**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-Q**

 

**ý****  Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

**Forthe quarterly period ended June 30, 2003**

 

**or**

 

**o****  Transition Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

**Forthe transition period from             to             **

 

**CommissionFile Number: 0-12177**

 

| **BIONOVA HOLDING CORPORATION**                                  |
|------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)          |
|                                                             |   |   |
| **Delaware**                                                     |   | **75-2632242** |
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification No. |
|                                                             |   |   |
| **9255 Customhouse Plaza, Suite I  San Diego, California**       |   | **92154** |
| (Address of  principal executive offices)                        |   | (Zip Code) |
|                                                             |
| **(609)  744-8105**                                              |
| (Registrant’s  telephone number, including area code)       |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

Yes  ý  No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined byRule 12b-2 of the Securities Exchange Act of 1934, as amended).

Yes  o  No  ý

 

As of August 13, 2003, 22,905,408 shares of common stock, parvalue $0.01 per share, of Bionova Holding Corporation were outstanding.

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**BIONOVA HOLDING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**Thousands of U.S. Dollars**

**(except share 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                   |   |
| 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             |   | 33,607                  |   |
| Property, plant and equipment, net                                                                                                                                                        |   | 31,900             |   | 34,150                  |   |
| Patents and trademarks                                                                                                                                                                    |   | 1,097              |   | 1,249                   |   |
| Other assets                                                                                                                                                                              |   | 10,558             |   | 11,828                  |   |
| Total assets                                                                                                                                                                              |   | $                  | 86,255 |                    | $      | 80,834 |   |
|                                                                                                                                                                                      |   |               |   |                    |   |
| LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS’EQUITY (DEFICIT)                                                                                                                    |   |               |   |                    |   |
| Current liabilities:                                                                                                                                                                      |   |               |   |                    |   |
| Accounts payable and accrued expenses                                                                                                                                                     |   | $                  | 20,112 |                    | $      | 16,090 |   |
| Accounts due to related parties                                                                                                                                                           |   | 102,228            |   | 96,857                  |   |
| Short-term bank loans                                                                                                                                                                     |   | 4,525              |   | 9,818                   |   |
| Total current liabilities                                                                                                                                                                 |   | 126,865            |   | 122,765                 |   |
| Long-term liabilities with third parties                                                                                                                                                  |   | 1,872              |   | —                  |   |
| Total liabilities                                                                                                                                                                         |   | 128,737            |   | 122,765                 |   |
| Minority interest                                                                                                                                                                         |   | 447                |   | 401                     |   |
| Commitments and contingencies (see Note 8 and Note  12)                                                                                                                                   |   |               |   |                    |   |
| 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, 22,905,408 and 23,588,031 shares issued and outstanding at June  30, 2003 and December 31,  2002, respectively         |   | 229                |   | 229                     |   |
| Additional paid-in capital                                                                                                                                                                |   | 171,574            |   | 171,574                 |   |
| Accumulated deficit                                                                                                                                                                       |   | (215,008           | )      | (213,914                | )      |
| Accumulated other comprehensive income (loss)                                                                                                                                             |   | 276                |   | (221                    | )      |
| Total stockholders’ equity (deficit)                                                                                                                                                 |   | (42,929            | )      | (42,332                 | )      |
| Total liabilities, minority interest, and  stockholders’ equity (deficit)                                                                                                            |   | $                  | 86,255 |                    | $      | 80,834 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

2

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**BIONOVA HOLDING CORPORATION**

 

**UNAUDITED CONSOLIDATED STATEMENT OFOPERATIONS**

**AND COMPREHENSIVE INCOME AND LOSS**

**Thousands of U.S. Dollars**

**(except per share amounts)**

 
|                                                                     |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                     |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                     |   |                              |   |                            |   |   |   |   |   |
| Total  revenues                                                          |   | $                                 | 28,300 |                            | $      | 43,805 |   | $ | 56,394 |   | $ | 90,254 |   |
|                                                                     |   |                              |   |                            |   |   |   |   |   |
| Cost  of sales                                                           |   | 24,948                            |   | 42,961                          |   | 50,909 |   | 82,035 |   |
| Selling  and administrative expenses                                     |   | 3,183                             |   | 4,157                           |   | 6,395 |   | 8,081 |   |
| Research  and development expenses                                       |   | —                            |   | 1,257                           |   | — |   | 2,086 |   |
| Amortization  of goodwill, patents and trademarks                        |   | 62                                |   | 125                             |   | 152 |   | 250 |   |
|                                                                     |   | 28,193                            |   | 48,500                          |   | 57,456 |   | 92,452 |   |
|                                                                     |   |                              |   |                            |   |   |   |   |   |
| Operating  income (loss)                                                 |   | 107                               |   | (4,695                          | )      | (1,062 | ) | (2,198 | ) |
|                                                                     |   |                              |   |                            |   |   |   |   |   |
| 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                             |   | (442                            | )      | 5,117 |   | (70 | ) |
|                                                                     |   | 4,124                             |   | (2,362                          | )      | 1,347 |   | (3,801 | ) |
|                                                                     |   |                              |   |                            |   |   |   |   |   |
| 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 per common share                                       |   | $                                 | 0.06   |                            | $      | (0.32 | )  | $ | (0.05 | )  | $ | (0.29 | ) |
|                                                                     |   |                              |   |                            |   |   |   |   |   |
| Weighted  average number of common shares outstanding                    |   | 22,905,408                        |   | 23,480,408                      |   | 22,905,408 |   | 23,480,408 |   |
| Weighted  average number of common shares outstanding, assuming dilution |   | 46,061,524                        |   | 23,480,408                      |   | 22,905,408 |   | 23,480,408 |   |
|                                                                          |        |                                   |        |                                 |        |  |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these unaudited consolidated financialstatements.

 

3

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**BIONOVA HOLDING CORPORATION**

**UNAUDITED CONSOLIDATED STATEMENT OFCASH FLOWS**

**Thousands of U.S. Dollars**

 
|                                                                                  |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                  |   | **2003**                        |   | **2002** |   |
|                                                                                  |   |                            |   |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                                 |   |                            |   |   |   |
| Net  income (loss)                                                                    |   | $                               | (1,094 | ) | $ | (6,825 | ) |
| Adjustments  to reconcile net income to net cash provided by operating activities:    |   |                            |   |   |   |
| Minority  interest                                                                    |   | 46                              |   | 145 |   |
| Depreciation                                                                          |   | 1,372                           |   | 1,539 |   |
| Amortization  of patents and trademarks                                               |   | 152                             |   | 250 |   |
| Other                                                                                 |   | (47                             | )      | 573 |   |
| Net  changes (exclusive of subsidiaries acquired or divested) in:                     |   |                            |   |   |   |
| Accounts  receivable and advances to growers, net                                     |   | (7,166                          | )      | 3,145 |   |
| Inventories                                                                           |   | 1,602                           |   | 2,899 |   |
| Other  assets                                                                         |   | 1,845                           |   | (164 | ) |
| Accounts  payable and accrued expenses                                                |   | 4,022                           |   | 1,520 |   |
|                                                                                  |   |                            |   |   |   |
| NET  CASH PROVIDED BY OPERATING ACTIVITIES                                            |   | 732                             |   | 3,082 |   |
|                                                                                  |   |                            |   |   |   |
| 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                           |   | 2,114 |   |
|                                                                                  |   |                            |   |   |   |
| NET  CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                  |   | 4,247                           |   | (1,089 | ) |
|                                                                                  |   |                            |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                                 |   | 4,101                           |   | 1,030 |   |
| Cash  at beginning of period                                                          |   | 2,130                           |   | 2,463 |   |
| Cash  at end of period                                                                |   | $                               | 6,231  |   | $ | 3,493 |   |
|                                                                                  |   |                            |   |   |   |   |   |
| 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 accompanyingnotes are an integral part of these unaudited consolidated financialstatements.

 

4

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**BIONOVA HOLDING CORPORATION**

 

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**June 30, 2003**

 

**Note 1 – Basis of Presentation**

 

For operating andfinancial reporting purposes, Bionova Holding Corporation (together with itssubsidiaries, unless the context requires otherwise, “Bionova Holding” or the“Company”) historically has classified its business into three fundamentalareas:  (1) **Farming**, which consistsprincipally of interests in 100% Company-owned fresh produce productionfacilities and joint ventures or contract growing arrangements with othergrowers; (2) **Distribution***,* consisting principally of interests insales and distribution companies in Mexico, the United States, and Canada; and(3) **Researchand Development (or Technology)*,*** consisting of business unitsfocused on the development of fruits and vegetables and intellectual propertiesassociated with these development efforts. On June 30, 2002 the operations of the Research and Development segmentwere shut down and the remaining assets as of January 1, 2003, which consistsolely of patents and trademarks with a valuation of $1.2 million, have beenmerged into the activity of the holding company which will continue to try tolicense and sell these assets as opportunities become available.

 

In management’s opinion,the accompanying unaudited consolidated financial statements for BionovaHolding for the three and six month periods ended June 30, 2003 and 2002 havebeen prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial statements and include alladjustments (consisting only of normal recurring accruals) that the Companyconsiders necessary for a fair presentation of its financial position, resultsof operations, and cash flows for such periods.  However, the accompanying unaudited consolidated financial statementsdo not contain all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  The accompanying unaudited consolidatedfinancial statements should be read in conjunction with the Company’s auditedconsolidated financial statements and notes thereto presented in its 2002 10-Kfor the fiscal year ended December 31, 2002. Footnotes which would substantially duplicate disclosures in theCompany’s audited consolidated financial statements for the fiscal year endedDecember 31, 2002 contained in the 2002 10-K report have been omitted.  The interim consolidated financialinformation contained herein is not necessarily indicative of the results to beexpected for any other interim period or the full fiscal year ending December31, 2003.

 

# **Going Concern**

 

The Company incurred anet loss of $20.4 million for the year ended December 31, 2002. The Companyalso sustained significant operating losses and operating cash flowdeficiencies from 1997 through 2002.  AtJune 30, 2003 the Company had a negative working capital position of $84.2million.

 

Management has been andis continuing to address the Company’s financial condition by selling non-coreassets of the fresh produce business, and by selling and licensing itsintellectual property.    The Companyalso must find a solution to the $102.2 million of debt plus the interestaccruing in 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 theCompany’s ability to continue as a going concern.

 

The unauditedconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

5

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**Note 2 – Bank Debt**

 

At June 30, 2003 all ofthe Company’s $6.4 million of bank debt was associated with its fresh producebusiness.

 

In December 2002, BionovaProduce, Inc., Bionova Produce of Texas, Inc. and R.B. Packing of California,Inc., the Company’s major distributors of fresh produce in the United States,signed agreements for a new set of credit facilities with Wells Fargo BusinessCredit, Inc. (“WFBC”) which run through April 2006.  There are three separate, but related loan components associatedwith 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 ischarged at the Wells Fargo prime rate of interest plus 1.5% (5.5% at June 30,2003), and interest and principal amortization payments are made on a monthlybasis.  The second component is a“seasonal term loan” of $1.75 million, although only $1.0 million will beextended at this time.  Interest ischarged at the Wells Fargo prime rate of interest plus 1.5% (5.5% at June 30,2003), and interest payments are made on a monthly basis.  The outstanding principal balance on theseasonal term loan is amortized each year during the months of January throughApril, 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 permits 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 in thecredit agreement.  On June 13, 2003 theU.S distributing companies, Bionova Holding, Savia, and WFBC signed the “FirstAmendment 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 now is 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 addition to these credit facilities BionovaProduce, Inc. has a five-year loan secured by an airplane and is guaranteed bySavia.  The loan is for $0.7 million andis due August 30, 2006.  Principal andinterest payments of approximately $15,000 are due monthly.  The interest rate on this debt is 8.25% perannum.  At June 30, 2003 theprincipal outstanding under this five year loan agreement was $0.5 million.

 

On October 3, 2001Agrobionova, S.A. de C.V. (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 Mexican financialinstitution in conjunction with certain pieces of land being transferred toABSA.  On March 7, 2003, a new agreement was signed by Libra, the Alvarezfamily (the former owners of Libra), and ABSA whereby ABSA would transfercertain pieces of land it received from Libra stemming from the October 3, 2001agreement to the Mexican financial institution in exchange for a release fromthe $2.3 million mortgage obligation. The transfer of the land and the release of the mortgage obligation werecompleted on May 13, 2003.  In thefinancial statements for the year ended December 31, 2002 the total debtobligation of $2.3 million was classified as a component of short-term bankloans.

 

6

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**Note 3 - Net Income or Loss per Common Share**

 

The weighted averagenumber of common shares outstanding during the three and six month periodsended June 30, 2003 and 2002 was 22,905,408 and 23,480,408, 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 46,061,524 and46,636,524, respectively.

 

The following table setsforth the potential shares of common stock that are not included in the dilutednet loss per share attributable to common stockholders for the quarter endingJune 30, 2003 because to do so would be anti-dilutive.

 
|                                     |   | **(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**

 

Inventories werecomprised 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 |   |

 

ABSA, the Company’sMexican farming subsidiary, advances money to suppliers towards the purchase ofmaterials, and these amounts are reflected as Advances to Suppliers.  Due to ABSA’s financial condition, it has alarge number of accounts payable to suppliers that are seriously past due.  Certain suppliers have required that ABSApay amounts over and above the purchase prices for the materials they areproviding to ABSA to pay down a portion of the overdue payables.

 

**Note 5 – Assets Held for Sale**

 

Assets held for sale werecomprised 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 |   |

 

7

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**Note 6 – Reclassifications**

 

Certain prior yearamounts have been reclassified to conform to the current year presentation.

 

**Note 7 - Segment Reporting**

 

The Company historicallyclassified its business into three fundamental areas: **Farming**, which consistsprincipally of interests in Company-owned fresh produce production facilitiesand joint ventures with other growers; **Distribution**, consisting principally ofinterests in sales and distribution companies in Mexico, the United States, andCanada; and **Research and Development**, consisting of business units focusedon the development of fruits and vegetables and intellectual propertiesassociated with these development efforts. On June 30, 2002 the operations of the Research and Development segmentwere shut down and the remaining assets as of January 1, 2003, which consistedsolely of patents and trademarks with a valuation of $1.2 million, were mergedinto the activity of the holding company which is continuing to try to licenseand sell these assets as opportunities become available.

 

Information pertaining tothe operations of these different business segments is set forth below. TheCompany 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  and  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)          Identifiable assets forsegments are defined as total assets less cash in banks, deferred income taxesand investment in shares.

 

8

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Reconciliation of thesegments 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 | ) |
| Total  revenues                                            |   | $                              | 56,394  |   | $ | 90,254 |   |
|                                                       |   |                           |    |   |   |
| 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  income (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 |   |

 

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***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.

 

Revenue from externalcustomers 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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***Notes:***

(1)          Core vegetables includetomatoes, vine sweet mini peppers, bell peppers and cucumbers.

(2)          Fruits and other freshproduce include papayas, mangoes, grapes, melons, watermelons and others.

 

9

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**Note 8 – Legal Actions and Contingencies**

 

On January 7, 1999, aclass action lawsuit styled *Gordon K. Aaron et al. v. Empresas la Moderna, S.A.de C.V., et al.* was filed in the U.S. federal district court for theNorthern District of California.  OnJanuary 28, 1999, a substantially identical class action lawsuit styled *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 have been remanded tothe trial 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 adefendant in several lawsuits asserting claims against DNAP relating toresearch DNAP performed from 1983 through 1994 for Brown & WilliamsonTobacco Company (“B&W”).  Ingeneral, the cases allege that DNAP engaged in unfair business practices underCalifornia law and/or participated in an alleged conspiracy among cigarettemanufacturers to deceive the public regarding the hazards of smoking.  All of the pending cases are in Californiastate courts.  In December 1999, B&Wagreed to indemnify DNAP against all costs (including costs of defense and ofcosts of any judgment or settlement) incurred by DNAP in connection with thesecases and any similar cases in the future. Therefore, management no longer believes that these cases could have amaterial adverse effect on the Company’s financial condition or results of operations.  DNAP denies any wrongdoing or liability inthese matters and intends to vigorously contest these lawsuits.

 

On June 16, 2000, alawsuit styled *Santa Cruz Empacadora, S. de R.L. de C.V., v. R.B. Packing ofCalifornia, Inc.*was filed in the United States District Court forthe 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, through its subsidiary, VPP, acquired Monsanto Company’sstrawberry development program.  Theprogram included breeding assets and exclusive rights to certain of Monsanto’sgenetic and gene technology for berry development, and a non-exclusive right tofuture Monsanto berry technology, including strawberries, cranberries,raspberries, blackberries, boysenberries, and blueberries.  In January, 1999, VPP paid Monsanto $5.0million for those assets.  The purchasecontract stipulated that if Monsanto was able to satisfy certain conditions togrant certain additional licenses, VPP would be obligated to make payments ofan additional $7.0 million.  In 2000 VPPpaid Monsanto an additional $3.0 million when Monsanto was able to grant one ofthese licenses.  If Monsanto is able tofulfill the conditions to grant the additional licenses, then VPP would beobligated to

 

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make additional paymentsin an amount as great as $4.0 million in the future.  The granting of these additional licenses is contingent on theconclusion 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’sForm 10-K for the year ended December 31, 2002 that was filed on April 30, 2003for further discussion on the Company’s pending litigation and contingencies.

 

**Note 9 –  Accountingfor stock-based compensation**

 

The Company accounts forits stock-based compensation plans in accordance with SFAS No. 123, *Accounting for Stock-Based Compensation* asamended by SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.”  As permitted under SFAS No. 148, the Companyuses the intrinsic value-based method of Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for itsemployee stock-based compensation plans. Under APB Opinion No. 25, compensation expense is based on thedifference, if any, on the date of grant, between the fair value of theCompany’s shares and the exercise price of the option.  Compensation cost for stock options, if any,is realized ratably over the vesting period.

 

The Company providesadditional proforma disclosures required by SFAS No. 123 as amended by SFAS No.148, “Accounting for Stock-Based Compensation- Transition and Disclosure – AnAmendment of SFAS No. 123”.  Hadcompensation cost for the Company’s stock option plans been determined based onthe fair market value of the options at the grant dates, as prescribed in SFASNo. 123, the Company’s net income (loss) and net income (loss) per sharewould have been as follows:

 

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Thousandsof U.S. dollars(except per share data)

 
|                                                                                                              |   |                    |   |                  |   |               |   |               |   |
|-------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|--------------------|--------|--------------------|--------|
|                                                                                                              |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|                                                                                                              |   | **June 30,  2003**      |   | **June 30,  2002**    |   | **June 30,  2002** |   | **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 optionsgranted in 1999 was estimated using the Black-****Scholes****model with the following weighted average assumptions:  dividend yield of 0%, expected volatility of114%, risk free interest rate of 5.2%, and an expected life of 7 years.  No options were granted in 2002 or 2003.

 

##### **Note 10 – Sale of MexicanSubsidiary**

 

On June 13, 2003Bionova Holding and Agromod, S.A de C.V., a minority owner of ABSA, enteredinto an agreement to sell all of the shares of Technologia Aplicada enProcesos, S. de R.L. de C.V. (“TAP”), a Mexican subsidiary of Bionova Holding to Promo-Tow, S. de R.L. de C.V. (“PROMOTOW”),a Mexican company.  The shares of thisnew company had value to PROMOTOW because of certain financial benefitsPROMOTOW felt it could derive from ownership of TAP.  Bionova Holding received $5.4 million in cash on June 13 andcould receive up to an additional $0.6 million, which currently is being heldin escrow, during the third quarter of 2003 upon verification by an independentauditor of the historical financial statements of Bionova Holding’s Mexicanfarming subsidiaries.  The Companyrecorded only the $5.4 million as Other Income in the second quarter of 2003along with estimated tax expense associated with this transaction of $0.8million and transaction fees of $0.3 million. The accounting for this transaction is shown below.

** **
|                                                         |   | **(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 – Recent AccountingPronouncements**

 

                InJanuary 2003, the Financial Accounting Standards Board (FASB) issuedInterpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51.  FIN 46requires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties.  FIN 46 is effective immediately for all new variable interestentities created or acquired after January 31, 2003.  For variable interest entities created or acquired prior toFebruary 1, 2003, the provisions of FIN 46 must be applied for the firstinterim or annual period beginning after June 15, 2003. The adoption of FIN 46is not expected to have a material impact on the Company’s financial position,results of operations or cash flows.

 

                In May 2003, the FASB issued Statement of FinancialAccounting Standards No. 150 (SFAS 150), Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.  SFAS 150 establishes standards for theclassification and measurement of financial instruments with characteristics ofboth liabilities and equity.  ThisStatement is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003, except for mandatorily redeemablefinancial instruments of  nonpublicentities.  The adoption of this standardis not expected to have a material impact on the Company’s financial position,results of operations or cash flows.

 

# **Note 12 – Commitments**

 

As of June 30, 2003, the Company has agreements whereby it indemnifiesits officers and directors for certain events or occurrences while the officeror director is serving at the Company’s request in such capacity. The term ofthe indemnification period shall continue until and terminate upon the latterof: (a) 10 years after the date that the officer or director has ceased toserve the Company as an officer or director; or (b) one year after the final,nonappealable termination of any legal proceeding. The maximum potential amountof future payments the Company could be required to make under theseindemnification agreements cannot be reasonably measured and estimated andaccordingly, the Company has no liabilities recorded for these agreements as ofJune 30, 2003.

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**The Company**

 

Bionova HoldingCorporation, a Delaware corporation (together with its subsidiaries, unless thecontext requires otherwise, “Bionova Holding” or the “Company”), was formed inJanuary 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 whichthe Company owns 98.6% (“ABSA”),  (ii)International Produce Holding Company, a Delaware corporation, of which theCompany owns 100% (“IPHC”), (iii) DNA Plant Technology Corporation, a Delawarecorporation, of which the Company owns 100% (“DNAP”), and (iv) VPP Corporation,a Delaware corporation, of which the Company owns 100% (“VPP”).  Approximately 79% of the outstanding commonstock of the Company is indirectly owned by Savia, S.A. de C.V.

 

The Company historicallyclassified its business into three fundamental areas: **Farming**, which consistsprincipally of interests in Company-owned fresh produce production facilitiesand joint ventures with other growers; **Distribution**, consisting principally ofinterests in sales and distribution companies in Mexico, the United States, andCanada; and **Research and Development**, consisting of business units focusedon the development of fruits and vegetables and intellectual propertiesassociated with these development efforts. On June 30, 2002 the operations of the Research and Development segmentwere shut down and the remaining assets as of January 1, 2003, which consistedsolely of patents and trademarks with a valuation of $1.2 million, were mergedinto the activity of the holding company which is continuing to try to licenseand sell these assets as opportunities become available.

 

**Results of Operations**

 

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

 

Consolidated totalrevenues declined to $28.3 million for the quarter ended June 30, 2003 from$43.8 million in the same quarter of 2002, consolidated gross profit (salesless cost of sales) increased to $3.3 million for the quarter ended June 30,2003 from $0.8 million in the same quarter of 2002, and the Company’sconsolidated operating loss declined to $0.1 million for the quarter ended June30, 2003 from $4.7 million in the same quarter of 2002.

 

12

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FARMING segment revenues,the majority of which are eliminated in consolidation, declined from $16.1million in the second quarter of 2002 to $2.4 million in the second quarter of2003.  The lower sales volumes werelargely a consequence of the Company’s decision to forego tomato production inTodos Santos in the second quarter of 2003 due to limited cash resources andthe relatively low margins typically available during this season of theyear.  Despite the lower volumes, theoperating loss of the Farming segment declined from $2.0 million in the secondquarter of 2002 to $0.5 million in the second quarter of 2003, which was attributableto the very poor grape harvest experienced in the second quarter of 2002 causedby poor weather conditions and significantly lower than average prices.

 

DISTRIBUTION segmentrevenues declined from $37.1 million in the second quarter of 2002 to $30.1million in the same quarter of 2003. This decline was consistent with the curtailed production of the Farmingsegment, and U.S. sales were further impacted by a reduction in supply of thirdparty grape growers in the second quarter of 2003.  Distribution segment operating profit improved from a loss of$0.6 million in the second quarter of 2002 to a profit of $0.9 million in thesecond quarter of 2003.  Thisimprovement was driven by a $0.7 million increased in the operating profit ofPremier Fruits and Vegetables BBL, Inc., the Company’s distributor in Montreal,Quebec, and a significant reduction in selling and administrative expenses thatstems from an ongoing restructuring of the U.S. distribution companies thatbegan in the second half of 2002.

 

TheCompany closed down its research and development operations in June 2002.  Because of this shut down the Company had norevenues or expenses associated with this former business segment in the secondquarter of 2003 as compared with $1.6 million of revenues and an operatingprofit of $0.2 million in the second quarter of 2002.

 

Corporate administrativeexpenses declined from $0.5 million in the second quarter of 2002 to $0.2million in the second quarter of 2003. Interest expense decreased from $2.4 million in the second quarter of2002 to $2.3 million in the second quarter of 2003 while interest incomeincreased from $0.3 million to $0.7 million between these two periods.

 

The increase in othernon-operating income and expense from a negative $0.4 million in the secondquarter of 2002 to a positive $5.8 million in the second quarter of 2003 wasdriven primarily by a transaction completed at the end of the second quarter inwhich 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 increasedfrom $0.5 million in the second quarter of 2002 to $1.2 million in the secondquarter of 2003.  This increase was anoutgrowth of the taxes due in Mexico and the United States from the sale of theMexican subsidiary at the end of the second quarter.

 

13

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

 

Consolidated totalrevenues declined to $56.4 million for the six months ended June 30, 2003 from$90.3 million in the same period of 2002, consolidated gross profit (sales lesscost of sales) declined to  $5.1 millionfor the six months ended June 30, 2003 from $8.2 million in the same period of2002, and the Company’s consolidated operating loss declined to $1.4 millionfor the six months ended June 30, 2003 from $2.2 million in the same period of2002.

 

FARMING segment revenues,the majority of which are eliminated in consolidation, declined from $43.0million in the first six months of 2002 to $14.1 million in the same period of2003.  This reduction was driven largelyby the cash strains the Company faced in the fourth quarter of 2002 because ofa reduction 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 segmentrevenues declined from $78.8 million in the first six months of 2002 to $53.9 millionin the same period of 2003.  Thisdecline was consistent with the curtailed production of the Farming segment,and U.S. sales were further impacted by a reduction in supply of third partygrape growers in the second quarter of 2003. Premier Fruits & Vegetables, BBL Inc., the Company’s Canadiandistribution subsidiary, continued to show strong sales gains with an 18.2%increase for the first six months of 2003 as compared with the same period of2002.  Operating profit of theDistribution segment for the first six months of 2003 declined by $0.1 millionas compared with the same period of 2002. The decline in gross margins of the U.S. distribution companies of $1.8million was almost entirely offset by a $0.5 million improvement in the grossmargin of Canada along with a $1.2 million reduction in selling andadministrative expenses.  This reductionin selling and administrative expenses stems from an ongoing restructuring ofthe U.S. distribution companies that began in the second half of 2002.

 

TheCompany closed down its research and development operations in June 2002.  Because of this shut down the Company had norevenues or expenses associated with this former business segment in the firstsix months of 2003 as compared with $1.9 million of revenues and an operatingloss of $0.3 million in the same period of 2002.

 

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

 

The increase in othernon-operating income and expense from a negative $0.1 million in the first sixmonths of 2002 to a positive $5.1 million in the first six months of 2003 wasdriven primarily by a transaction completed at the end of the second quarter inwhich 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 increasedfrom $0.7 million in the first six months of 2002 to $1.3 million in the firstsix months of 2003.  This increase wasan outgrowth of the taxes due in Mexico and the United States from the sale ofthe Mexican subsidiary at the end of the second quarter.

 

14

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**Capital Expenditures**

 

During the first sixmonths of 2003 the Company made capital investments of $0.9 million.  The great majority of the funds were spentby Premier Fruits & Vegetables, BBL Inc. in Montreal, Quebec to constructadditional warehousing facilities and cold rooms to support its projectedgrowth requirements over the next three to five years.

 

**Liquidity and Capital Resources**

 

For the six months endedJune 30, 2003, the Company generated $0.7 million of cash from operatingactivities (which includes the $5.2 million gain on the sale of a Mexicansubsidiary).  The most significant itemscontributing to this cash generation were the net loss of $1.1 million, whichwas offset by depreciation and amortization that totaled $1.5 million duringthe six months, and the changes in the working capital account items.  Accounts receivable and advances to growersincreased by $7.2 million due to the lateness of this year’s grape harvest andthe growth in the Canadian business, inventories were reduced by $1.6 millionwhich was consistent with the winding down of the spring growing season, andaccounts payable increased by $4.0 million due again to the lateness of thegrape harvest 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 endedJune 30, 2003, the Company used $0.9 million in investing activities, all ofwhich was spent on property, plant, and equipment.

 

Net cash provided byfinancing 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 ofthe Company’s $6.4 million of bank debt was associated with its fresh producebusiness.

 

In December 2002, BionovaProduce, Inc., Bionova Produce of Texas, Inc. and R.B. Packing of California,Inc., the Company’s major distributors of fresh produce in the United States,signed agreements for a new set of credit facilities with Wells Fargo BusinessCredit, Inc. (“WFBC”) which run through April 2006.  There are three separate, but related loan components associatedwith 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 ischarged at the Wells Fargo prime rate of interest plus 1.5% (5.5% at June 30,2003), and interest and principal amortization payments are made on a monthlybasis.  The second component is a“seasonal term loan” of $1.75 million, although only $1.25 million will be extendedat this time.  Interest is charged atthe Wells Fargo prime rate of interest plus 1.5% (5.5% at June 30, 2003), andinterest payments are made on a monthly basis. The outstanding principal balance on the seasonal term loan is amortizedeach year during the months of January through April, and may then be borrowedagain in full on May 1.  The thirdcomponent is a $7 million revolving line of credit to support working capitalrequirements of the fresh produce business. The revolving line of credit must be paid down to a maximum of $1.5 millionfor a 30 day period between July 1 and September 30 each year.  Interest on this revolving line of credit ischarged at the Wells Fargo prime rate of interest plus 1.0% (5.0% at June 30,2003).  All three components of thecredit facilities are collateralized by all of the real and intangible assetsof the three U.S. distributing companies and are guaranteed by both BionovaHolding and its parent company, Savia.  The key covenants associated with these credit facilities are that thethree distributing companies as a group must maintain a minimum net worth of$8.75 million, a debt service coverage ratio of at least 1.25 to 1, achieveminimum levels of quarterly earnings before taxes to be agreed between theCompany and WFBC annually, and the distributing group may not experience a netloss during any month that exceeds $0.5 million or a net loss for a two monthperiod that exceeds $0.3 million.  Also,there are provisions in the credit agreement that permits WFBC to declare anevent of default if Savia fails to complete the restructuring of its debtfacilities with its banks.  An event ofdefault was declared in the second quarter of 2003 because Savia had failed tocomplete its restructuring by March 31, 2003, which

 

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was the date originally established in the creditagreement.  On June 30, 2003 the U.Sdistributing companies, Bionova Holding, Savia, and WFBC signed the “FirstAmendment to Credit and Security Agreement and Waiver of Defaults” which extendedthe date for Savia to complete its restructuring to September 30, 2003.  WFBC and Bionova Holding also agreed torenegotiate in good faith certain financial covenants relating to operatingperformance in the third and fourth quarters of 2003.  As of the date of these financial statements, the Company now isin compliance with all of the covenants of the credit facilities.  At June 30, 2003 the principaloutstanding in connection with the permanent term loan, the seasonal term loan,and the revolving line of credit was $1.7 million, $1.0 million, and $3.2million, respectively.

 

In addition to these credit facilities BionovaProduce, Inc. has a five-year loan secured by an airplane and is guaranteed bySavia.  The loan is for $0.7 million andis due August 30, 2006.  Principal andinterest payments of approximately $15,000 are due monthly.  The interest rate on this debt is 8.25% perannum.  At June 30, 2003 theprincipal outstanding 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 agreementwith Libra Exportaciones, S.A. de C.V. (“Libra”) whereby ABSA assumed a $2.3million mortgage obligation to a Mexican financial institution in conjunctionwith certain pieces of land being transferred to ABSA.  On March 7, 2003,a new agreement was signed by Libra, the Alvarez family (the former owners ofLibra), and ABSA whereby ABSA would transfer certain pieces of land it receivedfrom Libra stemming from the October 3, 2001 agreement to the Mexican financialinstitution in exchange for a release from the $2.3 million mortgageobligation.  The transfer of the landand the release of the mortgage obligation were completed on May 13, 2003.  In the financial statements for the yearended December 31, 2002 the total debt obligation of $2.3 million wasclassified as a component of short-term bank loans.

 

At June 30, 2003 BionovaHolding and its subsidiaries were indebted to Savia and its subsidiaries (otherthan Bionova Holding) in a total amount of $102.2 million.  Of this total $20.7 million was owed by ABSAand is accruing interest at a rate of approximately 9% per annum.  Bionova Holding had debt of $75.5 million toSavia.  The Bionova Holding debtcurrently is accruing 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 payablesoutstanding to vendors at June 30, 2003, many of which are significantly pastdue.  At this time, Bionova Holding doesnot know how this indebtedness will be handled.

 

On June 13, 2003 BionovaHolding and Agromod, S.A de C.V., a minority owner of ABSA, entered into anagreement to sell all of the shares of Technologia Aplicada en Procesos, S. deR.L. de C.V. (“TAP”),a Mexican subsidiary of Bionova Holding to Promo-Tow, S. de R.L. de C.V. (“PROMOTOW”), a Mexicancompany.  The shares of this new companyhad value to PROMOTOW because of certain financial benefits PROMOTOWfelt it could derive from ownership of TAP. Bionova Holding received $5.4 million in cash on June 13 and couldreceive up to an additional $0.6 million, which currently is being held inescrow, during the third quarter of 2003 upon verification by an independentauditor of the historical financial statements of Bionova Holding’s Mexicanfarming subsidiaries.  The Companyrecorded only the $5.5 million as Other Income in the second quarter of 2003along with estimated tax expense associated with this transaction of $0.8million and transaction fees of $0.3 million.

 

The resulting cash fromthis transaction has provided a temporary respite to permit the Company to paydown some of its long overdue payables and continue operations, albeit on asignificantly 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 the foreseeablefuture in its own agricultural activities or the funding of third partygrowers.  Consequently, the Company’sMexican subsidiary currently is in the process of 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.  At this time the Company doesnot plan to grow, nor fund any third party growers in Culican, which wouldtypically harvest in late December 2003 through April 2004, other than its vinesweet mini-pepper product.  The

 

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consequence of thisreduced production will be a lower level of sales in the United States in thefirst quarter of 2004 as compared with 2003.

 

Asa result of the Company’s operating losses during the past six years and itscurrent financial structure, there continues to be substantial doubt about theCompany’s ability to continue as a going concern.  Management has been and is continuing to address the Company’sfinancial condition by selling non-core assets of the fresh produce business,and by selling and licensing its intellectual property.  R.B. Packing of California, Inc. currentlyhas a contract pending to sell its real estate in California, Bionova Holdingrecently sold its TAP subsidiary in Mexico, and the Company completed a licenseof its Transwitch technology during the second quarter.  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 unauditedconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

**Disclosure Regarding Forward-Looking Statements**

 

This report on Form 10-Qincludes ‘‘forward-looking’’ statements within the meaning of Section 27A ofthe Securities Act of 1933, and Section 21E of the Securities Exchange Act of1934.  All statements, including withoutlimitation statements contained in this “Management’s Discussion and Analysisof Financial Condition and Results of Operations” other than statements ofhistorical facts included in this Form 10-Q, including statements regarding ourfinancial position, business strategy, prospects, plans and objectives of ourmanagement for future operations, and industry conditions, are forward-lookingstatements.  Although we believe thatthe expectations reflected in these forward-looking statements are reasonable,we can give you no assurance that these expectations will prove to becorrect.  In addition to importantfactors described elsewhere in this report, the following “Risk Factors,” sometimeshave affected, and in the future could affect, our actual results and couldcause these results during 2003 and beyond, to differ materially from thoseexpressed in any forward-looking statements made by us or on our behalf.  When we use the terms “Bionova,” “we,” “us,”and “our,” these terms refer to the Company and its subsidiaries.

 

**RISKS RELATING TO OUR FINANCIAL CONDITION**

 

**We maynot have enough cash to maintain our operations during the upcoming months**

 

Our fresh producebusiness requires cash to harvest crops that have been planted and to makeadvances to growers for crops to be planted in the next season.  Our produce business does not have cashreserves, so it depends on continued sales revenues and bank borrowings togenerate the required cash to support these needs.  If sales revenues are below projected levels during the secondhalf of 2003 (which might be caused by low production volumes, lower thanforecast customer demand for the Company’s vine sweet mini pepper, or lowcommodity prices), or if the lender to the distribution companies does notcontinue to provide financing, the produce business will not have sufficientcash to maintain its operations.  Inthat event, the produce business would be required to curtail or possibly evento suspend its operations and to make other expense reductions.

 

**We may continue to sustain losses and accumulate deficits inthe future**

 

We have sustained lossesin every year of our existence from 1996 through 2002.  As of June 30, 2003 our accumulated deficitwas $215.0 million.  For the year endedDecember 31, 2002 and the six months ended June 30, 2003, we had a net loss of$20.4 million and $1.1 million, respectively. The factors that caused these losses, including factors described inthis section, may continue to limit our ability to make a profit in the future.

 

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**We will need additional financing to achieve our growthobjectives, which could hurt our financial condition**

 

We will need additionalcapital to meet our growth objectives and working capital requirements.  Our projected cash flows from operations andexisting capital resources, including our existing credit lines, may not besufficient.  Therefore, our ability topursue these objectives may depend on our ability to obtain additional capital,which could cause us to incur additional debt or issue additional equitysecurities.  We cannot assure you thatadditional capital will be available on satisfactory terms, if at all, and, asa result, we may be restricted in our pursuit of future growth strategies.

 

**Our leveraged position could cause us to be unable to meetour capital needs, which could hurt our financial condition**

 

At June 30, 2003 we had aworking capital deficit of $84.2 million and a stockholders deficit of $42.9million.  We had $6.4 million of debtwith banks and $102.2 million of debt with Savia and Savia’s subsidiaries.  This level of indebtedness may posesubstantial risks to our company and to our stockholders, including the possibilitythat we may not generate sufficient cash flow to pay our outstandingdebts.  Our level of indebtedness mayalso adversely affect our ability to incur additional indebtedness and financeour future operations and capital needs, which may limit our ability to pursueother business opportunities.

 

**If we do not meet our debt covenants, we may not havesufficient funds to continue operations**

 

Our U.S. distributingcompanies hold bank debt which require that they achieve certain levels offinancial performance and that Savia complete the restructuring of its bankdebt by September 30, 2003.  Any failureto meet these covenants could result in an event of default and the calling inof these loan facilities.  If such anevent were to occur, it would significantly affect the current and futureoperations and financial performance of the Company and possibly even requirethat we shut down all operations.

 

**RISKS RELATING TO OUR FARMING AND DISTRIBUTION BUSINESS**

 

**Bad weather and crop disease can affect the amount of producewe can grow, which can decrease our revenues and profitability**

 

Weather conditionsgreatly affect the amount of fresh produce we bring to market, and,accordingly, the prices we receive for our produce.  Storms, frosts, droughts, and particularly floods, can destroy acrop and less severe weather conditions, such as excess precipitation, coldweather and heat, can kill or damage significant portions of a crop.  Crop disease and pestilence can beunpredictable and can have a devastating effect on our crops, rendering themunsalable and resulting in the loss of all or a portion of the crop for thatharvest season.  Even when only aportion of our crops are damaged, the profits we could have made on the cropwill be severely affected because the costs to plant and cultivate the entirecrop will have been incurred although we may experience low yields or may onlybe able to sell a portion of our crop.

 

**Labor shortages and union activity can affect our ability tohire workers to harvest and distribute our crops, which can hurt our financialcondition**

 

The production of freshproduce is heavily dependent upon the availability of a large labor force toharvest crops.  The turnover rate amongthe labor force is high due to the strenuous work, long hours, necessaryrelocation and relatively low pay.  Ifit becomes necessary to pay more to attract labor to farm work, our labor costswill increase.

 

The Mexican farm workforce retained by ABSA is unionized.  Ifthe union attempts to disrupt production and is successful on a large scale,labor costs will likely increase and work stoppages may be encountered, whichwould be particularly damaging in our industry where harvesting crops at peaktimes and getting them to market on a timely basis is critical.  The majority of fresh produce is shipped bytruck.  In the United States and inMexico, the trucking industry is largely unionized and therefore susceptible to

 

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labor disturbances.  As a result, delivery delays caused by labordisturbances in the trucking industry or any other reason could limit ourability to get fresh produce to market before it spoils.

 

**ABSA’s reliance on leases and production associations couldresult in increased costs, which could adversely affect our financial results**

 

ABSA relies onagricultural land leased from others, production associations with othergrowers, and contract production with third party growers for a large part ofits supply.  The average term of theland leases is two years and we expect to renew most of these land leases asthey expire.  If the other parties tothese leases were to choose not to renew their agreements with ABSA, ABSA wouldbe required to locate alternate sources of supply and/or land or, in somecases, to pay increased rents for land. In addition to increased rental rates, increases in land costs couldresult from increases in water charges, property taxes and relatedexpenses.  Production associations andcontract production with third party growers are generally arranged three tosix months prior to each growing season. The provisions of the contracts with these growers may change from yearto year, which can affect the amount of supply, the prices of the produce, andthe cost and profit sharing arrangements among the parties.  If these other growers choose not to renewtheir contracts, ABSA would be required to locate alternate sources of supply,which may or may not be available.

 

**Legal limitations could affect our ownership of rural land inMexico, which could decrease our supply of produce causing a decrease in ourrevenues and profitability**

 

ABSA owns a substantialamount of rural land in Mexico, which it uses to grow fresh fruits andvegetables.  Historically, the ownershipof rural land in Mexico has been subject to legal limitations and claims byresidents of rural communities, which in some cases could lead to the ownerbeing forced to surrender its land. ABSA has been involved in land dispute proceedings as part of itsordinary course of business.  ABSA hasnever lost any money in these land disputes, but if ABSA were ever required tosurrender any of its land, the volume of fresh fruits and vegetables itproduces would decline and adversely affect our profitability.

 

**RISKS RELATING TO OUR INTERNATIONAL OPERATIONS**

 

**Currency fluctuations and inflation can increase the cost ofour products in the United States and abroad, which decreases our revenues andprofitability**

 

While currency exchangerates in Mexico have been relatively stable over the past three years, previoushistory has shown that these rates can be highly volatile.  For example, in December 1994, the Mexicangovernment announced its intention to float the Mexican peso against the UnitedStates dollar and, as a result, the peso devalued over 40% relative to thedollar during that month.  Exchange ratefluctuations impact our subsidiaries’ businesses.  If the value of the peso decreases relative to the value of thedollar, then (i) imports of produce into Mexico for distribution become more expensivein peso terms and therefore more difficult to sell in the Mexican market; and(ii) inflation that generally accompanies reductions in the value of the pesoreduces the purchasing power of Mexican consumers, which reduces the demand forall products including produce and, in particular, imported, branded or otherpremium-quality produce.  Conversely, if the value of the peso increases relative to the value of thedollar, Mexican production costs increase in dollar terms, which results inlower margins or higher prices with respect to produce grown in Mexico and soldin the United States and Canada.

 

**Volatile interest rates in Mexico can increase our capitalcosts**

 

Historically, interestrates in Mexico have been volatile, particularly in times of economic unrestand uncertainty.  High interest ratesrestrict the availability and raise the cost of capital for our Mexicansubsidiaries and for growers and other Mexican parties with whom we dobusiness, both for borrowings denominated in pesos and for borrowingsdenominated in dollars.  Costs ofoperations for our Mexican subsidiaries are higher as a result.

 

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**Trade disputes between the United States and Mexico canresult in tariffs, quotas and bans on imports, including our products, whichcan hurt our financial condition**

 

Despite the enactment ofthe North American Free Trade Agreement, Mexico and the United States from timeto time are involved in trade disputes. The United States has, on occasion, imposed tariffs, quotas, andimportation bans on products produced in Mexico.  U.S. tomato growers have brought dumping claims against Mexicantomato growers and may do so again. Because some of our subsidiaries produce products in Mexico, which wesell in the United States, such actions, if taken, could adversely affect ourbusiness.

 

**GENERAL BUSINESS RISKS**

 

**Savia and Ag-Biotech Capital, LLC have substantial controlover the Company and can affect virtually all decisions made by itsstockholders and directors**

 

Ag-Biotech Capital, LLCbeneficially owns 18,076,839 shares of our common stock accounting for 78.9% ofall outstanding shares.  As a result,Ag-Biotech Capital, LLC has the requisite voting power to significantly affectvirtually all decisions made by the Company and its stockholders, including thepower to elect all directors and to block corporate actions such as anamendment to most provisions of the Company’s certificate ofincorporation.  This ownership andmanagement structure will inhibit the taking of any action by the Company thatis not acceptable to Ag-Biotech Capital, LLC.

 

**We may incur significant liability as a result of stockholderlawsuits**

 

The Company and itssubsidiary, DNA Plant Technology Corporation, have been sued in several lawsuitsrelating to the 1996 merger transaction (the “Merger”) in which DNAP became asubsidiary of the Company.  In thoselawsuits, the former preferred stockholders of DNAP alleged they should havereceived much more consideration for their shares in the Merger than theydid.  One of these cases is stillpending.  If the Company is ultimatelyfound to be liable in this case, the value of the potential judgment could befar more than the Company could afford to pay.

 

**We may not be able to adapt our management informationsystems and controls to keep pace with our future business strategy, whichcould hurt our financial condition**

 

The realization of ourbusiness strategy depends on, among other things, our ability to adaptmanagement information systems and controls and to hire, train and retainqualified employees to allow these operations to be effectively managed.  The geographic separation of oursubsidiaries’ operations exacerbates these issues.

 

**We arenot in compliance with the listing standards of the American Stock Exchange**

 

Our common stock islisted on the American Stock Exchange. On September 9, 2002, the American Stock Exchange advised us of itsintent to file an application to delist our common stock from the Exchange.  We have submitted a plan to the Exchange tocome back into compliance by June 30, 2003, which the Exchange hasaccepted.  However, our listing is beingcontinually subjected to this extension and is still under review by theExchange staff.  Failure to makeprogress consistent with the plan or to regain compliance with the continuedlisting standards could result in the Company being delisted from the Exchange.

 

All subsequent writtenand oral forward-looking statements attributable to the Company or personsacting on its behalf are expressly qualified in their entirety by thecautionary statements disclosed in this section and otherwise in this report.

 

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**ITEM 3.  Quantitativeand Qualitative Disclosures about Market Risk**

 

**Interest Rate Risk**

 

The table below providesinformation about the Company’s derivative financial instruments consistingprimarily of debt obligations that are sensitive to changes in interestrates.  For debt obligations, the tablepresents principal cash flows and related weighted average interest rates byexpected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to beexchanged under the contracts.  Weightedaverage variable rates are based on implied forward rates in the yield curve onJune 30, 2003.  The information ispresented in U.S. dollar equivalents, which is the Company’s reportingcurrency.  The instrument’s actual cashflows are denominated in both U.S. dollars and Mexican pesos, and are indicatedaccordingly in the table below.

 

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|                          |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008-2012** |   | **Total** |   | **Fair  Value** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|---------------|--------|-----------|--------|-----------------|--------|
| Short-term  debt:             |   |     |   |     |   |     |   |     |   |     |   |          |   |      |   |            |   |
| ($US equivalent in  millions) |   |     |   |     |   |     |   |     |   |     |   |          |   |      |   |            |   |
| U.S.  dollar variable rate    |   | $        | 4.5    |     | — |     | — |     | — |     | — |          | — |      | $      | 4.5             |   | $ | 4.5 |   |
| Average  interest rate        |   | 5.5      | %      |     |   |     |   |     |   |     |   |          |   | 5.5       | %      | 5.5             | %      |
| Peso  variable rate (in $US)  |   | —   |   | —   |   | —   |   | —   |   | —   |   | —        |   | —    |   | —          |   |
| Long-term  debt:              |   |     |   |     |   |     |   |     |   |     |   |          |   |      |   |            |   |
| U.S.  dollar fixed rate       |   | 0.1      |   | 0.1      |   | 0.2      |   | 0.1      |   | —   |   | —        |   | 0.5       |   | 0.5             |   |
| Average  interest rate        |   | 8        | %      | 8        | %      | 8        | %      | 8        | %      |     |   |          |   |      |   |            |   |
| U.S.  dollar variable rate    |   | 0.2      |   | 0.2      |   | 0.2      |   | 0.2      |   | 0.2      |   | 0.5           |   |      | 1.9    |            |   |  1.9 |   |
| (Prime  plus 1.5%)            |   |     |   |     |   |     |   |     |   |     |   |          |   |      |   |            |   |
|                               |        |          |        |          |        |          |        |          |        |          |        |               |        |           |        |                 |        |  |  |  |

 

The Company tries to usethe most cost-effective means to fund its operating and capital needs.  Fixed or variable debt will be borrowed inboth U.S. dollars and Mexican pesos. The Company borrows Mexican pesos to provide for its working capitalneeds in its Mexican operations.  Tominimize exchange risk associated with the importation of products, the Companywill enter into forward exchange contracts where the functional currency to beused in the transaction is dollars.

 

**Exchange Rate Risk**

 

At June 30, 2003 theCompany did not hold any financial instruments subject to exchange rate risk.

 

The Company is exposed toU.S. dollar-to-Mexican peso currency exchange risk due to revenues and costsdenominated in Mexican pesos associated with its Mexican subsidiary, ABSA.  The Company expects it will continue to beexposed to currency exchange risks in the future.

 

**Commodity Price Risk**

 

The table below providesinformation about the Company’s fresh produce growing crops inventory and fixedprice contracts that are sensitive to changes in commodity prices.  For inventory, the table presents the carryingamount and fair value at December 31, 2002. For the fixed price contracts, the table presents the notional amountsin Boxes, the weighted average contract prices, and the total dollar contractamount by expected maturity dates, the latest of which occurs within one yearfrom the reporting date.  Contractamounts are used to calculate the contractual payments and quantity of freshproduce to be exchanged under futures contracts.

 

**At December 31, 2002**

 
|                                                        |   | **Carrying  Amount** |   | **Fair  Value** |   |
|-------------------------------------------------------------|--------|----------------------|--------|-----------------|--------|
| On-balance  sheet commodity position:                       |   |                 |   |            |   |
| Fresh  produce crops in process inventory ($US in millions) |   | $                    | 1.870  |            | $      | 1.870 |   |
|                                                        |   |                 |   |            |   |
| Fixed  price contracts:                                     |   |                 |   |            |   |
| Contract  volumes  (456,000 boxes)                     |   |                 |   |            |   |
| Weighted  average unit price                                |   | $                    | 20.21  |            | $      | 20.21 |   |
| Contract  amount ($US in millions)                          |   | $                    | 9.216  |            | $      | 9.216 |   |

 

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In order to manage theexposure to commodity price sensitivity associated with fresh produce products,the Company enters into fixed price contracts with certain customers whichguarantee specified volumes for the growing season or the year at a fixedprice.

 

**Item 4.   Controls andProcedures**

 

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

 

Under the supervision andwith the participation of our management, including our principal executiveofficer, we conducted an evaluation of our “disclosure controls and procedures”(as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) within90 days of the filing date of this report. Based on this evaluation, our chiefexecutive officer and chief financial officer concluded that our disclosurecontrols and procedures need improvement. (See Item 4(b) below.)

 

(b)  *Changes in internal controls*

 

In connection with thepreparation of the Company’s consolidated financial statements as of and forthe year ended December 31, 2002, and based on a more recent review in thepreparation of the Company’s consolidated financial statements for the quarterended June 30, 2003, management in conjunction with our independent accountantsidentified certain deficiencies in the Company’s internal control proceduresthat would be deemed to be a material weakness under standards established bythe American Institute of Certified Public Accountants.  The deficiencies relate to (i) the Company’saccounting and financial reporting infrastructure for collecting, analyzing,and consolidating information to prepare the consolidated financial statementsfor the Company (ii) issues associated with timely and consistentreconciliation of the Company’s and its subsidiaries’ bank accounts,inventories, and intercompany accounts, (iii) the timely and completerevelation of material contracts entered into by subsidiaries of the Company,and (iv) the impact of  the resignationsof certain accounting personnel during the past year on the historicalknowledge and understanding of accounting and consolidation information.  These matters have been discussed with ourindependent accountants and with the Audit Committee of the Board of Directorsof the Company.  To address theseweaknesses, the Company plans to (i) develop a new set of consolidating systemsand procedures for financial statement preparation by the end of the thirdquarter of 2003, (ii) reinforce the procedures already in place requiring reconciliationof all accounts and review these reconciliations in conjunction with itsindependent accountants during the quarterly reviews of the Company’sconsolidated financial statements, (iii) hold regular meetings with officers ofsubsidiary companies to update and review all contracts being entered into andreinforce the requirement of the Company to immediately inform the ChiefExecutive Officer and the Chief Financial Officer of such contracts, and (iv)develop a documented, historical data base for financial information byDecember 31, 2003 so the critical accounting and financial information isindependent of the memory of specific individuals developing and preparing suchinformation.

 

**PART II – OTHER INFORMATION**

 

**Item 5.  OtherInformation**

 

**Indemnification Agreements with Officers and Directors**

 

During the second quarterof 2003 the Company entered into indemnification agreements with officers anddirectors of the Company which generally require the company to pay certaincosts and expenses incurred by such individuals in connection withlawsuitsbrought against them in their capacities as officers and directors of theCompany.and its subsidiaries.Given the current regulatory environment and thereduced availability of directors’ and officers’ insurance coverage, theCompany’s board of directors determined that these agreements were necessaryfor  the Company to retain its currentmanagement and to attract additional directors and officers.

 

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**Controlling Stockholder; Conflicts of Interest**

 

Approximately 78.9% ofthe outstanding shares of common stock of the Company are owned of record byAg-Biotech Capital LLC, a wholly-owned subsidiary of Savia.  Therefore, Savia has the power to elect amajority of the Company’s board of directors and to determine the outcome ofany action requiring the approval of the holders of the Company’s common stock.This ownership and management structure will inhibit the taking of any actionby the Company which is not acceptable to the controlling stockholder.

 

Certain of the Company’sdirectors and executive officers are also currently serving as board members orexecutive officers of Savia or companies related to Savia, and it is expectedthat each will continue to do so. Such management interrelationships andintercorporate relationships may lead to possible conflicts of interest.

 

The Company and otherentities that may be deemed to be controlled by or affiliated with Saviasometimes engage in (i) intercorporate transactions such as guarantees,management and expense sharing arrangements, shared fee arrangements, jointventures, partnerships, loans, options, advances of funds on open account andsales, leases and exchanges of assets, including securities issued by both relatedand unrelated parties and (ii) common investment and acquisition strategies,business combinations, reorganizations, recapitalizations, securitiesrepurchases and purchases and sales (and other acquisitions and dispositions)of subsidiaries, divisions or other business units, which transactions haveinvolved both related and unrelated parties. The Company continuouslyconsiders, reviews and evaluates, and understands that Savia and relatedentities consider, review and evaluate, transactions of the type describedabove. Depending upon the business, tax and other objectives then relevant, itis possible that the Company might be a party to one or more of suchtransactions in the future in addition to those currently in force.  In connection with these activities theCompany might consider issuing additional equity securities or incurringadditional indebtedness.  The Company’sacquisition activities may in the future include participation in theacquisition or restructuring activities conducted by other companies that maybe deemed to be controlled by Savia.

 

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

 

(a)  Exhibits

 

3.1                 Certificate  of Incorporation of the Company (filed as an exhibit to the Company’sRegistration Statement  on  Form S-4 (No.  333-09975) andincorporated herein by reference).

 

3.2                 Certificate  of Amendment to the Certificate of Incorporation of the Company effectiveSeptember 26, 1996 (filed as an exhibit to the Company’s quarterly report onForm 10-Q for the quarterly period ended June 30, 1996 and incorporated herein by reference).

 

3.3                 Certificateof Amendment to the Certificate of Incorporation of the Company effective April28, 1999 (filed as an exhibit to the Company’s Quarterly report on Form 10-Qfor the quarterly period ended March 31, 1999 and incorporated herein byreference).

 

3.4                 Bylawsof the Company (filed as an exhibit to the Company’s annual report on Form 10-Kfor the year ended December 31, 1998 and incorporated herein by reference).

 

4.1                 Certificate of Designations for SeriesA Convertible Preferred Stock (filed as an exhibit to the Company’s currentreport on Form 8-K filed on January 12, 2001 and incorporated herein byreference).

 

10.1           Form of IndemnificationAgreement between the Company and its directors and officers (filed as anexhibit to the Company's current report on Form 8-K dated September 5, 2003 andincorporated herein by reference).

 

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10.2           Transfer Agreement ofEquity Participations dated June 13, 2003 among the Company, Agromod, S.A. deC.V., Agrobionova, S.A. de C.V., Tecnología Aplicada en Procesos, S. de R.L. de C.V.,Grupo Metalsa, S.A. de C.V., and Promo-Tow, S. de R.L. de C.V (filed asan exhibit to the Company's current report on Form 8-K dated September 5, 2003and incorporated herein by reference).

 

10.3           Credit and SecurityAgreement among Bionova Produce, Inc., R.B. Packing of California, Inc.,  Bionova Produce of Texas, Inc.(collectively, jointly and severally the Borrower), and Wells Fargo Credit,Inc. dated December 5, 2002 (filed as an exhibit to the Company's currentreport on Form 8-K dated September 5, 2003 and incorporated herein byreference).

 

10.4           First Amendment toCredit and Security Agreement dated June 13, 2003 (filed as an exhibit to theCompany's current report on Form 8-K dated September 5, 2003 and incorporatedherein by reference).

 

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

 

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

 

32.1    Certification of Jose Manuel Garcia pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2    Certification of Arthur H. Finnel pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)  Reports on Form 8-K

 

The Company did not fileany reports on Form 8-K during the second quarter of 2003.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | BIONOVA HOLDING  CORPORATION   |                           |   |
|--------|--------------------------------|--------------------------------|--------|
|   |                           |                           |   |
|   |                           |                           |   |
|   |                           |                           |   |
|   | Date:  September 11, 2003 | By:  /s/ ARTHUR H. FINNEL |   |
|   |                           | Arthur H. Finnel               |   |
|   |                           | Chief Financial  Officer       |   |

 

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**INDEX TO EXHIBITS**

 

 

(a)  Exhibits

 

3.1                 Certificate  of Incorporation of the Company (filed as an exhibit to the Company’sRegistration Statement  on  Form S-4 (No.  333-09975) andincorporated herein by reference).

 

3.2                 Certificate  of Amendment to the Certificate of Incorporation of the Company effectiveSeptember 26,  1996 (filed  as an exhibit to the Company’s quarterlyreport on Form 10-Q for the quarterly period ended June 30, 1996 andincorporated herein by reference).

 

3.3                 Certificateof Amendment to the Certificate of Incorporation of the Company effective April28, 1999 (filed as an exhibit to the Company’s Quarterly report on Form 10-Qfor the quarterly period ended March 31, 1999 and incorporated herein byreference).

 

3.4               Bylawsof the Company (filed as an exhibit to the Company’s annual report on Form 10-Kfor the year ended December 31, 1998 and incorporated herein by reference)

 

4.1               Certificate of Designations for Series AConvertible Preferred Stock (filed as an exhibit to the Company’s currentreport on Form 8-K filed on January 12, 2001 and incorporated herein byreference).

 

10.1           Form of IndemnificationAgreement between the Company and its directors and officers (filed as anexhibit to the Company's current report on Form 8-K dated September 5, 2003 andincorporated herein by reference).

 

10.2           Transfer Agreement ofEquity Participations dated June 13, 2003 among the Company, Agromod, S.A. deC.V., Agrobionova, S.A. de C.V., Tecnología Aplicada en Procesos, S. de R.L. de C.V.,Grupo Metalsa, S.A. de C.V., and Promo-Tow, S. de R.L. de C.V (filed asan exhibit to the Company's current report on Form 8-K dated September 5, 2003and incorporated herein by reference).

 

10.3           Credit and Security Agreementamong Bionova Produce, Inc., R.B. Packing of California, Inc.,  Bionova Produce of Texas, Inc.(collectively, jointly and severally the Borrower), and Wells Fargo Credit,Inc. dated December 5, 2002 (filed as an exhibit to the Company's current reporton Form 8-K dated September 5, 2003 and incorporated herein by reference).

 

10.4           First Amendment toCredit and Security Agreement dated June 13, 2003 (filed as an exhibit to theCompany's current report on Form 8-K dated September 5, 2003 and incorporatedherein by reference).

 

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

 

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

 

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

 

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

 

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