DNAP Holding Corporation management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards 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 the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
March 27, 1997
25
DNAP HOLDING CORPORATION
(formerly Bionova U.S. Inc.)
CONSOLIDATED BALANCE SHEET
Thousands of U.S. Dollars
December 31,
------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 10,735 $ 1,580
Accounts receivable 30,941 25,444
Advances to growers 6,188 7,889
Inventories 20,139 14,730
Other current assets 1,158 142
-------- --------
Total current assets 69,161 49,785
-------- --------
Property, plant and equipment, net 34,784 25,983
Patents and trademarks, net 14,492 --
Goodwill, net 19,323 9,319
Deferred income taxes 2,850 3,281
Other assets 1,545 758
-------- --------
Total assets $142,155 $ 89,126
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank loans $ 32,110 $ 32,493
Current portion of long-term debt 9,104 610
Accounts payable and accrued expenses 30,773 17,038
Accounts payable to related parties 5,458 2,645
Deferred income taxes 3,592 2,037
-------- --------
Total current liabilities 81,037 54,823
Long-term debt 2,423 10,222
Long-term debt to related parties -- 293
-------- --------
Total liabilities 83,460 65,338
-------- --------
Minority interest 9,545 8,603
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 18,370,640 issued and outstanding 184 --
Additional paid-in capital 78,535 --
Capital contributed by Bionova (see note 1) -- 27,848
Accumulated deficit (29,468) (12,434)
Cumulative translation adjustment (101) (229)
-------- --------
49,150 15,185
-------- --------
Total liabilities and stockholders' equity $142,155 $ 89,126
-------- --------
-------- --------
The accompanying notes are an integral part of these financial statements.
26
DNAP HOLDING CORPORATION
(formerly Bionova U.S. Inc.)
CONSOLIDATED RESULTS OF OPERATIONS
Thousands of U.S. Dollars
(except per share amounts)
Year Ended December 31,
---------------------------------
1996 1995 1994
--------- --------- -------
Total revenues $ 192,985 $ 197,586 $64,112
--------- --------- -------
Cost of sales (176,353) (177,076) (65,760)
Selling and administrative expenses (16,195) (14,397) (9,509)
Write-off of purchased research and
development (12,900) -- --
Research and development expenses (1,244) -- --
Amortization of goodwill, patents
and trademarks (1,008) (538) (404)
--------- --------- -------
(207,700) (192,011) (75,673)
--------- --------- -------
Operating income (loss) (14,715) 5,575 (11,561)
--------- --------- -------
Interest expense (5,651) (8,430) (2,160)
Interest income 2,169 3,490 906
Exchange gain (loss), net 569 (4,748) (1,473)
Other non-operating income 2,058 -- --
--------- --------- -------
(855) (9,688) (2,727)
--------- --------- -------
Income (loss) before income tax (15,570) (4,113) (14,288)
Income tax (expense) benefit (2,738) (2,320) 1,842
--------- --------- -------
Net income (loss) before minority interest (18,308) (6,433) (12,446)
Minority interest in net loss (income)
of subsidiaries 1,274 3,049 5,673
--------- --------- -------
Net loss $ (17,034) $ (3,384) $(6,773)
--------- --------- -------
--------- --------- -------
Net loss per share $ (1.19)
---------
---------
The accompanying notes are an integral part of these financial statements.
27
DNAP HOLDING CORPORATION
(FORMERLY BIONOVA U.S. INC.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THOUSANDS OF U.S. DOLLARS
COMMON CUMULATIVE
SHARES COMMON PAID-IN CONTRIBUTED TRANSLATION ACCUMULATED
OUTSTANDING STOCK CAPITAL CAPITAL ADJUSTMENT DEFICIT TOTAL
----------- ------ ------- ----------- ----------- ----------- --------
BALANCES AT DECEMBER 31, 1993 $ 24,360 $ (2,277) $ 22,083
Investment by Bionova, S.A. de C.V. 2,552 2,552
Net loss (6,773) (6,773)
Translation adjustment $ (23) (23)
-------- ----- -------- --------
BALANCES AT DECEMBER 31, 1994 26,912 (23) (9,050) 17,839
Investment by Bionova, S.A. de C.V. 936 936
Net loss (3,384) (3,384)
Translation adjustment (206) (206)
-------- ----- -------- --------
BALANCES AT DECEMBER 31, 1995 27,848 (229) (12,434) 15,185
Issuance of shares for cash upon the
formation of Bionova U.S., Inc. 25,000 $ 25 25
Issuance of shares for cash and
upon transfer of Bionova S.A.
de C.V.'s interests in the
Bionova subsidiaries 270,922 $ 3 32,845 (27,848) 5,000
Issuance of shares to Bionova, S.A.
de C.V. prior to the merger 52,800 1 5,279 5,280
Shares issued to DNA Plant
Technology stockholders upon
consummation of the merger 5,511,192 55 32,511 32,566
Shares issued to Bionova International,
Inc. in connection with merger and
capital contribution 12,510,726 125 7,875 8,000
Net loss (17,034) (17,034)
Translation adjustment 128 128
---------- ---- ------- -------- ----- -------- --------
BALANCES AT DECEMBER 31, 1996 18,370,640 $184 $78,535 -- $(101) $(29,468) $49,150
---------- ---- ------- -------- ----- -------- --------
---------- ---- ------- -------- ----- -------- --------
The accompanying notes are an integral part of these financial statements.
28
DNAP HOLDING CORPORATION
(formerly Bionova U.S. Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Thousands of U.S. Dollars
Year Ended December 31,
----------------------------------
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (17,034) $ (3,384) $ (6,773)
Items not affecting cash:
Minority interest (1,274) (3,049) (5,673)
Depreciation 2,244 2,805 2,858
Amortization of goodwill, patents and trademarks 1,008 538 404
Write-off of purchased research