-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Il8gp/ccTdQE+xQ4ZB35kADzOcgw6J0lDbxySyt6pO7Y31qINB6lBTnityEFDE21 9fQIesUx5FSmDVPoAKSMdA== 0000950134-02-014720.txt : 20021119 0000950134-02-014720.hdr.sgml : 20021119 20021119155902 ACCESSION NUMBER: 0000950134-02-014720 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIMARK GROUP INC CENTRAL INDEX KEY: 0000922712 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FRUITS, VEG & PRESERVES, JAMS & JELLIES [2033] IRS NUMBER: 752436543 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26096 FILM NUMBER: 02833148 BUSINESS ADDRESS: STREET 1: UNIMARK HOUSE STREET 2: 124 MCMAKIN RD CITY: BARTONVILLE STATE: TX ZIP: 76226 BUSINESS PHONE: 8174912992 10-Q 1 d01327e10vq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q MARK (ONE) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2002 or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to ____________________ Commission file number 0-26096 THE UNIMARK GROUP, INC. (Exact name of registrant as specified in its charter) TEXAS 75-2436543 (State of incorporation or organization) (I.R.S. Employer Identification No.) UNIMARK HOUSE 124 MCMAKIN ROAD BARTONVILLE, TEXAS 76226 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (817) 491-2992 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- As of November 18, 2002, the number of shares outstanding of each class of common stock was: Common Stock, $0.01 par value: 21,044,828 shares INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets, December 31, 2001 and September 30, 2002................................................... 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2002............................ 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2002...................................... 5 Notes to Condensed Consolidated Financial Statements - September 30, 2002.................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........15 Item 3. Quantitative and Qualitative Disclosures About Market Risks..................................29 Item 4. Controls and Procedures......................................................................29 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................30 Item 2. Sale of Unregistered Securities..............................................................30 Item 3. Defaults Upon Senior Securities..............................................................30 Item 4. Submission of Matters to a Vote of Security Holders..........................................30 Item 5. Other Information...........................................................................30 Item 6. Exhibits and Reports on Form 8-K.............................................................30 SIGNATURES.............................................................................................31
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) THE UNIMARK GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30, 2001 2002 ---------------- ---------------- (NOTE 1) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents...................................... $ 1,135 $ 487 Accounts receivable - trade, net of allowance of $1,317 in 2001 and $979 in 2002........................................ 2,311 725 Accounts receivable - other.................................... 219 234 Note receivable................................................ 340 358 Income and value added taxes receivable........................ 537 758 Inventories.................................................... 7,560 4,382 Prepaid expenses............................................... 239 118 Property held for sale......................................... 5,372 -- ---------------- ---------------- Total current assets..................................... 17,713 7,062 Property, plant and equipment, net................................ 27,459 33,212 Goodwill, net..................................................... 2,516 2,516 Deposit on plant facility......................................... 2,262 2,057 Note receivable, less current portion............................. 259 27 Other assets...................................................... 203 234 ---------------- ---------------- Total assets............................................. $ 50,412 $ 45,108 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings.......................................... $ 5,437 $ 4,961 Current portion of long-term debt.............................. 2,243 856 Accounts payable - trade ...................................... 3,845 3,471 Accrued liabilities............................................ 4,767 5,326 ---------------- ---------------- Total current liabilities................................ 16,292 14,614 Long-term debt, less current portion.............................. 6,851 7,694 Deferred Mexican statutory profit sharing and income taxes........ 1,730 1,579 Commitments Shareholders' equity: Common stock, $0.01 par value: Authorized shares - 40,000,000; Issued and outstanding shares - 21,044,828 in 2001 and 2002.. 210 210 Additional paid-in capital..................................... 68,671 68,671 Accumulated deficit............................................ (43,342) (47,660) ---------------- ---------------- Total shareholders' equity............................... 25,539 21,221 ---------------- ---------------- Total liabilities and shareholders' equity............... $ 50,412 $ 45,108 ================ ================
See accompanying notes. 3 THE UNIMARK GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- -------------------------------- 2001 2002 2001 2002 ------------- -------------- --------------- ------------- (In thousands, except for per share amounts) Net sales...................................... $ 5,265 $ 5,435 $ 23,468 $ 20,197 Cost of products sold.......................... 5,798 6,536 23,389 21,062 ---------- --------- -------- -------- Gross profit (loss)............................ (533) (1,101) 79 (865) Selling, general and administrative expenses... 1,536 846 4,199 2,884 ---------- --------- -------- -------- Loss from operations........................... (2,069) (1,947) (4,120) (3,749) Other income (expense): Interest expense............................ (177) (130) (829) (329) Other income................................ 151 51 207 242 Foreign currency translation gain (loss).... 13 (104) (353) 304 ---------- --------- -------- -------- (13) (183) (975) 217 ---------- --------- -------- -------- Loss before extraordinary gain and income tax expense.......................... (2,082) (2,130) (5,095) (3,532) Income tax expense............................. 241 169 288 786 ---------- --------- -------- -------- Loss before extraordinary gain................. (2,323) (2,299) (5,383) (4,318) Extraordinary gain on forgiveness of debt...... -- -- 2,870 -- ---------- --------- -------- -------- Net loss....................................... $ (2,323) $ (2,299) $ (2,513) $ (4,318) ========== ========= ======== ======== Basic and diluted income (loss) per share: Loss before extraordinary gain.............. $ (0.11) $ (0.11) $ (0.32) $ (0.21) Extraordinary gain on forgiveness of debt... -- -- 0.17 -- ---------- --------- -------- -------- Net loss per share.......................... $ (0.11) $ (0.11) $ (0.15) $ (0.21) ========== ========= ======== ========
See accompanying notes. 4 THE UNIMARK GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ 2001 2002 ---------------- ---------------- (IN THOUSANDS) OPERATING ACTIVITIES Net loss ................................................................ $ (2,513) (4,318) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation......................................................... 1,638 1,251 Amortization of goodwill and other intangible assets................. 85 -- Deferred Mexican statutory profit sharing and income taxes........... 9 (151) Extraordinary gain on forgiveness of debt............................ (2,870) -- Cash provided by (used in) operating working capital: Receivables...................................................... 4,398 1,564 Inventories...................................................... 1,927 3,178 Prepaid expenses................................................. 240 121 Accounts payable and accrued liabilities......................... (1,807) 185 ---------------- ---------------- Net cash provided by operating activities................................ 1,107 1,830 ---------------- ---------------- INVESTING ACTIVITIES Purchases of property, plant and equipment............................... (2,945) (1,632) Decrease in deposit on plant facility.................................... 23 205 Decrease (increase) in other assets...................................... 180 (31) ---------------- ---------------- Net cash used in investing activities.................................... (2,742) (1,458) ---------------- ---------------- FINANCING ACTIVITIES Net proceeds from issuance of common stock............................... 4,976 -- Proceeds from issuance of short-term promissory note..................... 1,800 -- Payment of short-term promissory note.................................... (1,800) -- Decrease in short-term and current portion of long-term debt............. (2,978) (999) Payment of long-term debt................................................ (23) (21) ---------------- ---------------- Net cash provided by (used in) financing activities...................... 1,975 (1,020) ---------------- ---------------- Net increase (decrease) in cash and cash equivalents..................... 340 (648) Cash and cash equivalents at beginning of period......................... 1,075 1,135 ---------------- ---------------- Cash and cash equivalents at end of period............................... $ 1,415 $ 487 ================ ================
See accompanying notes. 5 THE UNIMARK GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Description of Business: Our company, The UniMark Group, Inc., a Texas corporation, is a vertically integrated citrus and tropical fruit growing and processing company with substantially all of its operations in Mexico. We conduct substantially all of our operations through our wholly-owned operating subsidiaries. In Mexico, our subsidiaries include: Industrias Citricolas de Montemorelos, S.A. de C.V. ("ICMOSA"), Grupo Industrial Santa Engracia, S.A. de C.V. ("GISE") and AgroMark, S.A. de C.V. ("AgroMark"). In the United States our subsidiary is UniMark Foods, Inc. ("UniMark Foods"). We have, for operating and financial reporting purposes, historically classified our business into two distinct business segments: packaged fruit and juice and oil. Within the packaged fruit segment, we focus on niche citrus and tropical fruit products including chilled, frozen and canned cut fruits and other specialty food ingredients. The packaged fruit segment processes and packages our products at three plants in Mexico. We also utilize independent food brokers to sell our food service and industrial products in the United States. Sales to our Japanese consumers are facilitated through Japanese trading companies. Within our juice and oil segment, we are continuing our agricultural development strategy. Pursuant to a long-term Supply Contract with The Coca-Cola Export Corporation ("Coca-Cola"), an affiliate of The Coca-Cola Company, which was amended during 2001, we acquired, developed and planted approximately 6,400 acres of Italian lemon groves (the "Lemon Project"). The planting program began in November 1996 and harvesting of the first crops commenced in late 2000. Based on recent agricultural conditions in Mexico, commercial production may not begin until the 2004 harvest. Due to the continued unfavorable and volatile worldwide market prices of frozen concentrate orange juice ("FCOJ") that has existed over the past several years and negative long-term prospects for the FCOJ market, in early 2002, we explored various strategic alternatives for our juice division. We suspended our frozen concentrate orange juice operations and offered the juice divisions plants for sale. Based on our intentions to sell these assets, we reclassified our juice division's long-lived assets as "Property held for sale" in our December 31, 2001 and March 31, 2002 condensed consolidated balance sheets. During the first quarter of 2002, we leased our Victoria juice processing plant to the largest FCOJ producer in Mexico, under a lease that expired May 31, 2002. Subsequent to May 15, 2002, we determined that our efforts and prospects to divest our juice division's long-term assets on acceptable terms were unlikely given current market conditions. As such, we engaged in active discussions with an unaffiliated third party to lease these plants. In this regard, we pursued the strategic alternative of leasing or operating our juice plants. Based on our decision to lease or operate these plants, these plant assets are now classified as long-term property, plant and equipment in our condensed consolidated balance sheet at September 30, 2002. On November 1, 2002, our Mexican subsidiary, GISE, entered into an operating agreement with a third party to produce various citrus juices and concentrates during the 2002/2003 juice processing season. See Note 12 to the condensed consolidated financial statements for a further discussion of this operating agreement. Going Concern Considerations: The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have sustained net losses in each of the last five fiscal years and in the first nine months of 2002. As of September 30, 2002, our accumulated deficit was $47.7 million, 6 we are unable to repay two of our Mexican subsidiaries loans and accrued interest under expired loan agreements, we had a working capital deficit of $7.5 million, our on hand cash balances were $487,000 and we are generating negative gross margins. Also, our efforts to raise capital through the divestiture of our juice division's assets were unsuccessful. Our cash requirements for the remainder of 2002 and beyond will depend upon the level of sales and gross margins, expenditures for capital equipment and improvements, investments in agricultural projects, the timing of inventory purchases and necessary reductions of debt. Projected working capital requirements for the remainder of 2002 and beyond are significantly greater than current levels of available financing. We have, in recent years, relied upon sales of our common stock to our principal shareholder and bank financing to finance our working capital and certain of our capital expenditures. Our inability to obtain sufficient debt or equity capital for these projects and commitments and for working capital requirements could have a material adverse effect on us and our projects including the realization of the amounts capitalized, deferred costs and deposits related to these projects and commitments. These matters raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent on our ability to obtain additional financing for our working capital requirements and in generating sufficient cash flows to operate our business. Our independent public accountants have informed us that they will be unable to complete their review of our interim financial statements for the quarterly period ended September 30, 2002, prior to the filing of this Form 10-Q. As a result, the interim financial statements contained in our quarterly report on Form 10-Q for the quarter ended September 30, 2002 have not been reviewed by our independent public accountants as required pursuant to Rule 10-01(d) of Regulation S-X, and therefore, the filing of this Form 10-Q is considered to be incomplete. As soon as our independent public accountants complete their review of our third quarter 2002 financial statements, we will file an amended Form 10-Q/A. Interim Financial Statements: The condensed consolidated financial statements at September 30, 2002, and for the three and nine month periods then ended are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission. The results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative of future financial results. Year End Balance Sheet: The condensed consolidated balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Risk Factors: Our operations are subject to risk factors that could impact our business. These factors include risks relating to our financial condition, our Mexican operations, general business risks and risks relating to our common stock. Risks relating to our financial condition include the fact that we are experiencing significant liquidity problems and have many indications of "going concern" conditions; we may be forced to seek protection under applicable provisions of the federal bankruptcy code if Rabobank Nederland or one of our Mexican banks exercise their legal rights and remedies; we may continue to sustain losses and accumulated deficits in the future; we are dependent upon a limited number of customers; we are subject to risks associated in implementation of our business strategy; additional financing will be required to achieve our growth and to perform our contractual obligations. Risks relating to our Mexican operations include the fact that we are subject to the risk of fluctuating foreign currency exchange rates and inflation; we are dependent upon fruit growing conditions, access to water and availability and price of fresh fruit; labor shortages and union activity could affect our ability to hire and we are dependent on the Mexican labor market; we are subject to statutory employee profit sharing in Mexico; we are subject to volatile 7 interest rates in Mexico which could increase our capital costs; trade disputes between the United States and Mexico could result in tariffs, quotas and bans on imports, including our products, which could impair our financial condition; we are subject to governmental laws that relate to ownership of rural lands in Mexico. General business risks include the fact that we may be subject to product liability and product recall; we are subject to governmental and environmental regulations; we are dependent upon our management team; we have a seasonal business; we face strong competition; and we have a shareholder that has substantial control over our company and can affect virtually all decisions made by our shareholders and directors. Risks related to our common stock include the delisting in March 2001 from the Nasdaq National Market may reduce the liquidity and marketability of our common stock and may depress the market price of our common stock; "penny stock" regulations may impose restrictions on marketability of our common stock; our common stock price has been and may continue to be highly volatile; and we have never paid a dividend. For a discussion of additional factors that may affect actual results, investors should refer to our filings with the Securities and Exchange Commission and those factors listed under "Risk Factors" starting on page 22 of this Form 10-Q. Recently Issued Accounting Pronouncements: Goodwill: We adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This SFAS also provides that goodwill should not be amortized, but shall be tested for impairment annually or more frequently if circumstance indicates potential impairment, through a comparison of fair value to its carrying amount. As of January 1, 2002, we ceased amortization of goodwill. Transitional impairment tests of our goodwill did not require an adjustment as of January 1, 2002. Goodwill amortization for the three and nine month periods ended September 30, 2001 was $20,400 and $61,200 respectively, and was immaterial on a basic and diluted per share basis. As of December 31, 2001 and September 30, 2002, goodwill is net of accumulated amortization of $422,000. Impairment of Long-Lived Assets: We adopted SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets", effective January 1, 2002. SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. The adoption of SFAS No. 144 did not have a material impact on our consolidated financial position or results of operations. New Accounting Pronouncements: In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which establishes the accounting standards for the recognition and measurement of obligations associated with the retirement of tangible long-lived assets. Under SFAS No. 143, the costs of retiring an asset will be recorded as a liability when the retirement obligation arises, and will be amortized over the life of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on our consolidated results of operations and financial position. In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No. 4, 44 and 64, Amendment of SFAS Statement No. 13, and Technical Corrections". This pronouncement, among other things, requires certain gains and losses on the extinguishment of debt previously treated as extraordinary items to be classified as income or loss from continuing operations. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material impact on our consolidated results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities". This pronouncement addresses the financial accounting and reporting costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. SFAS No. 146 requires an entity to record 8 a liability for costs associated with an exit or disposal activity when that liability is incurred and can be measured at fair value, and to subsequently adjust the recorded liability for changes in estimated cash flows. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We are currently evaluating the potential impact, if any, that the implementation will have on our consolidated results of operations and financial position. Reclassifications: Certain prior period items have been reclassified to conform to the current period presentation in the accompanying condensed consolidated financial statements. NOTE 2 - LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2002, we owed $1.5 million to Cooperative Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland") under a loan agreement with our Mexican subsidiary, GISE, which expired on January 2, 2002. To date, Rabobank Nederland has not agreed to extend or restructure its loan and has not pursued legal remedies under the security and guarantee agreements. Although we are currently negotiating repayment schedules with Rabobank Nederland, if Rabobank Nederland were to exercise all of its rights and remedies, under the security and guarantee agreements, such action could have a significant adverse effect upon our consolidated financial condition and prospects and could significantly impact our ability to implement our business strategy, including our ability to operate the Lemon Project and our ability to continue as a going concern. In such event, we may be forced to seek protection under applicable provisions of the federal bankruptcy code. As of September 30, 2002, accrued interest of approximately $60,000 was outstanding. In early July 2002, our Mexican subsidiary, ICMOSA, entered into a restructured loan agreement with Grupo Financiero Banorte ("Banorte"), which amortized the outstanding principal balance at June 30, 2002 of $3.1 million over a period of five and one-half years. The loan repayment schedule requires quarterly payments of principal and interest (Libor plus 3.75%) through December 31, 2007, with $275,000 due over the next twelve months. In our September 30, 2002 condensed consolidated balance sheet we have classified $2.7 million as long-term debt. We are current in our scheduled interest payments to Banorte. As of September 30, 2002, our Mexican subsidiary, ICMOSA, owed $3.5 million under a secured pre-export financing loan agreement with Banco Nacional de Comercio Exterior, S.N.C. ("Bancomext"). The outstanding balance consisted of six separate notes that became due in various amounts and dates between July 9, 2002 and August 6, 2002. Bancomext has not renewed these notes. As of September 30, 2002, accrued interest on these notes of approximately $67,000 was outstanding. Because we are currently exploring a restructuring of these notes with Bancomext, to date, they have not pursued their legal remedies under the loan agreement. No assurances can be given, however, that we will be successful in our restructuring efforts. If Bancomext were to exercise all of its rights and remedies, such action could have a significant adverse effect upon our consolidated financial condition and prospects and could significantly impact our ability to implement our business strategy, including our ability to continue as a going concern. On February 21, 2000, we entered into a $5.1 million (48 million Mexican pesos) nine-year term financing agreement (the "FOCIR Agreement") with Fondo de Capitalizacion e Inversion del Sector Rural (`FOCIR"), a public Trust of the Mexican Federal Government that invests in agricultural projects with long-term viability. Under the terms of the FOCIR Agreement, FOCIR will provide up to $5.1 million to fund additional Lemon Project costs, which will include land preparation, planting, equipment, irrigation systems and grove maintenance. This financing represents the purchase of an equity interest in GISE of approximately 17.6%. Amounts advanced under the FOCIR Agreement are classified outside equity due to mandatory redemption provisions. As of September 30, 2002, total advances under the FOCIR Agreement were $4.9 million (47,033,971 Mexican pesos). The terms of the FOCIR Agreement provide for the calculation and accrual of annual accretion using one of two alternative methods. The first method determines accretion by multiplying the year's Mexican inflation index rate plus 4.2% by the FOCIR balance. The second method determines annual accretion by multiplying GISE's shareholders equity, using Mexican generally accepted accounting principles, at the end of the year by a factor of 1.036 and then multiplying by the FOCIR equity interest percent. The calculation 9 that results in the greater amount will be the annual accretion amount. Accretion accumulates annually over the nine-year period of the FOCIR Agreement and is paid only upon expiration or early termination of the FOCIR Agreement. During the term of the FOCIR Agreement, we have the option to prepay the loan at any time. As of September 30, 2002, accretion accrued under the FOCIR Agreement amounted to $744,000 and the weighted average annual accretion rate for all advances was approximately 5.4%. The FOCIR Agreement also contains, among other things, certain provisions relating to GISE's future financial performance, the establishment of an irrevocable trust guaranteeing the FOCIR loan, which includes transferring to the trust GISE common shares that represent 33.4% of GISE's outstanding shares and the governance of GISE. Under the terms of our lemon processing contract with Coca-Cola, we have the option to receive an advance on the current years processing volume. This advance can be up to 50% of the prior years billings. Accordingly, in June 2002, we requested and received a $580,000, non-interest, cash advance. This cash advance is being amortized during the current processing season billings. As of September 30, 2002, approximately $450,000 of this advance was outstanding. In September 2002, we received $800,000 as a working capital cash advance from our largest customer, in connection with the production of a new product beginning in the fourth quarter of 2002. This advance is being repaid in 16 weekly installments of $50,000 commencing in mid October 2002. Interest at 8.5% will be included with the final payment. Our juice processing division has a long-term lemon processing contract with an affiliate of The Coca-Cola Company that expires in 2007. Under the terms of this contract, we are obligated to process annually between 12,000 and 300,000 metric tons of lemons for Coca-Cola. Our current processing capacity for Italian lemons is approximately 40,000 metric tons. During the current processing season, we anticipate processing between 25,000 and 30,000 metric tons. As we presently do not have sufficient production capacity for future years processing, we anticipate that performing the terms of this contract will require substantial capital expenditures or additional processing capacity. In connection with exploring various strategic alternatives for our juice processing division's assets, we are exploring restructuring our lemon processing contract with Coca-Cola. Our failure to obtain capital to expand our production capacity or the failure to restructure our lemon processing agreement or to secure additional processing capacity could have a material adverse effect on our business, prospects, Lemon Project and financial condition. In recent years, we have relied upon bank financing, principally short-term, to finance our working capital and certain of our capital expenditure needs. Presently, we are in active discussions with several financial institutions to replace working capital facilities that expired to establish a working capital debt facility for the Lemon Project and are pursuing equity alternatives. Our failure to obtain additional financing beyond current levels to meet our working capital and capital expenditure requirements could have a material adverse effect on us and our ability to continue as a going concern. NOTE 3 - SALE OF COMMON STOCK AND INCREASE IN AUTHORIZED SHARES On June 25, 2001, we completed a rights offering wherein existing shareholders purchased an additional 7,106,502 shares of common stock at a price of $0.73 per share, with gross proceeds to us of approximately $5.2 million. Our largest shareholder, M & M Nominee, LLC, purchased 6,849,315 shares in the offering, increasing their ownership to 13,149,274 shares, or 62.5% of our outstanding common stock. As a result of the rights offering, our outstanding shares of common stock increased to 21,044,828. At our annual meeting held in June 2001, shareholders approved an amendment to our Articles of Incorporation that increased the authorized number of shares of our common stock from 20,000,000 shares to 40,000,000 shares. 10 NOTE 4 - RELATED PARTY TRANSACTIONS Effective September 1, 2000, we entered into an agreement with Promecap, S.C. for the services of Emilio Castillo Olea to be our President and Chief Executive Officer at an annual rate of $150,000. Mr. Castillo is also a Director of Promecap, S.C. On February 15, 2001, we borrowed $1.8 million under the terms of an unsecured, 12% promissory note from our largest shareholder. This note was repaid in June 2001, including accrued interest of approximately $78,000, from the proceeds of the rights offering. NOTE 5 - LEMON PROJECT In April 1998, GISE and Coca-Cola, entered into a twenty-year Supply Contract, with a ten-year renewal option, for the production of Italian lemons. This new Supply Contract replaced the original contract entered into in October 1996. Pursuant to the terms of the Supply Contract, GISE was required to plant and grow 3,500 hectares (approximately 8,650 acres) of Italian lemons within the following three years for sale to Coca-Cola at pre-determined prices. The Supply Contract required Coca-Cola to provide, free of charge, up to 875,000 lemon tree seedlings, enough to plant approximately 2,800 hectares. In addition, the Supply Contract requires Coca-Cola to purchase all the production from the project. As a result of several amendments to the Supply Contract during 2001, the project has been reduced to approximately 2,572 hectares (approximately 6,353 acres), which represents all the land currently planted, and reduced the seedlings to 765,000, enough to plant approximately 2,448 hectares (6,047 acres), which have been delivered to the project by Coca-Cola. During 2001, we sold our two smaller lemon groves, Laborcitas (240 acres) and Paraiso (339 acres), with all the proceeds used to reduce outstanding debt. These groves were more mature but geographically situated apart from the remaining groves. The status of the Lemon Project as of September 30, 2002, adjusted to reflect the Supply Contract amendments and the groves disposed, is as follows:
HECTARES ACRES -------- ----- Land - Acquired......................................... 2,862 7,071 Prepared and planted............................. 2,572 6,353 Land held in reserve and access roads............ 290 718 Expenditures - Total projected expenditures, as revised......... $20.5 million Incurred since inception......................... 18.0 million Projected for remainder of 2002 and beyond....... 2.5 million
The planting program began in November 1996 with the first harvests in late 2000. Peak harvesting of our lemon crop generally occurs in our fourth quarter. Following is a summary of the first two years harvests, net of divestitures:
2000 2001 -------- -------- Metric tons........................... 96 3,800 Billed revenue........................ $ 13,000 $560,000
Until the groves reach commercial production, all revenues from the harvest, net of harvesting and shipping costs to our processing plant, are offset against the Lemon Project costs, which are capitalized. Based on recent agricultural conditions in Mexico, commercial production may not begin until the 2004 harvest. As a result, we have revised our total projected expenditures to reflect this delay. Once commercial production is reached, deferred orchard costs will be amortized based on the year's yield to total estimated yield for the remaining years of the Supply Contract. 11 Our juice processing division has a long-term lemon processing contract with an affiliate of The Coca-Cola Company that expires in 2007. Under the terms of this contract, we are obligated to process annually between 12,000 and 300,000 metric tons of Italian lemons for Coca-Cola. Our current processing capacity for Italian lemons is approximately 40,000 metric tons. During the current processing season, we anticipate processing between 25,000 and 30,000 metric tons. As we presently do not have sufficient production capacity for future years processing, we anticipate that performing the terms of this contract will require substantial capital expenditures or securing additional processing capacity. In connection with exploring various strategic alternatives for our juice processing division's assets, we are exploring restructuring our lemon processing contract with Coca-Cola. Our failure to obtain capital to expand our production capacity or the failure to restructure our lemon processing agreement or to secure additional processing capacity could have a material adverse effect on our business, prospects, Lemon Project and financial condition. NOTE 6 - SETTLEMENT OF INDEBTEDNESS In June 2001, our Mexico subsidiary, ICMOSA, entered into a settlement agreement with Bancrecer, S.A., Institucion de Banca Multiple ("Bancrecer") to resolve all outstanding issues between them, including the existing litigation relating to the outstanding $4.0 million term note and accrued interest of approximately $750,000. Under the terms of the settlement agreement, ICMOSA paid $1.8 million to Bancrecer prior to the end of June 2001, as payment in full of all outstanding obligations. The portion of principal and interest forgiven by Bancrecer of approximately $2.9 million, net of professional fees associated with the settlement, has been reported as an extraordinary gain in the nine months ended September 30, 2001 condensed consolidated statement of operations. NOTE 7 - NET LOSS PER SHARE The following table sets forth the computation of our basic and diluted loss per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ----------------------- 2001 2002 2001 2002 ---------- ----------- ---------- ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) NUMERATOR Loss before extraordinary gain................... $ (2,323) $ (2,299) $ (5,383) $ (4,318) Extraordinary gain............................... -- -- 2,870 -- ---------- --------- -------- -------- Net loss......................................... $ (2,323) $ (2,299) $ (2,513) $ (4,318) ---------- --------- -------- -------- DENOMINATOR Denominator for basic loss per share - weighted average shares outstanding..................... 21,045 21,045 16,463 21,045 ========== ========= ======== ======== Basic and diluted net loss before extraordinary gain per share.................................. $ (0.11) $ (0.11) $ (0.32) $ (0.21) ========== ========= ======== ======== Basic and diluted net loss per share............. $ (0.11) $ (0.11) $ (0.15) $ (0.21) ========== ========= ======== ========
We had stock options outstanding of 268,000 and 132,500 at September 30, 2001 and September 30, 2002, respectively, that were not included in their respective periods per share calculations because their effect would have been anti-dilutive. 12 NOTE 8 - INVENTORIES Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30, 2001 2002 ------------ ------------- (IN THOUSANDS) Finished goods: Cut fruits ............................... $ 2,964 $ 1,893 Juice and oils ........................... 554 12 -------- ------- 3,518 1,905 Pineapple orchards............................ 1,219 -- Raw materials and supplies.................... 2,018 1,768 Advances to suppliers......................... 805 709 -------- ------- Total $ 7,560 $ 4,382 ======== ========
NOTE 9 - DELISTING FROM THE NASDAQ NATIONAL MARKET On March 14, 2001, we received a Nasdaq Staff Determination indicating that we failed to present a definitive plan which would enable us to evidence compliance satisfying all requirements for continued listing on Nasdaq's National Market System ("NMS") within a reasonable period of time and to sustain compliance with those requirements over the long-term. The continued listing requirements that we were unable to sustain were the minimum bid of $1.00 per share for over thirty consecutive trading days and the minimum market value of public float of $5.0 million. As such, our common stock was delisted from the Nasdaq's NMS effective at the opening of business on March 15, 2001. Our common stock now trades on the Over-the-Counter Electronic Bulletin Board under the symbol "UNMG.OB". NOTE 10 - SEGMENT INFORMATION We have two reportable segments: packaged fruit and juice and oil.
PACKAGED JUICE FRUIT AND OIL TOTAL ------------ ----------- ----------- THREE MONTHS ENDED SEPTEMBER 30, 2001 Revenues from external customers........... $ 3,681 $ 1,584 $ 5,265 Segment loss .............................. (1,251) (378) (1,629) THREE MONTHS ENDED SEPTEMBER 30, 2002 Revenues from external customers........... $ 5,036 $ 399 $ 5,435 Segment loss............................... (1,716) (152) (1,868) NINE MONTHS ENDED SEPTEMBER 30, 2001 Revenues from external customers........... $ 18,840 $ 4,628 $ 23,468 Segment loss............................... (2,925) (988) (3,913) NINE MONTHS ENDED SEPTEMBER 30, 2002 Revenues from external customers........... $ 19,183 $ 1,014 $ 20,197 Segment loss.............................. (2,003) (738) (2,741)
13 The following are reconciliations of reportable segment profit or loss to our consolidated totals.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ----------------------------- 2001 2002 2001 2002 ----------------------------- -------------- -------------- Total loss for reportable segments....... $ (1,629) $ (1,868) $ (3,913) $ (2,741) Amortization of subsidiary acquisition costs recognized in consolidation...... (70) -- (211) -- Unallocated corporate expenses - General and administrative.......... (383) (262) (971) (791) ---------- -------- -------- -------- Loss before extraordinary gain and income tax expense............................ $ (2,082) $ (2,130) $ (5,095) $ (3,532) =========== ======== ======== ========
NOTE 11 - COMMITMENTS AND LITIGATION Effective January 1, 1995, we entered into a five-year operating agreement with Industrias Horticolas de Montemorelos, S.A. de C.V. ("IHMSA") to operate a freezing plant located in Montemorelos, Nuevo Leon, Mexico. Pursuant to the terms of the operating agreement, we were obligated to pay IHMSA an operating fee sufficient to cover the interest payments on IHMSA's $3.4 million of outstanding debt. During the term of the operating agreement, we have the option to buy the IHMSA facility. During the third quarter of 2001, we negotiated revisions to the operating agreement with IHMSA's management, extending the agreement's expiration date to January 1, 2021, and reduced the purchase option price from $4.5 to $3.5 million, which includes the assumption of approximately $1.2 million of IHMSA's debt. During 1997, we elected to advance $1.7 million to IHMSA to retire certain of its outstanding debt and during the fourth quarter of 2001 we advanced IHMSA an additional $636,000, both of which will be applied to the purchase price. In December 2001, we exercised our purchase option and expect to finalize formal closing documents and take title to the facility by December 31, 2002. All amounts previously paid to IHMSA, along with the assumption of the $1.2 million of debt comprise the final purchase price. At December 31, 2001 and September 30, 2002, all amounts advanced to IHMSA, of $2.3 and $2.1 million, respectively, are included in "Deposit on plant facility" in the condensed consolidated balance sheets at December 31, 2001 and September 30, 2002. Our juice processing division has a long-term lemon processing contract with an affiliate of The Coca-Cola Company that expires in 2007. Under the terms of this contract, we are obligated to processing annually between 12,000 and 300,000 metric tons of Italian lemons for Coca-Cola. Our current processing capacity for Italian lemons is approximately 40,000 metric tons. During the current processing season, we anticipate processing between 25,000 and 30,000 metric tons. As we presently do not have sufficient production capacity for future years processing, we anticipate that performing the terms of this contract will require substantial capital expenditures or securing additional processing capacity. In connection with exploring various strategic alternatives for our juice processing division's assets, we are exploring restructuring our lemon processing contract with Coca-Cola. Our failure to obtain capital to expand our production capacity or to restructure our lemon processing agreement or to secure additional processing capacity could have a material adverse effect on our business, prospects, Lemon Project and financial condition. Several legal proceedings arising in the normal course of business are pending against us, including certain of our Mexican subsidiaries. On September 18, 2002, an action captioned "Complaint for Avoidance of Preferential Transfers and Turnover of Property of the Estate" styled Golden Gem Growers, Inc., a Reorganized Debtor and Daniel E. Dempsey, CPA, Disbursing Agent for The Estate of Golden Gem Growers, Inc., Plaintiff vs. The UniMark Group, Inc., Gisalamo S.A. de C.V., and Grupo Industrial Santa 14 Engracia S.A. de C.V., Defendants, was filed in the United States Bankruptcy Court, Middle District of Florida, Orlando Division, Adversary Proceeding No. 02-258. The compliant seeks recovery of $200,000 of payments made by Golden Gem prior to its filing for bankruptcy protection in September 2001. Although the ultimate resolution of this matter cannot be determined at this time, any unfavorable outcome could have a material adverse effect on our financial condition and in our ability to continue as a going concern. In September 2002, we settled certain claims made by the owners of a juice processing facility in Mexico that was previously leased. Under the settlement, we paid the claimant $125,000 in cash to discharge all claims against certain of our Mexican subsidiaries and certain of our former and current officers and directors. This settlement was provided for in prior period financial statements. NOTE 12 - SUBSEQUENT EVENTS On November 1, 2002, our Mexican subsidiary, GISE, entered into an operating agreement with a third party to process various citrus juices and concentrates at our Poza Rica plant for the period of November 1, 2002 through October 31, 2003 and at our Victoria plant from January 1, 2003 through May 31, 2003. The operating agreement requires the third party to pay a fixed processing fee of $400,000 for the processing of products at the two plants, reimburse us for substantially all of the plants' variable production expenses, reimburse us for all the labor costs associated with the Poza Rica plant and $25,000 of the Victoria plant labor costs and provide all the citrus fruit to be processed. In addition, the operating agreement can be terminated by either party upon the occurrence of specified conditions with defined financial penalties. Finalization of the operating agreement is subject to the third party entering into a binding agreement with a certain equipment supplier by November 26, 2002. Subsequent to September 30, 2002, our current president and chief executive officer announced his intentions to resign his officer position for personal reasons. Although no specific timetable has been established for his departure, our board of directors have established search criteria for his replacement. PART I. - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The actual results could differ significantly from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this report. Statements contained in this report that are not historical facts are forward-looking statements that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. A number of important factors could cause the actual results for 2002 and beyond to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. These factors include risks relating to our financial condition, our Mexican operations, general business risks and risks relating to our common stock. For a discussion of these factors that may affect actual results, investors should refer to our filings with the Securities and Exchange Commission and those factors listed under "Risk Factors" starting on page 22 of this Form 10-Q. CONVERSION TO U.S. GAAP We conduct substantially all of our operations through our wholly-owned operating subsidiaries. ICMOSA is a Mexican corporation with its headquarters located in Montemorelos, Nuevo Leon, Mexico, whose principal activities consist of operating citrus processing plants and various citrus groves throughout Mexico. GISE is a Mexican corporation with its headquarters located in Cd. Victoria, Tamaulipas, Mexico, whose principal activities are the operation of two citrus juice and oil processing plants, as well as 15 managing the Lemon Project. ICMOSA and GISE maintain their accounting records in Mexican pesos and in accordance with Mexican generally accepted accounting principles and are subject to Mexican income tax laws. Our Mexican subsidiaries financial statements have been converted to United States generally accepted accounting principles ("U.S. GAAP") and U.S. dollars. Unless otherwise indicated, all dollar amounts included herein are set forth in U.S. dollars. The functional currency of UniMark and its subsidiaries is the U.S. dollar. RESULTS OF OPERATIONS The following table sets forth certain condensed consolidated financial data, expressed as a percentage of net sales for the periods indicated:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, --------------------------- --------------------------- 2001 2002 2001 2002 ---- ---- ---- ---- Net sales................................... 100.0% 100.0% 100.0% 100.0% Cost of products sold....................... 110.1 120.3 99.7 104.3 --------- ------- ------- ------- Gross profit (loss)......................... (10.1) (20.3) 0.3 (4.3) Selling, general and administrative expenses 29.2 15.5 17.9 14.3 --------- ------- ------- ------- Loss from operations........................ (39.3) (35.8) (17.6) (18.6) Other income (expense): Interest expense........................ (3.3) (2.4) (3.5) (1.6) Other income............................ 2.9 0.9 0.9 1.2 Foreign currency translation gain (loss) 0.2 (1.9) (1.5) 1.5 --------- ------- ------- ------- (0.2) (3.4) (4.1) 1.1 --------- ------- -------- ------- Loss before extraordinary gain and income tax expense............................. (39.5) (39.2) (21.7) (17.5) Income tax expense.......................... 4.6 3.1 1.2 3.9 --------- ------- ------- ------- Loss before extraordinary gain.............. (44.1) (42.3) (22.9) (21.4) Extraordinary gain on forgiveness of debt... -- -- 12.2 -- --------- ------- ------- ------- Net loss.................................... (44.1)% (42.3)% (10.7)% (21.4)% ========= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Net sales consist of packaged fruit and citrus juice and oil. Packaged fruit sales increased $1.3 million from $3.7 million in 2001 to $5.0 million in 2002, or 35.1%. This increase was primarily caused by increases in our retail sales of $1.2 million from $2.4 million in 2001 to $3.6 million in 2002, or 50.0%, and an increase in our Japan sales of $233,000 from $335,000 in 2001 to $568,000 in 2002, or 70.0%. Retail sales consist primarily of sales to Del Monte, which includes both retail and wholesale club products. The increase in retail sales was primarily due to the timing of our production schedule for our citrus products. The increase in our Japan sales during the third quarter of 2002 was caused by timing differences in shipments compared to the prior year quarter. Although our sales to Japan increased in the current period, future period sales are anticipated to decline as a result of reduced demand for our products by our Japanese customers. Typically, given the availability of fresh citrus, during our first and fourth quarters, we produce and ship a substantial amount of our annual citrus products. During the first nine months of 2002, we extended the citrus processing season compared with prior years and reduced some of the seasonality in our production scheduling by procuring citrus from other growing regions in Mexico. Citrus juice and oil sales decreased $1.2 million from $1.6 million in 2001 to $400,000 in 2002, or 75.0%. Due to the continued unfavorable and volatile worldwide market prices for FCOJ that has existed over the past several years and negative long-term prospects for the FCOJ market, in early 2002, we 16 suspended our frozen concentrate orange juice operations. See Notes 1 and 12 to the condensed consolidated financial statements for a further discussion of our juice division operations. As a result of the foregoing, net sales increased slightly from $5.3 million in 2001 to $5.4 million in 2002, or 1.8% due to increased sales in our packaged fruit segment, which were offset by reduced sales in our juice and oil segment. Gross profit, as a percentage, for our packaged fruit segment decreased from a loss of 12.9% in 2001 to a loss of 15.5% in 2002. The gross margin reduction in the current period was impacted on a positive basis through aggressive cost cutting, favorable fruit purchasing and improved plant efficiencies over the 2001 quarter, but was negatively impacted in the 2002 quarter by a non-cash inventory write-down of $567,000, which reduced gross margin by 11.3%, as a result of our decision to discontinue our pineapple growing operations. Citrus juice and oil gross profit decreased from a loss of 3.7% in 2001 to a loss of 79.9% in 2002. This decrease was primarily due to unabsorbed plant costs related to our decision not to produce during the 2001/2002 processing season and costs associated with selling our remaining inventory. Gross loss overall decreased as a percent of net sales from a loss of 10.1% in 2001 to a loss of 20.3% in 2002 due to the factors discussed above. Selling, general and administrative expenses ("SG&A") decreased from $1.5 million in 2001 to $846,000 in 2002, or 43.6%. This significant improvement was due to reduced SG&A expenses in both our packaged fruit and juice and oil segments and those associated with being a publicly-held company. Interest expense decreased $47,000 from $177,000 in 2001 to $130,000 in 2002, or 26.6%. This decrease was due to a $3.6 million reduction in our total outstanding debt from $16.8 million at September 30, 2001 to $13.5 million at September 30, 2002, reduced interest rates and the capitalization of interest costs associated with our Lemon Project. Other income decreased by $100,000 in 2002 as compared to 2001 and consists of miscellaneous non- operating income and expense items. Foreign currency translation gain (loss) decreased from a gain of $13,000 in 2001 to a loss of $104,000 in 2002, and resulted primarily from the conversion of our foreign subsidiaries financial statements from Mexican pesos to U.S. GAAP in U.S. dollars. Our foreign currency translation losses during the current quarter were mainly due to an increase in the exchange rate between the Mexican peso and the U.S. dollar. Income tax expense decreased by $72,000 from $241,000 in 2001 to $169,000 in 2002, and was insignificant between periods. As a result of the foregoing, we reported net losses of $2.3 million in both periods. NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Net sales consist of packaged fruit and citrus juice and oil. Packaged fruit sales increased slightly by $400,000 from $18.8 million in 2001 to $19.2 million in 2002, or 2.1%. This increase was caused by an increase in our retail sales of $900,000 from $11.6 million in 2001 to $12.5 million in 2002, or 7.7%, offset by a decrease in our foodservice and industrial sales of $300,000 from $2.3 million in 2001 to $2.0 million in 2002, or 13.0% and a decrease in our Japan sales of $200,000 from $4.6 million in 2001 to $4.4 million in 2002, or 4.3%. Retail sales consist primarily of sales to Del Monte, which includes both retail and wholesale club products. This increase in retail sales was attributable to the timing of our production schedule for our citrus products. The decrease in our Japan sales during the 2002 period was caused by timing differences in shipments compared to the prior year period. Although our sales to Japan decreased in the current period, future period sales are anticipated to decline as a result of 17 reduced demand for our products by our Japanese customers. Foodservice and industrial sales were impacted by our focus on higher margin customers, which resulted in lost revenues. Typically, given the availability of fresh citrus, during our first and fourth quarters, we produce and ship a substantial amount of our annual citrus products. During the first nine months of 2002, we extended the citrus processing season beyond prior years and reduced some of the seasonality in our production scheduling by procuring citrus from other growing regions in Mexico Citrus juice and oil sales decreased $3.6 million from $4.6 million in 2001 to $1.0 million in 2002, or 78.3%. Due to the continued unfavorable and volatile worldwide market prices for FCOJ that has existed over the past several years and negative long-term prospects for the FCOJ market, in early 2002, we suspended our frozen concentrate orange juice operations. See Notes 1 and 12 to the consolidated financial statements for a further discussion of our juice division operations. As a result of the foregoing, net sales decreased $3.3 million from $23.5 million in 2001 to $20.2 million in 2002, or 14.0% due to the sales decrease in our juice and oil segment. Gross profit, as a percentage, for our packaged fruit segment decreased from a loss of 0.7% in 2001 to a loss of 1.1% in 2002. The gross margin reduction in the current period was impacted on a positive basis through aggressive cost cutting, favorable fruit purchasing and improved plant efficiencies over the 2001 quarter, but was negatively impacted in the 2002 quarter by non-cash inventory write-downs of $1.1 million, which reduced gross margin by 5.7%, as a result of our decision to discontinue our pineapple growing operations. Citrus juice and oil gross profit decreased from 4.5% in 2001 to a loss of 64.6% in 2002. This significant decrease was primarily due to unabsorbed plant costs related to our decision not to produce during the 2001/2002 processing season and costs associated with selling our remaining inventory. Gross profit overall decreased as a percent of net sales from 0.3% in 2001 to a loss of 4.3% in 2002 due to the factors discussed above. Selling, general and administrative expenses ("SG&A") decreased $1.3 million from $4.2 million in 2001 to $2.9 million in 2002, or 31.0%. This significant improvement was due to reduced SG&A expenses at both our packaged fruit and juice and oil segments and those associated with being a publicly-held company. Interest expense decreased $500,000, from $829,000 in 2001 to $329,000 in 2002, or 60.3%. This decrease was due to a $3.6 million reduction in our total outstanding debt from $16.8 million at September 30, 2001 to $13.5 million at September 30, 2002, reduced interest rates and the capitalization of interest costs associated with our Lemon Project. Other income increased slightly by $35,000 in 2002 as compared to 2001 and consists of miscellaneous non-operating income and expenses items. Foreign currency translation gain (loss), which increased from a net loss of $353,000 in 2001 to a net gain of $304,000 in 2002, resulted primarily from the conversion of our foreign subsidiaries financial statements from Mexican pesos to U.S. GAAP in U.S dollars. The increase in our foreign currency translation gain is the result of a weaker Mexican peso in the current period as compared to the U.S. dollar. Income tax expense increased by $498,000 from $288,000 in 2001 to $786,000 in 2002, and was primarily due to an increase in our valuation allowances associated with financial and tax reporting timing differences in Mexico, which is required in accordance with U.S. GAAP. Extraordinary gain on forgiveness of debt of $2.9 million, net of expenses, in the 2001 period represents the agreement reached in June 2001, with a Mexican bank on the settlement of approximately $4.7 million of outstanding principal and accrued interest for $1.8 million. See Note 6 to the condensed consolidated financial statements for a further discussion of this gain. 18 As a result of the foregoing, we reported a net loss of $2.5 million in 2001 as compared to a net loss of $4.3 million in 2002. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002, our cash and cash equivalents totaled $487,000, a decrease of $648,000 from year-end 2001. During 2002, our operating activities generated cash of $1.8 million primarily from reductions in our year-end 2001 receivables and inventories of $1.6 and $2.2 million, respectively, and depreciation expense of $1.3 million offset by our net loss of $4.3 million. Under the terms of our lemon processing contract with Coca-Cola, we have the option to receive an advance on the current years processing volume. This advance can be up to 50% of the prior years billings. Accordingly, in June 2002, we requested and received a $580,000, non-interest, cash advance. This cash advance is being amortized during the current processing season billings. As of September 30, 2002, approximately $450,000 of this advance was outstanding. In September 2002, we received $800,000 as a working capital cash advance from our largest customer, in connection with the production of a new product beginning in the fourth quarter of 2002. This advance is being repaid in 16 weekly installments of $50,000 commencing in mid October 2002. Interest at 8.5% will be included with the final payment. As of September 30, 2002, we owed $1.5 million to Cooperative Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland") under a loan agreement with our Mexican subsidiary, GISE, which expired on January 2, 2002. To date, Rabobank Nederland has not agreed to extend or restructure its loan and has not pursued legal remedies under the security and guarantee agreements. Although we are currently negotiating repayment schedules with Rabobank Nederland, if Rabobank Nederland were to exercise all of its rights and remedies, under the security and guarantee agreements, such action could have a significant adverse effect upon our consolidated financial condition and prospects and could significantly impact our ability to implement our business strategy, including our ability to operate the Lemon Project and our ability to continue as a going concern. In such event, we may be forced to seek protection under applicable provisions of the federal bankruptcy code. As of September 30, 2002, accrued interest of approximately $60,000 was outstanding. In early July 2002, our Mexican subsidiary, ICMOSA, entered into a restructured loan agreement with Grupo Financiero Banorte ("Banorte"), which amortized the outstanding principal balance of $3.1 million over a period of five and one-half years. The loan repayment schedule requires quarterly payments of principal and interest (Libor plus 3.75%) through December 31, 2007, with $275,000 due over the next twelve months. In our September 30, 2002 condensed consolidated balance sheet we have classified $2.7 million as long-term debt. We are current in our scheduled interest payments to Banorte. As of September 30, 2002, our Mexican subsidiary, ICMOSA, owed $3.5 million under a secured pre-export financing loan agreement with Banco Nacional de Comercio Exterior, S.N.C. ("Bancomext"). The outstanding balance consisted of six separate notes that became due in various amounts and dates between July 9, 2002 and August 6, 2002. Bancomext has not renewed these notes. As of September 30, 2002, accrued interest on these notes of approximately $67,000 was outstanding. Because we are currently exploring a restructuring of these notes with Bancomext, to date, they have not pursued their legal remedies under the loan agreement. No assurances can be given, however, that we will be successful in our restructuring efforts. If Bancomext were to exercise all of its rights and remedies, such action could have a significant adverse effect upon our consolidated financial condition and prospects and could significantly impact our ability to implement our business strategy, including our ability to continue as a going concern. On February 21, 2000, we entered into a $5.1 million (48 million Mexican pesos) nine-year term financing agreement (the "FOCIR Agreement") with Fondo de Capitalizacion e Inversion del Sector Rural (`FOCIR"), a public Trust of the Mexican Federal Government that invests in agricultural projects with long-term viability. Under the terms of the FOCIR Agreement, FOCIR will provide up to $5.1 million to fund additional Lemon Project costs, which will include land preparation, planting, equipment, irrigation 19 systems and grove maintenance. This financing represents the purchase of an equity interest in GISE of approximately 17.6%. Amounts advanced under the FOCIR Agreement are classified outside equity due to mandatory redemption provisions. As of September 30, 2002, total advances under the FOCIR Agreement were $4.9 million (47,033,971 Mexican pesos). The terms of the FOCIR Agreement provide for the calculation and accrual of annual accretion using one of two alternative methods. The first method determines accretion by multiplying the year's Mexican inflation index rate plus 4.2% by the FOCIR balance. The second method determines annual accretion by multiplying GISE's shareholders equity, using Mexican generally accepted accounting principles, at the end of the year by a factor of 1.036 and then multiplying by the FOCIR equity interest percent. The calculation that results in the greater amount will be the annual accretion amount. Accretion accumulates annually over the nine-year period of the FOCIR Agreement and is paid only upon expiration or early termination of the FOCIR Agreement. During the term of the FOCIR Agreement, we have the option to prepay the loan at any time. As of September 30, 2002, accretion accrued under the FOCIR Agreement amounted to $744,000 and the weighted average annual accretion rate for all advances was approximately 5.4%. The FOCIR Agreement also contains, among other things, certain provisions relating to GISE's future financial performance, the establishment of an irrevocable trust guaranteeing the FOCIR loan, which includes transferring to the trust GISE common shares that represent 33.4% of GISE's outstanding shares and the governance of GISE. In recent years, we have relied upon bank financing, principally short term, to finance our working capital and certain of our capital expenditure needs. Presently, we are in active discussions with several financial institutions to replace existing working capital facilities that expired and to establish a working capital debt facility for the Lemon Project and we are also pursuing equity alternatives. Our failure to obtain additional financing beyond current levels to meet our working capital and capital expenditure requirements could have a material adverse effect on us and our ability to continue as a going concern. Our 2001 audited consolidated financial statements, which is included in our Form 10-K for the fiscal year ended December 31, 2001, includes a report from our independent auditors with a "going concern" explanatory paragraph (see Note 2 to our 2001 consolidated financial statements) which discusses certain conditions that could impact our ability to continue operations under the current business conditions given our recurring losses, negative cash flows and substantial difficulties in meeting our obligations. We cannot be sure that our cash and cash equivalents on hand and our cash availability will be sufficient to meet our anticipated working capital needs and capital expenditures. We began to address our "going concern" issue and the underlying liquidity problem through the Del Monte transaction during 2000 and a fundamental change in our business strategy. We also decided to discontinue the juice division of our juice and oil segment and pursue all strategic alternatives available to maximize asset value. Our efforts to raise capital through the divestiture of our juice division's assets have been unsuccessful. To finance our current working capital requirements and our current and future expenditures, we will need to issue additional equity securities and or incur additional debt. We may not be able to obtain additional required capital on satisfactory terms, if at all. In April 1998, GISE and Coca-Cola entered into a twenty-year Supply Contract, with a ten-year renewal option, for the production of Italian lemons. This new Supply Contract replaced the original contract entered into in October 1996. Pursuant to the terms of the Supply Contract, GISE was required to plant and grow 3,500 hectares (approximately 8,650 acres) of Italian lemons within the following three years for sale to Coca-Cola at pre-determined prices. The Supply Contract required Coca-Cola to provide, free of charge, up to 875,000 lemon tree seedlings, enough to plant approximately 2,800 hectares. In addition, the Supply Contract requires Coca-Cola to purchase all the production from the project. As a result of amendments to the Supply Contract during 2001, the Lemon Project has been reduced to approximately 2,572 hectares (approximately 6,353 acres), which represents all the land currently planted, and reduced the seedlings to 765,000 (enough to plant approximately 2,448 hectares (6,047 acres), which have been delivered to the project by Coca-Cola. As a result of the amendments to the Supply Contract, substantially all of the development costs have been incurred. During 2001, we sold our two smaller lemon groves, Laborcitas (240 acres) and Paraiso (339 acres). Although these were mature groves, they were geographically situated 20 apart from the remaining groves. The status of the Lemon Project as of September 30, 2002, adjusted to reflect the Supply Contract amendments and the groves disposed, is as follows:
HECTARES ACRES -------- ----- Land - Acquired......................................... 2,862 7,071 Prepared and planted............................. 2,572 6,353 Land held in reserve and access roads............ 290 718 Expenditures - Total projected expenditures, as revised......... $20.5 million Incurred since inception......................... 18.0 million Projected for remainder of 2002 and beyond....... 2.5 million
The planting program began in November 1996 with the first harvests in late 2000. Peak harvesting of our lemon crop generally occurs in our fourth quarter. Following is a summary of the first two years harvests, net of divestitures:
2000 2001 -------- -------- Metric tons........................ 96 3,800 Billed revenue..................... $ 13,000 $560,000
Until the groves reach commercial production, all revenues from the harvest, net of harvesting and shipping costs to our processing plant, are offset against the Lemon Project costs, which are capitalized. Based on recent agricultural conditions in Mexico, commercial production may not begin until the 2004 harvest. As a result, we have revised our total projected expenditures to reflect this delay. Once commercial production is reached, deferred orchard costs will be amortized based on the year's yield to total estimated yield for the remaining years of the Supply Contract. Our juice processing division has a long-term lemon processing contract with an affiliate of The Coca-Cola Company that expires in 2007. Under the terms of this contract, we are obligated to processing annually between 12,000 and 300,000 metric tons of Italian lemons for Coca-Cola. Our current processing capacity for Italian lemons is approximately 40,000 metric tons. During the current processing season, we anticipate processing between 25,000 and 30,000 metric tons. As we presently do not have sufficient production capacity for future years processing, we anticipate that performing the terms of this contract will require substantial capital expenditures or securing additional processing capacity. In connection with exploring various strategic alternatives for our juice processing division's assets, we are exploring restructuring our lemon processing contract with Coca-Cola. Our failure to obtain capital to expand our production capacity or to restructure our lemon processing agreement or to secure additional processing capacity could have a material adverse effect on our business, prospects, Lemon Project and financial condition. Our cash requirements for the remainder of 2002 and beyond will depend primarily upon the level of our sales and gross margins, expenditures for capital equipment and improvements, investments in agricultural projects, the timing of inventory purchases, increased acceptance of recently introduced products and necessary reductions of debt. Presently, we are in discussions with other financial institutions regarding further extending or replacing our existing debt facilities and we are also pursuing equity alternatives. No assurances can be given that we will be able to obtain such debt facilities on acceptable terms. The failure to obtain such debt facilities could have a material adverse effect on results of operations and financial condition. 21 NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued SFAS No.143, "Accounting for Asset Retirement Obligations" which establishes the accounting standards for the recognition and measurement of obligations associated with the retirement of tangible long-lived assets. Under SFAS No. 143, the costs of retiring an asset will be recorded as a liability when the retirement obligation arises, and will be amortized over the life of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on our consolidated results of operations and financial position. In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No. 4, 44 and 64, Amendment of SFAS Statement No. 13, and Technical Corrections". This pronouncement, among other things, requires certain gains and losses on the extinguishment of debt previously treated as extraordinary items to be classified as income or loss from continuing operations. SFAS No. 145 is effective fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material impact on our consolidated results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities". This pronouncement addresses the financial accounting and reporting costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. SFAS No. 146 requires an entity to record a liability for costs associated with an exit or disposal activity when that liability is incurred and can be measured at fair value, and to subsequently adjust the recorded liability for changes in estimated cash flows. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We are currently evaluating the potential impact, if any, that the implementation will have on our consolidated results of operations and financial position. RISK FACTORS If any of the following risks actually occur, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our underlying common stock could decline and you may lose part or all of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. As a result, we cannot predict every risk factor, nor can we assess the impact of all of the risk factors on our businesses or to the extent to which any factor, or combination of factors, may impact our financial condition and results of operation. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations, and perhaps our ability to continue as a going concern. RISKS RELATING TO OUR FINANCIAL CONDITION WE ARE EXPERIENCING SIGNIFICANT LIQUIDITY PROBLEMS AND HAVE MANY INDICATIONS OF "GOING CONCERN" CONDITIONS. We have sustained net losses in each of the last five fiscal years and in the first nine months of 2002. As of September 30, 2002, our accumulated deficit was $47.7 million, we are unable to repay two of our Mexican subsidiaries loans and accrued interest under expired loan agreements, we had a working capital deficit of $7.5 million, our on hand cash balances were $487,000 and we are generating negative gross margins. Also, our efforts to raise capital through the divestiture of our juice division's assets were unsuccessful. Our cash requirements for the remainder of 2002 and beyond will depend upon the level of sales and gross margins, expenditures for capital equipment and improvements, investments in agricultural projects, the timing of inventory purchases and necessary reductions of debt. Projected working capital requirements for the remainder of 2002 and beyond are significantly greater than current levels of available financing. We have, in recent years, relied upon sales of our common stock to our principal shareholder and bank financing to finance our working capital and certain of our capital expenditures. Our inability to obtain sufficient debt or equity capital for these projects and commitments and for working capital requirements could have a material adverse effect on us and our projects including the realization of the 22 amounts capitalized, deferred costs and deposits related to these projects and commitments. To finance current and future expenditures, we will need to issue additional equity securities and/or incur additional debt. We may not be able to obtain additional required capital on satisfactory terms, if at all, which raises serious doubt about our ability to continue as a going concern. WE MAY BE FORCED TO SEEK PROTECTION UNDER APPLICABLE PROVISIONS OF THE FEDERAL BANKRUPTCY CODE IF RABOBANK NEDERLAND OR ONE OF OUR MEXICAN BANKS EXERCISES THEIR LEGAL RIGHTS AND REMEDIES. As of September 30, 2002, we owed $1.5 million to Cooperative Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland") under a loan agreement with our Mexican subsidiary, GISE, which expired on January 2, 2002. To date, Rabobank Nederland has not agreed to extend or restructure its loan and has not pursued legal remedies under the security and guarantee agreements. Although we are currently negotiating repayment schedules with Rabobank Nederland, if Rabobank Nederland were to exercise all of its rights and remedies, under the security and guarantee agreements, such action could have a significant adverse effect upon our consolidated financial condition and prospects and could significantly impact our ability to implement our business strategy, including our ability to operate the Lemon Project and our ability to continue as a going concern. In such event, we may be forced to seek protection under applicable provisions of the federal bankruptcy code. As of September 30, 2002, accrued interest of approximately $60,000 was outstanding. As of September 30, 2002, our Mexican subsidiary, ICMOSA, owed $3.5 million under a secured pre-export financing loan agreement with Banco Nacional de Comercio Exterior, S.N.C. ("Bancomext"). The outstanding balance consisted of six separate notes that became due in various amounts and dates between July 9, 2002 and August 6, 2002. Bancomext has not renewed these notes. As of September 30, 2002, accrued interest on these notes of approximately $67,000 was outstanding. Because we are currently exploring a restructuring of these notes with Bancomext, to date, they have not pursued their legal remedies under the loan agreement. No assurances can be given, however, that we will be successful in our restructuring efforts. If Bancomext were to exercise all of its rights and remedies, such action could have a significant adverse effect upon our consolidated financial condition and prospects and could significantly impact our ability to implement our business strategy, including our ability to continue as a going concern. WE MAY CONTINUE TO SUSTAIN LOSSES AND ACCUMULATED DEFICITS IN THE FUTURE. We have sustained net losses in each of the last five fiscal years and in the first nine months of 2002. As of September 30, 2002 our accumulated deficit was $47.7 million. Our ability to achieve profitability in the future will depend on many factors, including our ability to produce and market commercially acceptable products into foreign countries while reducing operating costs. Because we were not profitable in each of the last five years and during the first nine months of 2002, there can be no assurance that we will achieve a profitable level of operations in the remainder of 2002 and beyond, or, if profitability is achieved that it can be sustained. WE ARE DEPENDENT UPON A LIMITED NUMBER OF CUSTOMERS. We have a limited number of customers. As a result of the sale of our Sunfresh(R) brand to Del Monte during 2000 and the entering into a long-term supply agreement to supply a minimum quantity of chilled and canned citrus products for distribution by Del Monte under the Sunfresh(R) brand into the United States retail and wholesale club markets, sales to them represented 46.4% of our 2001 net sales and 59.8 % for the nine months ended September 30, 2002. In addition, we expect that more than half of our foreseeable future net sales will be dependent on Del Monte. We believe that our future success depends upon the future operating results of Del Monte with respect to the Sunfresh(R) brand and their ability to broaden the customer base of the Sunfresh(R) brand products. Although the long-term supply agreement requires Del Monte to purchase minimum quantities of product, there can be no assurances that Del Monte will not reduce, delay or eliminate purchases from us, which could have a material adverse effect on our results of operations and financial condition. In addition, Del Monte has significant leverage and could attempt to 23 change the terms, including pricing and volume, upon which Del Monte and we do business, thereby adversely affecting our consolidated results of operations and financial condition. WE ARE SUBJECT TO RISKS ASSOCIATED IN IMPLEMENTATION OF OUR BUSINESS STRATEGY. We are subject to our ability to implement our business strategy and improve our operating results, which will depend in part on our ability to realize significant cost savings associated with our supply agreement with Del Monte through operating efficiencies, achieve additional sales penetration for products sold into foreign markets and develop new products and customers in our packaged fruit segment. No assurance can be given that we will be able to achieve such goals or that, in implementing cost saving measures, it will not impair our ability to respond rapidly or efficiently to changes in the competitive environment. In such circumstances, our consolidated results of operations and financial condition could be materially adversely affected. ADDITIONAL FINANCING WILL BE REQUIRED TO ACHIEVE OUR GROWTH. If we do not achieve or maintain significant revenues or profitability or have not accurately predicted our cash needs, or if we decide to change our business plans, we will need to raise additional funds in the future. There can be no assurance that we will be able to raise additional funds on favorable terms or at all, or that such funds, if raised, will be sufficient to permit us to manufacture and distribute our products. If we raise additional funds by issuing equity securities, shareholders may experience dilution in their ownership interest. If we raise additional funds by issuing debt securities, we may incur significant interest expense and become subject to covenants that could limit our ability to operate and fund our business. Further, we may be forced to sell certain of our assets, which may be sold at a loss. If additional funds are not available when required, we may be unable to effectively realize our current plans. ADDITIONAL FINANCING WILL BE REQUIRED TO PERFORM OUR CONTRACTUAL OBLIGATIONS. Our juice processing division has a long-term lemon processing contract with an affiliate of the Coca-Cola Company that expires in 2007. Under the terms of this contract, we are obligated to processing annually between 12,000 and 300,000 metric tons of Italian lemons for Coca-Cola. Our current processing capacity for Italian lemons is approximately 40,000 metric tons. During the current processing season, we anticipate processing between 25,000 and 30,000 metric tons. As we presently do not have sufficient production capacity for future years processing, we anticipate that performing the terms of this contract will require substantial capital expenditures or securing additional processing capacity. In connection with exploring various strategic alternatives for our juice processing division's assets, we are exploring restructuring our lemon processing contract with Coca-Cola. Our failure to obtain capital to expand our production capacity or the failure to restructure our lemon processing agreement or to secure additional processing capacity could have a material adverse effect on our business, prospects, Lemon Project and consolidated financial condition. RISKS RELATING TO OUR MEXICAN OPERATIONS WE ARE SUBJECT TO THE RISK OF FLUCTUATING FOREIGN CURRENCY EXCHANGE RATES AND INFLATION. We are subject to market risk associated with adverse changes in foreign currency exchange rates and inflation in our operations in Mexico. Our consolidated results of operations are affected by changes in the valuation of the Mexican peso to the extent that our Mexican subsidiaries have peso denominated net monetary assets or net monetary liabilities. In periods where the peso has been devalued in relation to the U.S. dollar, a gain will be recognized to the extent there are peso denominated net monetary liabilities while a loss will be recognized to the extent there are peso denominated net monetary assets. In periods where the peso has gained value, the converse would be recognized. Our consolidated results of operations are also subject to fluctuations in the value of the peso as they affect the translation to U.S. dollars of Mexican subsidiaries net deferred tax assets or net deferred tax liabilities. Since these assets and liabilities are peso denominated, a falling peso results in a translation loss to the extent there are net deferred tax assets or a translation gain to the extent there are net deferred tax liabilities. Pricing associated with the long-term 24 supply agreement entered into with Del Monte is in U.S. dollars. Our exposure to foreign currency exchange rate risk is difficult to estimate due to factors such as balance sheets accounts, and the existing economic uncertainty and future economic conditions in the international marketplace. Significant fluctuations in the exchange rate of the Mexican peso compared to the U.S. dollar, as well as the Mexican inflation rate, could significantly impact our ability to fulfill our contractual obligations under the Del Monte supply agreement in a profitable manner, which could result in a material adverse effect upon our consolidated results of operations and financial conditions. WE ARE DEPENDENT UPON FRUIT GROWING CONDITIONS, ACCESS TO WATER AND AVAILABILITY AND PRICE OF FRESH FRUIT. We grow grapefruit used in our packaged fruit operations and grow Italian lemons pursuant to the terms of a long-term supply contract with an affiliate of Coca-Cola. Severe weather conditions, lack of water and natural disasters, such as floods, droughts, frosts, earthquakes or pestilence, may affect the supply of one or more of our products and could significantly impact the development of the Lemon Project. A substantial amount of our growing operations are irrigated and a lack of water has not had a material adverse effect on our growing operations for many years. There can be no assurances that future weather conditions and lack of irrigation water will not have a material adverse effect on results of operations and financial conditions. In addition, we also source a substantial amount of our raw materials from third-party suppliers throughout various growing regions in Mexico and Texas. A crop reduction or failure in any of these fruit growing regions resulting from factors such as weather, pestilence, disease or other natural disasters, could increase the cost of our raw materials or otherwise adversely affect our operations. Competitors may be affected differently depending upon their ability to obtain adequate supplies from sources in other geographic areas. If we are unable to pass along the increased raw material costs, our consolidated financial condition and results of operations could be materially adversely affected. LABOR SHORTAGES AND UNION ACTIVITY COULD AFFECT OUR ABILITY TO HIRE AND WE ARE DEPENDENT ON THE MEXICAN LABOR MARKET. We are heavily dependent upon the availability of a large labor force to produce our products. The turnover rate among the labor force is high. If it becomes necessary to pay more to attract labor, our labor costs will increase. The Mexican agricultural work force, whether seasonal or permanent, are generally affiliated with labor unions which are generally affiliated with a national confederation. If the unions attempt to disrupt production and are successful on a large scale, labor costs will likely increase and work stoppages may be encountered, which could be particularly damaging in our industry where the harvesting season for citrus crops occur at peak times and getting the fruit processed and packed on a timely basis is critical. WE ARE SUBJECT TO STATUTORY EMPLOYEE PROFIT SHARING IN MEXICO. All Mexican companies, including ours, are required to pay their employees, in addition to their agreed compensation benefits, profit sharing in an aggregate amount equal to 10% of taxable income, as adjusted to eliminate most of the effects of Mexican inflation, calculated for employee profit sharing purposes, of the individual corporation employing such employees. As a result of losses for income tax purposes at our Mexican subsidiaries over the past several years, we have not been required to pay any profit sharing. Statutory employee profit sharing expense, when paid, is reflected in our cost of goods sold and selling, general and administrative expenses, depending upon the function of the employees to whom profit sharing payments are made. Our net losses on a consolidated basis as shown in the condensed consolidated financial statements are not a meaningful indication of taxable income of our subsidiaries for profit sharing purposes or of the amount of employee profit sharing. 25 WE ARE SUBJECT TO VOLATILE INTEREST RATES IN MEXICO, WHICH COULD INCREASE OUR CAPITAL COSTS. We are subject to volatile interest rates in Mexico. 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 our Mexican subsidiaries and for growers and other Mexican parties with whom we do business, both for borrowings denominated in pesos and for borrowings denominated in dollars. As a result, costs of operations for our Mexican subsidiaries could be higher. TRADE DISPUTES BETWEEN THE UNITED STATES, MEXICO AND EUROPE COULD RESULT IN TARIFFS, QUOTAS AND BANS ON IMPORTS, INCLUDING OUR PRODUCTS, WHICH COULD IMPAIR OUR FINANCIAL CONDITION. We are subject to trade agreements between Mexico, the United States and Europe. Despite the enactment of the North American Free Trade Agreement, Mexico and the United States from time to time are involved in trade disputes. The United States has, on occasion, imposed tariffs, quotas, and importation limitations on products produced in Mexico. Because all of our products are currently produced by our subsidiaries in Mexico, which we sell in the United States and Europe, such actions, if taken, could adversely affect our business. WE ARE SUBJECT TO GOVERNMENTAL LAWS THAT RELATE TO OWNERSHIP OF RURAL LANDS IN MEXICO. We own or lease, on a long-term basis, approximately 7,000 acres of rural land in Mexico, which is used for production of the Lemon Project. Historically, the ownership of rural land in Mexico has been subject to governmental regulations, which in some cases could lead to the owner being unable to sell his land to companies putting together significant land concentrations. Although we have not experienced any major legal disputes in obtaining the land for the Lemon Project, there can be no assurance that we will be able to obtain large blocks of land for future growing projects without incurring government resistance. GENERAL BUSINESS RISKS WE MAY BE SUBJECT TO PRODUCT LIABILITY AND PRODUCT RECALL. We produce a consumer product that is subject to product recall. The testing, marketing, distribution and sale of food and beverage products entail an inherent risk of product liability and product recall. There can be no assurance that product liability claims will not be asserted against us or that we will not be obligated to recall our products. Although we maintain product liability insurance coverage in the amount of $11,000,000 per occurrence, there can be no assurance that this level of coverage is adequate. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on our consolidated results of operations and financial condition. WE ARE SUBJECT TO GOVERNMENTAL AND ENVIRONMENTAL REGULATIONS. We are subject to numerous domestic and foreign governmental and environmental laws and regulations as a result of our agricultural, food and juice processing activities. The Food and Drug Administration ("FDA"), the United States Department of Agriculture ("USDA"), the Environmental Protection Agency, and other federal and state regulatory agencies in the United States extensively regulate our activities in the United States. The manufacturing, processing, packing, storage, distribution and labeling of food and juice products are subject to extensive regulations enforced by, among others, the FDA and to inspection by the USDA and other federal, state, local agencies. Applicable statutes and regulations governing food products include "standards of identity" for the content of specific types of foods, nutritional labeling and serving size requirements and under "Good Manufacturing Practices" with respect to production processes. We believe that our products satisfy, and any new products will satisfy, all applicable regulations and that all of the ingredients used in our products are "Generally Recognized as Safe" by the FDA for the intended purposes for which they will be used. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as 26 well as potential criminal sanctions, which could have a material adverse effect on our consolidated results of operations and financial condition. The Secretaria de Agricultura, Ganaderia, Desarrollo Rural, Pesca y Alimentacion (SAGARPA), the Secretaria de Medio Ambiente y Recursos Naturales (SEMARNAT), the Secretaria de Salud (SS), and other federal and state regulatory agencies in Mexico extensively regulate our Mexican operations. Many of these laws and regulations are becoming increasingly stringent and compliance with them is becoming increasingly expensive. On a daily basis, we test our products in our internal laboratories and, periodically, submit samples of our products to independent laboratories for analysis. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on results of operations and financial condition. Although we believe that our facilities are currently in compliance with all applicable environmental laws, failure to comply with any such laws could have a material adverse effect on our consolidated results of operations and financial condition. WE ARE DEPENDENT UPON OUR MANAGEMENT TEAM. We rely on the business, technical expertise and experience of our senior management and certain other key employees. The loss of the services of any of these individuals could have a material adverse effect on results of operations and financial condition. We believe that our future success is also dependent upon our ability to continue to attract and retain qualified personnel in all areas of our business. No senior members of our Mexican operations are bound by non-compete agreements, and if such members were to depart and subsequently compete with us, such competition could have a material adverse effect on our consolidated results of operations and financial condition. WE HAVE A SEASONAL BUSINESS. We are a seasonal business and, as with any agribusiness, demand for our citrus and tropical fruit products is strongest during the fall, winter and spring when many seasonal fresh products are not readily available for sale in supermarkets in North America. In addition, a substantial portion of our exports to Japan are processed and shipped during the first and fourth quarters of each year. Our management believes that our quarterly consolidated net sales will continue to be impacted by this pattern of seasonality. WE FACE STRONG COMPETITION. We operate in a highly competitive market. The food industry, including the markets in which we compete, is highly competitive with respect to price and quality, including taste, texture, healthfulness and nutritional value. We face direct competition from citrus processors with respect to our existing product lines and face potential competition from numerous, well established competitors possessing substantially greater financial, marketing, personnel and other resources than we do. In recent years, numerous companies have introduced products positioned to capitalize on growing consumer preference for fresh fruit products. It can be expected that we will be subject to increasing competition from companies whose products or marketing strategies address these consumer preferences. WE HAVE A SHAREHOLDER THAT HAS SUBSTANTIAL CONTROL OVER OUR COMPANY AND CAN AFFECT VIRTUALLY ALL DECISIONS MADE BY OUR SHAREHOLDERS AND DIRECTORS. M & M Nominee LLC ("M & M Nominee") owns 13,149,274 shares of our common stock accounting for 62.5% of all issued and outstanding shares. As a result, M & M Nominee has the requisite voting power to significantly affect virtually all decisions made by our company and its shareholders, including the power to elect all directors and to block corporate actions such as amendments to most provisions of our articles of incorporation. This ownership and management structure could inhibit the taking of any action by our company that is not acceptable to M & M Nominee. 27 RISKS RELATING TO OUR COMMON STOCK THE DELISTING IN MARCH 2001 FROM THE NASDAQ NATIONAL MARKET MAY REDUCE THE LIQUIDITY AND MARKETABILITY OF OUR COMMON STOCK AND MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. On March 15, 2001, Nasdaq delisted our common stock from The Nasdaq National Market and moved our common stock to the Over-the-Counter Electronic Bulletin Board ("OTC Bulletin Board") under the symbol "UNMG.OB". Although our securities are included on the OTC Bulletin Board, there can be no assurance that a regular trading market for the securities will be sustained in the future. The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than The Nasdaq Stock Market, and quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers as are those for The Nasdaq Stock Market. Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain. The reduced liquidity of our common stock and the reduced public access to quotations for our common stock could depress the market price of our common stock. "PENNY STOCK" REGULATIONS MAY IMPOSE RESTRICTIONS ON MARKETABILITY OF OUR COMMON STOCK. The Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any equity security that is not traded on a national securities exchange or Nasdaq and that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Since our securities that are currently included on the OTC Bulletin Board are trading at less than $5.00 per share at any time, our common stock may become subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. Accredited investors generally include investors that have assets in excess of $1,000,000 or an individual annual income exceeding $200,000, or, together with the investor's spouse, a joint income of $300,000. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require, among other things, the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market and the risks associated therewith. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the penny stock rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of stockholders to sell our securities in the secondary market. OUR COMMON STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE. The price of our common stock has been particularly volatile and will likely continue to fluctuate in the future. Announcements of chronological innovations, regulatory matters or new commercial products by us or our competitors, developments or disputes concerning patent or proprietary rights, publicity regarding actual or potential product results relating to products under development by us or our competitors, regulatory developments in both the United States and foreign countries, public concern as to the safety of pharmaceutical or dietary supplement products, and economic and other external factors, as well as period-to-period fluctuations in financial results, may have a significant impact on the market price of our common stock. In addition, from time to time, the stock market experiences significant price and volume fluctuations that may be unrelated to the operating performance of particular companies or industries. The market price of our common stock, like the stock prices of many publicly traded smaller companies, has been and may continue to be highly volatile. 28 WE HAVE NEVER PAID A DIVIDEND. We have never paid cash dividends on our common stock or any other securities. We anticipate that we will retain any future earnings for use in the expansion and operation of our business, and do not anticipate paying cash dividends in the foreseeable future. PART I. - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS We are exposed to market risk from changes in our outstanding bank debt and interest rates. The following table presents principal cash flows and related weighted-average interest rates by expected maturity dates for our debt obligations. INTEREST RATE SENSITIVITY Principal Amount by Expected Maturity Average Interest Rate (In thousands, except interest rates)
Estimated Fair There- Value 2002 2003 2004 2005 2006 after Total 9/30/02 ------ ------ ------ ------ ------ ------- ----- --------- Long-term debt, including current portion Fixed rate.................... $ 466 $ 28 $ 14 $ -- $ -- $ -- $ 505 $ 508 Average interest rate......... 18.3% 6.9% 6.9% Variable rate................. $ 146 $ 300 $300 $ 400 $ 700 $6,196 $8,042 $8,042 Average interest rate......... 9.1% 7.3% 7.3% 7.3% 7.3% 6.8%
At September 30, 2002, U.S. dollar denominated long-term debt amounted to $3.2 million as compared to Mexican peso denominated long-term debt of $5.4 million. PART I. - ITEM 4 CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. We have conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended, within 90 days of the filing date of this Quarterly Report on Form 10-Q. Based on our evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us is recorded, processed, summarized and reported within the required time periods. In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Changes in Internal Controls. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our evaluation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 11, "Commitments and Litigation", to our condensed consolidated financial statements for a discussion of our legal proceedings. 29 ITEM 2. SALE OF UNREGISTERED SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and " Risk Factors - Risks Relating to Our Financial Condition - We may be forced to seek protection under applicable provisions of the federal bankruptcy code if Rabobank Nederland or one of our Mexican banks exercises their legal rights and remedies", for a discussion of our noncompliance with our loan agreements with Bancomext and Rabobank Nederland. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders on September 18, 2002, the shareholders of our company elected or ratified, along with the results of these votes, the following: 1. Elected seven (7) Directors.
DIRECTOR NOMINEES FOR ABSTAIN ----------------- ---------- ------- Emilio Castillo Olea ......................... 17,312,345 48,732 David E. Ziegler ............................. 17,312,345 48,732 Jakes Jordaan ................................ 17,315,545 45,532 Federico Chavez Peon ......................... 17,312,545 48,532 Luis A. Chico Pardo .......................... 17,315,545 45,532 Iain Aitken .................................. 17,315,595 45,482 Arturo Herrera Barre ......................... 17,312,595 48,482
2. Ratified Mancera, S.C., Member Practice of Ernst & Young Global as independent public accountants of our company for the fiscal year ending December 31, 2002. Results of the voting, are as follows: FOR: ............... 17,282,382 AGAINST: ........... 25,195 ABSTAIN: ........... 53,500 ITEM 5. OTHER INFORMATION None ITEM 6 . EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits: EXHIBIT NO. 99 99(a) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 B. Reports on Form 8-K: None 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE UNIMARK GROUP, INC. ------------------------------- Registrant Date: November 19, 2002 /s/ Emilio Castillo Olea ------------------- ------------------------------- Emilio Castillo Olea, President (Principal Executive Officer) Date: November 19, 2002 /s/ David E. Ziegler ------------------- ------------------------------- David E. Ziegler, Chief Financial Officer (Principal Accounting Officer) 31 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Emilio Castillo Olea certify that: 1. I have reviewed this quarterly report on Form 10-Q of The UniMark Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ Emilio Castillo Olea ----------------- ------------------------------- Emilio Castillo Olea, President (Principal Executive Officer) 32 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, David E. Ziegler certify that: 1. I have reviewed this quarterly report on Form 10-Q of The UniMark Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; e) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and f) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ David E. Ziegler ------------------ --------------------- David E. Ziegler, Chief Financial Officer (Principal Accounting Officer) 33 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION 99(a) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-99.(A) 3 d01327exv99wxay.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 99(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES -OXLEY ACT OF 2002) In connection with the Quarterly Report of The UniMark Group, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacity and date indicated below, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934, except that the Company's financial statements have not been reviewed by independent public accountants as required pursuant to Rule 10-01(d); and (2) The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations. Date: November 19, 2002 /s/ Emilio Castillo Olea ------------------- -------------------------------------- Emilio Castillo Olea, President (Principal Executive Officer) EX-99.(B) 4 d01327exv99wxby.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 99(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES -OXLEY ACT OF 2002) In connection with the Quarterly Report of The UniMark Group, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacity and date indicated below, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, except that the Company's financial statements have not been reviewed by independent public accountants as required pursuant to Rule 10-01(d); and (2) The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations. Date: November 19, 2002 /s/ David E. Ziegler ------------------ ----------------------------------- David E. Ziegler, Chief Financial Officer (Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----