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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
Registrant, State of Incorporation, Address and Telephone Number
----------------------------------------------------------------
THE UNIMARK GROUP, INC.
(A Texas Corporation)
UNIMARK HOUSE
124 McMAKIN ROAD
BARTONVILLE, TEXAS 76226
(817) 491-2992
IRS Employer Identification Number 75-2436543
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
At July 31, 2003, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $3,158,222 based on the
closing price of the Registrant's Common Stock on the Pink Sheets. The number of
outstanding shares of the Registrant's Common Stock, par value $0.01 per share,
was 21,044,828 on July 31, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-K incorporates certain information by reference
from the Registrant's definitive proxy statement to be filed concurrently
herewith pursuant to Regulation 14A under the Securities Exchange Act of 1934.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Annual Report on Form 10-K 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 - Risk Factors" and "Business," 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 2003 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 our common stock. Risks relating
to our financial condition include the fact that we may continue to sustain
losses and accumulated deficits in the future; that we are dependent upon a
limited number of customers, particularly Del Monte Foods; that we may lose our
net operating loss carryforwards, which could prevent us from offsetting future
taxable income in the United States; and that we are subject to risks associated
in implementation of our business strategy. Risks relating to our Mexican
operations include the fact that we are subject to the risk of fluctuating
foreign currency exchange rates and inflation; that we are dependent upon fruit
growing conditions, access and availability of water and the price of fresh
fruit; that labor shortages and union activity could affect our ability to hire
and we are dependent on the Mexican labor market; that we are subject to
statutory employee profit sharing in Mexico; that we are subject to volatile
interest rates in Mexico which could increase our capital costs; that trade
disputes between the United States, Mexico, Japan and Europe could result in
tariffs, quotas and bans on imports, including our products, which could impair
our financial condition; and that we are subject to governmental laws that
relate to ownership of rural lands in Mexico. General business risk include the
fact that we may be subject to product liability and product recall; that we are
subject to governmental and environmental regulations; that we are dependent
upon our management team; that we have a seasonal business; that we face strong
competition; that we have a significant shareholder that has substantial control
over our company and can affect virtually all decisions made by our shareholders
and directors; and we are subject to recent legislative actions and potential
new accounting pronouncements. Risks relating to our common stock include the
delisting from the Over-the-Counter Bulletin Board has further reduced the
liquidity and marketability of our common stock and may further depress the
market price of our common stock; that "Penny Stock" regulations may impose
restrictions on marketability of our stock; that our common stock price has been
and may continue to be highly volatile; and that we have never paid a dividend.
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
Due to the continued unfavorable and volatile worldwide market prices of
frozen concentrate orange juice ("FCOJ") that existed over the past several
years and negative long-term prospects for the FCOJ market, we explored various
strategic alternatives for our juice and oil business segment.
In March 2003, we received formal offers from The Coca-Cola Export
Corporation, Mexico Branch ("Coca-Cola") to purchase our Victoria juice and oil
plant and rescind certain contract rights for the growing and processing of
Italian lemons for aggregate cash payments by Coca-Cola of $16.0 million. In
April 2003, we consummated the portion of the transaction with Coca-Cola
pertaining to the rescission of all contract rights and obligations for the
growing and processing of Italian lemons for an aggregate cash payment of $12.5
million. In this regard, we retained the approximately 7,100 acres of lemon
groves, which included all the land, irrigation systems and related agricultural
equipment. As part of the sale agreement we are contractually restricted from
industrial processing our lemons and are limited in marketing our lemons solely
as fresh fruit until July 30, 2007.
2
As of July 25, 2003, approximately $2.5 million of the gross proceeds from
the Coca-Cola transaction have been used to pay past due accounts payable and
operating expenses of our lemon groves and juice and oil processing plants prior
to sale, severance payments to former plant and administrative employees of the
juice division, repay the Cooperative Centrale Raiffeisen-Boerenleenbank B.A.
("Rabobank Nederland") loan of $1.5 million, repay the Banco Nacional de Mexico,
S.A., ("Banamex") loans of $558,000 and repayment of bridge loans to our largest
shareholder, M&M Nominee, LLC ("M&M Nominee") of $368,000. The remaining cash of
approximately $7.6 million is anticipated to be used to pay operating expenses
of the lemon groves and provide working capital for our continuing operations.
Cash disbursements for purposes other than those associated with GISE's juice
division and agricultural operations are subject to the FOCIR Agreement and
would require their prior approval for disbursement.
In June 2003, we sold our Poza Rica juice plant to an unaffiliated third
party for $1.0 million plus value added taxes of $120,000. As of July 25, 2003,
total cash payments received amounted to $345,000 with the remaining balance
payable in six installments under a promissory note. The remaining payments,
which aggregate $220,000 in 2003 and $590,000 in 2004, are secured by personal
guarantees of the purchaser's shareholders and a related company and a pledge
agreement.
Although no assurances can be given, we anticipate that the closing date of
the sale of our Victoria juice and oil plant, for a cash payment of $3.5
million, will be during the third quarter of 2003.
With the completion of the pending sale of our Victoria juice and oil plant
and related processing equipment, our juice and oil business segment will
consist exclusively of our Italian lemon groves. Our Board of Directors is
exploring several strategic alternatives for our lemon groves, which includes
the divestiture of the lemon groves, a joint venture or strategic partnering
relationship for the growing, distribution and marketing of fresh lemons. Also,
our Board of Directors is evaluating operating strategies for selling our lemons
in the fresh markets of the United States, Europe and the Pacific Rim, or to
other users of fresh lemons.
GENERAL
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. Historically, we have, for
operating and financial reporting purposes, classified our business into two
distinct business segments: packaged fruit and juice and oil. Upon the
divestiture of our juice and oil division's remaining assets, our business
segments for operating and financial reporting purposes will consist of two
distinct business segments: packaged fruit and agricultural operations.
Within our packaged fruit business 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 business segment processes
and packages our products at three processing plants in Mexico. Our Mexican
plants are located in major fruit growing regions. We utilize independent food
brokers to sell our foodservice and industrial products in the United States.
Sales to our Japanese consumers are facilitated through Japanese trading
companies.
The UniMark Group, Inc. was organized in 1992 to combine the packaged fruit
operations of a Mexican citrus and tropical fruit processor, which commenced
operations in 1974, with UniMark Foods, Inc., a company that marketed and
distributed products in the United States. On August 31, 2000, we sold to Del
Monte Foods Company ("Del Monte") all of our interests in our worldwide rights
to the Sunfresh(R), Fruits of Four Seasons(R) and Flavor Fresh(TM) brands, our
McAllen, Texas distribution facility, including certain inventory associated
with our retail and wholesale club business, and other property and equipment.
Separately, we entered into a 5-year supply agreement with Del Monte under which
we have been contracted to produce chilled and canned citrus products for Del
Monte's retail and wholesale club markets. Under the terms of the agreement, Del
Monte has agreed to purchase minimum quantities of our citrus products at agreed
upon prices for sale in the United States. We retained the rights to our
foodservice, industrial and Japanese business. Also, we were granted by Del
Monte a 5-year license for
3
the rights to the Sunfresh(R), Fruits of Four Seasons(R) and Flavor Fresh(TM)
brands for specific areas, including Europe, Asia, the Pacific Rim and Mexico.
We conduct substantially all of our operations through our wholly owned
operating subsidiaries. In Mexico, our operating 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").
PACKAGED FRUIT BUSINESS SEGMENT
General. In our packaged fruit business segment, we focus on niche citrus
and tropical fruit products including chilled, frozen and canned cut fruits and
other specialty food ingredients. Our packaged fruit operations produce an array
of products that include refrigerated cut fruits for retail as well as
foodservice sales, individually quick frozen fruits ("IQF") primarily for
industrial sales in the United States as well as Japan and pasteurized canned
fruits. As discussed below, our retail and wholesale club products in the United
States are sold directly to Del Monte pursuant to our 5-year supply agreement
and our foodservice and industrial products are typically sold through brokers
or distributors. We process and package our products in three plants, which are
located in major fruit growing regions in Mexico.
Our relationship with Del Monte. On August 31, 2000, we sold to Del Monte
all of our interests in the Sunfresh(R), Fruits of Four Seasons(R) and Flavor
Fresh(TM) brands, as well as related inventory in the United States and our
warehouse facility in McAllen, Texas. In connection with this sale, we agreed
not to sell any of our products in the United States retail and wholesale club
markets distribution channel. Separately, we entered into a 5-year supply
agreement in which, Del Monte agreed to purchase minimum quantities of products
at agreed upon prices for sale in the United States retail and wholesale club
markets. As a result of the sale, sales to Del Monte represented 9.7%, 46.4% and
59.0%, respectively, of our 2000, 2001 and 2002 consolidated net sales.
Strategy. Our strategic objective in our packaged fruit business segment is
to be a leading supplier of premium processed cut fruit products to major
branded food companies and national restaurant chains. To achieve these
objectives, the key elements of our growth and operating strategies are as
follows:
- - Strengthen our Del Monte relationship in the United States and pursue
strategic partnering with food marketers. We intend to leverage our
production capacity and operating expertise in Mexico through strengthening
our Del Monte relationships in the United States and pursuing strategic
partnering agreements with food marketers in non-United States markets,
specifically Europe and the Pacific Rim.
- - Focus on premium quality products. Our premium product positioning requires
that we implement and monitor strict quality control standards in the
growing and production of our products.
- - Penetrate new markets. We plan to pursue expansion of our products to other
regions of the world, specifically Europe, the Pacific Rim and Mexico.
- - Joint new product development. We intend to work closely with our strategic
partners to develop and introduce new and innovative premium products, such
as the new 8oz. cup of fresh red grapefruit now produced for Del Monte.
- - Strict cost control. Under our strategy, cost control is imperative. We
plan to continue our focus on cost control by leveraging our fruit
procurement purchasing power, increasing operating efficiencies and
reducing general and administrative costs.
4
Current products. Our principal products are derived from citrus and
tropical fruits. We have focused on applying our knowledge and expertise of
fruit growing and processing capabilities to develop two key product categories:
cut fruits and specialty food ingredients.
Cut Fruits. Presently, our cut fruit product offerings include:
- - Chilled fruit. The chilled fruit line includes mango slices, red and white
grapefruit sections and slices, orange slices, pineapple chunks and a
variety of fruit salads. These products are packed for retail, wholesale
club and foodservice customers in a variety of presentations. As of
September 1, 2000, the retail and wholesale club items are marketed and
sold by Del Monte in the United States under the Sunfresh(R) brand. We now
sell this product line in Mexico under our own brand name, Sunfruit. In
early 2003, we began production of a new 8oz. cup of fresh red grapefruit
for Del Monte, which is sold under their Fruit Naturals(R) trade name.
- - Canned fruit. The canned fruit line includes orange and grapefruit
segments, as well as citrus and tropical salads packed primarily for retail
and wholesale club customers. These products are marketed and sold by Del
Monte in the United States retail and wholesale club markets under the
Sunfresh(R) brand.
- - IQF fruit. The frozen line of fruit includes melon, mango, orange,
grapefruit, papaya, pineapple and various combinations of products are
packed for foodservice and industrial customers.
Specialty Food Ingredients. Presently, our specialty food ingredients
include:
- - Citrus segments. We market citrus sections packaged in industrial sizes to
food and soft drink producers in Japan to enhance the flavor and texture of
fruit juices and desserts.
- - Citrus cell-sacs. We developed a unique processing method that separates
cold-peeled citrus fruit into individual juice-containing cell-sacs. These
cell-sac products are sold to food and soft drink producers in Japan to
enhance the flavor and texture of fruit juices and desserts.
SALES AND DISTRIBUTION
Our sales and distribution activities are conducted as follows:
United States Sales. As of September 1, 2000, we discontinued selling and
distributing our retail and wholesale club line of products in the United
States. These product lines are now marketed, distributed and sold exclusively
by Del Monte in the United States. Under the terms of the supply agreement with
Del Monte, we agreed to produce these canned and chilled citrus products for Del
Monte, who has agreed to purchase a minimum volume of these products at
predetermined prices. The supply agreement has an initial 5-year term. At the
expiration of the initial term both parties can agree to renew the agreement.
Del Monte is the largest producer and distributor of processed vegetables and
fruit products in the United States. Del Monte's products are sold by most
retail grocers, supercenters, wholesale club stores and mass merchandisers
throughout the United States.
Foodservice and Industrial Sales. Foodservice and industrial sales, which
were channels excluded from the Del Monte transaction, are managed by a small
sales team based in Bartonville, Texas. Sales to fast food chains, restaurants,
hospitals and other foodservice customers are made either directly by us to end
users or through several foodservice brokers and distributors. Industrial sales
consist primarily of IQF sales to industrial users in the United States for
re-packing or further processing. We utilize several independent industrial food
brokers to sell our products to industrial users in the United States.
Japanese Sales. We export a line of pasteurized citrus products to Japan
for use in the food and beverage industries. Although sales to industrial
customers in Japan are facilitated through Japanese trading companies, we
maintain direct relationships with our major industrial customers. An export
sales
5
manager located in Mexico City, who deals primarily with Japanese trading
companies, conducts our Japanese exports.
European Sales. Currently, we conduct a limited amount of business in
Europe. As a result of recent changes in the Eurodollar in relation to the U.S.
dollar and Mexican peso, which could result in potential new opportunities, we
will look to expand our European business in our cut fruits and specialty food
ingredients product offerings. No assurances can be given that these efforts
will be successful.
Mexican Sales. As part of the sale to Del Monte in August 2000, Del Monte
granted us, under a 5-year license, the rights to sell the Sunfresh(R) brand in
specific countries, including Mexico. Initially sales to our Mexico retail and
wholesale club customers were made through a limited number of distributors.
However, they are now conducted directly to the customer using the Sunfruit
brand name. Sales to our customers in Mexico during 2002 were approximately
$160,000.
The following table shows the amount and percentage of net sales
contributed by the various distribution channels for our packaged fruit products
during the previous three years:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2000 2001 2002
-------------------- -------------------- --------------------
NET NET NET
SALES PERCENT SALES PERCENT SALES PERCENT
--------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Packaged Fruit:
Retail .......................... $ 16,348 50.2% $ 138 0.5% $ 158 0.6%
Del Monte ....................... 4,392 13.5 15,860 58.7 16,021 63.9
Japan ........................... 4,695 14.4 7,339 27.1 5,705 22.8
Wholesale club .................. 2,810 8.6 -- -- -- --
Foodservice ..................... 2,667 8.2 2,135 7.9 1,846 7.4
Industrial and other ............ 1,650 5.1 1,560 5.8 1,339 5.3
--------- ------ --------- ------ --------- ------
Total .............. $ 32,562 100.0% $ 27,032 100.0% $ 25,069 100.0%
========= ====== ========= ====== ========= ======
Retail sales. Prior to the Del Monte transaction in 2000, we marketed our
products to over 200 regional and national supermarket chains and wholesalers
throughout the United States. In conjunction with our own national sales force,
we utilized over 50 independent food brokers and distributors to sell our
products.
Effective September 1, 2000, as part of the Del Monte transaction, we
entered into a 5-year supply agreement pursuant to which we produce and sell to
Del Monte, for the retail and wholesale club markets, chilled and canned citrus
products. Average selling prices under the Del Monte supply agreement are
significantly less than those previously charged to the national supermarket
chains. This is the result of our elimination of substantially all our United
States costs from future periods that were associated with sales and marketing,
distribution, accounting functions, interest expense and headcount.
Japanese sales. We export a line of frozen and pasteurized citrus products
and juice-containing citrus cell-sac products to Japan for use in the food and
beverage industries. Although sales to industrial customers in Japan are
facilitated through Japanese trading companies, we maintain direct relationships
with our industrial customers.
Wholesale club sales. Prior to the Del Monte transaction, we sold our
products directly to wholesale clubs throughout the United States. Presently,
sales for the wholesale club channel are made to Del Monte pursuant to the
5-year supply agreement.
Foodservice sales. Our sales to national restaurant chains, restaurants,
hospitals and other foodservice customers are made either directly to or through
a limited number of foodservice distributors or by our foodservice sales force.
6
Industrial and other sales. Industrial and other sales consist primarily of
IQF sales to industrial users in the United States for re-packing or further
processing. We utilize several independent industrial food brokers to sell our
products to industrial users in the United States.
Distribution. We operate our own trucking fleet to transport finished
packaged fruit products from our Mexican manufacturing facilities to Del Monte's
distribution center and other cold storage facilities in McAllen, Texas.
Products exported to Europe and Japan are shipped directly from Mexico.
PROCUREMENT
Currently, a substantial quantity of the fruit we process is purchased from
third parties. However, our Mexico grapefruit growing operations supply a
significant amount of our grapefruit requirements. In addition, we purchase
grapefruit from growers in the Texas Rio Grande Valley for processing at our
Mexican facilities. Substantially all of the mangos, oranges and melons used in
our operations are purchased from third-party growers throughout Mexico.
PROCESSING
Upon arrival at our Mexico processing plants, fruit is inspected and
washed. On the production line, the fruit is peeled and cut into various
presentations (slices, sections, chunks, and balls). Following this process,
some fruits are further processed into juice-containing cell-sacs. In addition,
some processed fruits are frozen utilizing our IQF process. Other processed
fruits are transferred directly into bulk storage or final product packaging
(jars and cans). After further processing, the juice-containing cell-sacs are
canned while the frozen products are packaged into plastic bags or trays. Our
ICMOSA plant is our primary plant and serves as the hub for our other two
Mexican processing plants. All of our products are labeled and packaged for
final shipment at each of our plants.
To increase our operating efficiency, we are currently exploring "enzyme
peeling" as an alternative to our traditional hand-peeling process. This
technique has the potential of significantly improving fruit yields as the use
of knives is eliminated in the peeling process, which translates to less fruit
and labor costs per production unit. No assurance can be given that this process
will be successfully implemented.
JUICE AND OIL BUSINESS SEGMENT
JUICE DIVISION
Recent Developments. Due to the continued unfavorable and volatile
worldwide market prices of FCOJ that existed over the past several years and
negative long-term prospects for the FCOJ market, we explored various strategic
alternatives for our juice and oil business segment.
In March 2003, we received formal offers from Coca-Cola to purchase our
Victoria juice and oil plant and rescind certain contract rights for the growing
and processing of Italian lemons for aggregate cash payments by Coca-Cola of
$16.0 million. In April 2003, we consummated the portion of the transaction with
Coca-Cola pertaining to the rescission of all contract rights and obligations
for the growing and processing of Italian lemons for an aggregate cash payment
of $12.5 million. In this regard, we retained the approximately 7,100 acres of
lemon groves, which included all the land, irrigation systems and related
agricultural equipment. As part of the sale agreement we are contractually
restricted from industrial processing our lemons and are limited in marketing
our lemons solely as fresh fruit until July 30, 2007.
In June 2003, we sold our Poza Rica juice plant to an unaffiliated third
party for $1.0 million plus value-added taxes of $120,000. As of July 25, 2003,
total cash payments received amounted to $345,000 with the balance payable in
six installments under a promissory note. The remaining payments, which
aggregate $220,000 in 2003 and $590,000 in 2004, are secured by personal
guarantees of the purchaser's shareholders and a related company and a pledge
agreement.
7
Although no assurances can be given, we anticipate that the closing date of
the sale of our Victoria juice and oil plant, for a cash payment of $3.5
million, will be during the third quarter of 2003.
With the completion of the pending sale of our Victoria juice and oil plant
and related processing equipment, our juice and oil business segment will
consist exclusively of our agricultural operation; our Italian lemon groves. Our
Board of Directors is exploring several strategic alternatives for our lemon
groves, which includes the divestiture of the lemon groves, a joint venture or
strategic partnering relationship for the growing, distribution and marketing of
fresh lemons. Also, our Board of Directors is evaluating operating strategies
for selling our lemons in the fresh markets of the United States, Europe and the
Pacific Rim, or to other users of fresh lemons.
Processing Season. Historically the citrus processing season in Mexico
extended from September to mid-July of the following year.
Processing plants. During the last processing season that we processed
FCOJ, the 2000/2001 processing season, we operated two juice processing plants,
which were located in the citrus growing region of Mexico close to the United
States and the Mexican ports of Tampico and Veracruz. Collectively, the plants
had the capacity to process 800 metric tons of fruit per day, with 15 juice
extractors and approximately 89,000 square feet of plant space. Our citrus
concentrates and single strength citrus juices were sold directly to juice
importers and distributors in North America, Europe and the Pacific Rim.
During the 2000/2001 processing season, as outlined below, our juice
division produced a diverse array of products for distribution under different
arrangements as follows:
- - Processing Contract. Our juice division had a long-term lemon processing
contract with Coca-Cola that was due to expire in 2007. Under the terms of
this contract, we were obligated to process between 12,000 and 300,000
metric tons of lemons for Coca-Cola. However, our Victoria juice and oil
plant processing capacity for Italian lemons was approximately 40,000
metric tons, substantially less than the contract requirement. During the
current processing season, we processed between 25,000 and 30,000 metric
tons. As we did not have sufficient production capacity for future years
processing, we anticipated that performing under the terms of this contract
would require substantial capital expenditures or securing additional
processing capacity. As a result, this contract has been rescinded. See
"Business - Recent Developments."
- - Season Contract Orders. During the 2000/2001 processing season, our juice
division received "season orders," primarily for FCOJ, which were placed
for the duration of the season. A limited volume of single strength orange
juice was also manufactured for these seasonal orders. At the season's
onset, delivery schedule and prices were negotiated.
- - Spot Market. In prior processing seasons, our juice division produced a
significant amount of concentrate, primarily orange juice, based on annual
sales estimates. As a result, our juice division had to invest significant
working capital to build up the inventory during that processing season to
sell in the future at market prices. As a result of our decision to divest
our juice division assets, our present and future working capital
requirements were substantially reduced.
Current Products. In prior years, our juice division marketed directly to
major industrial users a full line of citrus juice products including citrus
concentrates and single strength juices:
- Citrus concentrates. Our citrus juice concentrates were produced from
oranges, grapefruits, tangerines, Persian limes and lemons. These
products were squeezed, filtered and concentrated through evaporation
and then packed in drums or shipped in tankers.
- Single strength juices. Our citrus juices were produced from oranges,
which were pasteurized and shipped directly to the United States
border primarily in stainless steel containers for direct delivery to
customers.
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- Citrus oils. Our citrus oils were extracted from oranges, grapefruits,
tangerines, Persian limes and lemons. These oils were primarily used
by our customers in beverages, perfumes and other scented products.
- Cattle feed. As a by-product of the juice production, which was sold
primarily to local farmers, we produced cattle feed by dehydrating the
citrus peel.
- Pectin. As a by-product of the Italian lemon processing, the lemon
peel was processed for Coca-Cola for the production of pectin.
Procurement. During the 2000/2001 processing season, we purchased citrus
products from growers throughout Mexico. Most of our orange supply was procured
from local suppliers under various arrangements, including pre-harvest
contracts, operating agreements, individual fixed price contracts to purchase a
grower's entire production and cash on delivery. The principal fruit supply
areas were in the following states: San Luis Potosi (flat and mountain region),
Veracruz (flat and hill region) and Tamaulipas (central and south state region).
The State of Veracruz, located along the east coast of Mexico, is Mexico's
largest orange producing region.
We believed that the geographic diversification provided from our citrus
sourcing reduced our juice division's risk of supply, as states such as
Veracruz, historically, had very low risk of damage by frost or hurricane and
allowed our juice division to enjoy an extended harvesting season of up to 10
months. Normally, the harvesting season commenced in September with the
processing of Italian lemons until November when the processing of grapefruit,
tangerines, Persian limes and oranges began and continued until the end of the
regular season in May (8 months). As a result of our juice division's access to
fruit from the North of Veracruz and San Luis Potosi, our harvesting season
generally lasted two additional months, until mid-July. Our Victoria plant
processed fruit grown primarily in the northeastern region of Mexico. The fruit
was transported by common carrier to our two Mexican plants.
Processing. Our juice division's processing plants were substantially
automated. Once the fruit arrived at the plant, it was unloaded onto rollers and
temporarily stored in silos. When released to production, the fruit was then
washed and inspected. Bruised and damaged fruit was removed by hand with the
remaining fruit routed to rollers with short needles, which extracted the oil
from the peel. Once the oil was removed, the fruit was sorted by size and sent
to the slicing and squeezing machines. These machines sliced the fruit, squeezed
the juice and extracted the pulp. The juice was then separated from the pulp and
the water was extracted from the juice through evaporation. The juice
concentrate and essence oils were then stored on site until shipped to our
customers.
Sales and Distribution. Most of our juice division's production was sold to
industrial users and bottlers of juice products. Because Mexican juice has
desirable taste and color properties, it was frequently used to enhance the
flavor and color of the final product and was often used for blending with
orange juice from other countries, particularly Brazil. Our juice division
transported finished product in tankers or drums by common carrier to North
American customers. Products to overseas customers were shipped in ocean freight
containers.
AGRICULTURAL OPERATION
General. Our Agricultural Operation acquired and developed, pursuant to a
long-term supply contract with Coca-Cola, approximately 2,871 hectares (7,100
acres) of lemon groves for the Lemon Project, of which approximately 1,950
hectares (4,800 acres) comprise the current planting area. This contract has
been rescinded. See "Business - Recent Developments." Our Board of Directors is
exploring several strategic alternatives for our lemon groves, which include the
divestiture of the lemon groves and a joint venture or strategic partnering
relationship for the growing, distribution and marketing of fresh lemons. Also,
our Board of Directors is evaluating operating strategies for selling our lemons
in the fresh markets
9
of the United States, Europe and the Pacific Rim, or to other users of fresh
lemons. Through geographical diversification, staggered planting, preventive
maintenance including fumigation and fertilization and a highly developed
technical staff we intend to reduce the agricultural risk. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors - We are dependent upon fruit growing conditions, access to water and
availability and price of fresh fruit."
Strategy. With the completion of the pending sale of our Victoria juice and
oil plant and related processing equipment, our juice and oil business segment
will consist exclusively of our agricultural operation; our Italian lemon
groves. Our Board of Directors is exploring several strategic alternatives for
our lemon groves, which includes the divestiture of the lemon groves, a joint
venture or strategic partnering relationship for the growing, distribution and
marketing of fresh lemons. Also, our Board of Directors is evaluating operating
strategies for selling our lemons in the fresh markets of the United States,
Europe and the Pacific Rim, or to other users of fresh lemons.
Lemon Project. As of December 31, 2002, our Lemon Project consisted of
2,871 hectares (approximately 7,100 acres). This land, which is situated in the
northern states of Tamaulipas and San Luis Potosi, consists of two separate
groves with different maturity profiles. These groves were initially planted
with approximately 800,000 lemon trees. Pursuant to the terms of the now
cancelled long-term supply contract, Coca-Cola provided us, free of charge,
765,000 lemon tree seedlings that were used for planting approximately 6,023
acres. We also operate our own nursery where young seedlings are prepared for
planting, which provided us with the remaining 35,000 trees, as well as acting
as a source of replanting for damaged trees. In connection with the transaction
with Coca-Cola pertaining to the rescission of all contract rights and
obligations for the growing and processing of Italian lemons for an aggregate
cash payment of $12.5 million, we elected to cease active cultivation of
recently planted lemon tree seedlings and used some for replanting of damaged
trees. As such, we presently have approximately 560,000 lemon trees under active
cultivation on approximately 4,800 acres. As part of the sale agreement we are
contractually restricted from industrial processing our lemons and are limited
in marketing our lemons solely as fresh fruit until July 30, 2007.
The planting program began in November 1996 with the first harvests in late
2000. Following is a summary of our first three years harvests:
2000 2001 2002
---- ---- ----
Metric tons 96 3,800 3,348
Billed revenue $ 13,000 $ 560,000 $ 475,000
All costs incurred to plant and maintain our lemon orchards have been
capitalized and deferred as of December 31, 2002. As a result of the rescission
of all contract rights and obligation for the growing of Italian lemons in April
2003, these deferred and capitalized costs will be amortized over their
estimated useful lives starting in our second quarter of 2003. In prior years,
it was determined that these deferred costs would be amortized based on the
projected year's yield to total estimated yield over the life of the rescinded
supply contract.
As of December 31, 2002, our lemon groves consisted of the following:
PROPERTY
NAME LOCATION HECTARES ACREAGE CROP INTEREST
---- -------- -------- ------- ---- --------
Gomez Farias, (A)
Tamaulipas,
El Cielo Grove ........... Mexico 725 1,791 Italian lemons Owned
Cd. Valles,
San Luis Potosi,
Flor de Maria Grove....... Mexico 2,146 5,301 Italian lemons Leased
------ -----
Total 2,871 7,092
====== =====
(A) One hectare equals approximately 2.47 acres.
10
Included in our lemon land is a 30-year lease associated with 2,100
hectares (approximately 5,200 acres) of rural land used for the growing of
Italian lemons, comprising substantially all the land of our Flor de Maria
grove. This lease, which was prepaid at the price of the land sales price, $1.9
million, was entered into in 1999 with a group of local Mexican land owners,
which acquired the land under the "Ejido" system of land ownership. We are
currently in the process of transitioning the lease into a land purchase, which
is not expected to result in any significant increase in the amounts previously
paid.
EMPLOYEES
As of June 30, 2003, we employed approximately 1,200 employees in our
packaged fruit operations and approximately 115, all of which are in the
agricultural sector, in our juice and oil operations, all of which were located
in Mexico. In Mexico, labor relations are governed by separate collective labor
agreements between the employers and the unions representing the particular
group of employees. Most of our employees in Mexico, whether seasonal or
permanent, are affiliated with labor unions which are generally affiliated with
a national confederation. Consistent with other labor practices in Mexico, wages
are negotiated every year while additional benefits are negotiated every two
years. Termination payments are charged to operations in the year in which the
decision to dismiss an employee is made. All Mexican companies, including ours,
are required to pay their employees, in addition to their agreed compensation
benefits, statutory 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
had to pay any statutory profit sharing. Our corporate office is located in
Bartonville, Texas and consists of four full time employees.
ITEM 2. PROPERTIES
GROWING OPERATIONS
To ensure the availability of the highest quality raw materials, we own or
operate several citrus groves in Mexico. We believe that Mexico's favorable
climate and soil conditions, coupled with competitive labor and land costs,
offer significant opportunities to grow high quality fruits in a cost-effective
manner. Presently, a large portion of our raw materials are provided by growers
under various arrangements, including operating agreements and individual fixed
price contracts. The following table sets forth our various agricultural groves:
11
PROPERTY
NAME LOCATION ACREAGE CROP INTEREST
---- -------- ------- ---- --------
PACKAGED FRUIT GROVES
Loma Bonita Grove........... Loma Bonita,
Oaxaca, Mexico 190 acres White grapefruit Leased
Las Varas Grove(1) (2)...... Loma Bonita,
Oaxaca, Mexico 642 acres Pineapple Leased
Villa Azueta I Grove (1) Villa Azueta,
(3) ...................... Veracruz, Mexico 84 acres Pineapple Leased
Villa Azueta II Grove (1) Villa Azueta,
(4)....................... Veracruz, Mexico 610 acres Pineapple Owned
Azteca Grove (5)............ Montemorelos, White and rio red
Nuevo Leon, Mexico 144 acres grapefruit Leased
Las Tunas Grove............. Isla, White and pink
Veracruz, Mexico 120 acres grapefruit Leased
LEMON GROVES
El Cielo Grove ............. Gomez Farias,
Tamaulipas, Mexico 1,791 acres Italian lemons Owned
Flor de Maria Grove......... Cd. Valles, San Luis
Potosi, Mexico 5,301 acres Italian lemons Leased
(1) During the third quarter of 2002, we discontinued our pineapple growing
operations.
(2) As a result of the decision to discontinue our pineapple growing
operations, on May 8, 2003, we entered into a mutual release agreement with
the owners of the grove, which terminated the lease.
(3) In 1995, we entered into a 10-year lease for this grove and have an option
to purchase the grove for fair market value determined at the time such
option is exercised.
(4) This grove is currently being held for sale.
(5) In 1994, ICMOSA entered into a 10-year operating agreement with the owners
of this grove, which is located near the ICMOSA plant in Montemorelos.
Pursuant to the agreement, ICMOSA operates the grove and purchases all the
grapefruit at a formula price tied to the price of grapefruit purchased
from unrelated third parties. The grove consists of approximately 13,000
grapefruit trees and incorporates advanced agricultural technology. Each
tree has a watering and feeding system that can also be used as an
anti-freeze system utilizing mist generated by three 500 horsepower
boilers.
FACILITIES
Our principal processing facilities are described below:
APPROXIMATE
NUMBER OF
APPROXIMATE EMPLOYEES
SQUARE (AS OF JUNE 30,
NAME LOCATION FOOTAGE 2003) INTEREST
---- -------- ------- --------------- --------
PACKAGED FRUIT OPERATIONS (7)
ICMOSA Plant (1)............. Montemorelos, Nuevo Leon,
Mexico 80,000 729 Owned
IHMSA Plant (3).............. Montemorelos, Nuevo Leon,
Mexico 40,000 389 Leased
Puebla Plant................. Tlatlauquipec, Puebla, Mexico 50,000 82 Owned
JUICE AND OIL OPERATIONS
Victoria Juice and Oil Plant Cd. Victoria, Tamaulipas,
(2)(5)..................... Mexico 65,700 115 (6) Owned
Veracruz Juice Plant (4)..... Poza Rica, Veracruz, Mexico 22,900 -0- Owned
12
(1) This facility is pledged as collateral under a certain bank loan.
(2) This property, which was pledged as collateral under certain bank loans,
was repaid in 2003.
(3) The agreement, pursuant to which this facility is leased, grants us the
option to purchase the facility prior to the expiration of such agreement.
We have exercised our purchase option and are waiting to finalize formal
closing documents.
(4) This plant was sold in June 2003.
(5) This plant is in the process of being sold.
(6) All the employees are associated with our Lemon project.
(7) Approximately 1,000 of the employees are represented by a labor union.
Contracts are negotiated ever two years. The current contract expires in
2005.
Our other supporting facilities consist of our corporate headquarters where
we lease approximately 13,000 square feet of office space in Bartonville, Texas
(located 20 miles from the Dallas/Fort Worth International Airport). As a result
of the Del Monte transaction, this facility is listed with a realtor for
subleasing.
ITEM 3. LEGAL PROCEEDINGS
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 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 would not
have a material adverse effect on our consolidated financial condition.
As a result of the decline in the worldwide market prices of FCOJ, during
2000 we decided to discontinue operating a juice processing facility in Mexico
that had been leased from Frutalamo S.A. de C.V. ("Frutalamo") under the terms
of deposit, operating and stock purchase agreements entered into in December
1996. As we were unsuccessful in negotiating a settlement with Frutalamo to
terminate such agreements, we wrote off a previously recorded non-refundable
deposit of $1.5 million and recorded a cancellation fee of $1.0 million at June
30, 2000. These charges are included in our 2000 consolidated statement of
operations as "Provision for losses on abandonment of leased facility."
Subsequent to December 31, 2000, Frutalamo and certain of its shareholders
(collectively, the "Frutalamo Plaintiffs") initiated legal proceedings in Mexico
naming as defendants certain of our Mexican subsidiaries, certain current and
former employees, officers and directors of our company and a former contractor.
In September 2002, we settled these claims for $125,000 in cash. Recently, we
learned that, notwithstanding such settlement, certain claims asserted against
us by the Frutalamo Plaintiffs, prior to September 2002, continue to be under
review before the Mexican courts. Management denies any wrongdoing in this
matter and intends to vigorously contest these claims. The resolution of this
matter is not expected to have a material adverse effect on our consolidated
financial condition or results of operations.
INTELLECTUAL PROPERTY RIGHTS
In connection with the Del Monte transaction in 2000, we sold the worldwide
rights to our Sunfresh(R), Fruits of Four Seasons(R) and Flavor Fresh(TM)
brands. Del Monte granted us a 5-year royalty free license for the rights to
these brands for specific areas, including Europe, Asia, the Pacific Rim and
Mexico. We now sell this product line in Mexico under our own brand name,
Sunfruit.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCK HOLDER MATTERS
Our common stock was quoted on the Over-the-Counter Bulletin Board under
the symbol "UNMG.OB." The following table sets forth, for the periods indicated,
the high and low sale prices as reported on The Nasdaq National Market and the
Over-the-Counter Bulletin Board over the past two years.
HIGH LOW
---- ---
Year ended December 31, 2001:
First Quarter....................................... 0.688 0.500
Second Quarter...................................... 0.670 0.370
Third Quarter....................................... 0.580 0.380
Fourth Quarter...................................... 0.730 0.350
Year ended December 31, 2002:
First Quarter....................................... 0.550 0.340
Second Quarter...................................... 0.620 0.320
Third Quarter....................................... 0.590 0.330
Fourth Quarter...................................... 0.550 0.220
The quotations in the tables above reflect inter-dealer prices without
retail markups, markdowns or commissions. Effective at the opening of business
on March 15, 2001, our common stock began trading on the Over-the-Counter
Bulletin Board under the symbol "UNMG.OB." Prior to March 15, 2001 our common
stock was traded on The Nasdaq National Market under the symbol "UNMG." On May
29, 2003, our common stock began trading on the Over-the-Counter Bulletin Board
Pink Sheets under the symbol "UNMG.PK." On July 31, 2003, the last reported sale
price for our common stock was $0.40. As of July 31, 2003 there were
approximately 100 shareholders of record of our common stock and approximately
1,500 beneficial shareholders.
We have not paid any cash dividends since inception and for the foreseeable
future intend to follow a policy of retaining all of our earnings, if any, to
finance the development and continued expansion of our business. There can be no
assurance that dividends will ever be paid. Any future determination as to
payment of dividends will depend upon our financial condition, results of
operations and such other factors, as our Board of Directors deems relevant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
our selected historical consolidated financial data. The selected historical
consolidated financial data has been derived from the historical consolidated
financial statements and in the case of the fiscal years ended December 31,
2000, 2001 and 2002, should be read in conjunction with such financial
statements and the notes thereto included elsewhere herein.
14
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Net sales ..................................... $ 72,311 $ 66,233 $ 45,191 $ 34,216 $ 27,162
Gross profit (loss) ........................... 16,148 7,630 1,038 836 (140)
Income (loss) from operations ................. 1,758 (9,167) (12,330) (8,207) (7,077)
Operating results of certain operations
disposed of during 1999:
Operating income (loss) .................... 122 (127) -- -- --
Loss on disposal of operations ............. -- (1,517) -- -- --
Net loss ...................................... (2,965) (12,996) (11,363) (8,765) (7,942)
Basic and diluted loss per share .............. (0.29) (0.97) (0.82) (0.50) (0.38)
Basic and diluted weighted average shares ..... 10,131 13,462 13,938 17,618 21,045
Current assets ................................ $ 39,443 $ 30,591 $ 18,398 $ 17,713 $ 8,027
Current liabilities ........................... 36,968 35,454 27,703 15,547 17,679
Working capital (deficit) ..................... 2,475 (4,863) (9,305) 2,166 (9,652)
Total assets .................................. 93,513 82,352 63,202 50,412 42,775
Short-term debt ............................... 22,417 22,449 15,984 7,680 8,657
Long-term debt ................................ 7,833 6,207 5,005 6,851 4,622
Total debt .................................... 30,250 28,656 20,989 14,531 13,279
Accumulated deficit ........................... (10,218) (23,214) (34,577) (43,342) (51,284)
Total shareholders' equity .................... 48,712 40,691 29,328 25,539 17,597
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
Due to the continued unfavorable and volatile worldwide market prices of
FCOJ that existed over the past several years and negative long-term prospects
for the FCOJ market, we explored various strategic alternatives for our juice
and oil business segment.
In March 2003, we received formal offers from Coca-Cola to purchase our
Victoria juice and oil plant and rescind certain contract rights for the growing
and processing of Italian lemons for aggregate cash payments by Coca-Cola of
$16.0 million. In April 2003, we consummated the portion of the transaction with
Coca-Cola pertaining to the rescission of all contract rights and obligations
for the growing and processing of Italian lemons for an aggregate cash payment
of $12.5 million. In this regard, we retained the approximately 7,100 acres of
lemon groves, which included all the land, irrigation equipment and related
agricultural equipment. As part of the sale agreement we are contractually
restricted from industrial processing our lemons and are limited in marketing
our lemons solely as fresh fruit until July 30, 2007.
In June 2003, we sold our Poza Rica juice plant to an unaffiliated third
party for $1.0 million plus value-added taxes of $120,000. As of July 25, 2003,
total cash payments received amounted to $345,000 with the balance payable in
six installments under a promissory note. The remaining payments, which
aggregate $220,000 in 2003 and $590,000 in 2004, are secured by personal
guarantees of the purchaser's shareholders and a related company and a pledge
agreement.
Although no assurances can be given, we anticipate that the closing date of
the sales of our Victoria juice and oil plant, for a cash payment of $3.5
million, will be during the third quarter of 2003.
With the completion of the pending sale of our Victoria juice and oil plant
and related processing equipment, our juice and oil business segment will
consist exclusively of our agricultural operation; our
15
Italian lemon groves. Our Board of Directors is exploring several strategic
alternatives for our lemon groves, which includes the divestiture of the lemon
groves, a joint venture or strategic partnering relationship for the growing,
distribution and marketing of fresh lemons. Also, our Board of Directors is
evaluating operating strategies for selling our lemons in the fresh markets of
the United States, Europe and the Pacific Rim, or to other users of fresh
lemons.
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto, the "Selected Financial
Data" and the "Risk Factors" included elsewhere in this Item 7.
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 now located in Cd.
Mante, Tamaulipas, Mexico, which until June 2003 was located in Cd. Victoria,
Tamaulipas, Mexico, whose principal activities were the operation of two citrus
juice and oil processing plants, as well as managing our 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.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with
accounting principals generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported revenues and expenses
during the reporting period. We base our estimates and judgments on historical
experience and various other factors that we believe to be reasonable under the
circumstances, which results in forming the basis for making judgments about the
carrying values of our assets and liabilities. Actual results may differ from
these estimates under different assumptions or conditions. Our significant
accounting policies are described in Note 1 to our consolidated financial
statements.
The critical accounting policies described herein are those that are most
important to the depiction of our financial condition and results of operations
and their application requires management's most subjective judgment in making
estimates about the effect of matters that are inherently uncertain. We believe
that the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
In the normal course of business, we extend credit to our customers on a
short-term basis. Although credit risks associated with our customers is
considered minimal, we routinely review our accounts receivable balances and
make provisions for probable doubtful accounts. In circumstances where
management is aware of a specific customer's inability to meet their financial
obligations to us, a specific reserve is provided to reduce the receivable to
the amount expected to be collected. Historically we do not provide a general
reserve.
16
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 2002, we adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which requires
our management to review for impairment its long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. When such an event occurs, management determines whether there
has been impairment by comparing the anticipated undiscounted future net cash
flows to the related asset's carrying value. If an asset is considered impaired,
the asset is written down to fair value, which is determined based either on
discounted cash flows or appraised value, depending on the nature of the asset.
Prior to January 1, 2002, management determined whether any long-lived assets
had been impaired based on the criteria established in SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be disposed
of." The carrying amount of a long-lived asset was considered impaired when the
estimated undiscounted cash flow from each asset was less than its carrying
amount. In that event, we recorded a loss equal to the amount by which the
carrying amount exceeds the fair value of the long-lived asset. Changes in our
projected cash flows as well as differences in the discount rate used in the
calculation could have a material effect on the financial statements. Due to
adverse industry conditions, changes in business strategy and our financial
condition, it was determined at year-end 2001 that our juice division assets
were impaired. We have re-examined our juice division assets in 2002 and
concluded that an additional adjustment was required.
As a result, during 2002, we recorded in our fourth quarter of 2002, a
non-cash charge of $557,000 associated with our juice and oil processing plants.
This charge is associated with our juice and oil business segment and is
included under the caption "Impairment of long-lived assets" in our 2002
consolidated statement of operations. Subsequently, we entered into sale
agreements for these facilities. In June 2003, we finalized the sale of one of
the facilities. The second sale is expected to be finalized during the 2003
third quarter.
INCOME TAXES
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted rates. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized as income in the period
that includes the enactment date. In assessing the realization of deferred
income tax assets, management considers whether it is more likely than not that
some portion or all of the deferred income tax assets will be realized. The
ultimate realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Due to our historical operating results,
management is unable to conclude on a more likely than not basis that all
deferred income tax assets generated through operating losses through December
31, 2002 will be realized. Accordingly, we have recognized a valuation allowance
equal to the difference between deferred income tax assets and the deferred
income tax liabilities.
LEGAL PROCEEDINGS AND LOSS CONTINGENCIES
Our company is involved in routine legal and administrative matters that
arise from the normal conduct of business. Some of these matters are not within
our control and are difficult to predict and often are resolved over long
periods of time. We maintain insurance, including directors' and officers' and
corporate liability insurance, with third parties to mitigate any loss that is
related to certain claims. Loss contingencies are recorded as liabilities in the
financial statements when it is determined that we have incurred a loss that is
probable and the amount of the loss is reasonably estimable, in accordance with
SFAS No. 5, "Accounting for Contingencies."
17
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data
expressed as a percentage of net sales for the periods indicated:
YEARS ENDED DECEMBER 31,
------------------------------
2000 2001 2002
------ ------ ------
Net sales ..................................... 100.0% 100.0% 100.0%
Cost of products sold ......................... 97.7 97.6 100.5
------ ------ ------
Gross profit (loss) ........................... 2.3 2.4 (0.5)
Selling, general and administrative expenses .. 29.6 17.0 14.2
Impairment of long-lived assets ............... -- 9.5 11.3
------ ------ ------
Loss from operations .......................... (27.3) (24.1) (26.0)
Other income (expense):
Interest expense ............................ (6.0) (2.8) (1.5)
Interest income ............................. 1.8 0.4 0.3
Other income (expense), net ................. -- (2.5) 0.8
Gain on sale of Sunfresh(R)brand and
related assets ......................... 6.9 -- --
Nonrecurring gain from VAT refund ........... 3.7 -- --
Gain on forgiveness of debt ................. -- 8.4 --
Provision for loss on abandonment of leased
facility ............................... (5.5) -- --
Foreign currency translation loss ........... (1.0) (1.5) (0.8)
------ ------ ------
Loss before income taxes ...................... (27.4) (22.1) (27.2)
Income tax expense (benefit) .................. (2.3) 3.5 2.0
------ ------ ------
Net loss ...................................... (25.1)% (25.6)% (29.2)%
====== ====== ======
Years Ended December 31, 2002 and 2001
Net sales consist of packaged fruit and citrus juice and oils. Packaged
fruit sales decreased $1.9 million from $27.0 million in 2001 to $25.1 million
in 2002, or 7.0%. This sales decrease was primarily caused by a slight increase
in sales to Del Monte of $100,000 from $15.9 million in 2001 to $16.0 million in
2002, and was offset by decreases of 13.5% in foodservice and industrial sales
from $3.7 million in 2001 to $3.2 million in 2002 and a decrease of 21.9 % in
our Japanese sales from $7.3 million in 2001 to $5.7 million in 2002. The
decrease in our foodservice sales in 2002 was impacted by our decision in 2000
to reduce product line and product offerings and a decrease in our sales of
industrial products. The decrease in our sales to Japan was caused by reduced
demand in 2002 from the Japanese trading companies that purchase our citrus
products compared to the prior year.
Citrus juice and oil sales decreased $5.1 million from $7.2 million in 2001
to $2.1 million in 2002, or 70.8%. 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, we suspended our frozen
concentrate orange juice operations (see Notes 1 and 13). With the divestiture
of our juice and oil plant assets, we have exited the juice division of our
juice and oil business segment. See "Business - Recent Developments."
As a result of the foregoing, net sales decreased $7.0 million from $34.2
million in 2001 to $27.2 million in 2002, or 20.5% due to decreases in both
packaged fruit and juice and oil sales.
Gross profit on packaged fruit sales decreased slightly from 2.4% in 2001
to 2.2% 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 period, but was negatively
impacted by a non-cash inventory write-down of $1.1 million, which reduced gross
margin by 4.4%, as a result of our decision to discontinue our pineapple growing
operations.
18
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 to suspend our frozen concentrate orange juice
operations and liquidate our remaining inventory.
As a result of the foregoing, gross profit as a percentage of net sales
decreased from 2.4% in 2001 to a loss of 0.5% in 2002. In addition,
substantially all of our Mexican subsidiaries operating and manufacturing costs
are peso-based. These peso-based costs include labor, energy and utilities and
raw materials. Generally, these costs increase in relation to the Mexican
inflation rate, which for 2002 has been approximately 5.7%. In addition, over
the past several years, the Mexican peso has strengthened slightly against the
U.S. dollar. Since our sales to Del Monte and our Japanese customers are based
in U.S. dollars, the increases in our manufacturing costs resulting from Mexican
inflation and the slight strengthening of the Mexican peso relative to the U.S.
dollar have negatively impacted our gross margins.
Selling, general and administrative expenses ("SG&A") decreased $1.9
million from $5.8 million in 2001 to $3.9 million in 2002, or 32.7%. This
significant improvement was due to reduced SG&A expenses at both our packaged
fruit and juice and oil business segments and those associated with being a
publicly held company. We anticipate that compliance with the Sarbanes-Oxley Act
of 2002 will increase the associated costs with being a publicly held company.
Impairment of long-lived assets of $3.2 million in 2001 and $3.1 million in
2002 represented non-cash charges which resulted from our decision to
discontinue our juice processing line of business in our juice and oil business
segment and write down the long-lived assets, including goodwill, to their
estimated fair values. Included in the write-downs were write-offs of goodwill
of $300,000 in 2001 and $2.5 million in 2002.
Interest expense decreased $535,000 from $942,000 in 2001 to $407,000 in
2002, or 56.8%. This decrease was primarily the result of interest expense
reductions resulting from a repayment of over $2.2 million of long-term debt
with the proceeds from the sale of our Hacienda and two small lemon groves in
December 2001, the elimination of interest expense associated the settlement of
debt with a Mexican bank in 2001 and the capitalization of interest costs
associated with our Lemon Project. As of December 31, 2002 our total outstanding
debt was $13.3 million compared to $14.5 million at December 31, 2001.
Interest income decreased $76,000 from $151,000 in 2001 to $75,000 in 2002
and was primarily the result of decreased cash balances available for investing
and lower interest rates.
Other income (expense), net increased from a net expense of $922,000 in
2001 to net income of $217,000 in 2002. The 2001 amount consists primarily of
losses associated with the disposal of property, plant and equipment at our
Mexican subsidiaries, GISE and ICMOSA, which we believe was not essential to our
future growth. In December 2001, we sold our Hacienda and two of the smaller
lemon groves for $2.5 million in cash and used the proceeds to retire debt and
accrued interest. The Hacienda and one of the groves were part of the initial
purchase of GISE in 1996. We also vacated two of the leased plants used in our
packaged fruit segment, resulting in the write-off of non-sellable building
improvements and machinery used at those facilities of approximately $625,000.
The 2002 amount consists primarily of miscellaneous non-operating income and
expense items.
Gain on forgiveness of debt of $2.9 million in 2001 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.
Foreign currency translation gain (loss), which increased from a net loss
of $505,000 in 2001 to a net loss of $210,000 in 2002, result from the
re-measurement of our foreign subsidiaries financial statements to U.S. GAAP.
This increase is the result of a slightly weaker Mexican peso in the current
year as compared to the U.S. dollar.
19
Income tax expense decreased $660,000 from $1.2 million in 2001 to $540,000
in 2002. These changes are due primarily to permanent differences between book
income, or loss, reported in Mexico (as stated in U.S. dollars and in accordance
with U.S. GAAP) on the one hand and Mexican taxable income, or loss, calculated
in Mexican pesos according to Mexican income tax laws on the other hand. In
addition, in accordance with U.S. GAAP, valuation allowances, which have been
provided for net operating losses generated in Mexico and in the U.S., are
reviewed periodically by management for reasonableness. As a result of this
review, these valuation allowances were increased in each year based on
expiration dates of our net operating loss and asset tax credit carryforwards in
Mexico.
As a result of the foregoing, we reported net losses of $8.8 million in
2001 and $7.9 million in 2002.
Years Ended December 31, 2001 and 2000
Net sales consist of packaged fruit and citrus juice and oils. Packaged
fruit sales decreased 17.2% from $32.6 million in 2000 to $27.0 million in 2001.
This sales decrease was primarily caused by a combined decrease in retail, Del
Monte and wholesale club sales of 32.2% from $23.6 million in 2000 to $16.0
million in 2001, a 14.0% decrease in foodservice and industrial sales from $4.3
million in 2000 to $3.7 million in 2001 and an increase in sales to Japan of
55.3% from $4.7 million in 2000 to $7.3 million in 2001. Retail sales in 2001
consisted primarily of sales to Del Monte, which includes both retail and
wholesale club products. In connection with the Del Monte transaction in
September 2000, which included the sale of substantially our entire Sunfresh(R)
brand on hand inventory associated with both retail and wholesale club products,
we entered into a 5-year supply agreement with Del Monte under which we produce
the chilled and canned citrus products for them at our existing facilities in
Mexico. As a result, average selling prices under the Del Monte supply agreement
are substantially lower than those previously charged to the national
supermarket chains. The Del Monte transaction, which allowed us to retain the
rights to our foodservice, industrial and Japanese sales, also granted us a
royalty free 5-year license agreement for the rights to sell the Sunfresh(R)
brand in specific areas, including Europe, Asia, the Pacific Rim and Mexico. The
decrease in our foodservice sales in the 2001 period was impacted by our
decision in 2000 to reduce product line and product offerings and a decrease in
our sales of industrial products. The increase in our sales to Japan was caused
by increased demand in 2001 from the Japanese trading companies that purchase
our citrus products compared to the prior year period.
Citrus juice and oil sales decreased by 42.9%, or $5.4 million, from $12.6
million in 2000 to $7.2 million in 2001. This decrease was caused by a
continuation of unfavorable worldwide market prices of FCOJ in 2001 compared to
2000, which resulted in reduced average selling prices. As a result, GISE
processed and sold significantly lower volumes of frozen concentrate in 2001 as
compared to 2000. 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, we decided in early 2002 to discontinue
our juice processing operations.
As a result of the foregoing, net sales decreased 24.3% from $45.2 million
in 2000 to $34.2 million in 2001 due to decreases in both packaged fruit and
juice and oil sales.
Gross profit on packaged fruit sales decreased from 6.9% in 2000 to 2.4% in
2001. Our 2001 gross margin was adversely impacted by the lower gross margin
associated with the Del Monte sales because such sales were at wholesale price
levels as compared with direct sales in the retail channel, at higher prices,
during 2000, and by continued agricultural difficulties associated with our
pineapple growing operations. In addition, since substantially all of our sales
are in U.S. dollars and our operating and manufacturing costs are peso-based,
the continuing strengthening of the Mexican peso relative to the U.S. dollar in
2001 adversely impacted our gross margins.
Citrus juice and oil gross profit increased from (9.5)% in 2000 to 2.8% in
2001. The significant improvement in 2001 is primarily a function of aggressive
cost cutting and improvements in our product mix. These improvement, however,
were partially offset by significantly reduced sales volume and lower production
levels.
20
As a result of the foregoing, gross profit as a percentage of net sales
increased slightly from 2.3% in 2000 to 2.4% in 2001. In addition, substantially
all of our Mexican subsidiaries operating and manufacturing costs are
peso-based. These peso-based costs include labor, energy and utilities and raw
materials. Generally, these costs increase in relation to the Mexican inflation
rate, which for 2001 have been approximately 4.5%. In addition, over the past 24
months, the Mexican peso has strengthened against the U.S. dollar. Since our
sales to Del Monte and our Japanese customers are based in U.S. dollars, the
increases in our manufacturing costs resulting from Mexican inflation and the
strengthening of the Mexican peso have negatively impacted our gross margins.
Selling, general and administrative expenses ("SG&A") decreased from $13.4
million in 2000 to $5.8 million in 2001, or 56.7%. As a result of the Del Monte
transaction, we have significantly reduced the costs of our United States
operations. Because we no longer sell directly into the U.S. retail and
wholesale club channels, SG&A costs associated with these lines of business have
been substantially eliminated. Remaining U.S. SG&A expenses are those necessary
to operate our United States foodservice and industrial products business,
develop our Mexico and European markets and those associated with operating a
publicly-held company.
Impairment of long-lived assets of $3.2 million in 2001 resulted from our
decision to discontinue our juice processing line of business in our juice and
oil business segment. As a result, we recorded a non-cash charge associated with
the write-down to estimated realizable value of certain long-lived assets of
this division, which consisted of a $2.9 million write-down of property, plant
and equipment and a $300,000 write-down of goodwill. We have reclassified these
assets, which have a remaining carrying value of $5.4 million, to current assets
in our December 31, 2001 consolidated balance sheet.
Interest expense decreased by 65.1%, or $1.8 million, from $2.7 million in
2000 to $942,000 in 2001. This decrease was primarily the result of interest
expense reductions resulting from us repaying approximately $10.5 million of
short and long-term debt with the net proceeds from the Del Monte transaction in
2000, a reduction of over $2.2 million repayment of long-term debt with the
proceeds from the sale of our Hacienda and two small lemon groves in December
2001, reduced interest rates primarily associated with the FOCIR debt, the
elimination of interest expense associated the settlement of debt with a Mexican
bank and the capitalization of interest costs associated with our Lemon Project.
As of December 31, 2001 our total outstanding debt was $14.5 million compared to
$22.0 million at December 31, 2000.
Interest income decreased from $802,000 in 2000 to $151,000 in 2001 and was
caused primarily from the decrease in our cash balances available for investing
and lower interest rates.
Other expense of $922,000 in 2001 consists primarily of losses associated
with the disposal of property, plant and equipment at our Mexican subsidiaries,
GISE and ICMOSA, which we believe was not essential to our future growth. In
December 2001, we sold our Hacienda and two of the smaller lemon groves for $2.5
million in cash and used the proceeds to retire debt and accrued interest. The
Hacienda and one of the groves were part of the initial purchase of GISE in
1996. We also vacated two of the leased plants used in our packaged fruit
business segment, resulting in the write-off of non-sellable building
improvements and machinery used at those facilities of approximately $625,000.
Gain on sale of Sunfresh(R) brand and related assets of $3.1 million in
2000 represents the gain realized on the August 31, 2000 sale of our Sunfresh(R)
brand to Del Monte (see Note 2).
Nonrecurring gain from VAT refund of $1.7 million in 2000 represents a
value added tax refund received by one of our Mexican subsidiaries (see Note 2).
Gain on forgiveness of debt of $2.9 million in 2001 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.
21
Provision for losses on abandonment of leased facility of $2.5 million in
2000 represents a non-cash loss associated with the write-off of a
non-refundable deposit and the recording of a cancellation fee in connection
with management's decision not to exercise its option to purchase a certain
juice processing facility.
Foreign currency translation losses, which result from the re-measurement
of our foreign subsidiaries financial statements to U.S. GAAP, increased
slightly from a loss of $452,000 in 2000 to a loss of $505,000 in 2001.
Income tax expense (benefit) of $(1.0) million and $1.2 million were
recorded in 2000 and 2001, respectively, on losses before income taxes of $12.4
million in 2000 and $10.4 million in 2001. These changes are due primarily to
permanent differences between book income, or loss, reported in Mexico (as
stated in U.S. dollars and in accordance with U.S. GAAP) on the one hand and
Mexican taxable income, or loss, calculated in Mexican pesos according to
Mexican income tax laws on the other hand. Further, asset tax payments of
$582,000 and the reversal of deferred income taxes of $1.1 million associated
with the write-down of GISE's long-lived assets during 2001 impact income tax
expense. In addition, in accordance with U.S. GAAP, valuation allowances, which
have been provided for net operating losses generated in Mexico and in the U.S.,
are reviewed periodically by management for reasonableness. As a result of this
review, these valuation allowances were increased based on expiration dates of
our net operating loss and asset tax credit carryforwards in Mexico.
As a result of the foregoing, we reported net losses of $11.4 million in
2000 and $8.8 million in 2001.
LIQUIDITY AND CAPITAL RESOURCES
In April 2003, we consummated the portion of the transaction with Coca-Cola
pertaining to the rescission of all contract rights and obligations for the
growing and processing of Italian lemons for an aggregate cash payment of $12.5
million. In June 2003, we sold our Poza Rica juice plant to an unaffiliated
third party for $1.0 million, plus value-added taxes of $120,000. As of July 25,
2003, total cash payments received amount to $345,000 with the balance payable
in six installments under a promissory note, which aggregate $220,000 in 2003
and $590,000 in 2004. Although no assurances can be given, we anticipate that
the closing date of the sale of our Victoria juice and oil plant, for a cash
payment $3.5 million, will be during the third quarter of 2003.
At December 31, 2002 our cash and cash equivalents totaled $406,000, a
decrease of $729,000 from year-end 2001. During 2002, our operating activities
generated cash of $2.1 million primarily from reductions in our year-end 2001
receivables, inventories and an increase in our accounts payable, accrued
liabilities and other long-term liability. Capital expenditures were $1.7
million in 2002 and we reduced our total outstanding debt by $1.3 million in
2002. Working capital at December 31, 2002 amounted to a deficit of $9.7
million.
Our prior year's report of independent auditors, which accompanied our
audited consolidated financial statements for 2000 and 2001, included a going
concern explanatory paragraph that raised substantial doubt about our ability to
continue operations under existing business conditions given our recurring
losses, negative cash flows and substantial difficulties in meeting our
obligations. In recent years we had to rely on sales of our common stock to our
principal shareholder and bank financing to finance our working capital needs
and certain of our 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 business segment and offered for sale all of its property,
plant and equipment. In March 2003, we received formal offers from Coca-Cola to
purchase our Victoria juice and oil plant and rescind certain contract rights
for the growing and processing of Italian lemons for aggregate cash payments by
Coca-Cola of $16.0 million. In April 2003, we consummated the portion of the
transaction with Coca-Cola pertaining to the rescission of all contract rights
and obligations for the
22
growing and processing of Italian lemons associated with the contracts described
above, for an aggregate cash payment of $12.5 million. In this regard, we
retained the approximately 7,100 acres of lemon groves, which included all the
land, irrigation systems and related agricultural equipment. As part of the sale
agreement we are contractually restricted from industrial processing our lemons
and are limited in marketing our lemons solely as fresh fruit until July 30,
2007.
As of July 25, 2003, approximately $2.5 million of the gross proceeds from
the Coca-Cola transaction have been used to pay past due accounts payable and
operating expenses of our lemon groves and juice and oil processing plants prior
to sale, pay severance payments to former plant and administrative employees of
the juice division, repay the Rabobank Nederland loan of $1.5 million (see Note
6), repay the Banamex loans of $558,000 (see Note 7) and repayment of bridge
loans to our largest shareholder, M&M Nominee, of $368,000. The remaining cash
of approximately $7.6 million is anticipated to be used to pay operating
expenses of the lemon groves and provide working capital for our continuing
operations. Cash disbursements for purposes other than those associated with
GISE's juice division and agricultural operations are subject to the FOCIR
Agreement (see Note 7) and would require their prior approval for disbursement.
Substantially all the proceeds are invested in short-term, interest bearing
investment grade securities. As of December 31, 2002, principal of $4.6 million
($47.0 million Mexican pesos) and accrued accretion of $1.4 million ($14.6
million Mexican pesos), was owed to FOCIR.
We currently have no material commitments for 2003, other than those
disclosed in the footnotes to our 2002 consolidated financial statements.
We have experienced significant operating losses and negative cash flows to
date. Our management's plans to increase our cash flows from operations relies
significantly on increases in revenues generated from our packaged fruit
business segment, further development of a strategy for our lemon groves, which
could include a complete or partial sale, distributing the lemons in the fresh
market or developing other uses for the lemons and further decreases in our
operating expenses in all areas, including our costs of being a public company.
However, there are no assurances that we will be successful in effecting such
changes. If future revenues are not sufficient to cover our 2003 and beyond
working capital requirements or fund revenue growth or expenditures for new
processing technologies, we may need to obtain approval from FOCIR to use cash
from the Coca-Cola sale to fund such expenditures. If we are unsuccessful in
obtaining such approval, we may have to use a portion of our cash to retire the
FOCIR debt and accreted interest.
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, legal obligations associated
with the retirement of long-lived assets will be recorded as a liability when
the retirement obligation arises, and the cost capitalized as part of the
related long-lived assets and amortized over the life of the assets. 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. We elected to adopt
SFAS No. 145 in 2002 related to the gain of $2.9 million from the settlement of
certain debt with a Mexican bank and, accordingly, reclassified the
extraordinary amount recognized in 2001 to other income (expense) in our 2001
consolidated statement of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This pronouncement addresses the
financial accounting and reporting costs associated with an
23
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This Statement also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in annual and
interim financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure requirements of this Statement will be
effective during our first quarter of fiscal 2003. The adoption of SFAS No. 148
in the first quarter of 2003 did not have a significant impact on our
disclosures relating to our stock option plans.
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.
RISKS RELATING TO OUR FINANCIAL CONDITION
WE MAY CONTINUE TO SUSTAIN LOSSES AND ACCUMULATED DEFICITS IN THE FUTURE.
We have sustained net losses in each of the last six fiscal years. As of
December 31, 2002 our accumulated deficit was $51.3 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 six years, there can be no assurance that we will achieve a
profitable level of operations in fiscal 2003 and beyond, or, if profitability
is achieved that it can be sustained.
Our Board of Directors is exploring several strategic alternatives for
selling our lemons in the fresh markets of the United States, Europe and the
Pacific Rim, or to other users of fresh lemons. Unless successful in the
divestiture of our lemon groves, our ability to achieve profitability in the
future will depend on several factors, including our ability to produce and
market fresh lemons commercially.
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 5-year 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 9.7%, 46.4% and
59.0%, respectively, of our 2000, 2001 and 2002 consolidated net sales. 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 5-year supply agreement requires Del
24
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
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 MAY LOSE OUR NET OPERATING LOSS CARRYFORWARDS, WHICH COULD PREVENT US FROM
OFFSETTING FUTURE TAXABLE INCOME IN THE UNITED STATES.
In June 2001, we completed a rights offering wherein M&M Nominee, our
largest shareholder, purchased an additional 6,849,315 shares of our common
stock increasing their ownership from 42.5% to 62.5%. Accordingly, we
experienced an ownership change as defined by Section 382 of the Internal
Revenue Code of 1986, as amended, which limits the use of net operating loss
carryforwards where changes occur in the stock ownership of a company. As a
result, this limitation will allow us to use only a portion of our pre-change
net operating loss carryforwards, which amounted to $17.7 million at December
31, 2002, to reduce subsequent taxable income in the United States, if any for
federal income tax purposes. Based upon the limitations of Section 382, we may
only be allowed to use approximately $425,000 of such losses each year to reduce
taxable income, if any, until such unused losses expire.
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.
Also, our Board of Directors is exploring several strategic alternatives
for our lemon groves, which include the divestiture of the lemon groves and a
joint venture or strategic partnering relationship for the growing, distribution
and marketing of fresh lemons. Also, our Board of Directors is evaluating
operating strategies for selling our lemons in the fresh markets of the United
States, Europe and the Pacific Rim, or to other users of fresh lemons. No
assurance can be given that we will be successful in exploring several strategic
alternatives for our lemon groves or develop successful operating strategies for
selling our lemons in the fresh markets of the United States, Europe and the
Pacific Rim, or to other users of fresh lemons.
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 financial statements. Since the assets and
liabilities therein are peso denominated, a falling peso results in a
translation loss to the extent there are net peso assets or a translation gain
to the extent there are net peso liabilities. Pricing associated with the 5-year
supply agreement entered into with Del Monte is in U.S. dollars. Our exposure to
foreign currency exchange rate risk is difficult to estimate
25
due to factors such as balance sheet accounts, and the existing economic
uncertainty and future economic conditions in the Mexican 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 AND AVAILABILITY OF WATER
AND THE PRICE OF FRESH FRUIT.
We grow grapefruit, which is used in our packaged fruit operations, and
Italian lemons. 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 yields
of our lemon groves. Substantially all of our growing operations are irrigated
and a lack of water has not had a materially adverse effect on our growing
operations. There can be no assurances that future weather conditions and lack
of irrigation water will not have a material adverse effect on the results of
our operations and our 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 and work our lemon groves. The turnover rate among the
labor force is high due to competitive labor conditions in the area that our
plants are located. If it becomes necessary to pay more to attract labor, our
labor costs will increase.
Our Mexican work force, whether seasonal or permanent, are generally
affiliated with labor unions that 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 as shown in
our consolidated statements of operations are not always a meaningful indication
of taxable income of our subsidiaries for profit sharing purposes or of the
amount of employee profit sharing.
26
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 U.S. dollars. As a result, costs of operations for our
Mexican subsidiaries could be higher.
TRADE DISPUTES BETWEEN THE UNITED STATES, MEXICO, JAPAN 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, Japan
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, Japan 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 are used primarily for growing our Italian lemons.
Historically, the ownership of rural land in Mexico has been subject to legal
limitations and claims by residents of rural communities. Although we have not
experienced any legal disputes with respect to our land ownership, we are
transitioning, pursuant to the terms of an existing agreement with an "Ejido"
system of land ownership, approximately 5,200 acres of land from a 30-year lease
to a land purchase. If we were unsuccessful in our efforts to transition this 30
year lease, such event could adversely affect the potential strategic
alternative to divest our lemon groves.
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
27
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 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 own 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 initiatives
taken by our company that are not acceptable to M&M Nominee.
28
WE ARE SUBJECT TO RECENT LEGISLATIVE ACTIONS AND POTENTIAL NEW ACCOUNTING
PRONOUNCEMENTS.
In order to comply with the newly adopted Sarbanes-Oxley Act of 2002 and
proposed accounting changes by the Securities and Exchange Commission ("SEC"),
we may be required to increase or modify our internal controls, hire additional
personnel and additional outside legal, accounting and advisory services, all of
which could cause our general and administrative costs to increase. Proposed
changes in accounting rules, including legislative and other proposals to
account for employee stock options as compensation expense among others, could
potentially increase the expenses we report under United States Generally
Accepted Accounting Practices and could adversely affect our operating results.
RISKS RELATING TO OUR COMMON STOCK
THE DELISTING FROM THE OVER-THE-COUNTER BULLETIN BOARD HAS FURTHER REDUCED THE
LIQUIDITY AND MARKETABILITY OF OUR COMMON STOCK AND MAY FURTHER 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." On May 29,
2003, our common stock ceased to be quoted for trading on the OTC Bulletin
Board, and is presently listed on the "Pink Sheets." Prices for securities
traded solely on the Pink Sheets may be difficult to obtain. As such our stock
has very limited liquidity and marketability. This very limited liquidity,
marketability, the reduced public access to quotations for our common stock and
lack of a regular trading market for our stock have depressed the market price
of our stock. Although we intend to take actions necessary to have our stock
included in the OTC Bulletin Board, there can be no assurance that we will be
successful. Further, the OTC Bulletin Board is an unorganized, inter-dealer,
over-the-counter market with significantly less liquidity than other recognized
markets such as The Nasdaq Stock Market.
"PENNY STOCK" REGULATIONS MAY IMPOSE RESTRICTIONS ON MARKETABILITY OF OUR COMMON
STOCK.
The SEC 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
29
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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK.
Our interest expense is most sensitive to changes in the general level of
U.S. interest rates and London interbank offered rates. In this regard, changes
in these interest rates affect the interest paid on our debt.
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
There- Fair Value
2003 2004 2005 2006 2007 after Total 12/31/02
---- ---- ---- ---- ---- ----- ----- --------
Long-term debt, including
current portion
Fixed rate $ 490 $ 12 $ -- $ -- $ -- $ -- $ 502 $ 502
Average interest rate 17.8% 6.9%
Variable rate $ 446 $ 300 $400 $700 $1,260 $4,611 $7,717 $7,717
Average interest rate 7.9% 7.3% 7.3% 7.3% 7.3% 11.4%
At December 31, 2002, U.S. dollar denominated long-term debt amounted to
$3.1 million as compared to Mexican peso denominated long-term debt of $5.1
million.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors............................................................... 32
Consolidated Balance Sheets as of December 31, 2001 and 2002................................. 33
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 2001 and 2002......................................................... 34
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000, 2001 and 2002......................................................... 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002......................................................... 36
Notes to Consolidated Financial Statements................................................... 37
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts.......................................... 56
31
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
The UniMark Group, Inc.
We have audited the accompanying consolidated balance sheets of The UniMark
Group, Inc. (the Company) as of December 31, 2001 and 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the index at Item 16(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The UniMark Group, Inc. at December 31, 2001 and 2002, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Mancera, S.C.,
Member Practice of
Ernst & Young Global
Mexico City, Mexico
July 25, 2003
32
THE UNIMARK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
2001 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,135 $ 406
Accounts receivable - trade, net of allowance of $1,317 in 2001
and $1,118 in 2002............................................ 2,311 736
Accounts receivable - other...................................... 219 246
Notes receivable................................................. 340 310
Income and value added taxes receivable.......................... 537 909
Inventories...................................................... 7,560 5,221
Prepaid expenses................................................. 239 199
Property held for sale........................................... 5,372 --
-------- --------
Total current assets..................................... 17,713 8,027
Property, plant and equipment, net................................. 27,459 32,486
Goodwill, net...................................................... 2,516 --
Deposit on plant facility.......................................... 2,262 2,044
Notes receivable, less current portion............................. 259 --
Other assets....................................................... 203 218
-------- --------
Total assets............................................. $ 50,412 $ 42,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................................. $ 3,550 $ 100
Short and long-term debt in default.............................. 2,617 8,529
Current portion of long-term debt................................ 1,513 28
Accounts payable - trade......................................... 3,845 4,401
Accrued liabilities.............................................. 4,022 4,621
-------- --------
Total current liabilities................................ 15,547 17,679
Long-term debt, less current portion............................... 6,851 4,622
Deferred Mexican statutory profit sharing and income taxes......... 1,730 1,443
Other long-term liability.......................................... 745 1,434
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value:
Authorized shares - 40,000,000 in 2001 and 2002
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) (51,284)
-------- --------
Total shareholders' equity............................... 25,539 17,597
-------- --------
Total liabilities and shareholders' equity............... $ 50,412 $ 42,775
======== ========
See accompanying notes.
33
THE UNIMARK GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
2000 2001 2002
-------- -------- --------
Net sales .................................... $ 45,191 $ 34,216 $ 27,162
Cost of products sold ........................ 44,153 33,380 27,302
-------- -------- --------
Gross profit (loss) .......................... 1,038 836 (140)
Selling, general and administrative expenses.. 13,368 5,798 3,864
Impairment of long-lived assets .............. -- 3,245 3,073
-------- -------- --------
Loss from operations ......................... (12,330) (8,207) (7,077)
Other income (expense):
Interest expense ........................... (2,714) (942) (407)
Interest income ............................ 802 151 75
Other income (expense), net ................ -- (922) 217
Gain on sale of Sunfresh(R) brand and
related assets ........................... 3,089 -- --
Nonrecurring gain from VAT refund .......... 1,685 -- --
Gain on forgiveness of debt ................ -- 2,870 --
Provision for losses on abandonment
of leased facility ....................... (2,490) -- --
Foreign currency translation loss .......... (452) (505) (210)
-------- -------- --------
(80) 652 (325)
-------- -------- --------
Loss before income taxes ..................... (12,410) (7,555) (7,402)
Income tax expense (benefit) ................. (1,047) 1,210 540
-------- -------- --------
Net loss ..................................... $(11,363) $ (8,765) $ (7,942)
======== ======== ========
Basic and diluted loss per share ............. $ (0.82) $ (0.50) $ (0.38)
======== ======== ========
See accompanying notes.
34
THE UNIMARK GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
ADDITIONAL
COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
------ ----- ------- ------- -----
Balance as of December 31, 1999 ......... 13,938,326 $ 139 $ 63,766 (23,214) 40,691
Net loss .............................. -- -- -- (11,363) (11,363)
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2000 ......... 13,938,326 139 63,766 (34,577) 29,328
Shares issued for cash in public rights
offering, net of offering expenses ... 7,106,502 71 4,905 -- 4,976
Net loss .............................. -- -- -- (8,765) (8,765)
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2001 .......... 21,044,828 210 68,671 (43,342) 25,539
Net loss .............................. -- -- -- (7,942) (7,942)
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2002 .......... 21,044,828 $ 210 $ 68,671 $ (51,284) $ 17,597
========== ========== ========== ========== ==========
See accompanying notes.
35
THE UNIMARK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
2000 2001 2002
-------- -------- --------
OPERATING ACTIVITIES
Net loss ...................................................... $(11,363) $ (8,765) $ (7,942)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on sale of Sunfresh(R) brand and related assets ...... (3,089) -- --
Provision for doubtful accounts ........................... 1,055 224 --
Depreciation .............................................. 2,169 2,180 1,536
Amortization of intangible assets ......................... 133 106 --
Impairment of long-lived assets ........................... -- 3,245 3,073
Gain on forgiveness of debt ............................... -- (2,870) --
Provision for losses on abandonment of leased facility .... 1,490 -- --
Deferred Mexican statutory profit sharing and income
taxes ................................................... (1,379) 564 (287)
Write-down of long-term orchard costs ..................... 434 -- --
Loss on disposal or write-off of plant and equipment ...... 711 1,306 --
Changes in operating assets and liabilities, net of effects
associated with the sale of the Sunfresh(R) brand in 2000:
Receivables ............................................ 1,884 3,762 1,465
Inventories ............................................ 917 2,924 2,339
Prepaid expenses ....................................... 579 104 40
Accounts payable and accrued liabilities ............... 1,456 (1,912) 1,155
Other long-term liability .............................. 280 465 689
-------- -------- --------
Net cash provided by (used in) operating activities ........... (4,723) 1,333 2,068
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment .................... (5,626) (3,150) (1,748)
Net proceeds from sale of the Sunfresh(R) brand and related
assets ..................................................... 13,052 -- --
Proceeds from sale of businesses and sale of plant and
equipment .................................................. -- 2,646 --
Decrease (increase) in deposit on plant facility .............. 7 (667) 218
Decrease (increase) in other assets ........................... 298 181 (15)
-------- -------- --------
Net cash provided by (used in) investing activities ........... 7,731 (990) (1,545)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from the issuance of common shares ............... -- 4,976 --
Proceeds from issuance of short-term promissory note .......... -- 1,800 100
Payment of short-term promissory note ......................... -- (1,800) --
Net reductions of short-term debt, short and long-term debt
in default and current portion of long-term debt ............ (8,424) (5,230) (1,329)
Proceeds from long-term debt .................................. 4,936 -- --
Payments of long-term debt .................................... (2,513) (29) (23)
-------- -------- --------
Net cash used in financing activities ......................... (6,001) (283) (1,252)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......... (2,993) 60 (729)
Cash and cash equivalents at beginning of year ................ 4,068 1,075 1,135
-------- -------- --------
Cash and cash equivalents at end of year ...................... $ 1,075 $ 1,135 $ 406
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid ............................................... $ 2,907 $ 1,676 $ 329
======== ======== ========
Asset tax paid .............................................. $ 312 $ 582 $ 492
======== ======== ========
See accompanying notes.
36
THE UNIMARK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 our operations in Mexico.
We conduct substantially all of our operations through our wholly owned
operating subsidiaries. In Mexico, our operating 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").
Principles of Consolidation: The consolidated financial statements include
our accounts and the accounts of our subsidiaries, all of which are
wholly-owned. All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition: Revenue is recognized on sales of products when the
customer receives title to the goods, generally upon delivery.
Cost of Products Sold: Cost of products sold includes the cost of the
fruit, packaging materials, labor, depreciation, overhead, transportation and
other distribution costs, including handling costs incurred to deliver our
products to our customers.
Foreign Operations: Substantially all of our operations are located in
Mexico and a significant portion of our fruit is procured in Mexico. In
addition, substantially all of our Mexican employees are affiliated with labor
unions and are typically covered by two-year contracts.
Use of Estimates: The preparation of our consolidated financial statements
in conformity with generally accepted accounting principles requires our
management to make estimates and assumptions in determining the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Our actual results could differ from
those estimates.
Our company is vertically integrated for a portion of its raw materials.
Such inventory is recorded at the lower of cost or market, which involves
significant estimates. Factors such as weather, pestilence, disease or other
natural disasters could affect estimated yields causing actual results to differ
from those estimated.
Cash Equivalents: We consider all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk: We process and sell niche citrus and tropical
fruit products, and other specialty food ingredients to customers in the
foodservice and retail industries in the United States, Mexico, Europe and
Japan. We perform periodic credit evaluations of our customers' financial
condition and generally do not require collateral. Trade receivables generally
are due within 30 days. We maintain an allowance for doubtful accounts, which is
based on an analysis of past due accounts, which was $1.3 million and $1.1
million as of December 31, 2001 and 2002, respectively. Historically credit
losses have been within management's expectations, and with the exception of one
customer account, which is fully reserved, have not been significant. Two
customers accounted for 64.0% and 74.5% of our net sales in the years ended
December 31, 2001 and 2002, respectively. No one customer accounted for more
than 10% of our net sales for the year ended December 31, 2000. As a result of
our sale of our Sunfresh(R), Fruits of Four Seasons(R) and Flavor Fresh(TM)
brands to Del Monte in 2000, along with the entering into of a 5-year
37
supply agreement to produce the aforementioned brands of chilled and canned
citrus products for distribution into its retail and wholesale club markets, a
significant portion of our foreseeable future net sales will be dependent on
this customer. We believe that our future success depends upon the future
operating results of Del Monte and in their ability to broaden their customer
base. There can be no assurances that Del Monte will not reduce, delay or
eliminate purchases from us, which could have a material adverse affect on our
business, results of operations and financial condition. In addition, Del Monte
could have significant leverage and could attempt to change the terms, including
pricing, upon which our company and Del Monte does business, thereby adversely
affecting our business, results of operations and financial condition. Sales to
Del Monte for the period September 1, 2000 to December 31, 2000 amounted to $4.4
million and for the years ended December 31, 2001 and 2002 amounted to $15.9
million and $16.0 million, respectively.
Inventories: Inventories are valued at the lower of cost or market using
average cost and consist primarily of processed finished goods, raw materials,
supplies and advances to suppliers.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Depreciation is computed primarily by the straight-line method over the
following estimated useful lives:
Buildings.............................................. 20 years
Machinery and equipment................................ 5-12.5 years
All costs incurred to plant and maintain our lemon orchards have been
capitalized and deferred as of December 31, 2002. As a result of the rescission
of all contract rights and obligation for the growing of Italian lemons in April
2003, these deferred and capitalized costs will be amortized over their
estimated useful lives starting in our second quarter of 2003. In prior years,
it was determined that these deferred costs would be amortized based on the
projected year's yield to total estimated yield over the life of the rescinded
supply contract.
Impairment of Long-Lived Assets: Effective January 1, 2002, we adopted SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 superceded 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 Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," ("APB No. 30") for the disposal of a segment of a business.
Consistent with SFAS No. 121, SFAS No. 144 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Based on the continued
unfavorable and volatile worldwide market prices for FCOJ, we suspended our
frozen concentrate orange juice operations in early 2002, and offered all the
long-lived assets related to this operation for sale. Based on our intentions to
sell these assets, we classified them as "Property held for sale" in our
December 31, 2001 consolidated balance sheet. In accordance with SFAS No. 121,
and based on an appraisal from a third party, we recorded a non-cash charge of
$3.2 million in 2001 for impairment of these assets in order to value these
assets at their estimated fair value. This charge, which included $300,000 of
impaired goodwill, is associated with our juice and oil business segment and is
included under the caption "Impairment of long-lived assets" in our 2001
consolidated statement of operations.
During 2002, we determined that our efforts and prospects to divest our
juice division's long-term assets on acceptable terms were unlikely to result in
successful transactions. As such, we entered into leases with an unaffiliated
third party to lease these plants. Based on our decision to lease/operate these
facilities, we reclassified these assets to long-term property, plant and
equipment in the second quarter 2002 financial statements, at the fair market
value of such assets at the time the decision was taken by management to
lease/operate these plants, which approximated their book value at December 31,
2001.
In early 2003, we received offers to sell our juice processing facilities
to two separate parties. As a result of these offers, and in accordance with
SFAS No. 144, we recorded in our fourth quarter of 2002, a
38
non-cash charge of $557,000, which is the difference between the offer prices we
agreed to sell the plants and the carrying amounts of these assets as of
December 31, 2002. This charge is associated with our juice and oil business
segment and is included under the caption "Impairment of long-lived assets" in
our 2002 consolidated statement of operations. Subsequently, we entered into
sale agreements with these parties. On June 10, 2003 we finalized the sale of
one of the facilities. The second sale is expected to be finalized during the
third quarter 2003.
There are numerous uncertainties and inherent risks in the citrus industry,
such as, but not limited to general economic conditions, actions of competitors,
ability to manage growth, actions of regulatory authorities, consumer demand and
risk relating to international operations. Adverse effects from these risks may
result in adjustments to the carrying value of our assets and liabilities in the
future.
Goodwill: Prior to January 1, 2002, goodwill had been amortized on a
straight-line basis over a period of 40 years. In July 2001, the FASB issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." Effective January 1, 2002, we adopted SFAS No. 142. Under
SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually for impairment or more frequently if
indicators arise. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives. 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.
Outstanding goodwill of $2.5 million at December 31, 2001 was associated with
our Lemon Project, which is part of our juice and oil business segment. As a
result of the sale of our contract rights for the growing and processing of
Italian lemons in April 2003 (see Note 16), we again reviewed our remaining
goodwill of $2.5 million and determined that it was impaired. As a result, we
recorded a non-cash impairment charge of $2.5 million for the year ended
December 31, 2002, which is included under the caption "Impairment of long-lived
assets" in our 2002 consolidated statement of operations.
Goodwill amortization each of the years ended December 31, 2001 and 2000
was $81,600 and was immaterial. As of December 31, 2001, goodwill is net of
accumulated amortization of $422,000.
Foreign Currency Translation: The functional currency of our company and
our subsidiaries is the U.S. dollar. Transactions in foreign currency are
recorded at the prevailing exchange rate on the day of the related transaction.
Inventories, property, plant and equipment and shareholders' equity are
translated at the historical exchange rate. Monetary assets and liabilities
denominated in foreign currency are remeasured to U.S. dollars at the prevailing
exchange rate as of the balance sheet date. Revenues and expenses are translated
at the average exchange rates in effect during the reporting period. Revenues
and expenses related to non-monetary assets are translated at the historical
exchange rates of the related assets. Exchange rate differences are reflected in
the current year's operations.
Our consolidated results of operations are affected by changes in the
valuation of the Mexican peso to the extent that ICMOSA or GISE have peso
denominated net monetary assets or net monetary liabilities. In periods where
the peso has been devalued in relation to the U.S. dollar, a gain will be
recognized to the extent there are peso denominated net monetary liabilities
while a loss will be recognized to the extent there are peso denominated net
monetary assets. In periods where the peso has gained value, the converse would
be recognized.
Income Taxes: Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. We review the recoverability of
deferred taxes and provide valuation allowances to the extent necessary.
Reclassifications: Certain prior year items have been reclassified to
conform to the current year presentations in our consolidated financial
statements. The most significant reclassifications were the reclassification of
accreted interest under the FOCIR Agreement from short-term to long- term
liabilities and the reclassification of the gain from the settlement of debt
with a Mexican bank in 2001 from an extraordinary amount to other income
(expense).
39
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, legal obligations associated
with the retirement of long-lived assets will be recorded as a liability when
the retirement obligation arises, and the cost capitalized as part of the
related long-lived assets and amortized over the life of the assets. 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 Nos. 4, 44
and 64, Amendment of SFAS 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. We elected to early
adopt SFAS No. 145 in 2002 related to the gain of $2.9 million from the
settlement of certain debt with a Mexican bank and, accordingly, reclassified
the extraordinary amount recognized in 2001 to other income (expense) in our
consolidated statements of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with 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.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 supersedes
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others," and provides guidance to guarantors on the recognition and disclosure
concerning obligations under certain guarantees in interim and annual financial
statements. The initial recognition and measurement provisions of Interpretation
No. 45 are effective for guarantees issued or modified after December 31, 2002,
and are to be applied prospectively. The disclosure requirements were effective
for financial statements for interim or annual periods ending after December 15,
2002. The initial adoption of Interpretation No. 45 did not have a material
impact on our consolidated results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This Statement also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in annual and
interim financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure provisions of this Statement will be effective
during our first quarter of fiscal 2003. The adoption of SFAS No. 148 did not
have a significant impact on our disclosures relating to our stock option plans.
NOTE 2 - NON-OPERATING TRANSACTIONS
GAIN ON SALE OF SUNFRESH(R) BRAND AND RELATED ASSETS
On August 31, 2000, we sold to Del Monte the rights to our Sunfresh(R)
brand, our McAllen, Texas distribution center, including certain inventory,
other intellectual property and property and equipment associated with the
Sunfresh(R) brand for $14.5 million in cash, subject to adjustment for inventory
levels. Separately, Del Monte and our company entered into a 5-year supply
agreement under which we will produce for the retail and wholesale club markets
chilled and canned citrus products for Del Monte at our
40
facilities in Mexico. We retained the rights to our foodservice, industrial and
Japanese sales. Also, Del Monte granted us a 5-year license for the rights to
the Sunfresh(R), Fruits of Four Seasons(R) and Flavor Fresh(TM) brands for
specific areas, including Europe, Asia, the Pacific Rim and Mexico. As a result
of this transaction, we realized a pretax gain of $3.1 million during the
quarter ended September 30, 2000. A significant portion of the net proceeds was
used to repay indebtedness outstanding under the Rabobank Nederland loan
agreements and to repay the mortgage note on our distribution facility.
NONRECURRING GAIN FROM VAT REFUND
In 1997, our subsidiary, GISE, a Mexican citrus juice and oil processor,
filed a refund claim with the Mexican taxing authorities claiming they were
overcharged value added taxes ("VAT" - also called a IVA (Impuestos Valor
Agregado) tax in Mexico) for taxes paid during the years of 1992 through 1995
associated with the production and sale of frozen orange juice concentrate. In
August 2000, the Mexican taxing authorities agreed to GISE's claim and refunded
these VAT taxes. As a result, we realized a net gain in 2000 of $1.7 million,
after deducting professional fees associated with the claim.
PROVISION FOR LOSSES ON ABANDONMENT OF LEASED FACILITY
As a result of the decline in the worldwide market prices of FCOJ, during
2000, we decided to discontinue operating a juice processing facility in Mexico
that had been leased from Frutalamo under the terms of deposit, operating and
stock purchase agreements entered into in December 1996. As we were unsuccessful
in negotiating a settlement with Frutalamo to terminate such agreements, we
wrote off a previously recorded non-refundable deposit of $1.5 million and
recorded a cancellation fee of $1.0 million at June 30, 2000. These charges are
included in our 2000 consolidated statement of operations as "Provision for
losses on abandonment of leased facility."
Subsequent to December 31, 2000, the Frutalamo Plaintiffs initiated legal
proceedings in Mexico naming as defendants certain of our Mexican subsidiaries,
certain current and former employees, officers and directors of our company and
a former contractor. In September 2002, we settled these claims for $125,000 in
cash. Recently, we learned that, notwithstanding such settlement, certain claims
asserted against us by the Frutalamo Plaintiffs, prior to September 2002,
continue to be under review before the Mexican courts. Management denies any
wrongdoing in this matter and intends to vigorously contest these claims. The
resolution of this matter is not expected to have a material adverse effect on
our consolidated financial condition or results of operations.
NOTE 3 - LOSS PER SHARE
The following table sets forth the computation of our basic and diluted net
loss per share:
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 2001 2002
---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NUMERATOR
Net loss .......................................... $ (11,363) $ (8,765) $ (7,942)
=========== ============ ========
DENOMINATOR
Denominator for basic and diluted net loss per
share - weighted average shares outstanding ....... 13,938 17,618 21,045
=========== ============ ========
Basic and diluted net loss per share .............. $ (0.82) $ (0.50) $ (0.38)
=========== ============ ========
At December 31, 2000, 2001 and 2002, we had common stock options
outstanding of 238,000, 132,500 and 95,000 respectively, which were not included
in their respective years per share calculations because their effect would have
been anti-dilutive.
41
NOTE 4 - INVENTORIES
Inventories consist of the following:
DECEMBER 31,
------------
2001 2002
---- ----
(IN THOUSANDS)
Finished goods -
Cut fruits ............ $2,964 $2,939
Juice and oils ........ 554 --
------ ------
3,518 2,939
Pineapple orchards ....... 1,219 --
Raw materials and supplies 2,018 1,825
Advances to suppliers .... 805 457
------ ------
Total .......... $7,560 $5,221
====== ======
During 2002, we recorded non-cash inventory write-downs of $1.1 million
related to our pineapple orchards as a result of our decision to discontinue the
pineapple operations of our packaged fruit business segment.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consists of the following:
DECEMBER 31,
------------
2001 2002
---- ----
(IN THOUSANDS)
Land -
Lemon ................. $ 2,398 $ 2,505
Other ................. 437 762
Orchards -
Lemon ................. 14,272 15,905
Buildings and improvements. 6,219 6,559
Machinery and equipment.... 13,839 16,816
-------- --------
37,165 42,547
Accumulated depreciation... (9,706) (10,061)
-------- --------
Total ........... $ 27,459 $ 32,486
======== ========
During 2001, we wrote-off certain machinery and equipment of $700,000
related to closed plant facilities associated with our packaged fruit business
segment. This charge is included in the caption "Other income (expense)" in our
2001 consolidated statement of operations. Based on the continued unfavorable
and volatile worldwide market prices for FCOJ, we suspended our frozen
concentrate orange juice operations in early 2002, and offered all the
long-lived assets related to this operation for sale. Based on our intentions to
sell these assets, we classified them as "Property held for sale" in our
December 31, 2001 consolidated balance sheet. In accordance with SFAS No. 121,
we recorded a non-cash charge of $2.9 million in 2001 for impairment of these
assets, which is included under the caption "Impairment of long-lived assets" in
our 2001 consolidated statement of operations.
During 2002, we determined that our efforts and prospects to divest our
juice division's long-term assets on acceptable terms were unlikely to result in
successful transactions. As such, we entered into leases with an unaffiliated
third party to lease these plants. Based on our decision to lease/operate these
facilities, we reclassified these assets to long-term property, plant and
equipment in the second quarter 2002 financial statements, at the fair market
value of such assets at the time the decision was taken by management to
lease/operate these plants, which approximated their book value at December 31,
2001.
In early 2003, we received offers to sell our juice processing facilities
to two separate parties. As a result of these offers, and in accordance with
SFAS No. 144, we recorded in our fourth quarter of 2002, a non-cash charge of
$557,000, which is the difference between the offer prices and the carrying
amounts of
42
these assets. This charge is associated with our juice and oil business segment
and is included under the caption "Impairment of long-lived assets" in our 2002
consolidated statement of operations. In June 2003, we finalized the sale of one
of the facilities. The second sale is expected to be finalized during the third
quarter 2003.
Included in our lemon land is a 30-year lease associated with 2,100
hectares (approximately 5,200 acres) of rural land used for the growing of
Italian lemons, comprising substantially all the land of our Flor de Maria
grove. This lease, which was prepaid at the price of the land sales price, $1.9
million, was entered into in 1999 with a group of local Mexican land owners,
which acquired the land under the "Ejido" system of land ownership. We are
currently in the process of transitioning the lease into a land purchase, which
is not expected to result in any significant increase in the amounts previously
paid.
NOTE 6 - SHORT-TERM DEBT
Short-term debt consists of the following:
DECEMBER 31,
------------
2001 2002
---- ----
(IN THOUSANDS)
Note payable to Rabobank Nederland under a discretionary uncommitted line of
credit which expired January 2, 2002, cross-collateralized amongst all of our
subsidiaries and guaranteed by the company..................................... $1,887 $1,461
Notes payable to Bancomext for pre-export financing, interest at
various rates from 5.11% to 8.47%, secured by certain
receivables of a Mexican subsidiary ........................................... 3,500 3,500
Note payable to a Mexican credit union, unsecured, 8.0%, due
March 2002 .................................................................... 50 --
Promissory note payable to M&M Nominee, 10%, due June 2003 ..................... -- 100
------ ------
$5,437 $5,061
====== ======
As of December 31, 2002, we owed $1.5 million Rabobank Nederland under a
loan agreement that expired on January 2, 2002. This loan, which was in default
at December 31, 2002, was repaid in May 2003.
As of June 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 during 2002.
These notes have not been renewed by Bancomext and are in default. As of
December 31, 2002, accrued interest on these notes of approximately $116,000 is
also outstanding. Bancomext has not pursued its legal remedies under the loan
agreement. We are currently negotiating a restructuring of a joint loan with
Bancomext and Banorte (see Note 7) that would amortize the balances over a
period of up to ten years. No assurances, however, can be given that we will be
successful in restructuring these loans.
The Rabobank Nederland and Bancomext outstanding balances have been
included under the caption "Short and long-term debt in default" in our December
31, 2002 consolidated balance sheet.
The weighted-average interest rate on our short-term borrowings as of
December 31, 2001 and 2002 was 8.3% and 7.7%, respectively.
43
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------
2001 2002
---- ----
(IN THOUSANDS)
Long-term financing with FOCIR, due February 2009, including
accreted interest ................................................. $ 4,936 $ 4,611
Note payable to a Mexican bank, collateralized by certain plant
and equipment in Mexico; principal and interest at 18.5%,
payable monthly; unpaid principal and interest due November
2004 .............................................................. 613 462
Note payable to Banorte ............................................. 3,360 3,010
Note payable to a Mexican bank; collateralized by certain plant
and equipment in Mexico; principal and interest at Libor plus
8%, payable monthly ............................................... 117 96
Other notes payable ................................................. 68 40
------- -------
9,094 8,219
Less current portion ................................................ (2,243) (3,946)
------- -------
Long-term debt, excluding current portion ........................... $ 6,851 $ 4,273
======= =======
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, is included under the caption "Gain on forgiveness of debt"
in other income (expense) in our 2001 consolidated statement of operations.
During 2002, ICMOSA entered into a restructured loan agreement with Grupo
Financiero Banorte ("Banorte") that amortized the outstanding principal balance
over a period of five and one-half years. The loan repayment schedule requires
quarterly payments of principal and interest (Libor plus 3.50%) through December
31, 2007, with $300,000 due over the next twelve months. The Banorte loan
agreement is secured by certain assets of ICMOSA and includes certain covenants
that, amongst others, restrict future borrowings and contains a cross-default
provision. As a result of the default of the Bancomext loan discussed in Note 6,
we are currently in default of the Banorte loan agreement and the entire loan
balance has been included under the caption "Short and long-term debt in
default" in our consolidated balance sheet at December 31, 2002. Because we are
currently in discussions with Banorte to restructure their loan with our
Bancomext loan, they have not pursued their legal remedies available to them
under the loan agreement.
As of December 31, 2002, the notes payable to a Mexican bank in the amounts
of $462,000 and $96,000, were in default of their scheduled payments and have
been included under the caption "Short and long-term debt in default" in our
December 31, 2002 consolidated balance sheet. These loans were repaid in July
2003.
On February 21, 2000, we entered into a $48.0 million Mexican pesos (U.S.
$5.1 million at the exchange rate in effect at that time) 9-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 agreed to provide up to $48.0 million Mexican pesos
to fund additional Lemon Project costs, which included 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
44
provisions. As of December 31, 2001 and 2002, advances under the FOCIR Agreement
were $4.9 million and $4.6 million (47,033,971 Mexican pesos), respectively.
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 factors of 1.084 for 2001 and
1.126 for 2002, and then multiplying by the FOCIR equity interest percentage.
The calculation that results in the greater amount will be the annual accretion
amount. Accretion accumulates annually over the 9-year period of the FOCIR
Agreement and is paid only upon expiration or early termination of the FOCIR
Agreement. As of December 31, 2001 and 2002, accretion accrued under the FOCIR
Agreement amounted to $745,000 and $1.4 million, respectively, which is
classified as a long-term liability in our consolidated balance sheets. As of
December 31, 2002, the weighted average accretion rate for all advances under
the FOCIR Agreement was approximately 11.4%. 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. As of December
31, 2002, we were not in compliance with certain of the FOCIR Agreement
covenants, and accordingly, we were in default of the agreement. We have
received a waiver of these defaults from FOCIR through January 2004.
Certain of our Mexico loan contracts establish restrictions and obligations
with respect to the application of funds and require maintenance of insurance on
the assets and timely presentation of financial information. In addition, after
considering the repayment of the Rabobank Nederland and Banamex loans during
2003, approximately $7.0 million of net property, plant and equipment and
certain receivables are pledged as collateral under short and long-term debt
agreements.
At December 31, 2002 U.S. dollar denominated long-term debt amounted to
$3.1 million as compared to Mexico peso denominated long-term debt of $5.1
million.
Based on interest rates provided by our long-term debt and the floating
rates provided on our short-term borrowings, we believe the carrying amounts of
our short and long-term debt approximate their fair value.
During the years ended December 31, 2000, 2001 and 2002, interest expense
of $665,000, $1.1 million and $961,000, respectively, was capitalized as a
portion of our long-term orchard development costs.
Scheduled maturities of long-term debt, based on the original loan
agreements before reclassifications arising from defaults, are as follows:
PAYMENTS
--------
(IN THOUSANDS)
2003........................................... $ 936
2004........................................... 312
2005........................................... 400
2006........................................... 700
2007........................................... 1,260
Thereafter..................................... 4,610
--------
$ 8,218
========
NOTE 8 - RELATED PARTY TRANSACTIONS
On June 25, 2001 we completed a rights offering wherein M&M Nominee
purchased an additional 6,849,315 shares of our common stock at a price of $0.73
per share, with gross proceeds to us of $5.0 million. M&M Nominee owns, as of
December 31, 2002, 13,149,274 shares of our common stock, representing 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,
45
including the power to elect all directors and to block corporate actions such
as amendments to most provisions of our articles of incorporation.
Effective September 1, 2000, we entered into an agreement with Promecap,
S.C. for the services of Emilio Castillo Olea to become our President and Chief
Executive Officer at the annual rate of $150,000. Mr. Castillo was also a
Director of Promecap, S.C., a financial advisory services firm to Mexico
Strategic Investment Fund Ltd., which owns 80% of M&M Nominee. M&M Nominee is
our largest shareholder. On January 31, 2003, Mr. Castillo resigned his officer
positions with our company, and on May 30, 2003, resigned as a Director.
On February 15, 2001, we borrowed $1.8 million under the terms of an
unsecured promissory note, with interest at 12%, from M&M Nominee. This note was
repaid in June 2001, including accrued interest of approximately $78,000, from
the proceeds of the rights offering.
On December 18, 2002, January 10, 2003, January 24, 2003, February 11, 2003
and March 6, 2003, respectively, we received $100,000, $125,000, $200,000,
$110,000 and $125,000 under the terms of short-term promissory notes, interest
at 10%, from our largest shareholder. These notes were repaid in April 2003,
including accrued interest of $16,000.
During 2000, 2001 and 2002, we paid Jordaan & Riley, PLLC (and its
predecessor Jakes Jordaan, PLLC) approximately $242,000, $242,000 and $98,000,
respectively, for legal services rendered. Mr. Jordaan is the chairman of the
board of our company and is a member of Jordaan & Riley, PLLC. We believe that
said arrangement is no less favorable to us than would be available from
unrelated third parties.
NOTE 9 - LEASES
We lease buildings, various plant facilities, certain equipment and citrus
groves under operating leases. Our lease covering the Lawrence, Massachusetts
plant facility expired in August 2002. We also have under lease 538 acres of
citrus groves in Mexico for periods of ten to fifteen years expiring in various
years from 2004 to 2010.
Our future minimum payments under non-cancelable operating leases with
initial terms of one year or more at December 31, 2002, consist of the following
(In thousands):
YEAR AMOUNT
---- ------
2003............. $ 171
2004............. 148
2005............. 135
2006............. 376
2007............. 71
Thereafter....... 143
--------
$ 1,044
========
Rent expense was $1.4 million, $275,000 and $154,000 for the years ended
December 31, 2000, 2001 and 2002, respectively.
NOTE 10 - INCOME TAXES AND MEXICAN STATUTORY PROFIT SHARING
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
our deferred tax assets and liabilities as of December 31, 2001 and 2002 are as
follows:
46
DECEMBER 31,
------------
2001 2002
---- ----
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards.............. $17,502 $19,178
Inventories................................... 158 139
Asset tax credit.............................. 2,285 2,680
Credit available to offset Mexican taxes...... 165 --
Accrued liabilities........................... 545 655
Reserve for doubtful accounts................. 27 23
Other......................................... (97) 511
------- -------
Total deferred tax assets....................... 20,585 23,186
Less valuation allowance........................ (14,060) (17,457)
------- -------
Net deferred tax assets......................... $ 6,525 $ 5,729
======= =======
Deferred tax liabilities:
Depreciation.................................. $ 1,382 $ 1,443
Inventories................................... 5,149 4,286
Other......................................... -- --
------- -------
Deferred tax liabilities........................ $ 6,531 $ 5,729
======= =======
Loss before income taxes relating to our operations in the United States
and Mexico is as follows:
YEARS ENDED DECEMBER 31,
------------------------
2000 2001 2002
---- ---- ----
(IN THOUSANDS)
United States... $ (2,585) $ (4,903) $ (3,613)
Mexico.......... (9,838) (2,652) (3,789)
Other........... 13 -- --
-------- -------- --------
$(12,410) $ (7,555) $ (7,402)
======== ======== ========
The components of income tax expense (benefit) include the following:
YEARS ENDED DECEMBER 31,
------------------------
2000 2001 2002
---- ---- ----
(IN THOUSANDS)
Foreign - current asset tax... $ 312 $ 582 $ 540
Foreign - deferred ........... (1,359) 628 --
------- ------- -------
$(1,047) $ 1,210 $ 540
======= ======= =======
The differences between the actual income tax expense (benefit) and the
amount computed by applying the U.S. statutory federal corporate tax rate of 34%
to the loss before income taxes are as follows:
YEARS ENDED DECEMBER 31,
------------------------
2000 2001 2002
---- ---- ----
(IN THOUSANDS)
Benefit computed at U.S. federal statutory rate.. $(4,219) $(2,644) $(2,517)
Increase in valuation reserve ................... 3,140 4,329 3,397
Permanent differences and foreign taxes ......... 431 (139) (544)
Other ........................................... (399) (336) 204
------- ------- -------
$(1,047) $ 1,210 $ 540
======= ======= =======
47
The statutory federal income tax rate in Mexico for 2000, 2001 and 2002 was
35%. Beginning in the year 2003, the statutory federal income tax rate in Mexico
will decrease annually by 1% until the rate reaches 32% in the year 2005.
As of December 31, 2002, we had the following operating loss and asset tax
carryforwards available to offset future U.S. and Mexican taxable income and
income tax liabilities, respectively:
AVAILABLE TAX LOSS CARRYFORWARDS RECOVERABLE ASSET TAX
YEAR OF -------------------------------- ---------------------
EXPIRATION U.S. MEXICO TOTAL MEXICO
- ---------- ---- ------ ----- ------
(In thousands)
2003 $ -- $ 742 $ 742 $ 125
2004 -- 1,374 1,374 270
2005 -- -- -- --
2007 -- 1,731 1,731 90
2008 -- 2,851 2,851 105
2009 -- 6,369 6,369 273
2010 -- 10,198 10,198 491
2011 -- 3,331 3,331 646
2012 2,887 5,990 8,877 661
2018 2,915 -- 2,915 --
2019 5,773 -- 5,773 --
2020 3,543 -- 3,543 --
2021 5,454 -- 5,454 --
2022 1,116 -- 1,116 --
--------- --------- --------- ---------
$ 21,688 $ 32,586 $ 54,274 $ 2,661
========= ========= ========= =========
In June 2001, we completed a rights offering wherein M&M Nominee, our
largest shareholder, purchased an additional 6,849,315 shares of our common
stock increasing their ownership from 42.5% to 62.5%. Accordingly, we
experienced an ownership change as defined by Section 382 of the Internal
Revenue Code of 1986, as amended, which limits the use of net operating loss
carryforwards where changes occur in the stock ownership of a company. As a
result, this limitation will allow us to use only a portion of our pre-change
net operating loss carryforwards, which amounted to approximately $17.7 million
at December 31, 2002, to reduce subsequent taxable income in the United States,
if any for federal income tax purposes. Based upon the limitations of Section
382, we may only be allowed to use approximately $425,000 of such losses each
year to reduce taxable income, if any, until such unused losses expire. Post
change net operating loss carryforwards, which are not subject to limitation,
amounted to approximately $4.0 million at December 31, 2002.
Tax loss carryforwards of our Mexican subsidiaries, which are translated at
the value of the Mexican peso as of year-end, can be inflation-indexed until the
date of their application against future taxable income for tax reporting
purposes.
Our Mexican subsidiaries are each required to pay annually asset taxes, an
alternative minimum tax in Mexico, if the asset tax calculation is greater than
income taxes payable for the year. Asset taxes are calculated at 1.8% of assets
less certain liabilities and can be carriedforward for up to 10 years as credits
against future income taxes payable. Before any asset tax carryforwards can be
applied, all net operating losses must be first utilized.
Our Mexican subsidiaries are required by Mexican law to pay employee profit
sharing to all its employees in addition to their contractual compensation and
benefits. Currently the statutory rate for employee profit sharing is 10% and is
based on each year's taxable income for tax reporting purposes, adjusted to
eliminate most of the effects of Mexican inflation. As a result of our Mexican
subsidiaries reporting losses for income tax purposes over the past several
years, current payments have not been required. A liability, however, must be
recognized for deferred employee profit sharing purposes based on temporary
differences between income for financial reporting purposes and income for
purposes of computing the current amount of the employee profit sharing payment.
As of December 31, 2001 and
48
2002, the liability for deferred Mexican employee profit sharing was $1.7
million and $1.4 million, respectively, and is included under the caption
"Deferred Mexican statutory profit sharing and income taxes" in our consolidated
balance sheets.
NOTE 11 - STOCK OPTIONS
In 1994, we adopted the 1994 Employee Stock Option Plan and an Outside
Director Stock Option Plan (the "1994 Plans"). Under the 1994 Plans, our Board
of Directors were authorized to grant options to employees and consultants and
to our outside directors to purchase up to 820,000 and 100,000 shares
respectively, of our common stock which were reserved for such purposes. The
terms and vesting period for options granted under the 1994 Plans were fixed by
our Board of Directors at the time of grant provided that the exercise period
was not greater than 10 years from the date of grant. The exercise price for any
options granted under the 1994 Plans for employees and consultants could not be
less than 100% and 85% of the fair market value of our common stock on the date
of the grant for Incentive and Non-statutory Stock Options, as defined,
respectively. The exercise price for options granted under the 1994 Plans for
outside directors could not be less than 100% of the fair market value of our
common stock on the date of grant.
In 1999, we adopted the 1999 Stock Option Plan (the "1999 Plan") under
which stock options could be granted to employees, outside directors and
consultants to purchase our common stock. The 1999 Plan, which is similar to the
1994 Plan for employees, is for a period of ten years and has reserved 500,000
shares of our common stock for stock option grants. Effective with the adoption
of the 1999 Plan, we discontinued granting options under the 1994 Plans.
A summary of the status of all of our stock options at December 31, 2000,
2001 and 2002 and the changes during the periods ended are presented in the
following tables.
1994 PLANS
----------
EMPLOYEE STOCK OUTSIDE DIRECTORS STOCK
OPTION PLAN OPTION PLAN
--------------------------- ---------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- ---------- -------- ----------
Options outstanding, January 1, 2000.... 243,000 $ 5.94 35,000 $ 5.46
Granted............................... -- -- -- --
Forfeited............................. (110,000) 4.36 (10,000) 10.94
-------- --------
Options outstanding, December 31, 2000.. 133,000 7.25 25,000 3.28
Granted............................... -- -- -- --
Forfeited............................. (133,000) 7.25 (2,500) 6.88
-------- --------
Options outstanding, December 31, 2001.. -- -- 22,500 2.88
Granted............................... -- -- -- --
Forfeited ............................ -- -- (22,500) 2.88
-------- --------
Options outstanding, December 31, 2002.. -- -- -- --
======== ========
Exercisable at December 31,
2000.................................. 133,000 7.25 25,000 3.28
2001.................................. -- -- 22,500 2.88
2002.................................. -- -- -- --
49
1999 PLAN
---------
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
-------- ----------
Options outstanding, January 1, 2000.... 250,000 2.53
Granted............................... 30,000 1.17
Forfeited............................. (200,000) 2.51
--------
Options Outstanding December 31, 2000 .. 80,000 2.05
Granted............................... 30,000 .57
Forfeited............................. --
--------
Options Outstanding December 31, 2001... 110,000 1.65
Granted............................... -- --
Forfeited............................. (15,000) 1.37
--------
Options outstanding December 31, 2002... 95,000 1.70
========
Exercisable at December 31,
2000................................. 52,000 1.96
2001................................. 65,000 2.03
2002................................. 65,000 1.70
At December 31, 2002 there were no options outstanding under the 1994 Plans
for both employees and outside directors.
Options outstanding at December 31, 2002 under the 1999 Plan had
exercisable prices that ranged from $0.5625 to $2.938 and a weighted-average
remaining contractual life of 1.9 years. Under the 1999 Plan, all options
granted to outside directors become exercisable on the first anniversary of
grant while options granted to employees and consultants vest ratably over four
years.
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations, in accounting for our employee and outside director stock
options because, as discussed below, the alternative fair value accounting
provided for under FASB No. 123, "Accounting for Stock-Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing stock options. Because the exercise price of our stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized under APB No. 25.
Pro forma information regarding net loss and net loss per share, as
required by FASB No. 123 as if we had accounted for our stock options under the
fair value method, has been omitted as the fair value and number of outstanding
options is not significant. Additionally, the effect of amortization of the fair
value of previously granted options is not considered to be material.
NOTE 12 - LEMON PROJECT
In March 2003, we received formal offers from Coca-Cola to purchase our
Victoria juice and oil plant and rescind certain contract rights for the growing
and processing of Italian lemons for aggregate cash payments by Coca-Cola of
$16.0 million. In April 2003, we consummated the portion of the transaction with
Coca-Cola pertaining to the rescission of all contract rights and obligations
for the growing and processing of Italian lemons for an aggregate cash payment
of $12.5 million. In this regard, we retained the approximately 7,100 acres of
lemon groves, which included all the land, irrigation systems and related
agricultural equipment. As part of the sale agreement we are contractually
restricted from industrial processing our lemons and are limited in marketing
our lemons solely as fresh fruit until July 30, 2007. The proceeds from the
rescission of the contract rights will be offset against our deferred orchard
costs in 2003.
As of December 31, 2002, our Lemon Project consisted of 2,871 hectares
(approximately 7,100 acres). This land, which is situated in the northern states
of Tamaulipas and San Luis Potosi, consists of two
50
separate groves with different maturity profiles. These groves were initially
planted with approximately 800,000 lemon trees. Pursuant to the terms of the now
cancelled long-term supply contract, Coca-Cola provided us, free of charge,
765,000 lemon tree seedlings that were used for planting approximately 6,023
acres. We also operate our own nursery where young seedlings are prepared for
planting, which provided us with the remaining 35,000 trees, as well as acting
as a source of replanting for damaged trees. In connection with the transaction
with Coca-Cola pertaining to the rescission of all contract rights and
obligations for the growing and processing of Italian lemons for an aggregate
cash payment of $12.5 million, we elected to cease active cultivation of
recently planted lemon tree seedlings and used some for replanting of damaged
trees. As such, we presently have approximately 560,000 lemon trees under active
cultivation on approximately 4,800 acres. As part of the sale agreement we are
contractually restricted from industrial processing our lemons and are limited
in marketing our lemons solely as fresh fruit until July 30, 2007.
The planting program began in November 1996 with the first harvests in late
2000. Following is a summary of our first three years harvests:
- --------------------------------------------------------------
2000 2001 2002
- --------------------------------------------------------------
Metric tons 96 3,800 3,348
- --------------------------------------------------------------
Billed revenue $ 13,000 $ 560,000 $ 475,000
- --------------------------------------------------------------
All costs incurred to plant and maintain our lemon orchards have been
capitalized and deferred as of December 31, 2002. As a result of the rescission
of all contract rights and obligation for the growing of Italian lemons in April
2003, these deferred and capitalized costs will be amortized over their
estimated useful lives starting in our second quarter of 2003. In prior years,
it was determined that these deferred costs would be amortized based on the
projected year's yield to total estimated yield over the life of the rescinded
supply contract.
As of December 31, 2002, our lemon groves consisted of the following:
PROPERTY
NAME LOCATION HECTARES ACREAGE CROP INTEREST
- ---- ---------- -------- ------- ---- --------
Gomez Farias, (A)
Tamaulipas,
El Cielo Grove ........ Mexico 725 1,791 Italian lemons Owned
Cd. Valles,
San Luis Potosi,
Flor de Maria Grove.... Mexico 2,146 5,301 Italian lemons Leased
----- -----
Total 2,871 7,092
===== =====
(A) One hectare equals approximately 2.47 acres.
Included in our lemon land is a 30-year lease associated with 2,100
hectares (approximately 5,200 acres) of rural land used for the growing of
Italian lemons, comprising substantially all the land of our Flor de Maria
grove. This lease, which was prepaid at the price of the land sales price, $1.9
million, was entered into in 1999 with a group of local Mexican land owners,
which acquired the land under the "Ejido" system of land ownership. We are
currently in the process of transitioning the lease into a land purchase, which
is not expected to result in any significant increase in the amounts previously
paid.
We also had a long-term lemon processing contract with Coca-Cola that would
have expired in 2007. Under the terms of this contract, we were obligated to
processing annually between 12,000 and 300,000 metric tons of Italian lemons for
Coca-Cola. Our Victoria juice and oil plant processing capacity for Italian
lemons was approximately 40,000 metric tons. During the current processing
season, we processed between 25,000 and 30,000 metric tons. As we did not have
sufficient production capacity for future years processing, we anticipated that
performing under the terms of this contract would require substantial capital
expenditures or securing additional processing capacity. In connection with
exploring various strategic alternatives for our juice processing division's
assets, we explored restructuring our lemon processing contract with Coca-Cola,
but were unsuccessful.
51
NOTE 13 - SEGMENT AND GEOGRAPHIC INFORMATION
For operating and financial reporting purposes, we have historically
classified our business into two fundamental areas: packaged fruit and juice and
oil. Our packaged fruit division consists of three operating units that
hand-process and sell tropical and citrus fruit products directly to our largest
customer, Del Monte, to foodservice providers and distributors and to industrial
food and beverage processors. This division also operated our pineapple
orchards. Our juice and oil business segment has consisted of our juice
division, which produced frozen concentrate orange juice and other citrus
juices, which were sold directly to juice bottlers and the extraction of
essential oils from citrus fruits, which were sold directly to commercial users,
and our agricultural operation, which is developing our Italian lemon orchards.
With the completion of the pending sale of our Victoria juice and oil plant and
related equipment, our juice and oil business segment will consist exclusively
of our Italian lemon groves.
We evaluate our segment performance and allocate resources based on profit
or loss from operations before income taxes and do not allocate corporate
general and administrative expenses and amortization of intangibles to our
segments. The accounting policies for each of our business segments are the same
as those described in the summary of significant accounting policies in Note 1.
Inter-segment sales and transfers are insignificant. Our reportable segments are
each managed separately because they process and distribute distinct products
with different production processes. Information pertaining to the operations of
our two business segments is set forth below.
PACKAGED JUICE
FRUIT AND OIL TOTAL
--------- ------- --------
YEAR ENDED DECEMBER 31, 2002
Revenues from external customers........... $ 25,069 $ 2,093 $ 27,162
Interest expense........................... 393 14 407
Interest revenue........................... 71 4 75
Asset tax.................................. 518 22 540
Depreciation expense....................... 941 595 1,536
Impairment loss............................ -- 3,073 3,073
Segment loss............................... (2,252) (4,045) (6,297)
Segment assets............................. 31,285 27,398 58,683
Expenditures for long-lived assets......... 15 1,733 1,748
YEAR ENDED DECEMBER 31, 2001
Revenues from external customers........... $ 27,032 $ 7,184 $ 34,216
Interest expense........................... 922 20 942
Interest revenue........................... 144 7 151
Asset tax.................................. 535 47 582
Depreciation and amortization expense...... 1,311 693 2,004
Impairment loss............................ -- 3,245 3,245
Segment income (loss)...................... 214 (6,089) (5,875)
Segment assets............................. 37,829 32,051 69,880
Expenditures for long-lived assets......... 565 2,585 3,150
YEAR ENDED DECEMBER 31, 2000
Revenues from external customers........... $ 32,562 $ 12,629 $ 45,191
Inter-segment revenues..................... 103 34 137
Interest expense........................... 2,087 627 2,714
Interest revenue........................... 414 388 802
Asset tax.................................. 199 113 312
Depreciation and amortization expense...... 1,603 375 1,978
Segment loss............................... (5,695) (1,889) (7,584)
Segment assets............................. 62,140 36,163 98,303
Expenditures for long-lived assets......... 413 5,213 5,626
52
The following are reconciliations of reportable segment revenues, profit or
loss, and assets to our consolidated totals.
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
--------- --------- ---------
REVENUES
Total external revenues for reportable segments...... $ 45,191 $ 34,216 $ 27,162
Inter-segment revenues for reportable segments....... 137 -- --
Elimination of inter-segment revenues................ (137) -- --
--------- --------- ---------
Total consolidated revenues................ $ 45,191 $ 34,216 $ 27,162
========= ========= =========
PROFIT OR LOSS
Total profit or loss for reportable segments......... $ (7,584) $ (5,875) $ (6,297)
Subsidiary acquisition costs recognized in
consolidation....................................... (282) (282) --
Unallocated corporate general and administrative
expenses
- General and administrative........................ (2,054) (1,398) (1,105)
- Provision for losses on abandonment of leased
facility......................................... (2,490) -- --
--------- --------- ---------
Loss before income taxes............................. $ (12,410) $ (7,555) $ (7,402)
========= ========= =========
ASSETS
Total assets for reportable segments................. $ 98,303 $ 69,880 $ 58,683
Other assets......................................... 77,397 56,995 59,165
Elimination of intercompany profits in inventory..... (48) (48) (48)
Elimination of intercompany receivables.............. (68,153) (28,229) (24,807)
Allocation of acquisition costs of subsidiaries
recorded in consolidation........................... (35,472) (39,900) (44,585)
Reclassification of deferred tax assets recorded in
consolidation....................................... (8,825) (8,286) (5,633)
--------- --------- ---------
Total consolidated assets............... $ 63,202 $ 50,412 $ 42,775
========= ========= =========
OTHER SIGNIFICANT ITEMS
SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS TOTALS
-------- ----------- ------------
Year ended December 31, 2002:
Interest expense..................... $ 407 $ -- $ 407
Depreciation expense................. 1,536 -- 1,536
Expenditures for long-lived assets... 1,748 -- 1,748
Year ended December 31, 2001:
Interest expense..................... $ 942 $ -- $ 942
Depreciation and amortization expense 2,004 282 2,286
Expenditures for long-lived assets... 3,150 -- 3,150
Year ended December 31, 2000:
Interest expense..................... $ 2,714 $ -- $ 2,714
Depreciation and amortization expense 1,978 324 2,302
Expenditures for long-lived assets... 5,626 -- 5,626
The reconciling item in 2000 and 2001 to adjust depreciation and
amortization expense, relates to amortization of goodwill (amortization was
discontinued as of January 1, 2002 in accordance with SFAS No. 142),
depreciation of assets recorded in consolidation and depreciation of corporate
assets. None of the other adjustments to the consolidated totals are material.
53
The following geographic information attributes our revenues to countries
based on the location of our customers.
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 2001 2002
-------- -------- --------
REVENUES
United States.......................... $ 33,079 $ 21,495 $ 18,787
Japan.................................. 4,695 7,339 5,705
Mexico................................. 3,921 3,842 2,058
Europe................................. 3,496 1,540 612
-------- -------- --------
Consolidated total.......... $ 45,191 $ 34,216 $ 27,162
======== ======== ========
LONG-LIVED ASSETS
United States.......................... $ 710 $ 302 $ 43
Mexico................................. 44,095 32,396 34,705
======== -------- --------
Consolidated total.......... $ 44,805 $ 32,698 $ 34,748
======== ======== ========
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
WEIGHTED
NET INCOME AVERAGE BASIC
(LOSS) PER AND DILUTED
NET GROSS PROFIT LOSS FROM NET INCOME SHARE - BASIC SHARES
QUARTER SALES (LOSS) OPERATIONS (LOSS) AND DILUTED OUTSTANDING
- ---------- ---------- ------------ ---------- ------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002
First $ 7,140 $ 656 $ (353) $ (367) $ (0.02) 21,045
Second (1) 7,622 (420) (1,449) (1,652) (0.08) 21,045
Third (1) 5,435 (1,101) (1,949) (2,299) (0.11) 21,045
Fourth (2) 6,965 725 (3,326) (3,624) (0.17) 21,045
2001
First $ 10,338 $ 760 $ (562) $ (1,283) $ (0.09) 13,938
Second (3) 7,865 (148) (1,522) 1,093 0.08 14,333
Third 5,265 (533) (1,951) (2,323) (0.11) 21,045
Fourth (4) 10,748 757 (4,172) (6,252) (0.30) 21,045
Notes to unaudited quarterly results of operations:
(1) The second and third quarters of 2002 were negatively impacted by
non-cash inventory write-downs of $520,000 and $567,000, respectively, as
a result of our decision to discontinue the pineapple growing operations
of our packaged fruit business segment.
(2) The fourth quarter of 2002 was unfavorably impacted by a non-cash charge
of $3.1 million associated with the impairment of long-lived assets
associated with our juice and oil business segment.
(3) The second quarter of 2001 was favorably impacted by a gain of $2.9
million from the forgiveness of debt by a Mexican bank.
(4) The fourth quarter of 2001 was unfavorably impacted by a non-cash charge
of $3.2 million associated with the impairment of long-lived assets, a
loss of approximately $1.3 million associated with the sale and write
down of property, plant and equipment and adjustments to deferred income
tax expense of approximately $700,000 resulting from increases to our
income tax valuation allowances as a result of a review of the expiration
dates of our net operating and asset tax credit carryforwards in Mexico.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Effective January 1, 1995, we entered into a long-term 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, our company was obligated to pay
54
IHMSA an operating fee sufficient to cover the interest payments on IHMSA's $3.4
million of outstanding debt with a Mexican bank. During the term of the
operating agreement, we have the option to buy the IHMSA facility.
During the third quarter of 2001, we successfully negotiated revisions to
the operating agreement with IHMSA's management, extending the agreement's
expiration date from January 1, 2002 to January 1, 2021, and reducing the
purchase option price from $4.5 to $3.5 million. The revised purchase option
also 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 then outstanding debt and during the fourth quarter of 2001, we advanced
IHMSA an additional $636,000, $300,000 of which was used to retire its $3.4
million of bank debt, both of which will be applied to the purchase price.
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, 2002, all
amounts advanced to IHMSA of $2.0 million are included under the caption
"Deposit on plant facility" in our consolidated balance sheet at December 31,
2002.
In December 2001, we exercised our purchase option and expected to finalize
formal closing documents and take title to the facility during 2002. The actual
closing of the purchase transaction is subject to approval of the debt
assumption by the Mexican lending institution and ICMOSA's current banks. Until
the closing takes place, ICMOSA will operate the IHMSA facility under the
long-term operating agreement.
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 Engracia S.A. de C.V.,
Defendant," 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 would not
have a material adverse effect on our consolidated financial condition.
As a result of the decline in the worldwide market prices of FCOJ, during
2000 we decided to discontinue operating a juice processing facility in Mexico
that had been leased from Frutalamo under the terms of deposit, operating and
stock purchase agreements entered into in December 1996. As we were unsuccessful
in negotiating a settlement with Frutalamo to terminate such agreements, we
wrote off a previously recorded non-refundable deposit of $1.5 million and
recorded a cancellation fee of $1.0 million at June 30, 2000. These charges are
included in our 2000 consolidated statement of operations as "Provision for
losses on abandonment of leased facility."
Subsequent to December 31, 2000, the Frutalamo Plaintiffs initiated legal
proceedings in Mexico naming as defendants certain of our Mexican subsidiaries,
certain current and former employees, officers and directors of our company and
a former contractor. In September 2002, we settled these claims for $125,000 in
cash. Recently, we learned that, notwithstanding such settlement, certain claims
asserted against us by the Frutalamo Plaintiffs, prior to September 2002,
continue to be under review before the Mexican courts. Management denies any
wrongdoing in this matter and intends to vigorously contest these claims. The
resolution of this matter is not expected to have a material adverse effect on
our consolidated financial condition or results of operations.
From time to time our company is engaged in various other legal proceedings
in the normal course of business. The ultimate liability, if any, for the
aggregate amounts claimed cannot be determined at this time. However, our
company, based on the consultation with legal counsel, is of the opinion that
there are
55
no matters pending or threatening which could have a material adverse effect on
our consolidated financial position or results of operations.
NOTE 16 - SUBSEQUENT EVENTS
In March 2003, we received formal offers from Coca-Cola to purchase our
Victoria juice and oil plant and rescind certain contract rights for the growing
and processing of Italian lemons for aggregate cash payments by Coca-Cola of
$16.0 million. In April 2003, we consummated the portion of the transaction with
Coca-Cola pertaining to the rescission of all contract rights and obligations
for the growing and processing of Italian lemons for an aggregate cash payment
of $12.5 million. In this regard, we retained the approximately 7,100 acres of
lemon groves, which included all the land, irrigation systems and related
agricultural equipment. As part of the sale agreement we are contractually
restricted from industrial processing our lemons and are limited in marketing
our lemons solely as fresh fruit until July 30, 2007.
Although no assurances can be given, we anticipate that the closing date of
the sale of our Victoria juice and oil plant, for a cash payment of $3.5
million, will be during the third quarter of 2003.
In June 2003, we sold our Poza Rica juice plant to an unaffiliated third
party for $1.0 million, plus value-added taxes of $120,000. As of July 25, 2003,
total cash payments received amounted to $345,000 with the balance payable in
six installments under a promissory note. The remaining payments, which
aggregate $220,000 in 2003 and $590,000 in 2004, are secured by personal
guarantees of the purchaser's shareholders and a related company and a pledge
agreement.
With the completion of the pending sale of our Victoria juice and oil plant
and related processing equipment, our juice and oil business segment will
consist exclusively of our agricultural operation; our Italian lemon groves. Our
Board of Directors is exploring several strategic alternatives for our lemon
groves, which includes the divestiture of the lemon groves, a joint venture or
strategic partnering relationship for the growing, distribution and marketing of
fresh lemons. Also, our Board of Directors is evaluating operating strategies
for selling our lemons in the fresh markets of the United States, Europe and the
Pacific Rim, or to other users of fresh lemons.
SCHEDULE II
THE UNIMARK GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(TABLE IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COST AND OTHER DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) END OF PERIOD
- -----------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 2002 $ 1,317 126 -- 325 $ 1,118
Year ended December 31, 2001 $ 1,568 224 -- 475 $ 1,317
Year ended December 31, 2000 $ 665 1,055 -- 152 $ 1,568
(1) Represents uncollectible accounts charged against the allowance for doubtful
accounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from the
section "Directors and Executive Officers" in our 2002 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
sections "Compensation of Executive Officers" and "Compensation of Directors" in
our 2002 Proxy Statement. Information in the section and subsection titled
"Report of The UniMark Group, Inc. Board of Directors Compensation Committee"
and "Performance Graph" is not incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from the
section "Security Ownership of Principal Shareholders, Directors and Management"
in our 2002 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
sections "Compensation of Executive Officers," "Compensation of Directors" and
"Certain Transactions" in our 2002 Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that our company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time period specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by our company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to our company's
management, including its principal executive officer and its principal
financial officer, as appropriate to allow timely decisions to be made regarding
required disclosure. Our company's Chief Executive Officer and our Chief
Financial Officer have evaluated our company's disclosure controls and
procedures as of a date within 90 days of the filing date of this Annual Report
on Form 10-K and have concluded that our company's disclosure controls and
procedures are effective as of the date of such evaluation.
With the filing of this Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, we will be filing approximately three months past our
extension request to April 15, 2003. This filing delay has been caused by
several factors, which are as follows -
- We were unable to contract with our independent public accountants
to initiate their examination of our consolidated financial
statements for the fiscal year ending December 31, 2002, until all
prior period audit and audit related fees were paid. All fees were
subsequently paid in late March 2003, at which point they
commenced their audit procedures.
- As a result of the finalization of a transaction with Coca-Cola
for the rescission of certain contract rights for the growing and
processing of Italian lemons in Mexico, which was
57
completed in April 2003, a detailed analysis of the impact of this
transaction on our December 31, 2002 deferred orchard costs was
required to assess impairment of these long-lived assets under
current accounting literature, which included an expert third
party appraisal of the assets which we obtained in June 2003.
- As part of our company's decision to discontinue the juice
division of our juice and oil business segment, we entered into
contracts to sell our juice processing plants and related
equipment located in Mexico. As a result, additional analysis was
required in assessing the impairment of these long-lived assets
under current accounting literature.
Changes in Internal Controls
Our company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of our company's
financial reporting, the effectiveness and efficiency of our company's
operations and our company's compliance with applicable laws and regulations.
There have been no significant changes in our company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date our company carried out its evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from the
section "Fees Paid to Auditors" in our 2002 Proxy Statement.
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 16(a) (1) FINANCIAL STATEMENTS
See Index to Financial Statements (Item 8).
ITEM 16(a) (2) FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements (Item 8).
ITEM 16(a) (3) EXHIBITS
NUMBER
EXHIBIT EXHIBIT
- ------- -------
3.1 Articles of Incorporation of The UniMark Group, Inc., as amended (1)
3.2 Amended and Restated Bylaws of The UniMark Group, Inc. (1)
3.3 Articles of Exchange of The UniMark Group, Inc. (1)
4.1 Specimen Stock Certificate (1)
10.1 The UniMark Group, Inc. 1994 Employee Stock Option Plan (1)
10.2 The UniMark Group, Inc. 1994 Stock Option Plan for Directors (1)
10.3 Stock Exchange Agreement between The UniMark Group, Inc. and the
stockholders of Industrias Citricolas de Montemorelos, S.A. de C.V.(1)
10.4 Citrus Grove Lease Agreement (1)
10.5 Asset Operating Agreement between the Registrant and Industrias
Horticolas de Montemorelos, S.A. de C.V.(2)
10.6 Lease agreement among Hector Gerardo Castagne Maitret, Carlos
Courturier Arellano, Mauro Alberto Salazar Rangel, Miguel Angel
Salazar Rangel, Alejandrina Trevino Garcia, Gerardo Trevino Garcia,
Jorge Maitret and Industrias Citricolas de Montemorelos, S.A. de
C.V.(2)
10.7 Contract of Purchase and Sale between Empacadora Tropifrescos,
Sociedad Anonima de Capital Variable and Industrias Citricolas de
Montemorelos, S.A. de C.V.(2)
58
10.8 Lease Agreement between Industrias Citricolas de Montemorelos, S.A. de
C.V. and Valpak, S.A. de C.V. dated July 1, 1995(3)
10.9 Asset Operating Agreement between Industrial Citricolas de
Montemorelos, S.A. de C.V. and Empacadora de Naranjas Azteca, S.A. de
C.V. dated July 1, 1995(3)
10.10 Contract for Operation, Administration, and Purchase and Sale of Fruit
between Industrial Citricolas de Montemorelos, S.A. de C.V. and Mr.
Jorge Croda Manica ("Las Tunas") dated July 1, 1995(3)
10.11 Lease Contract between Industrial Citricolas de Montemorelos, S.A. de
C.V. and Mr. Mauro Alberto Salazar Rangel and Mr. Miguel Angel Salazar
Rangel ("Huerta Loma Bonita") dated 1995(3)
10.12 Unilateral Recognition of Indebtedness and Granting of Revolving
Collateral between Industrial Citricolas de Montemorelos, S.A. de C.V.
and Rabobank Curacao N.V. dated September 20, 1995(3)
10.13 Amended and Restated Stock Purchase Agreement among The UniMark Group,
Inc., 9029-4315 Quebec Inc., Michel Baribeau and Gestion Michel
Baribeau Inc. dated January 3, 1996(4)
10.14 Lease Agreement between Loma Bonita Partners and UniMark Foods, Inc.
dated November 28, 1995(3)
10.15 Lease Agreement between The UniMark Group, Inc. and Grosnez Partners
dated January 1, 1996(3)
10.16 Rural Property Sublease Agreement between Industrial Citricolas de
Montemorelos, S.A. de C.V. and Lorenzo Uruiza Lopez dated October 23,
1995(3)
10.17 Purchase Agreement between Industrial Citricolas de Montemorelos, S.A.
de C.V. and Jose Enrique Alfonso Perez Rodriquez dated October 23,
1995(3)
10.18 Stock Purchase Agreement between The UniMark Group, Inc. and the
stockholders of Grupo Industrial Santa Engracia dated April 30,
1996(6)
10.19 Stock Purchase Agreement between The UniMark Group, Inc., UniMark
Foods, Inc., Sam Perricone Children's Trust 1972, Sam Perricone and
Mark Strongin dated May 9, 1996(6)
10.20 Employment Agreement by and between Grupo Industrial Santa Engracia,
S.A. de C.V. and Ing Jose Ma. Martinez Brohez dated as of May 9,
1996(7)
10.21 Lease Agreement by and among Ralphs Grocery Company, Simply Fresh
Fruit, Inc. and Davalon Sales, Inc. dated as of March 1, 1994(7)
10.22 Revolving Credit Agreement by and among UniMark Foods, Inc., The
UniMark Group, Inc., UniMark International, Inc., Simply Fresh Fruit,
Inc. and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. dated
February 12, 1997. (9)
10.23 Supply Contract between The Coca-Cola Export Corporation and Grupo
Industrial Santa Engracia, S.A. de C.V. dated October 7, 1996. (9)
10.24 Loan Agreement made between Industrias Citricolas de Montemorelos,
S.A. de C.V., Grupo Industrial Santa Engracia, S.A. de C.V., Agromark,
S.A. de C.V., as borrowers; The UniMark Group, Inc., as guarantor, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. "Rabobank
Nederland," as lender, dated May 29, 1997. (10)
10.25 Revolving Loan Agreement with Security Interest by and between
Industrias Citricolas de Montemorelos, S.A. de C.V., as borrower,
Grupo Industrial Santa Engracia, S.A. de C.V. "Gise," Agromark, S.A.
de C.V. "Agromark," and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A."Rabobank Nederland" New York Branch
dated April 10, 1997. (10)
10.26 Revolving Loan Agreement with Security Interest by and between Grupo
Industrial Santa Engracia, S.A. de C.V. "Gise," as borrower,
Industrias Citricolas de Montemorelos, S.A. de C.V. "Icmosa,"
Agromark, S.A. de C.V. "Agromark," and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A. "Rabobank Nederland" New York Branch
dated April 10, 1997. (10)
10.27 First Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated October 7, 1997. (10)
10.28 Second Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit,
59
Inc., the guarantors, and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland," New York Branch
dated November 12, 1997. (10)
10.29 Third Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated May 22, 1998. (14)
10.30 Fourth Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated December 31, 1998. (14)
10.31 Letter given by Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.,
"Rabobank Nederland," New York Branch to UniMark Foods, Inc., the
borrower, and The UniMark Group, Inc., UniMark International, Inc.,
Simply Fresh Fruit, Inc., the guarantors, and Industrias Citricolas de
Montemorelos, S.A. de C.V., Grupo Industrial Santa Engracia, S.A. de
C.V., and Agromark, S.A. de C.V. regarding the renewal of financing.
(14)
10.32 Articles of Association of Gisalamo, S.A. de C.V. (11)
10.33 Deposit, Operation, Exploitation and Stock Purchase Option Agreement
by and among The UniMark Group, Inc. and Mr. Francisco Domenech
Tarrago and Mr. Francisco Domenech Perusquia dated December 17, 1996
(11)
10.34 Gratuitous Loan Agreement by and among Gisalamo, S.A. de C.V. and
Frutalamo, S.A. de C.V. dated December 17, 1996 (11)
10.35 Non-Competition Agreement by and among The UniMark Group, Inc. and
Jorn Budde dated February 18, 1998 (12)
10.36 Supply Agreement between the Coca-Cola Export Corporation and Grupo
Industrial Santa Engracia, S.A. de C.V. dated April 2, 1998 (13)
10.37 Fifth Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit, Inc., the guarantors, and
Cooperative Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated May 17, 1999 (14)
10.38 The UniMark Group, Inc. 1999 Stock Option Plan (14)
10.39 Employment Agreement by and among The UniMark Group, Inc. and Charles
Horne dated as of March 31, 1999 (14)
10.40 Employment Agreement by and among The UniMark Group, Inc. and Roman
Shumny dated as of November 20, 1998 (14)
10.41 Sixth Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc. UniMark
International, Inc. Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated January 3, 2000 (15)
10.42 Seventh Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc. UniMark
International, Inc. Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated March 1, 2000 (15)
10.43 Standby Funding Commitment by and among The UniMark Group, Inc. and
Promecap, S.C. dated April 17, 2000 (15)
10.44 Stock Purchase Agreement dated as of October 11, 1999, by and among
The UniMark Group, Inc. and Francois Gravil - Guy Picard in trust for
a company to be owned and operated by Francois Gravil and Guy Picard,
for all the issued and outstanding capital stock of Les Produits
Deli-Bon Inc. (17)
10.45 Asset Purchase Agreement dated October 18, 1999 by and among SFFI
Company, Inc., Sam Perricone, as guarantor, Sam Perricone Children's
Trust - 1972, The UniMark Group, Inc. and Simply Fresh Fruit, Inc.
(17)
10.46 Asset Purchase Agreement dated as of August 25, 2000 by and among Del
Monte Corporation, UniMark Foods, Inc. and The UniMark Group, Inc.
(17)
10.47 Promissory Note for $1,800,000 by and among The UniMark Group, Inc.
and M&M Nominee, L.L.C., 12%, due July 31, 2001 (17)
60
10.48 Fifth Amendment to the Revolving Loan Agreement with Security Interest
by and Among Industrial Santa Engracia, S.A. de C.V. as Borrower,
Industrias Citricolas de Montemorelos, S.A. de C.V. and AgroMark S.A.
de C.V., as Guarantors, The UniMark Group, Inc., as Guarantor and
Pledgor, Mr. Rafael Vaquero Bazan and Mr. Jose Maria Brohez, as
Pledgors, and Cooperatieve Centrale-Raiffeissen Boerenleenbank B.A.,
as lender, dated as of September 1, 2000 (17)
10.49 Sixth Amendment to the Revolving Loan Agreement with Security Interest
by and Among Grupo Industrial Santa Engracia, S.A. de C.V. as
Borrower, Industrias Citricolas de Montemorelos, S.A. de C.V. and
AgroMark S.A. de C.V., as Guarantors, The UniMark Group, Inc., as
Guarantor and Pledgor, Mr. Rafael Vaquero Bazan and Mr. Jose Maria
Brohez, as Pledgors, and Cooperatieve Centrale-Raiffeissen
Boerenleenbank B.A., as lender dated as of January 1, 2001 (17)
10.50 Modifying Agreement to Supply Agreement between The Coca-Cola Export
Corporation and Grupo Industrial Santa Engracia, S.A. de C.V. dated as
of January 15, 2001 (18)
10.51 Promissory Note for $100,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLP,10%, due June 10, 2003 (19)
10.52 Promissory Note for $125,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLC,10%, due July 9, 2003(19)
10.53 Guaranty Agreement dated as of January 10, 2003, executed by Grupo
Industrial Santa Engracia, S.A. de C.V. in favor of M&M Nominee, LLC
(19)
10.54 Promissory Note for $200,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLP, 10%, due April 30, 2003 (22)
10.55 Guaranty Agreement dated as of January 24, 2003, executed by
Industrias Citricolas de Montemorelos, S.A. de C.V. in favor of M&M
Nominee, LLC (22)
10.56 Promissory Note for $110,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLP, 10%, due July 9, 2003 (22)
10.57 Guaranty Agreement dated as of February 11, 2003, executed by Grupo
Industrial Santa Engracia, S.A. de C.V. in favor of M&M Nominee, LLC
(22)
10.58 Promissory Note for $125,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLC, 10%, due July 9, 2003 (22)
10.59 Guaranty Agreement dated as of March 6, 2003, executed by Grupo
Industrial Santa Engracia, S.A. de C.V. in favor of M&M Nominee, LLC
(22)
10.60 Agreement for the Termination of the Supply Agreement and its
Corresponding Amendments dated April 11, 2003, by and between Grupo
Industrial Santa Engracia, S.A. de C.V. and The Coca-Cola Export
Corporation, Mexico Branch (20)
10.61 Agreement for the Termination of the Processing Agreement dated April
11, 2003, by and between Grupo Industrial Santa Engracia, S.A. de C.V.
and The Coca-Cola Export Corporation, Mexico Branch (21)
10.62 Rural Property Lease Agreement between Ejido "Laguna del Mante,"
Municipio de Ciudad Valles, Estado de San Luis Potosi, and "Grupo
Industrial Santa Engracia," S.A. de C.V., dated December, 2002 (22)
10.63 Agreement for the Ejido land transfer between Eijdo "Laguna del
Mante," Municipio de Ciudad Valles, Estado de San Luis Potosi, and
"Grupo Industrial Santa Engracia," S.A. de C.V., dated December, 2002
(22)
99(a) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (22)
99(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (22)
21 Subsidiaries of the Registrant (11) (16)
23 Consent of Mancera, S.C., Member Practice of Ernst & Young Global (22)
- ---------------------
(1) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form SB-2, as amended, SEC Registration No. 33-78352-D.
(2) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994.
61
(3) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-QSB for the fiscal quarter ended September 30, 1995.
(4) Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K dated January 16, 1995.
(5) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
(6) Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K dated May 10, 1996.
(7) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1, as amended, SEC Registration No. 333-3539.
(8) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1996.
(9) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
(10) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1997.
(11) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
(12) Previously filed as an Exhibit to the Registrant's Current Report on Form
8-K dated February 18, 1998.
(13) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1998.
(14) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10Q for the fiscal quarter ended June 30, 1999.
(15) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
(16) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 30, 2000.
(17) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1, as amended, SEC Registration No. 333-60130 dated May 18,
2001.
(18) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2001.
(19) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 2002.
(20) Previously filed as Exhibit 99.2 to the Registrant's Current Report on
Form 8-K dated April 16, 2003.
(21) Previously filed as Exhibit 99.3 to the Registrant's Current Report on
Form 8-K dated April 16, 2003.
(22) Filed herewith.
ITEM 16(b) REPORTS ON FORM 8-K
On December 10, 2002, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission announcing director changes.
On February 5, 2003, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission announcing management changes.
On March 7, 2003, we filed a Current Report on Form 8-K with the Securities
and Exchange Commission announcing a $16.0 million proposal for a juice
processing plant and certain contract rights for the growing and processing
of Italian lemons.
On April 11, 2003, we filed a Current Report on Form 8-K with the Securities
and Exchange Commission announcing a sale transaction which rescinded all
contract rights and obligations for the growing and processing of Italian
lemons for an aggregate cash payment of $12.5 million.
On June 6, 2003, we filed a Current Report on Form 8-K with the Securities
and Exchange Commission announcing a director resignation.
On June 17, 2003, we filed a Current Report on Form 8-K with the Securities
and Exchange Commission announcing appointment of new a director.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Gustavo Fernandez Cardenas
-----------------------------------------
Gustavo Fernandez Cardenas
President and Chief Executive Officer
Dated: August 12, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report was signed below by the following persons on behalf of the registrant and
in the capacities and on the dates stated:
SIGNATURE TITLE DATE
- --------------------------------- ---------------------------------- ---------------
/s/ Gustavo Fernandez Cardenas President, Chief Executive Officer August 12, 2003
- --------------------------------- (Principal Executive Officer)
Gustavo Fernandez Cardenas
/s/ David E. Ziegler Chief Financial Officer (Principal August 12, 2003
- --------------------------------- Financial and Accounting Officer)
David E. Ziegler
/s/ Jakes Jordaan Director, Chairman August 12, 2003
- ---------------------------------
Jakes Jordaan
/s/ Iain Aitken Director August 12, 2003
- ---------------------------------
Iain Aitken
/s/ Eduardo Beruff Director August 12, 2003
- ---------------------------------
Eduardo Beruff
/s/ Federico Chavez Peon Director August 12, 2003
- ---------------------------------
Federico Chavez Peon
/s/ Luis A. Chico Pardo Director August 12, 2003
- ---------------------------------
Luis A. Chico Pardo
/s/ Arturo Herrera Barre Director August 12, 2003
- ---------------------------------
Arturo Herrera Barre
/s/ C. Jackson Pfeffer Director August 12, 2003
- ---------------------------------
C. Jackson Pfeffer
/s/ Manuel Morales Camporredondo Director August 12, 2003
- ---------------------------------
Manuel Morales Camporredondo
63
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Gustavo Fernandez Cardenas, certify that:
1. I have reviewed this annual report on Form 10-K of The UniMark Group,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
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 annual 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 annual report (the "Evaluation
Date"); and
c) presented in this annual 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
annual report whether 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: August 12, 2003 /s/ Gustavo Fernandez Cardenas
-------------------------------------
Gustavo Fernandez Cardenas, President
(Principal Executive Officer)
64
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 annual report on Form 10-K of The UniMark Group,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual
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 annual report (the
"Evaluation Date"); and
f) presented in this annual 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
annual report whether 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: August 12, 2003 /s/ David E. Ziegler
-----------------------------------------
David E. Ziegler, Chief Financial Officer
(Principal Accounting Officer)
65
INDEX TO EXHIBITS
NUMBER
EXHIBIT EXHIBIT
- ------- -------
3.1 Articles of Incorporation of The UniMark Group, Inc., as amended (1)
3.2 Amended and Restated Bylaws of The UniMark Group, Inc. (1)
3.3 Articles of Exchange of The UniMark Group, Inc.(1)
4.1 Specimen Stock Certificate (1)
10.1 The UniMark Group, Inc. 1994 Employee Stock Option Plan (1)
10.2 The UniMark Group, Inc. 1994 Stock Option Plan for Directors (1)
10.3 Stock Exchange Agreement between The UniMark Group, Inc. and the
stockholders of Industrias Citricolas de Montemorelos, S.A. de C.V.(1)
10.4 Citrus Grove Lease Agreement (1)
10.5 Asset Operating Agreement between the Registrant and Industrias
Horticolas de Montemorelos, S.A. de C.V. (2)
10.6 Lease agreement among Hector Gerardo Castagne Maitret, Carlos
Courturier Arellano, Mauro Alberto Salazar Rangel, Miguel Angel
Salazar Rangel, Alejandrina Trevino Garcia, Gerardo Trevino Garcia,
Jorge Maitret and Industrias Citricolas de Montemorelos, S.A. de
C.V.(2)
10.7 Contract of Purchase and Sale between Empacadora Tropifrescos,
Sociedad Anonima de Capital Variable and Industrias Citricolas de
Montemorelos, S.A. de C.V. (2)
10.8 Lease Agreement between Industrias Citricolas de Montemorelos, S.A. de
C.V. and Valpak, S.A. de C.V. dated July 1, 1995(3)
10.9 Asset Operating Agreement between Industrial Citricolas de
Montemorelos, S.A. de C.V. and Empacadora de Naranjas Azteca, S.A. de
C.V. dated July 1, 1995(3)
10.10 Contract for Operation, Administration, and Purchase and Sale of Fruit
between Industrial Citricolas de Montemorelos, S.A. de C.V. and Mr.
Jorge Croda Manica ("Las Tunas") dated July 1, 1995(3)
10.11 Lease Contract between Industrial Citricolas de Montemorelos, S.A. de
C.V. and Mr. Mauro Alberto Salazar Rangel and Mr. Miguel Angel Salazar
Rangel ("Huerta Loma Bonita") dated 1995(3)
10.12 Unilateral Recognition of Indebtedness and Granting of Revolving
Collateral between Industrial Citricolas de Montemorelos, S.A. de C.V.
and Rabobank Curacao N.V. dated September 20, 1995(3)
10.13 Amended and Restated Stock Purchase Agreement among The UniMark Group,
Inc., 9029-4315 Quebec Inc., Michel Baribeau and Gestion Michel
Baribeau Inc. dated January 3, 1996(4)
10.14 Lease Agreement between Loma Bonita Partners and UniMark Foods, Inc.
dated November 28, 1995(3)
10.15 Lease Agreement between The UniMark Group, Inc. and Grosnez Partners
dated January 1, 1996(3)
10.16 Rural Property Sublease Agreement between Industrial Citricolas de
Montemorelos, S.A. de C.V. and Lorenzo Uruiza Lopez dated October 23,
1995(3)
10.17 Purchase Agreement between Industrial Citricolas de Montemorelos, S.A.
de C.V. and Jose Enrique Alfonso Perez Rodriquez dated October 23,
1995(3)
10.18 Stock Purchase Agreement between The UniMark Group, Inc. and the
stockholders of Grupo Industrial Santa Engracia dated April 30,
1996(6)
10.19 Stock Purchase Agreement between The UniMark Group, Inc., UniMark
Foods, Inc., Sam Perricone Children's Trust 1972, Sam Perricone and
Mark Strongin dated May 9, 1996(6)
10.20 Employment Agreement by and between Grupo Industrial Santa Engracia,
S.A. de C.V. and Ing Jose Ma. Martinez Brohez dated as of May 9,
1996(7)
10.21 Lease Agreement by and among Ralphs Grocery Company, Simply Fresh
Fruit, Inc. and Davalon Sales, Inc. dated as of March 1, 1994(7)
10.22 Revolving Credit Agreement by and among UniMark Foods, Inc., The
UniMark Group, Inc., UniMark International, Inc., Simply Fresh Fruit,
Inc. and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. dated
February 12, 1997. (9)
10.23 Supply Contract between The Coca-Cola Export Corporation and Grupo
Industrial Santa Engracia, S.A. de C.V. dated October 7, 1996. (9)
10.24 Loan Agreement made between Industrias Citricolas de Montemorelos,
S.A. de C.V., Grupo Industrial Santa Engracia, S.A. de C.V., Agromark,
S.A. de C.V., as borrowers; The UniMark Group, Inc., as guarantor, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. "Rabobank
Nederland", as lender, dated May 29, 1997. (10)
10.25 Revolving Loan Agreement with Security Interest by and between
Industrias Citricolas de Montemorelos, S.A. de C.V., as borrower,
Grupo Industrial Santa Engracia, S.A. de C.V. "Gise," Agromark, S.A.
de C.V. "Agromark," and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A."Rabobank Nederland" New York Branch
dated April 10, 1997. (10)
10.26 Revolving Loan Agreement with Security Interest by and between Grupo
Industrial Santa Engracia, S.A. de C.V. "Gise," as borrower,
Industrias Citricolas de Montemorelos, S.A. de C.V. "Icmosa,"
Agromark, S.A. de C.V. "Agromark," and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A. "Rabobank Nederland" New York Branch
dated April 10, 1997. (10)
10.27 First Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated October 7, 1997. (10)
10.28 Second Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated November 12, 1997. (10)
10.29 Third Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated May 22, 1998. (14)
10.30 Fourth Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated December 31, 1998. (14)
10.31 Letter given by Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.,
"Rabobank Nederland," New York Branch to UniMark Foods, Inc., the
borrower, and The UniMark Group, Inc., UniMark International, Inc.,
Simply Fresh Fruit, Inc., the guarantors, and Industrias Citricolas de
Montemorelos, S.A. de C.V., Grupo Industrial Santa Engracia, S.A. de
C.V., and Agromark, S.A. de C.V. regarding the renewal of financing.
(14)
10.32 Articles of Association of Gisalamo, S.A. de C.V. (11)
10.33 Deposit, Operation, Exploitation and Stock Purchase Option
Agreement by and among The UniMark Group, Inc. and Mr. Francisco
Domenech Tarrago and Mr. Francisco Domenech Perusquia dated
December 17, 1996 (11)
10.34 Gratuitous Loan Agreement by and among Gisalamo, S.A. de C.V. and
Frutalamo, S.A. de C.V. dated December 17, 1996 (11)
10.35 Non-Competition Agreement by and among The UniMark Group, Inc. and
Jorn Budde dated February 18, 1998 (12)
10.36 Supply Agreement between the Coca-Cola Export Corporation and Grupo
Industrial Santa Engracia, S.A. de C.V. dated April 2, 1998 (13)
10.37 Fifth Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc., UniMark
International, Inc., Simply Fresh Fruit, Inc., the guarantors, and
Cooperative Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated May 17, 1999 (14)
10.38 The UniMark Group, Inc. 1999 Stock Option Plan (14)
10.39 Employment Agreement by and among The UniMark Group, Inc. and Charles
Horne dated as of March 31, 1999 (14)
10.40 Employment Agreement by and among The UniMark Group, Inc. and Roman
Shumny dated as of November 20, 1998 (14)
10.41 Sixth Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc. UniMark
International, Inc. Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated January 3, 2000 (15)
10.42 Seventh Amendment to Revolving Credit Agreement by and among UniMark
Foods, Inc., the borrower, and The UniMark Group, Inc. UniMark
International, Inc. Simply Fresh Fruit, Inc., the guarantors, and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
Nederland," New York Branch dated March 1, 2000 (15)
10.43 Standby Funding Commitment by and among The UniMark Group, Inc. and
Promecap, S.C. dated April 17, 2000 (15)
10.44 Stock Purchase Agreement dated as of October 11, 1999, by and among
The UniMark Group, Inc. and Francois Gravil - Guy Picard in trust for
a company to be owned and operated by Francois Gravil and Guy Picard,
for all the issued and outstanding capital stock of Les Produits
Deli-Bon Inc. (17)
10.45 Asset Purchase Agreement dated October 18, 1999 by and among SFFI
Company, Inc., Sam Perricone, as guarantor, Sam Perricone Children's
Trust - 1972, The UniMark Group, Inc. and Simply Fresh Fruit, Inc.
(17)
10.46 Asset Purchase Agreement dated as of August 25, 2000 by and among Del
Monte Corporation, UniMark Foods, Inc. and The UniMark Group, Inc.
(17)
10.47 Promissory Note for $1,800,000 by and among The UniMark Group, Inc.
and M&M Nominee, L.L.C., 12%, due July 31, 2001 (17)
10.48 Fifth Amendment to the Revolving Loan Agreement with Security Interest
by and Among Industrial Santa Engracia, S.A. de C.V. as Borrower,
Industrias Citricolas de Montemorelos, S.A. de C.V. and AgroMark S.A.
de C.V., as Guarantors, The UniMark Group, Inc., as Guarantor and
Pledgor, Mr. Rafael Vaquero Bazan and Mr. Jose Maria Brohez, as
Pledgors, and Cooperatieve Centrale-Raiffeissen Boerenleenbank B.A.
,as lender, dated as of September 1, 2000 (17)
10.49 Sixth Amendment to the Revolving Loan Agreement with Security Interest
by and Among Grupo Industrial Santa Engracia, S.A. de C.V. as
Borrower, Industrias Citricolas de Montemorelos, S.A. de C.V. and
AgroMark S.A. de C.V., as Guarantors, The UniMark Group, Inc., as
Guarantor and Pledgor, Mr. Rafael Vaquero Bazan and Mr. Jose Maria
Brohez, as Pledgors, and Cooperatieve Centrale-Raiffeissen
Boerenleenbank B.A., as lender dated as of January 1, 2001 (17)
10.50 Modifying Agreement to Supply Agreement between The Coca-Cola Export
Corporation and Grupo Industrial Santa Engracia, S.A. de C.V. dated as
of January 15, 2001 (18)
10.51 Promissory Note for $100,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLP, 10%, due June 10, 2003 (19)
10.52 Promissory Note for $125,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLC, 10%, due July 9, 2003 (19)
10.53 Guaranty Agreement dated as of January 10, 2003, executed by Grupo
Industrial Santa Engracia, S.A. de C.V. in favor of M&M Nominee, LLC
(19)
10.54 Promissory Note for $200,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLP, 10%, due April 30, 2003 (22)
10.55 Guaranty Agreement dated as of January 24, 2003, executed by
Industrias Citricolas de Montemorelos, S.A. de C.V. in favor of M&M
Nominee, LLC (22)
10.56 Promissory Note for $110,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLP, 10%, due July 9, 2003 (22)
10.57 Guaranty Agreement dated as of February 11, 2003, executed by Grupo
Industrial Santa Engracia, S.A. de C.V. in favor of M&M Nominee, LLC
(22)
10.58 Promissory Note for $125,000 by and among The UniMark Group, Inc. and
M&M Nominee, LLC, 10%, due July 9, 2003 (22)
10.59 Guaranty Agreement dated as of March 6, 2003, executed by Grupo
Industrial Santa Engracia, S.A. de C.V. in favor of M&M Nominee, LLC
(22)
10.60 Agreement for the Termination of the Supply Agreement and its
Corresponding Amendments dated April 11, 2003, by and between Grupo
Industrial Santa Engracia, S.A. de C.V. and The Coca-Cola Export
Corporation, Mexico Branch (20)
10.61 Agreement for the Termination of the Processing Agreement dated April
11, 2003, by and between Grupo Industrial Santa Engracia, S.A. de C.V.
and The Coca-Cola Export Corporation, Mexico Branch (21)
10.62 Rural Property Lease Agreement between Ejido "Laguna del Mante,"
Municipio de Ciudad Valles, Estado de San Luis Potosi, and "Grupo
Industrial Santa Engracia," S.A. de C.V., dated December, 2002 (22)
10.63 Agreement for the Ejido land transfer between Eijdo "Laguna del
Mante," Municipio de Ciudad Valles, Estado de San Luis Potosi, and
"Grupo Industrial Santa Engracia," S.A. de C.V., dated December, 2002
(22)
99(a) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (22)
99(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (22)
21 Subsidiaries of the Registrant (11) (16)
23 Consent of Mancera, S.C., Member Practice of Ernst & Young Global
(22)
- ---------------------
(1) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form SB-2, as amended, SEC Registration No. 33-78352-D.
(2) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994.
(3) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-QSB for the fiscal quarter ended September 30, 1995.
(4) Previously filed as an Exhibit to the Registrant's Current Report on
Form 8-K dated January 16, 1995.
(5) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
(6) Previously filed as an Exhibit to the Registrant's Current Report on
Form 8-K dated May 10, 1996.
(7) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1, as amended, SEC Registration No. 333-3539.
(8) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1996.
(9) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
(10) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1997.
(11) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
(12) Previously filed as an Exhibit to the Registrant's Current Report on
Form 8-K dated February 18, 1998.
(13) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1998.
(14) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10Q for the fiscal quarter ended June 30, 1999.
(15) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
(16) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 30, 2000.
(17) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1, as amended, SEC Registration No. 333-60130 dated
May 18, 2001.
(18) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2001.
(19) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 2002.
(20) Previously filed as Exhibit 99.2 to the Registrant's Current Report on
Form 8-K dated April 16, 2003.
(21) Previously filed as Exhibit 99.3 to the Registrant's Current Report on
Form 8-K dated April 16, 2003.
(22) Filed herewith.