**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q/A**

 

| **ý****  Quarterly Report  Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |
| **For the quarterly period  ended June 30, 2003**                                                                                                                 |
|                                                                                                                                                              |
| **or**                                                                                                                                                            |
|                                                                                                                                                              |
| **o****  Transition Report Pursuant  to Section 13 or 15(d) of the Securities  Exchange Act of 1934**                                                        |
|                                                                                                                                                              |
| **For the transition period  from            to            ** |
|                                                                                                                                                              |
| **Commission File Number:  0-12177**                                                                                                                              |

 

**BIONOVAHOLDING CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                                        |   | **75-2632242**                       |
|-------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction  of incorporation or organization)                     |   | (I.R.S. Employer  Identification No. |
|                                                                                |   |                                 |
| **P.  O. Box 1586**                                                                 |   |                                 |
| **Nogales, Arizona**                                                                |   | **85628-1586**                       |
| (Address of principal executive offices)                                            |   | (Zip Code)                           |
|                                                                                |   |                                 |
| **(609) 744-8105**                                                                  |
| (Registrant’s telephone number, including area  code)                          |
|                                                                                |
| **9255 Customhouse Plaza, Suite  I  San Diego, California 92154**                   |
| (Former name, former address and former fiscal  year, if changed since last report) |
|                                                                                |

 

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filing requirementsfor the past 90 days.

Yesý  No o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined by Rule 12b-2 of the SecuritiesExchange Act of 1934, as amended).

Yes o No ý

 

 

Asof August 13, 2003, 23,012,753 shares ofcommon stock, par value $0.01 per share, of Bionova Holding Corporation wereoutstanding.

 

 

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**Explanatory Note**

 

Bionova Holding Corporation (“Bionova Holding” or the “Company”) isfiling this Quarterly Report on Form 10-Q/A to amend its Quarterly Report onForm 10-Q for the quarter ended June 30, 2003 which was originally filed withthe Securities and Exchange Commission (the “SEC”) on September 11, 2003.  This Quarterly Report on Form 10-Q/A amendscertain pages of Item 1 “Consolidated Financial Statements” and Item 2“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of the original Quarterly Report.

 

The Company is filing this Quarterly Report on Form 10-Q/A to reflectthe presentation of discontinued operations of the Company’s research anddevelopment business segment for the period ended June 30, 2002. The followingamended Quarterly Report on Form 10-Q/A reflects the separate basis forreporting discontinued operations of the research and development businesssegment that were properly reported on as discontinued operations in theDecember 31, 2002 Annual Report on Form 10-K and the June 30 and September 30,2002 Quarterly Reports on Form 10-Q. The reporting changes had no effect on the Company’s net loss orstockholders’ equity for the periods presented.  The Company has not updated the information contained herein toreflect events and transactions occurring subsequent to the date of theoriginal filing, September 11, 2003 or update those disclosures in any wayother than to reflect the discontinued operations of the research anddevelopment business segment that were originally reported on a separatebasis.  Events have taken place thatwould have been reflected in the Original Form 10-Q if they had taken placeprior to the date of the original filing. The Company recommends that this report be read in conjunction with theCompany’s reports filed with the SEC subsequent to September 11, 2003.

 

2

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**PART I- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**BIONOVAHOLDING CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**Thousandsof U.S. Dollars**

**(exceptshare and per share amounts)**

 
|                                                                                                                                                                               |   | **June 30,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
| ASSETS:                                                                                                                                                                            |   |               |   |                   |   |
| Current  assets:                                                                                                                                                                   |   |               |   |                   |   |
| Cash  and cash equivalents                                                                                                                                                         |   | $                  | 6,231  |                   | $      | 2,130 |   |
| Accounts  receivable, net                                                                                                                                                          |   | 21,181             |   | 13,644                 |   |
| Advances  to growers, net                                                                                                                                                          |   | 2,942              |   | 3,313                  |   |
| Net  assets of discontinued operations                                                                                                                                             |   | —             |   | 1,165                  |   |
| Inventories,  net                                                                                                                                                                  |   | 9,616              |   | 11,218                 |   |
| Assets  held for sale (see Note 5)                                                                                                                                                 |   | 1,727              |   | 1,727                  |   |
| Other  current assets                                                                                                                                                              |   | 1,003              |   | 1,575                  |   |
| Total  current assets                                                                                                                                                              |   | 42,700             |   | 34,772                 |   |
| Property,  plant and equipment, net                                                                                                                                                |   | 31,900             |   | 34,150                 |   |
| Patents  and trademarks                                                                                                                                                            |   | 1,097              |   | —                 |   |
| Other  assets                                                                                                                                                                      |   | 10,558             |   | 11,828                 |   |
| Total  assets                                                                                                                                                                      |   | $                  | 86,255 |                   | $      | 80,750 |   |
|                                                                                                                                                                               |   |               |   |                   |   |
| LIABILITIES,  MINORITY INTEREST, AND STOCKHOLDERS’EQUITY (DEFICIT)                                                                                                            |   |               |   |                   |   |
| Current  liabilities:                                                                                                                                                              |   |               |   |                   |   |
| Accounts  payable and accrued expenses                                                                                                                                             |   | $                  | 20,112 |                   | $      | 16,006 |   |
| Accounts  due to related parties                                                                                                                                                   |   | 102,228            |   | 96,857                 |   |
| Short-term  bank loans                                                                                                                                                             |   | 4,525              |   | 9,818                  |   |
| Total  current liabilities                                                                                                                                                         |   | 126,865            |   | 122,681                |   |
| Long-term liabilities with third parties                                                                                                                                           |   | 1,872              |   | —                 |   |
| Total  liabilities                                                                                                                                                                 |   | 128,737            |   | 122,681                |   |
| Minority  interest                                                                                                                                                                 |   | 447                |   | 401                    |   |
| Commitments  and contingencies                                                                                                                                                     |   |               |   |                   |   |
| Stockholders’  equity (deficit):                                                                                                                                              |   |               |   |                   |   |
| Preferred stock, $0.01 par value, 5,000 shares  authorized, 200 shares issued and outstanding at both June 30, 2003 and  December 31, 2002, liquidation value of $10,000 per share |   | —             |   | —                 |   |
| Common  stock, $0.01 par value, 50,000,000 shares authorized, 23,012,753 shares  outstanding at June 30, 2003 and December 31, 2002                                                |   | 230                |   | 230                    |   |
| Additional  paid-in capital                                                                                                                                                        |   | 171,573            |   | 171,573                |   |
| Accumulated  deficit                                                                                                                                                               |   | (215,008           | )      | (213,914               | )      |
| Accumulated  other comprehensive income (loss)                                                                                                                                     |   | 276                |   | (221                   | )      |
| Total  stockholders’ deficit                                                                                                                                                  |   | (42,929            | )      | (42,332                | )      |
| Total  liabilities, minority interest, and stockholders’ deficit                                                                                                              |   | $                  | 86,255 |                   | $      | 80,750 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements

 

3

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**BIONOVAHOLDING CORPORATION**

 

**UNAUDITEDCONSOLIDATED STATEMENT OF OPERATIONS**

**ANDCOMPREHENSIVE INCOME AND LOSS**

**Thousandsof U.S. Dollars**

**(exceptshare and per share amounts)**

 

 
|                                                                     |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|--------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                     |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Total revenues                                                           |   | $                                | 28,300 |                           | $      | 42,447 |   | $ | 56,394 |   | $ | 88,334 |   |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Cost of sales                                                            |   | 24,948                           |   | 42,961                         |   | 50,909 |   | 82,035 |   |
| Selling and  administrative expenses                                     |   | 3,183                            |   | 3,921                          |   | 6,395 |   | 7,733 |   |
| Amortization of  patents and trademarks                                  |   | 62                               |   | —                         |   | 152 |   | — |   |
|                                                                     |   | 28,193                           |   | 46,882                         |   | 57,456 |   | 89,768 |   |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Operating income  (loss)                                                 |   | 107                              |   | (4,435                         | )      | (1,062 | ) | (1,434 | ) |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Interest expense                                                         |   | (2,320                           | )      | (2,427                         | )      | (4,747 | ) | (4,693 | ) |
| Interest income                                                          |   | 690                              |   | 299                            |   | 977 |   | 621 |   |
| Exchange gain (loss),  net                                               |   | (10                              | )      | 208                            |   | — |   | 341 |   |
| Other non-operating  income (expense), net                               |   | 5,764                            |   | (308                           | )      | 5,117 |   | 64 |   |
|                                                                     |   | 4,124                            |   | (2,228                         | )      | 1,347 |   | (3,667 | ) |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Income (loss) from continuing operations before discontinued  operations |   | 4,231                            |   | (6,663                         | )      | 285 |   | (5,101 | ) |
| Discontinued  operations:                                                |   |                             |   |                           |   |   |   |   |   |
| Loss from operations  of research and development business segment       |   | —                           |   | (394                           | )      | — |   | (898 | ) |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Income (loss) before  income taxes                                       |   | 4,231                            |   | (7,057                         | )      | 285 |   | (5,999 | ) |
| Income tax expense                                                       |   | 1,232                            |   | 488                            |   | 1,333 |   | 681 |   |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Income (loss) before  minority interest                                  |   | 2,999                            |   | (7,545                         | )      | (1,048 | ) | (6,680 | ) |
| Minority interest in  net loss (profit) of subsidiaries, net             |   | (55                              | )      | (57                            | )      | (46 | ) | (145 | ) |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Net income (loss)                                                        |   | 2,944                            |   | (7,602                         | )      | (1,094 | ) | (6,825 | ) |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Other comprehensive  income (expense) net of tax:                        |   |                             |   |                           |   |   |   |   |   |
| Foreign currency  translation adjustment                                 |   | 498                              |   | (80                            | )      | 497 |   | (4 | ) |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Comprehensive income  (loss)                                             |   | $                                | 3,442  |                           | $      | (7,682 | ) | $ | (597 | ) | $ | (6,829 | ) |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Basic earnings (loss) per common share                                   |   | $                                | 0.13   |                           | $      | (0.32 | ) | $ | (0.05 | ) | $ | (0.29 | ) |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Diluted earnings (loss) per common share                                 |   | $                                | 0.06   |                           | $      | (0.32 | ) | $ | (0.05 | ) | $ | (0.29 | ) |
|                                                                     |   |                             |   |                           |   |   |   |   |   |
| Weighted average  number of common shares outstanding                    |   | 23,012,753                       |   | 23,587,753                     |   | 23,012,753 |   | 23,587,753 |   |
| Weighted average  number of common shares outstanding, assuming dilution |   | 46,168,869                       |   | 46,743,869                     |   | 46,168,869 |   | 46,743,869 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

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**BIONOVAHOLDING CORPORATION**

**UNAUDITEDCONSOLIDATED STATEMENT OF CASH FLOWS**

**Thousandsof U.S. Dollars**

 
|                                                                                  |   | **Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                  |   | **2003**                       |   | **2002** |   |
|                                                                                  |   |                           |   |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                 |   |                           |   |   |   |
| Net loss                                                                              |   | $                              | (1,094 | ) | $ | (6,825 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities:      |   |                           |   |   |   |
| Minority interest                                                                     |   | 46                             |   | 191 |   |
| Depreciation                                                                          |   | 1,372                          |   | 1,431 |   |
| Amortization and write  off of patents and trademarks                                 |   | 152                            |   | — |   |
| Other                                                                                 |   | (47                            | )      | (4 | ) |
| Net changes (exclusive  of subsidiaries acquired or divested) in:                     |   |                           |   |   |   |
| Accounts receivable  and advances to growers, net                                     |   | (7,166                         | )      | 3,641 |   |
| Inventories                                                                           |   | 1,602                          |   | 2,899 |   |
| Net assets of  discontinued operations                                                |   | —                         |   | 3 |   |
| Other assets                                                                          |   | 1,845                          |   | (275 | ) |
| Accounts payable and  accrued expenses                                                |   | 4,022                          |   | 2,082 |   |
| NET CASH PROVIDED BY  OPERATING ACTIVITIES                                            |   | 732                            |   | 3,143 |   |
|                                                                                  |   |                           |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                 |   |                           |   |   |   |
| Purchases of property,  plant and equipment                                           |   | (878                           | )      | (963 | ) |
| NET CASH USED IN  INVESTING ACTIVITIES                                                |   | (878                           | )      | (963 | ) |
|                                                                                  |   |                           |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                 |   |                           |   |   |   |
| Net change in  short-term borrowing                                                   |   | (2,993                         | )      | (3,159 | ) |
| Net change in  long-term borrowing                                                    |   | 1,870                          |   | (44 | ) |
| Accounts due to  related parties                                                      |   | 5,370                          |   | 2,227 |   |
| NET CASH PROVIDED BY  (USED IN) FINANCING ACTIVITIES                                  |   | 4,247                          |   | (976 | ) |
|                                                                                  |   |                           |   |   |   |
| Net increase in cash  and cash equivalents                                            |   | 4,101                          |   | 1,204 |   |
| Cash at beginning of  period                                                          |   | 2,130                          |   | 2,177 |   |
| Cash at end of period                                                                 |   | $                              | 6,231  |   | $ | 3,381 |   |
|                                                                                  |   |                           |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:              |   |                           |   |   |   |
| Transfer of land to a  Mexican financial institution to satisfy a mortgage obligation |   | $                              | 2,300  |   | — |   |
| Release of a mortgage  obligation from a Mexican financial institution                |   | (2,300                         | )      | — |   |

 

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

 

5

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**BIONOVAHOLDING CORPORATION**

 

**NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**June30, 2003**

 

 

**Note 1 – Basis of Presentation**

 

Foroperating and financial reporting purposes, Bionova Holding Corporation(together with its subsidiaries, unless the context requires otherwise,“Bionova Holding” or the “Company”) historically has classified its businessinto three fundamental areas:  (1) **Farming**,which consists principally of interests in 100% Company-owned fresh produceproduction facilities and joint ventures or contract growing arrangements withother growers; (2) **Distribution***,* consisting principally ofinterests in sales and distribution companies in Mexico, the United States, andCanada; and (3) **Research and Development (or Technology)*,*** consisting ofbusiness units focused on the development of fruits and vegetables andintellectual properties associated with these development efforts.  On June 30, 2002 the operations of theResearch and Development segment were shut down and the remaining assets as ofJanuary 1, 2003, which consist solely of patents and trademarks with avaluation of $1.2 million, have been merged into the activity of the holdingcompany which will continue to try to license and sell these assets asopportunities become available.

 

Inmanagement’s opinion, the accompanying unaudited consolidated financialstatements for Bionova Holding for the three and six month periods ended Juner30, 2003 and 2002 have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialstatements and include all adjustments (consisting only of normal recurringadjustments) that the Company considers necessary for a fair presentation ofits financial position, results of operations, and cash flows for such periods.  However, the accompanying unauditedconsolidated financial statements do not contain all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements.  The accompanyingunaudited consolidated financial statements should be read in conjunction withthe Company’s audited consolidated financial statements and notes theretopresented in its 2002 10-K for the fiscal year ended December 31, 2002.  Footnotes which would substantiallyduplicate disclosures in the Company’s audited consolidated financialstatements for the fiscal year ended December 31, 2002 contained in the 200210-K report have been omitted.  Theinterim consolidated financial information contained herein is not necessarilyindicative of the results to be expected for any other interim period or thefull fiscal year ending December 31, 2003.

 

# **Going Concern**

 

The Company incurred a net loss of $20.4 million for the year endedDecember 31, 2002. The Company also sustained significant operating losses andoperating cash flow deficiencies from 1997 through 2002.  At June 30, 2003 the Company had a negativeworking capital position of $84.2 million.

 

Management has been and is continuing toaddress the Company’s financial condition by selling non-core assets of thefresh produce business, and by selling and licensing its intellectual property.  The Company also must find a solution to the$101.5 million of debt plus the interest accruing in 2003 that is due to Saviaand its subsidiaries during 2003.  Therecan be no assurance that these actions will result in sufficient workingcapital to significantly improve the Company’s current financial position orits results of operations nor can there be any assurance the Company will beable to meet its obligations in 2003 nor secure funds to take it beyond the2003 calendar year.  This raises substantial doubt about the Company’s ability tocontinue as a going concern.

 

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

 

6

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**Note 2 – Bank Debt**

 

At June 30, 2003 all of the Company’s $6.4 million of bank debt wasassociated with its fresh produce business.

 

In December 2002, Bionova Produce, Inc., Bionova Produce of Texas, Inc.and R.B. Packing of California, Inc., the Company’s major distributors of freshproduce in the United States, signed agreements for a new set of creditfacilities with Wells Fargo Business Credit, Inc. (“WFBC”) which run throughApril 2006.  There are three separate,but related loan components associated with these credit facilities.  First, Bionova Produce, Inc. was extended a“permanent term loan” of $1.75 million, which will be amortized over 10 years.  Interest is charged atthe Wells Fargo prime rate of interest plus 1.5% (5.5% at June 30, 2003), andinterest and principal amortization payments are made on a monthly basis.  The second component is a “seasonal termloan” with a maximum availability of $1.75 million.  Interest is charged at the Wells Fargo prime rate of interestplus 1.5% (5.5% at June 30, 2003), and interest payments are made on a monthlybasis.  The outstanding principalbalance on the seasonal term loan is amortized each year during the months ofJanuary through April, and may then be borrowed again in full on May 1.  The third component is a $7 millionrevolving line of credit to support working capital requirements of the freshproduce business.  The revolving line ofcredit must be paid down to a maximum of $1.5 million for a 30 day period betweenJuly 1 and September 30 each year. Interest on this revolving line of credit is charged at the Wells Fargoprime rate of interest plus 1.0% (5.0% at June 30, 2003).  All three components of the creditfacilities are collateralized by all of the real and intangible assets of thethree U.S. distributing companies and are guaranteed by both Bionova Holdingand its parent company, Savia.  The keycovenants associated with these credit facilities are that the three distributingcompanies as a group must maintain a minimum net worth of $8.75 million, a debtservice coverage ratio of at least 1.25 to 1, achieve minimum levels ofquarterly earnings before taxes to be agreed between the Company and WFBCannually, and the distributing group may not experience a net loss during anymonth that exceeds $0.5 million or a net loss for a two month period thatexceeds $0.3 million.  Also, there areprovisions in the credit agreement that permit WFBC to declare an event ofdefault if Savia fails to complete the restructuring of its debt facilitieswith its banks.  An event of default wasdeclared in the second quarter of 2003 because Savia had failed to complete itsrestructuring by March 31, 2003, which was the date originally established inthe credit agreement.  On June 13, 2003the U.S. distributing companies, Bionova Holding, Savia, and WFBC signed the“First Amendment to Credit and Security Agreement and Waiver of Defaults” whichextended the date for Savia to complete its restructuring to September 30,2003.  WFBC and Bionova Holding alsoagreed to renegotiate in good faith certain financial covenants relating tooperating performance in the third and fourth quarters of 2003.  As of the date of these financialstatements, the Company was in compliance with all of the covenants of thecredit facilities.  At June 30,2003 the principal outstanding in connection with the permanent term loan, theseasonal term loan, and the revolving line of credit was $1.7 million, $1.0million, and $3.2 million, respectively.

 

In additionto these credit facilities Bionova Produce, Inc. has a five-year loan securedby an airplane and is guaranteed by Savia. The loan is for $0.7 million and is due August 30, 2006.  Principal and interest payments ofapproximately $15,000 are due monthly. The interest rate on this debt is 8.25% per annum.  At June 30, 2003 the principaloutstanding under this five year loan agreement was $0.5 million.

 

On October 3, 2001 ABSA (as the Mexican designee of Bionova Produce,Inc.) entered into an agreement with Libra Exportaciones, S.A. de C.V.(“Libra”) whereby ABSA assumed a $2.3 million mortgage obligation to a Mexicanfinancial institution in conjunction with certain pieces of land beingtransferred to ABSA.  On March 7, 2003, a new agreement was signed by Libra,the Alvarez family (the former owners of Libra), and ABSA whereby ABSA wouldtransfer certain pieces of land it received from Libra stemming from theOctober 3, 2001 agreement to the Mexican financial institution in exchange fora release from the $2.3 million mortgage obligation.  The transfer of the land and the release of the mortgageobligation were completed on May 13, 2003. In the financial statements for the year ended December 31, 2002 thetotal debt obligation of $2.3 million was classified as a component ofshort-term bank loans.

 

7

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**Note 3 - Net Income or Loss perCommon Share**

 

Theweighted average number of common shares outstanding during the three and sixmonth periods ended June 30, 2003 and 2002 was 23,012,753 and 23,587,753, respectively.  On a diluted basis, assuming Savia were toconvert the 200 shares of preferred stock it currently holds into common, theweighted average number of common shares outstanding during the three and sixmonth periods ended June 30, 2003 and 2002 would have been 46,168,869 and46,743,869, respectively.

 
|                                     |   | **(Thousands of Shares)**                       |   |
|------------------------------------------|--------|-------------------------------------------------|--------|
|                                     |   | **Three and  Six  Months Ended  June 30, 2003** |   | **Three and  Six  Months Ended  June 30, 2002** | ** ** |
|                                     |   |                                            |   |   |   |
| Effect of dilutive  securities:          |   |                                            |   |   |   |
| Convertible preferred  stock outstanding |   | 23,156                                          |   | 23,156 |   |
| Stock options  outstanding               |   | 215                                             |   | 216 |   |

 

**Note 4 - Inventories**

 

Inventorieswere comprised of the following:

 
|                             |   | **(Thousands of U.S. Dollars)** |   |
|----------------------------------|--------|---------------------------------|--------|
|                             |   | **June 30,  2003**              |   | **December 31,  2002** |   |
| Finished produce                 |   | $                               | 230    |   | $ | 762 |   |
| Growing crops                    |   | 295                             |   | 2,660 |   |
| Advances to suppliers            |   | 2,359                           |   | 1,732 |   |
| Spare parts and materials        |   | 1,990                           |   | 2,340 |   |
| Merchandise in transit and other |   | 4,742                           |   | 3,724 |   |
|                             |   | $                               | 9,616  |   | $ | 11,218 |   |

 

Agrobionova,S.A. de C.V.**(“**ABSA”), the Company’s Mexican farming subsidiary, advancesmoney to suppliers towards the purchase of materials, and these amounts arereflected as Advances to Suppliers.  Dueto ABSA’s financial condition, it has a large number of accounts payable tosuppliers that are seriously past due. Certain suppliers have required that ABSA pay amounts over and above thepurchase prices for the materials they are providing to ABSA to pay down aportion of the overdue payables.

 

**Note 5 – Assets Held for Sale**

 

Assetsheld for sale were comprised of the following:

** **
|                                      |   | **(Thousands of U.S. Dollars)** |   |
|-------------------------------------------|--------|---------------------------------|--------|
|                                      |   | **June 30,  2003**              |   | **December 31,  2002** |   |
| Agricultural land in  Sinaloa, Mexico     |   | $                               | 322    |   | $ | 322 |   |
| Agricultural  land in Guerrero, Mexico    |   | 825                             |   | 825 |   |
| Commercial land in San  Diego, California |   | 580                             |   | 580 |   |
|                                      |   | $                               | 1,727  |   | $ | 1,727 |   |

 

**Note 6 – Reclassifications**

 

Certainprior year amounts have been reclassified to conform to the current yearpresentation.  Further, the unauditedconsolidated financial statements for Bionova Holding presented for the threeand six month periods ended June 30, 2002 were prepared in accordance with FASB144 to reflect the effects of

 

8

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thediscontinued operations of the research and development business and thecontinuing operations of the Company’s fresh produce farming and distributionbusiness.

 

**Note 7 - Segment Reporting**

 

TheCompany historically classified its business into three fundamental areas: **Farming**,which consists principally of interests in Company-owned fresh produceproduction facilities and joint ventures with other growers; **Distribution**,consisting principally of interests in sales and distribution companies inMexico, the United States, and Canada; and **Research and Development**, consisting ofbusiness units focused on the development of fruits and vegetables andintellectual properties associated with these development efforts.  On June 30, 2002 the operations of theResearch and Development segment were shut down and the remaining assets as ofJanuary 1, 2003, which consisted solely of patents and trademarks with avaluation of $1.2 million, were merged into the activity of the holding companywhich is continuing to try to license and sell these assets as opportunitiesbecome available.

 

Informationpertaining to the operations of these different business segments is set forthbelow. The Company evaluates performance based on several factors.  The most significant financial measure usedto evaluate business performance is business segment operating income.  Inter-segment sales are accounted for atfair value as if the sales were to third parties.  Segment information includes the allocation of corporate overheadto the various segments.

 
|                                 |   | **(Thousands  of U.S. Dollars)** |   |
|--------------------------------------|--------|----------------------------------|--------|
|                                 |   | **Farming**                      |   | **Distribution** |   | **Research  Development** |   | **Total of  Reportable  Segments** |   |
|                                 |   |                             |   |   |   |   |   |   |   |
| January 1 – June 30, 2003       |   |                             |   |   |   |   |   |   |   |
| Revenues from unaffiliated customers |   | $                                | 2,483  |   | $ | 53,911 |   | — |   | $ | 56,394 |   |
| Inter-segment revenues               |   | 11,654                           |   | — |   | — |   | 11,654 |   |
| Total revenues                       |   | 14,137                           |   | 53,911 |   | — |   | 68,048 |   |
| Operating profit (loss)              |   | (1,333                           | )      | 1,206 |   | — |   | (127 | ) |
| Depreciation and amortization        |   | 1,184                            |   | 188 |   | — |   | 1,372 |   |
| Identifiable assets (1)              |   | 68,078                           |   | 33,518 |   | — |   | 101,596 |   |
| Acquisition of long-lived assets     |   | —                           |   | 878 |   | — |   | 878 |   |
|                                 |   |                             |   |   |   |   |   |   |   |
| January 1 – June 30, 2002       |   |                             |   |   |   |   |   |   |   |
| Revenues from unaffiliated customers |   | $                                | 9,529  |   | $ | 78,805 |   | $ | 1,920 |   | $ | 90,254 |   |
| Inter-segment revenues               |   | 33,454                           |   | — |   | — |   | 33,454 |   |
| Total revenues                       |   | 42,983                           |   | 78,805 |   | 1,920 |   | 123,708 |   |
| Operating profit (loss)              |   | (340                             | )      | 1,333 |   | (264 | ) | 729 |   |
| Depreciation and amortization        |   | 1,251                            |   | 180 |   | 305 |   | 1,736 |   |
| Identifiable assets (1)              |   | 66,937                           |   | 28,471 |   | 15,657 |   | 111,065 |   |
| Acquisition of long-lived assets     |   | 846                              |   | 117 |   | — |   | 963 |   |
|                                      |        |                                  |        |  |  |  |  |  |  |  |  |  |  |

 

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(1)                    Identifiableassets for segments are defined as total assets less cash in banks, deferredincome taxes and investment in shares.

 

9

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Reconciliationof the segments to total consolidated amounts is set forth below:

 
|                                                       |   | **Thousands  of U.S. Dollars** |    |
|------------------------------------------------------------|--------|--------------------------------|---------|
|                                                       |   | **January 1 – June 30**   |    |
|                                                       |   | **2003**                       |    | **2002** |   |
|                                                       |   |                           |    |   |   |
| Revenues                                                   |   |                           |    |   |   |
| Revenues  from unaffiliated customers                      |   | $                              | 68,048  |   | $ | 123,708 |   |
| Inter-segment  revenues                                    |   | (11,654                        | )       | (33,454 | ) |
| Revenues  from discontinued operations                     |   | —                         |    | (1,920 | ) |
| Total  revenues                                            |   | $                              | 56,394  |   | $ | 88,334 |   |
|                                                       |   |                           |    |   |   |
| Income  before taxes                                       |   |                           |    |   |   |
| Total  operating profit (loss) from reportable segments    |   | $                              | (127    | ) | $ | 729 |   |
| Total  operating loss from Bionova Holding Corporation (1) |   | (935                           | )       | (2,927 | ) |
| Interest,  net                                             |   | (3,770                         | )       | (4,072 | ) |
| Exchange  gain (loss), net                                 |   | —                         |    | 341 |   |
| Other  non-operating (expense) income, net                 |   | 5,117                          |    | (70 | ) |
| Consolidated  profit (loss) before taxes                   |   | $                              | 285     |   | $ | (5,999 | ) |
|                                                       |   |                           |    |   |   |
| Assets                                                     |   |                           |    |   |   |
| Total segment identifiable assets                          |   | $                              | 101,596 |   | $ | 111,065 |   |
| Unallocated and corporate assets (2)                       |   | 5,825                          |    | 3,779 |   |
| Eliminations (3)                                           |   | (21,166                        | )       | (24,255 | ) |
| Consolidated assets                                        |   | $                              | 86,255  |   | $ | 90,589 |   |

 

----

***Notes:***

***(1)******                  ***Certainexpenses, such as shareholder litigation, investor relations, and Board andprofessional fees have not been allocated to the segments.  Management determined that these types ofexpenses have not been associated with, nor did the results of these activitiesbenefit the operating segments.

***(2)******                  ***IncludesBionova Holding’s and segments’ cash in banks, deferred income taxes and othercorporate assets.

***(3)******                  ***Consistsprincipally of inter-segment intercompany balances.

 

Revenuefrom external customers by product/service category is set forth below:

 
|                               |   | **(Thousands  of U.S. Dollars)** |   |
|------------------------------------|--------|----------------------------------|--------|
|                               |   | **Farming**                      |   | **Distribution** |   | **Research  and  Development** |   | **Total of  Reportable  Segments** |   |
| January 1 – June 30, 2003     |   |                             |   |   |   |   |   |   |   |
| Core vegetables (1)                |   | $                                | 2,260  |   | $ | 18,158 |   | $ | — |   | $ | 20,418 |   |
| Fruits and other fresh produce (2) |   | 223                              |   | 35,753 |   | — |   | 35,976 |   |
|                               |   |                             |   |   |   |   |   |   |   |
| January 1 – June 30, 2002     |   |                             |   |   |   |   |   |   |   |
| Core vegetables (1)                |   | $                                | 7,827  |   | $ | 47,682 |   | $ | — |   | $ | 55,509 |   |
| Fruits and other fresh produce (2) |   | 1,702                            |   | 31,123 |   | — |   | 32,825 |   |
| Contracted R&D revenue         |   | —                           |   | — |   | 521 |   | 521 |   |
| Licensed technology and royalties  |   | —                           |   | — |   | 1,399 |   | 1,399 |   |

 

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**Note 8 – Legal Actions andContingencies**

 

On January 7, 1999, a class action lawsuit styled *Gordon K. Aaron et al. v. Empresas laModerna, S.A. de C.V., et al.* was filed in the U.S. federal districtcourt for the Northern District of California. On January 28, 1999, a substantially identical class action lawsuitstyled *RobertKaczak v. Empresas la Moderna, S.A. de C.V., et al.* was filed in theU.S. federal district court for the Northern District of California, and thesetwo cases were then consolidated.  Theplaintiffs allege that, prior to the Merger of DNAP with a subsidiary of BionovaHolding on September 26, 1996, they owned shares of DNAP’s PreferredStock.  In connection with the Merger,all of the shares of common stock and Preferred Stock of DNAP were convertedinto the number of shares of common stock of Bionova Holding specified in theMerger Agreement.  The plaintiffs allegethat the Proxy Statement/Prospectus distributed to DNAP’s stockholders inconnection with the merger contained material misrepresentations and omitted tostate material facts.  Both DNAP andBionova Holding, as well as certain former and current directors of DNAP andBionova Holding, have been named as defendants in this matter.  The plaintiffs claim to have been damaged bythe alleged actions of the defendants and therefore the plaintiffs seekunspecified actual damages, reimbursement of their litigation costs andexpenses, and equitable relief, including rescission of the Merger.   The plaintiffs also allege that they wereentitled to receive, and seek specific performance of, special conversionprivileges under the terms of the Certificate of Designation that establishedthe Preferred Stock.  On March 8, 2000,the court dismissed nearly all of the plaintiffs’ claims, and subsequently theplaintiffs filed an amended complaint with respect to some of the dismissedclaims.  On September 19, 2000, thecourt ruled in favor of Bionova Holding and DNAP and dismissed all of theplaintiffs’ claims. The plaintiffs appealed this judgment to the U.S. Court ofAppeals for the Ninth Circuit, which heard arguments on the matter on February12, 2002.  On September 13, 2002, theNinth Circuit affirmed the dismissal of some of the claims, including all ofthe claims against DNAP, and reversed the dismissal of others.  The remaining claims were remanded to thetrial court for further proceedings. Bionova Holding and DNAP deny any wrongdoing and liability in thismatter and intend to vigorously contest the remaining claims in this lawsuit.

 

DNAP has been named as a defendant in several lawsuits asserting claimsagainst DNAP relating to research DNAP performed from 1983 through 1994 forBrown & Williamson Tobacco Company (“B&W”).  In general, the cases allege that DNAP engaged in unfair businesspractices under California law and/or participated in an alleged conspiracyamong cigarette manufacturers to deceive the public regarding the hazards ofsmoking.  All of the pending cases arein California state courts.  In December1999, B&W agreed to indemnify DNAP against all costs (including costs ofdefense and of costs of any judgment or settlement) incurred by DNAP inconnection with these cases and any similar cases in the future.  Therefore, management no longer believesthat these cases could have a material adverse effect on the Company’s financialcondition or results of operations. DNAP denies any wrongdoing or liability in these matters and intends tovigorously contest these lawsuits.

 

On June 16, 2000, a lawsuit styled *Santa Cruz Empacadora, S. de R.L. de C.V., v. R.B.Packing of California, Inc.*was filed in the United States DistrictCourt for the Southern District of California. R.B. Packing of California, Inc., a subsidiary of Bionova Holding, hadbeen the United States distributor of fresh produce sold by the plaintiff.  The plaintiff alleges that R.B. Packing ofCalifornia, Inc. sold Santa Cruz produce to related companies at below marketprices and thereby engaged in unfair conduct, fraud and breach of statutory andfiduciary duties.  The plaintiff seeksan unspecified amount of compensatory and punitive damages.  R.B. Packing of California, Inc. denies anywrongdoing or liability in this matter and intends to vigorously contest thislawsuit.

 

On December 30, 1998, Bionova Holding, throughits subsidiary, VPP, acquired Monsanto Company’s strawberry developmentprogram.  The program included breedingassets and exclusive rights to certain of Monsanto’s genetic and genetechnology for berry development, and a non-exclusive right to future Monsantoberry technology, including strawberries, cranberries, raspberries, blackberries,boysenberries, and blueberries.  InJanuary, 1999, VPP paid Monsanto $5.0 million for those assets.  The purchase contract stipulated that ifMonsanto was able to satisfy certain conditions to grant certain additionallicenses, VPP would be obligated to make payments of an additional $7.0million.  In 2000 VPP paid Monsanto anadditional $3.0 million when Monsanto was able to grant one of theselicenses.  If Monsanto is able tofulfill the conditions to grant the additional licenses, then VPP would be obligatedto

 

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makeadditional payments in an amount as great as $4.0 million in the future.  The granting of these additional licenses iscontingent on the conclusion of a lawsuit in which Monsanto is involved.  The Company does not believe this case islikely to be decided for at least two to three years, and it is not possible topredict with any certainty whether Monsanto will win or lose the case.

 

Please see the Company’s Form 10-K for the yearended December 31, 2002 that was filed on April 30, 2003 for further discussionon the Company’s pending litigation and contingencies.

 

**Note 9 – Accounting forstock-based compensation**

 

TheCompany accounts for its stock-based compensation plans in accordance with SFASNo. 123, *Accounting for Stock-Based Compensation*as amended by SFAS No. 148, “Accounting for Stock-Based Compensation Transitionand Disclosure.”  As permitted underSFAS No. 148, the Company uses the intrinsic value-based method of AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” to account for its employee stock-based compensation plans.  Under APB Opinion No. 25, compensationexpense is based on the difference, if any, on the date of grant, between thefair value of the Company’s shares and the exercise price of the option.  Compensation cost for stock options, if any,is realized ratably over the vesting period.

 

TheCompany provides additional proforma disclosures required by SFAS No. 123 asamended by SFAS No. 148, “Accounting for Stock-Based Compensation- Transitionand Disclosure – An Amendment of SFAS No. 123”.  Had compensation cost for the Company’s stock option plans beendetermined based on the fair market value of the options at the grant dates, asprescribed in SFAS No. 123, the Company’s net income (loss) and net income(loss) per share would have been as follows:

 

 
|                                                                                                             |   | **Thousands  of U.S. dollars  (except per share data)** |       |
|------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|------------|
|                                                                                                             |   | **Three  Months Ended**                                 | ** ** | **Six Months  Ended** | ** ** |
|                                                                                                             |   | **June 30,  2003**                                      |       | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
|                                                                                                             |   |                                                    |       |   |   |   |   |   |   |
| Net income (loss) as reported                                                                                    |   | 2,944                                                   |       | (7,602 | ) | (1,094 | ) | (6,825 | ) |
| Deduct: total stock-based employee  compensation expense determined under fair value based method for all awards |   | (7                                                      | )          | (21 | ) | (28 | ) | (42 | ) |
| Net income (loss) pro forma                                                                                      |   | 2,937                                                   |       | (7,623 | ) | (1,122 | ) | (6,867 | ) |
| Net income (loss) per share:                                                                                     |   |                                                    |       |   |   |   |   |   |   |
| As reported — basic                                                                                    |   | 0.13                                                    |       | (0.32 | ) | (0.06 | ) | (0.29 | ) |
| Pro forma — basic                                                                                      |   | 0.13                                                    |       | (0.32 | ) | (0.06 | ) | (0.29 | ) |
| As reported — diluted                                                                                  |   | 0.06                                                    |       | (0.32 | ) | (0.06 | ) | (0.29 | ) |
| Pro forma — diluted                                                                                    |   | 0.06                                                    |       | (0.32 | ) | (0.06 | ) | (0.29 | ) |

 

The fair value of options granted in 1999 was estimated using theBlack-****Scholes**** model with the followingweighted average assumptions:  dividendyield of 0%, expected volatility of 114%, risk free interest rate of 5.2%, andan expected life of 7 years.  No optionswere granted in 2002 or 2003.

 

**Note 10 –  Sale of Mexican Subsidiary**

 

On June 13, 2003 Bionova Holding and Agromod, S.A deC.V., a minority owner of ABSA, entered into an agreement to sell all of theshares of Technologia Aplicada en Procesos, S. de R.L. de C.V. (“TAP”), a Mexicansubsidiary of Bionova Holding to Promo-Tow,S. de R.L. de C.V. (“PROMOTOW”), a Mexican company.  The shares of this new company had value toPROMOTOW because of certain financial benefits PROMOTOW felt it couldderive from ownership of TAP.  BionovaHolding received

 

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$5.4 million incash on June 13 and could receive up to an additional $0.6 million, whichcurrently is being held in escrow, during the third quarter of 2003 uponverification by an independent auditor of the historical financial statementsof Biionova Holding’s Mexican farming subsidiaries.  The Company recorded only the $5.4 million as Other Income in thesecond quarter of 2003 along with estimated tax expense associated with thistransaction of $0.8 million and transaction fees of $0.3 million.  The accounting for this transaction is shownbelow.

 
|                                                         |   | **(U.S.  Dollars)** |      |
|--------------------------------------------------------------|--------|---------------------|-----------|
|                                                         |   |                |      |
| Gross proceeds from sale of Mexican  subsidiary              |   | $                   | 5,449,000 |   |
| Transaction fees                                             |   | 255,000             |      |
| Net proceeds (Other Income) from sale of  Mexican subsidiary |   | 5,194,000           |      |
| Net book assets of Mexican subsidiary                        |   | 11,000              |      |
| Gain on  sale                                                |   | $                   | 5,183,000 |   |

 

**Note 11 - RecentAccounting Pronouncements**

 

##### **In January 2003, the FinancialAccounting Standards Board ( FASB ) issued FASB Interpretation No. 46 ( FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No.51.  FIN 46 requires certain variable interest entities to be consolidatedby the primary beneficiary of the entity if the equity investors in the entitydo not have the characteristics of a controlling financial interest or do nothave sufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. FIN 46 iseffective immediately for all new variable interest entities created oracquired after January 31, 2003.  Forvariable interest entities created or acquired prior to February 1, 2003, theprovisions of FIN 46 must be applied for the first interim or annual periodending after December 31, 2003.  The adoption of FIN 46 is not expected tohave a material impact on the Company’s financial position, results ofoperations or cash flows.**

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150 (SFAS 150), Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.  SFAS 150 establishesstandards for the classification and measurement of financial instruments withcharacteristics of both liabilities and equity. It requires companies toclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances). SFAS 150 is effective beginning third quarter offiscal 2003.  The adoption of thisstandard is not expected to have a material impact on the Company’s financialposition, results of operations or cash flows.

 

**Note 12 - Commitments**

 

As of June 30,2003, the Company has agreements whereby it indemnifies its officers anddirectors for certain events or occurrences while the officer or director isserving at the company’s request in such capacity.  The term of the indemnification period shall continue until andterminate upon the latter of: (a) 10 years after the date that the officer ordirector has ceased to serve the Company as officer or director; or (b) oneyear after the final, non-appealable termination of any legal proceeding.  The maximum potential amount of futurepayments the Company could be required to make under these indemnificationagreements cannot be reasonably measured and estimated and accordingly, theCompany has no liabilities recorded for these agreements as of June 30, 2003.

 

**Note 13 –  Discontinued Operations:  Closing of Research and DevelopmentOperations**

 

On May 13, 2002 Bionova Holding announced it had begunclosing down its research and development operations, including all of theactivities carried out through its wholly owned DNAP and VPP subsidiarycompanies.   The focus of DNAP’sresearch during the past year had been the production of transgenic plantswhich provide improved disease resistance for fruit and vegetable crops.  Concerns about public acceptance oftransgenic products in these markets made producers reluctant to invest in thedevelopment of transgenic fruits and vegetables.  Further, the agricultural industry has suffered from low pricesfor its products over the past few years, leading growers, food companies andother providers to

 

13

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delay new researchand development investment.  Despite anintensive search, these factors made it difficult for DNAP to develop newcustomers; and, with the absence of a customer base, DNAP was not able toobtain venture capital or other financing sufficient to continueoperations.  Accordingly, the researchand development operations were closed down during May and June, including theOakland facility, and all personnel were laid off.  DNAP shifted its focus to the licensing and sale of itsintellectual property.  The shutdown ofoperations was completed on June 30, 2002.

 

In conjunction with the closing of the Company’sresearch and development operations, DNAP and Seminis Vegetable Seeds agreed toterminate their long-term funded research agreement, which was entered into inJanuary 1997.  Seminis made a cashpayment as part of the termination agreement, and DNAP acquired certaintechnology rights which bring value to its technology licensing and saleactivities.

 

InOctober 2001, the FASB issued Statement of Financial Accounting Standards No.144 (“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-LivedAssets,” which is effective for fiscal years beginning after December 15, 2001and interim periods within those fiscal periods.  This Statement supersedes FASB Statement No. 121 and APB 30,however, this Statement retains the requirement of Opinion 30 to reportdiscontinued operations separately from continuing operations and extends thatreporting to a component of an entity that either has been disposed of (bysale, by abandonment, or in a distribution to owners) or is classified as heldfor sale.

 

Revenues and losses of the Company’s research and developmentoperations for the quarter and six months ended June 30, 2002 (in thousands ofdollars) were as follows:

 
|                                   |   | **Quarter  Ended  June 30** |   | **Six Months  Ended June 30** |   |
|----------------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
| Revenues                               |   | $                           | 1,358  |                          | $      | 1,920 |   |
| Loss before provision for income taxes |   | (394                        | )      | (898                          | )      |
| Income tax expense                     |   | —                      |   | —                        |   |
| Net loss                               |   | (394                        | )      | (898                          | )      |
|                                        |        |                             |        |                               |        |  |  |

** **

**Summary data relating to the assetsand liabilities of the Company’s research and development operations (inthousands of dollars) at June 30, 2002 is shown below.**

** **
| Current  assets                        |   | $     | 572    |   |
|----------------------------------------|--------|-------|--------|--------|
| Total  assets                          |   | 3,322 |   |
| Net assets of Research and Development |   | 3,322 |   |

 

On January 1, 2003 the remaining assets of the Research and Developmentsegment, which consist solely of patents and trademarks with a valuation of$1.2 million, were merged into the activity of the holding company, which iscontinuing to try to license and sell these assets as opportunities becomeavailable.  Accordingly, the Companyceased the accounting for the Research and Development segment as discontinuedoperations as of January 1, 2003.

 

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**The Company**

 

BionovaHolding Corporation, a Delaware corporation (together with its subsidiaries,unless the context requires otherwise, “Bionova Holding” or the “Company”), wasformed in January 1996, and acts as a holding company for (i) Agrobionova, S.A.de C.V., a corporation organized under the laws of the United Mexican States,of which the Company owns 98.6% (“ABSA”), (ii) International Produce Holding Company, a Delaware corporation, ofwhich the Company owns 100% (“IPHC”), (iii) DNA Plant Technology Corporation, aDelaware corporation, of which the Company owns 100% (“DNAP”), and (iv) VPPCorporation, a Delaware corporation, of which the Company owns 100%(“VPP”).  Approximately 79% of theoutstanding common stock of the Company is indirectly owned by Savia, S.A. deC.V.

 

14

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TheCompany historically classified its business into three fundamental areas: **Farming**,which consists principally of interests in Company-owned fresh produceproduction facilities and joint ventures with other growers; **Distribution**,consisting principally of interests in sales and distribution companies inMexico, the United States, and Canada; and **Research and Development**, consisting ofbusiness units focused on the development of fruits and vegetables andintellectual properties associated with these development efforts.  On June 30, 2002 the operations of theResearch and Development segment were shut down and the remaining assets as ofJanuary 1, 2003, which consisted solely of patents and trademarks with avaluation of $1.2 million, were merged into the activity of the holding companywhich is continuing to try to license and sell these assets as opportunitiesbecome available.

 

**Results of Operations**

 

**Three Months EndedJune 30, 2003 Compared to the Three Months Ended June 30, 2002**

 

Consolidated total revenues declined to $28.3 million for the quarterended June 30, 2003 from $42.4 million in the same quarter of 2002,consolidated gross profit (sales less cost of sales) increased to $3.3 millionfor the quarter ended June 30, 2003 from a loss of $0.5 million in the samequarter of 2002, and the Company’s consolidated operating income improved to$0.1 million for the quarter ended June 30, 2003 as compared with an operatingloss of  $4.4 million in the samequarter of 2002.

 

FARMING segment revenues, the majority of which are eliminated inconsolidation, declined from $16.1 million in the second quarter of 2002 to$2.4 million in the second quarter of 2003. The lower sales volumes were largely a consequence of the Company’sdecision to forego tomato production in Todos Santos in the second quarter of2003 due to limited cash resources and the relatively low margins typicallyavailable during this season of the year. Despite the lower volumes, the operating loss of the Farming segmentdeclined from $2.0 million in the second quarter of 2002 to $0.5 million in thesecond quarter of 2003, which was attributable to the very poor grape harvestexperienced in the second quarter of 2002 caused by poor weather conditions andsignificantly lower than average prices.

 

DISTRIBUTION segment revenues declined from $37.1 million in the secondquarter of 2002 to $30.1 million in the same quarter of 2003.  This decline was consistent with thecurtailed production of the Farming segment, and U.S. sales were furtherimpacted by a reduction in supply of third party grape growers in the secondquarter of 2003.  Distribution segmentoperating profit improved from a loss of $0.6 million in the second quarter of2002 to a profit of $0.9 million in the second quarter of 2003.  This improvement was driven by a $0.7million increase in the operating profit of Premier Fruits and Vegetables BBL,Inc., the Company’s distributor in Montreal, Quebec, and a significantreduction in selling and administrative expenses that stems from an ongoingrestructuring of the U.S. distribution companies that began in the second halfof 2002.

 

**The Company closed down itsresearch and development operations in June 2002.  Because of this shut down the Company had no revenues or expensesassociated with this former business segment in the second quarter of 2003 ascompared with $1.4 million of revenues and an operating loss of $0.4 million inthe second quarter of 2002.**

** **

Corporate administrative expenses declined from $0.5 million in thesecond quarter of 2002 to $0.2 million in the second quarter of 2003.  Interest expense decreased from $2.4 millionin the second quarter of 2002 to $2.3 million in the second quarter of 2003while interest income increased from $0.3 million to $0.7 million between thesetwo periods.

 

The increase in other non-operating income and expense from a negative$0.4 million in the second quarter of 2002 to a positive $5.8 million in thesecond quarter of 2003 was driven by a transaction completed at the end of thesecond quarter in which the Company sold a Mexican subsidiary and received $5.2million in net proceeds.  Thistransaction is described in greater detail in the Liquidity and CapitalResources section below.

 

15

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Tax expense increased from $0.5 million in the second quarter of 2002to $1.2 million in the second quarter of 2003. This increase was an outgrowth of the taxes due in Mexico and the UnitedStates from the sale of the Mexican subsidiary at the end of the secondquarter.

 

**Six Months Ended June30, 2003 Compared to the Six Months Ended June 30, 2002**

 

Consolidated total revenues declined to $56.4 million for the sixmonths ended June 30, 2003 from $88.3 million in the same period of 2002,consolidated gross profit (sales less cost of sales) declined to  $5.5 million for the six months ended June30, 2003 from $6.3 million in the same period of 2002, and the Company’sconsolidated operating loss declined to $1.1 million for the six months endedJune 30, 2003 from $1.4 million in the same period of 2002.

 

FARMING segment revenues, the majority of which areeliminated in consolidation, declined from $43.0 million in the first sixmonths of 2002 to $14.1 million in the same period of 2003.  This reduction was driven largely by thecash strains the Company faced in the fourth quarter of 2002 because of areduction in bank financing during the months of October and November.  Due to the lack of cash, the farming segmentconcentrated a very significant proportion of its available resources on theproduction of the Company’s patented vine sweet mini pepper and significantlycurtailed production of tomatoes, peppers, and other commodity vegetables inCuliacan and Todos Santos during the first half of 2003.  The operating loss in the Farming segmentincreased from $0.3 million in the first six months of 2002 to $1.3 million inthe same period of 2003.  The increasein the operating loss of the Farming segment stemmed largely from the firstquarter results, which was driven by the much lower production volumes and verylow grape tomato prices, which further impacted ABSA’s revenues and margins inthe first quarter of 2003. Administrative expenses in the farming segment were reduced by $0.1million from the first six months of 2002 to the same period of 2003.

 

DISTRIBUTION segment revenues declined from $78.8 million in the firstsix months of 2002 to $53.9 million in the same period of 2003.  This decline was consistent with thecurtailed production of the Farming segment, and U.S. sales were furtherimpacted by a reduction in supply of third party grape growers in the second quarterof 2003.  Premier Fruits & Vegetables,BBL Inc., the Company’s Canadian distribution subsidiary, continued to showstrong sales gains with an 18.2% increase for the first six months of 2003 ascompared with the same period of 2002. Operating profit of the Distribution segment for the first six months of2003 declined by $0.1 million as compared with the same period of 2002. Thedecline in gross margins of the U.S. distribution companies of $1.8 million wasalmost entirely offset by a $0.5 million improvement in the gross margin ofCanada along with a $1.2 million reduction in selling and administrativeexpenses.  This reduction in selling andadministrative expenses stems from an ongoing restructuring of the U.S.distribution companies that began in the second half of 2002.

 

**The Company closed down itsresearch and development operations in June 2002.  Because of this shut down the Company had no revenues or expensesassociated with this former business segment in the first six months of 2003 ascompared with $1.9 million of revenues and an operating loss of $0.3 million inthe same period of 2002.**

** **

Corporate administrative expenses declined from $1.1 million in thefirst six months of 2002 to $0.9 million in the same period of 2003.  Interest expense was unchanged at $4.7million from the first six months of 2002 to the first six months of 2003 whileinterest income increased from $0.6 to $1.0 million between these two periods.

 

The increase in other non-operating income and expense from $0.1million in the first six months of 2002 to $5.1 million in the first six monthsof 2003 was driven by a transaction completed at the end of the second quarterin which the Company sold a Mexican subsidiary and received $5.2 million in netproceeds.  This transaction is describedin greater detail in the Liquidity and Capital Resources section below.

 

Tax expense increased from $0.7 million in the first six months of 2002to $1.3 million in the first six months of 2003.  This increase was an outgrowth of the taxes due in Mexico and theUnited States from the sale of the Mexican subsidiary at the end of the secondquarter.

 

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**Capital Expenditures**

 

Duringthe first six months of 2003 the Company made capital investments of $0.9million.  The great majority of thefunds were spent by Premier Fruits & Vegetables, BBL Inc. in Montreal,Quebec to construct additional warehousing facilities and cold rooms to supportits projected growth requirements over the next three to five years.

 

**Liquidity and Capital Resources**

 

For the six months ended June 30, 2003, the Company generated $0.7million of cash from operating activities (which includes the $5.2 million gainon the sale of a Mexican subsidiary). The most significant items contributing to this were the net loss of$1.1 million, which was offset by depreciation and amortization that totaled$1.5 million during the six months, and the changes in the working capitalaccount items.  Accounts receivable andadvances to growers increased by $7.2 million due to the lateness of thisyear’s grape harvest and the growth in the Canadian business, and accountspayable increased by $4.0 million due again to the lateness of the grapeharvest and payables due to growers, a higher level of payables in Canadaassociated with the warehouse construction in progress, and the payablesresulting from the expenses and taxes associated with the sale of the Mexicansubsidiary in June.

 

For the six months ended June 30, 2003, the Company used $0.9 millionin investing activities, all of which was spent on property, plant andequipment.

 

Netcash from financing activities during the first six months of 2003 totaled $3.6million.  Accounts due to relatedparties increased by $5.4 million as interest continued to accrue on theCompany’s debt to Savia.  The Companyreduced its seasonal term loan by $0.3 million and reduced its revolving lineof credit by $0.9 million.

 

At June 30, 2003 all of the Company’s $6.4 million of bank debt wasassociated with its fresh produce business.

 

In December 2002, Bionova Produce, Inc., Bionova Produce of Texas, Inc.and R.B. Packing of California, Inc., the Company’s major distributors of freshproduce in the United States, signed agreements for a new set of creditfacilities with Wells Fargo Business Credit, Inc. (“WFBC”) which run throughApril 2006.  There are three separate,but related loan components associated with these credit facilities.  First, Bionova Produce, Inc. was extended a“permanent term loan” of $1.75 million, which will be amortized over 10 years.  Interest is charged atthe Wells Fargo prime rate of interest plus 1.5% (5.5% at June 30, 2003), andinterest and principal amortization payments are made on a monthly basis.  The second component is a “seasonal termloan” with a maximum availability of $1.75 million.  Interest is charged at the Wells Fargo prime rate of interestplus 1.5% (5.5% at June 30, 2003), and interest payments are made on a monthlybasis.  The outstanding principalbalance on the seasonal term loan is amortized each year during the months ofJanuary through April, and may then be borrowed again in full on May 1.  The third component is a $7 millionrevolving line of credit to support working capital requirements of the freshproduce business.  The revolving line ofcredit must be paid down to a maximum of $1.5 million for a 30 day periodbetween July 1 and September 30 each year. Interest on this revolving line of credit is charged at the Wells Fargoprime rate of interest plus 1.0% (5.0% at June 30, 2003).  All three components of the creditfacilities are collateralized by all of the real and intangible assets of thethree U.S. distributing companies and are guaranteed by both Bionova Holdingand its parent company, Savia.  The keycovenants associated with these credit facilities are that the threedistributing companies as a group must maintain a minimum net worth of $8.75million, a debt service coverage ratio of at least 1.25 to 1, achieve minimumlevels of quarterly earnings before taxes to be agreed between the Company andWFBC annually, and the distributing group may not experience a net loss duringany month that exceeds $0.5 million or a net loss for a two month period thatexceeds $0.3 million.  Also, there areprovisions in the credit agreement that permit WFBC to declare an event ofdefault if Savia fails to complete the restructuring of its debt facilitieswith its banks.  An event of default wasdeclared in the second quarter of 2003 because Savia had failed to complete itsrestructuring by March 31, 2003, which was the date originally established inthe credit agreement.  On June 13, 2003the U.S. distributing companies, Bionova

 

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Holding,Savia, and WFBC signed the “First Amendment to Credit and Security Agreementand Waiver of Defaults” which extended the date for Savia to complete itsrestructuring to September 30, 2003. WFBC and Bionova Holding also agreed to renegotiate in good faithcertain financial covenants relating to operating performance in the third andfourth quarters of 2003.  As of the dateof these financial statements, the Company was in compliance with all of thecovenants of the credit facilities.  AtJune 30, 2003 the principal outstanding in connection with the permanent termloan, the seasonal term loan, and the revolving line of credit was $1.7million, $1.0 million, and $3.2 million, respectively.

 

Inaddition to these credit facilities Bionova Produce, Inc. has a five-year loansecured by an airplane and is guaranteed by Savia.  The loan is for $0.7 million and is due August 30, 2006.  Principal and interest payments ofapproximately $15,000 are due monthly. The interest rate on this debt is 8.25% per annum.  At June 30, 2003 the principaloutstanding under this five year loan agreement was $0.5 million.

 

On October 3, 2001 ABSA (as the Mexican designee of Bionova Produce,Inc.) entered into an agreement with Libra Exportaciones, S.A. de C.V.(“Libra”) whereby ABSA assumed a $2.3 million mortgage obligation to a Mexicanfinancial institution in conjunction with certain pieces of land beingtransferred to ABSA.  On March 7, 2003, a new agreement was signed byLibra, the Alvarez family (the former owners of Libra), and ABSA whereby ABSAwould transfer certain pieces of land it received from Libra stemming from theOctober 3, 2001 agreement to the Mexican financial institution in exchange fora release from the $2.3 million mortgage obligation.  The transfer of the land and the release of the mortgageobligation were completed on May 13, 2003. In the financial statements for the year ended December 31, 2002 thetotal debt obligation of $2.3 million was classified as a component ofshort-term bank loans.

 

At June 30, 2003 Bionova Holding and its subsidiarieswere indebted to Savia and its subsidiaries (other than Bionova Holding) in atotal amount of $102.2 million.  Of thistotal $20.7 million was owed by ABSA and is accruing interest at a rate ofapproximately 9% per annum.  BionovaHolding had debt including accrued interest of $75.5 million to Savia.  The Bionova Holding debt currently isaccruing interest at a rate of approximately 12.5% per annum.  Other subsidiaries of Bionova Holding hadrelated party accounts due to Savia and its subsidiaries that accounted for thebalance of the $6.0 million.  All of theBionova Holding debt is due to be paid by December 31, 2003.  The other related party accounts due toSavia and its subsidiaries have varying maturities, most of which are due atvarious times in 2003.  In addition toABSA’s significant debt to Savia, ABSA also had $8.7 million of payables outstandingto vendors at June 30, 2003, many of which are significantly past due.  At this time, Bionova Holding does not knowhow this indebtedness will be handled.

 

On June 13, 2003 Bionova Holding and Agromod, S.A deC.V., a minority owner of ABSA, entered into an agreement to sell all of the sharesof Technologia Aplicada en Procesos, S. de R.L. de C.V. (“TAP”), a Mexicansubsidiary of Bionova Holding to Promo-Tow,S. de R.L. de C.V. (“PROMOTOW”), a Mexican company.  The shares of this new company had value toPROMOTOW because of certain financial benefits PROMOTOW felt it couldderive from ownership of TAP.  BionovaHolding received $5.4 million in cash on June 13 and could receive up to anadditional $0.6 million, which currently is being held in escrow, during thethird quarter of 2003 upon verification by an independent auditor of thehistorical financial statements of Biionova Holding’s Mexican farmingsubsidiaries.  The Company recorded onlythe $5.4 million as Other Income in the second quarter of 2003 along withestimated tax expense associated with this transaction of $0.8 million andtransaction fees of $0.3 million.

 

The resultingcash from this transaction has provided a temporary respite to permit theCompany to pay down some of its long overdue payables and continue operations,albeit on a significantly reduced level as compared with past years.  Management has recognized that it still doesnot have the cash reserves to enable it to take significant risk in theforeseeable future in its own agricultural activities or the funding of thirdparty growers.  Consequently, theCompany’s Mexican farming subsidiary, ABSA, is seeking a partnershiparrangement with a large Mexican grower to enable it to plant and harvestproduction during the Todos Santos growing season from August through Novemberof 2003.  The most significant termscall for each partner to recover its cash and non-cash investments first, andthen the partners will share at a rate of 50/50 for any profit generated fromthe sale of tomatoes and 55/45 (55 being ABSA) on the sale of the vine sweetmini peppers being grown in Todos Santos. At this time the Company does not plan to grow,

 

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nor fund any third party growers in Culiacan,which would typically harvest in late December 2003 through April 2004, otherthan its vine sweet mini-pepper product. The consequence of this reduced production will be a lower level ofsales in the United States in the first quarter of 2004 as compared with 2003.

 

As a result of the Company’s operating lossesduring the past six years and its current financial structure, there continuesto be substantial doubt about the Company’s ability to continue as a goingconcern.  Management has been and iscontinuing to address the Company’s financial condition by selling non-coreassets of the fresh produce business, and by selling and licensing itsintellectual property. R.B. Packing of California, Inc. sold its real estate in California inthe third quarter of 2003, Bionova Holding recently sold its TAP subsidiary inMexico, and the Company completed a license of its Transwitch technology duringthe second quarter.  The Company alsomust find a solution to the $101.5 million of debt plus the interest accruingin 2003 that is due to Savia and its subsidiaries during 2003.  There can be no assurance that these actionswill result in sufficient working capital to significantly improve theCompany’s current financial position or its results of operations nor can therebe any assurance the Company will be able to meet its obligations in 2003 norsecure funds to take it beyond the 2003 calendar year.  This raises substantial doubt about the Company’s ability to continue as a goingconcern.

 

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

** **

**Item 4.   Controls and Procedures**

 

*(a)**                               Evaluationof disclosure controls and procedures*

 

Under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, we conductedan evaluation of our “disclosure controls and procedures” (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of theend of the period covered by this report, and have continued to make quarterlyreviews since then.  Based on theseevaluations, our chief executive officer and chief financial officer concludedthat our disclosure controls and procedures need improvement. (See Item 4(b)below.)

 

*(b)**                               Changesin internal controls*

 

In connection with the preparation of the Company’s consolidatedfinancial statements as of and for the year ended December 31, 2002, and basedon more recent reviews in the preparation of the Company’s consolidatedfinancial statements for the quarters ended June 30, 2003 and September 30,2003, management in conjunction with our independent accountants identifiedcertain deficiencies in the Company’s internal control procedures overfinancial reporting that would be deemed to be a material weakness understandards established by the American Institute of Certified PublicAccountants.  The deficiencies relate to(i) the Company’s accounting and financial reporting infrastructure forcollecting, analyzing, and consolidating information to prepare theconsolidated financial statements for the Company (ii) issues associated withtimely and consistent reconciliation of the Company’s and its subsidiaries’bank accounts, inventories, and intercompany accounts, (iii) the timely andcomplete revelation of material contracts entered into by subsidiaries of the Company,and (iv) the impact of the resignations of certain accounting personnel duringthe past year on the historical knowledge and understanding of accounting andconsolidation information.  Thesematters have been discussed with our independent accountants and with the AuditCommittee of the Board of Directors of the Company.  To address these weaknesses, the Company has (i) made certainchanges to the consolidating systems and procedures for financial statement preparationand the timely and consistent reconciliation of bank accounts, inventories, andintercompany accounts during 2003, (ii) added another accounting manager inMexico to support this activity, and (iii) improved the communication such thatmaterial contracts are now being reported in a timely manner.  Despite these changes, serious weaknessesare still being encountered, and the Company’s controller in Mexico and in itsTodos Santos farming operations resigned in the fall of 2003.  Efforts will continue to improve theconsolidating systems and procedures for financial statement preparation overthe next several months.  The Companyalso will continue to focus on recruiting the appropriate personnel to overcomethe deficiencies created by the recent resignations.

 

##### **Item 6.   Exhibits and Reports on Form 8-K**

 

(a)          Exhibits

 

31.1      Certificationof Jose Manuel Garcia pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e)

 

31.2      Certificationof Arthur H. Finnel pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e)

 

32.1      Certificationof Jose Manuel Garcia pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

32.2      Certificationof Arthur H. Finnel pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)         Reports on Form 8-K

 

The company did not file any reports on Form 8-K during the second quarterof 2003.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   | BIONOVA  HOLDING CORPORATION |
|--------|------------------------------|
|   |                         |
|   |                         |   |
|   | Date:  January 19, 2004 | By:  /s/ ARTHUR H. FINNEL |   |
|   |                         |   | Arthur H. Finnel |   |
|   |                         |   | Chief Financial Officer |   |

 

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**INDEX TO EXHIBITS**

 

(a)          Exhibits

 

31.1                 Certification ofJose Manuel Garcia pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e)

 

31.2                 Certification ofArthur H. Finnel pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e)

 

32.1                 Certification ofJose Manuel Garcia pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2                 Certification ofArthur H. Finnel pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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