** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| **ý****      ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF   THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                      |
| **FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002**                                                                                           |
|                                                                                                                                      |
| **o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF   THE SECURITIES EXCHANGE ACT OF 1934**                          |
| **For the transition period  from ____________ to ___________**                                                                           |
|                                                                                                                                      |
| **Commission File Number:  0-12177**                                                                                                      |
|                                                                                                                                      |
| **BIONOVA HOLDING CORPORATION**                                                                                                           |
| (Exact Name of Registrant as Specified in its  Charter)                                                                                   |
|                                                                                                                                      |
| **DELAWARE**                                                                                                                              |   | **75-2632242** |
| (State of incorporation)                                                                                                                  |   | (I.R.S. Employer Identification No.) |
|                                                                                                                                      |   |   |
| **9255 Customhouse Plaza, Suite I  San Diego, California**                                                                                |   | **92154** |
| (Address of principal executive offices)                                                                                                  |   | (Zip Code) |
|                                                                                                                                      |   |   |
| **REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (609)  744-8105**                                                              |
|                                                                                                                                      |
| **SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:**                                                                           |
|                                                                                                                                      |
| **COMMON STOCK, PAR VALUE $.01 PER SHARE**                                                                                                |
| (Title of class)                                                                                                                          |
| **SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  NONE**                                                                     |

 

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

Yes  ý  No  o  

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.

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

 

Theaggregate market value of the voting stock and non-voting stock held bynon-affiliates of the Registrant computed by reference to the price at whichthe common equity was last sold on April 8, 2003 was $965,714 (thecharacterization of officers and directors of the Registrant for purposes ofthis computation should not be construed as an admission for any other purposethat any such person is in fact an affiliate of the Registrant).

 

Number of shares of Common Stock outstanding asof April 8, 2003:    22,905,408.

 

 

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**TABLEOF CONTENTS**

** **
| DISCLOSURE  REGARDING FORWARD-LOOKING STATEMENTS                                                           |
|------------------------------------------------------------------------------------------------------------|
| **PART I**                                                                                                 |
| ITEM 1.  BUSINESS                                                                                     |
| Overview                                                                                                   |
| 2002 Year-End Financial  Position                                                                          |
| Near-Term  Financial and Business Outlook                                                                  |
| Background                                                                                                 |
| Farming                                                                                                    |
| Distribution                                                                                               |
| Research  and Development                                                                                  |
| Proprietary  Protection                                                                                    |
| Competition                                                                                                |
| Employees                                                                                                  |
| Controlling  Stockholder; Conflicts of Interest                                                            |
| ITEM  2.  PROPERTIES                                                                                  |
| ITEM 3.  LEGAL PROCEEDINGS                                                                            |
| ITEM  4.  SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS                                        |
| **PART II**                                                                                                |
| ITEM  5.  MARKET FOR REGISTRANT’S COMMON  EQUITY AND RELATED STOCKHOLDER MATTERS                 |
| Equity Compensation Plans                                                                                  |
| ITEM 6.  SELECTED  CONSOLIDATED FINANCIAL DATA                                                        |
| ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS |
| Overview                                                                                                   |
| Recent Accounting  Pronouncements                                                                          |
| Results  of Operations                                                                                     |
| Quarterly Results of  Operations                                                                           |
| Off Balance Sheet  Arrangements                                                                            |
| Capital  Expenditures                                                                                      |
| Liquidity and Capital  Resources                                                                           |
| Contractual  Obligations                                                                                   |
| Critical Accounting  Policies                                                                              |
| Risk Factors                                                                                               |
| ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY  DATA                                                       |
| ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE                             |
| **PART III**                                                                                               |
| ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                                            |
| ITEM 11.   EXECUTIVE COMPENSATION                                                                     |
| ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                             |
| ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS                                       |
| ITEM 14.   CONTROLS AND PROCEDURES                                                                    |
| **PART IV**                                                                                                |
| ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                            |

 

**Transwitch® is a registeredtrademark of DNAP or its subsidiaries. Master’s Touch® and Showcase® are registered trademarks of an affiliateof Bionova Holding.**

 

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**PART I**

 

**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

 

Thisreport on Form 10-K includes ‘‘forward–looking’’ statements within the meaningof Section 27A of the Securities Act of 1933, and Section 21E of the SecuritiesExchange Act of 1934.  All statements,including without limitation statements contained in this “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” otherthan statements of historical facts included in this Form 10-K, includingstatements regarding our financial position, business strategy, prospects,plans and objectives of our management for future operations, and industryconditions, are forward–looking statements. Although we believe that the expectations reflected in theseforward–looking statements are reasonable, we can give you no assurance thatthese expectations will prove to be correct. In addition to important factors described elsewhere in this report, the“Risk Factors” beginning on page 23 sometimes have affected, and in the futurecould affect, our actual results and could cause these results during 2003 andbeyond, to differ materially from those expressed in any forward–lookingstatements made by us or on our behalf. When we use the terms “Bionova,” “we,” “us,” and “our,” these termsrefer to the Bionova Holding Corporation and its subsidiaries.

 

**ITEM 1.  BUSINESS**

 

**Overview**

 

BionovaHolding Corporation, a Delaware corporation (together with its subsidiaries,unless the context requires otherwise, “Bionova Holding” or the “Company”), wasformed in January 1996, and acts as a holding company for (i) Agrobionova, S.A.de C.V., a corporation organized under the laws of the United Mexican States,of which the Company owns 98.6% (“ABSA”),  (ii) InternationalProduce Holding Company, a Delaware corporation, of which the Company owns100%  (“IPHC”), (iii) DNA PlantTechnology Corporation, a Delaware corporation, of which the Company owns 100%(“DNAP”), and (iv) VPP Corporation, a Delaware corporation, of which theCompany owns 100%  (“VPP”).   The Company acquired majority interests inABSA and IPHC on July 1, 1996, by means of a capital contribution from Bionova,S.A. de C.V. (“Bionova Mexico”), and on October 7, 1997, acquired all of theminority interests in IPHC and increased its ownership interest in ABSA to 80%.  On December 28, 2000, Bionova Holdingincreased its ownership interest in ABSA to 98.6% by completing thecapitalization of amounts that had previously been advanced to ABSA.  DNAP became a wholly-owned subsidiary of theCompany on September 26, 1996, as a result of the merger (the “Merger”) ofBionova Acquisition, Inc., a Delaware corporation that was a wholly-ownedsubsidiary of the Company, with and into DNAP. VPP was formed as a wholly-owned subsidiary of the Company on August 18,1997.

 

ABSAengages in the business of growing fresh fruits and vegetables, primarilytomatoes and peppers, in Mexico and exporting fresh produce to the UnitedStates and other markets.  In recentyears ABSA has been concentrating on the production and marketing ofproprietary products, such as its patented vine sweet mini pepper,  that offer the potential to generate highermargins as compared with commodity fresh produce items.  ABSA owns 98.0% of Siembra Cultivo y Cosechadel Noroeste, S.A. de C.V., a corporation organized under the laws of theUnited Mexican States (“Siembra”), which provides labor and administrativeservices to ABSA.  ABSA also owns 98.0%of Comercializadora Premier, S.A. de C.V., a corporation organized under thelaws of the United Mexican States (“Premier Mexico”), which providesadministrative services to the Company. IPHC is a holding company whose subsidiaries are in the business ofmarketing and distributing fresh produce primarily in the United States andCanada, including fruits and vegetables produced by ABSA.  DNAP and VPP are agribusiness biotechnologycompanies, which until the shut down of their research and developmentoperations in June 2002, concentrated on the development of fruits andvegetables and intellectual properties associated with these developmentefforts.  The Company has been, and iscontinuing to work on the licensing and sale of the patents and trademarks heldby DNAP and VPP.

 

Approximately 78.9% ofthe outstanding Common Stock of the Company is indirectly owned by Savia, S.A.de C.V. (“Savia”).  In addition, Saviaindirectly owns 200 shares of Series A Convertible Preferred Stock, which, ifconverted, would result in Savia owning 89.5% of the outstanding Common Stockof the Company.  The owner of record ofall of these shares of common and preferred stock is Ag-Biotech Capital, LLC, awholly-owned 

 

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subsidiary of Savia.  Savia is a Mexican corporation which acts asa holding company for several companies, including Seminis, Inc., the leadingmanufacturer of fruit and vegetable seeds in the world.

 

Thecorporate headquarters of the Company are located at 9255 Customhouse Plaza,Suite I, San Diego, California 92154, and the telephone number is (609)744-8105.

 

**2002 Year-End Financial Position**

 

Bionova Holding’s balancesheet at December 31, 2002 reflected that the Company was in a position oftechnical insolvency, as its current assets of $36.1 million fell far short ofits current liabilities of $122.7 million. The Company’s fresh produce subsidiaries owed $9.8 million to banks, allof which is secured by assets of the fresh produce subsidiaries and guaranteedby Bionova Holding and Savia.  AtDecember 31, 2002 Bionova Holding and its subsidiaries were indebted to Saviaand its subsidiaries (other than Bionova Holding) in a total amount of $96.9million.  Of this total $19.8 millionwas owed by ABSA and is accruing interest at a rate of approximately 9% perannum.  Bionova Holding had debt of$72.2 million to Savia.  The BionovaHolding debt currently is accruing interest at a rate of approximately 12.5%per annum.  Other subsidiaries ofBionova Holding had related party accounts due to Savia and its subsidiariesthat accounted for the remaining balance of $4.9 million.  All of the Bionova Holding debt originallywas due to be paid by December 31, 2002, but was extended by agreement betweenBionova Holding and Savia until December 31, 2003.  The other related party accounts due to Savia and its subsidiarieshave varying maturities, and most of these are due at various times in2003.  At this time, Bionova Holdingdoes not know how this indebtedness will be handled.

 

**Near-Term Financial and BusinessOutlook**

 

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,entered into a new set of credit facilities with Wells Fargo Business Credit,Inc. which run through April 2006. Included in these credit facilities is (i) a “permanent term loan” of$1.75 million, which will be amortized over 10 years,  (ii) a “seasonal term loan” of $1.75 million, althoughonly $1.25 million has been extended at this time, and (iii) a $7 millionrevolving line of credit to support working capital requirements of the freshproduce business.  The outstandingprincipal balance on the seasonal term loan is amortized each year during themonths of January through April, and may then be borrowed again in full on May1 provided no default has occurred.  Allof the credit facilities are secured by all of the real and intangible assetsof the three U.S. distributing companies and are guaranteed by both BionovaHolding and Savia.   Various covenantsand events of default are specified, including an event of default if Saviafails to complete the restructuring of its debt facilities with its banks byMarch 31, 2003.   As of the date of thefiling of this 10-K, the Company believes it is in compliance with all of thecovenants of these facilities with the exception of the Savia covenant.  While Savia believes it now has reached averbal understanding with its creditors and expects to move ahead with thecorresponding documentation to solidify an agreement, the restructuring is notyet complete.  Bionova Holding is indiscussions with Wells Fargo Business Credit in an effort to reach anaccommodation on this issue.

 

Due tothe lengthy negotiation required to obtain these new credit facilities, theCompany’s U.S. distributing companies were forced to scale back their plans tofund certain third party growers for the 2002-2003 winter growing season.  As a result of these cutbacks, ABSA and theU.S. distributing companies had been expecting their revenues for the fourthquarter of 2002 and the first quarter of 2003 to be lower than comparableperiods in prior years.  Further, ABSAconcentrated a much higher proportion of its production on its vine sweet minipepper due to the limited financial resources that were available.  ABSA subsequently experienced yield problemsdue to pest infestation of its mini pepper crop in Todos Santos in lateDecember 2002, causing the harvest to be significantly lower than had beenforecast.  While commodity prices weremuch higher than anticipated for tomatoes and some of the other fresh produceABSA harvested in the months of November 2002 through January 2003 in TodosSantos, these higher prices served to offset only a portion of the lossrealized on the mini pepper crop.  The Culiacan harvest, which will end inApril 2003, is progressing well from a production standpoint, but revenues arerunning somewhat below forecasted.

 

Theseevents have put an ever-increasing strain on the Company’s cash resources andits ability going forward to fund the spring and summer harvests for which itis currently planning.  Management hasbeen and is continuing to address the Company’s financial condition by sellingnon-core assets of the fresh produce business and 

 

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sellingand licensing its intellectual property. Company management also has been entertaining discussions withinvestment bankers and other advisors regarding possible strategic combinationsand other options for the Company to undertake a financial re-structuring.  Completing one or more such transactions isnow deemed essential for the Company to continue as a going concern.

 

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.  The Companyalso must find a solution to the $96.9 million of debt plus the interest whichis accruing that is due to Savia and its subsidiaries during 2003.  While the Company is actively seeking todevelop alternative sources of funding, there can be no assurance the Companywill be able to meet its obligations in 2003 nor secure funds to take it beyondthe 2003 calendar year. Additional financing may not be available to theCompany on favorable terms, if at all. If the Company is unable to obtain financing, or to obtain it onacceptable terms, Bionova Holding may be unable to execute its business plan.

 

Financialinformation relating to each of the Company’s industry segments is set forth inNote 21 to the Company’s consolidated financial statements contained in thisreport.  Financial information relatingto foreign and domestic operations and export sales also is set forth in Note21 to the Company’s consolidated financial statements.

 

**Background**

 

Foroperating and financial reporting purposes, Bionova Holding Corporation(together with its subsidiaries, unless the context requires otherwise,“Bionova Holding” or the “Company”) historically has classified its businessinto three fundamental areas:  (1) ***Farming***, whichconsists principally of interests in 100% Company-owned fresh produceproduction facilities and joint ventures or contract growing arrangements withother growers in Mexico; (2) ***Distribution****,* consisting principally of interests insales and distribution companies in the United States, and Canada; and (3) ***Research and Development (orTechnology),*** which until its shut down in June 2002 consisted ofbusiness units focused on the development of fruits and vegetables andintellectual properties associated with these development efforts.

 

**Farming**

 

ABSAis a leading grower of fresh produce in Mexico, primarily tomatoes and peppers,and, to a lesser extent, cucumbers, grapes and other fruits andvegetables.  Most of ABSA’s farmingoperations are located in the Mexican states of Sinaloa, Sonora and BajaCalifornia.  Advanced technology is usedto ensure consistent quality and yields, including special hybrid varieties,integrated pest management control, and computerized drip irrigation.  ABSA’s produce is distributed in the UnitedStates, Mexico and Canada under the “Master’s Touch” and “Showcase” brands aswell as other labels, depending on produce grades.

 

ABSA’ssupply derives from (i) produce grown on land owned or leased by ABSA, (ii)produce grown by producers with whom ABSA enters into a financing anddistribution contract and (iii) produce grown by producers with whom ABSAenters into both a production association agreement and a distributioncontract.  When ABSA enters into afinancing and distribution contract only, it agrees to provide the growerlimited financial assistance for harvesting and/or packing in exchange forexclusive distribution rights.  WhenABSA enters into a production association agreement, ABSA finances up to 50% ofthe production cost in a co-production contract with the grower.  ABSA provides technical support and agreesto handle the packing and distribution. Net proceeds are shared according to the terms of the association agreementafter ABSA recoups its investment. Historically, ABSA had financed up to 100% of the production cost in ajoint venture contract with the grower. ABSA discontinued this practice entirely in 2001.

 

In2002, approximately 66% of ABSA’s supply came from land owned or leased byABSA.  ABSA owns approximately 4,764acres in Sinaloa, Sonora, Baja California Sur, Michoacan, and several otherstates in Mexico.  ABSA leasesapproximately 1,474 acres in Baja California. During 2002, 34% of production supplied by ABSA was sourced throughproduction associations with growers and through distribution contracts.

 

In2002, approximately 68% of ABSA’s sales were tomatoes, 17% were peppers, 3%were cucumbers, 6% were grapes, 5% were the vine sweet mini pepper, and theremaining 1% was mixed vegetables.  In2001 and 2000, 

 

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respectively,ABSA’s sales were allocated approximately as follows:  tomatoes – 63% and 60%, peppers – 20% and 19%, cucumbers – 7% and5%, and grapes, melons and mixed vegetables – 10% and 16%.

 

In2002, 2001, and 2000, the Farming segment suffered operating losses of $9.2million, $13.4 million, and $12.7 million, respectively.  Of the $13.4 million operating loss in thissegment of the business in 2001, $8.6 million was attributable to the write offof all of the goodwill previously on the balance sheet of ABSA.

 

**Distribution**

 

TheCompany’s marketing and distribution activities are carried out by bothnational and regional distributors.  TheCompany’s national distributors in the United States are Bionova Produce, Inc.,R.B. Packing of California, Inc. and Bionova Produce of Texas, Inc., each ofwhich is a wholly-owned subsidiary of IPHC, and are referred to collectively as“Bionova Produce.”  Interfruver, S.A. deC.V., which until November of 2001 had been majority owned by ABSA until ABSA’sentire interest was sold to the minority owners of Interfruver, had served asthe Company’s distributor in Mexico.  Asa condition of the contract of sale, Interfruver has agreed to continuedistributing produce supplied by ABSA. The Company’s regional distributors are Premier Fruits and VegetablesBBL Inc. in Montreal, Quebec (“Premier”) and Premier Fruits and Vegetables(USA), Inc. in Philadelphia, Pennsylvania.

 

*National Distributors*

 

BionovaProduce, Inc., Bionova Produce of Texas, Inc. and R.B. Packing of California,Inc. collectively had revenues of $65.4 million in 2002.  The majority of these sales were made byBionova Produce, Inc., which is located in Nogales, Arizona, a major point ofentry for Mexican produce into the United States, and the majority of theproduce distributed by Bionova Produce, Inc. is provided by ABSA (includingproduce grown by ABSA and produce grown by growers with whom ABSA enters intoproduction association contracts).  Nosingle customer accounted for more than 10% of Bionova Produce, Inc.’s sales in2002.  In 2002, Bionova Produce, Inc.’ssales were 63% to supermarkets, 25% to wholesalers and 12% to brokers.  Its main selling season is December throughMay.

 

R.B.Packing of California, Inc. is located in San Diego, California and themajority of the produce it distributes is grown in California and the Mexicanstates of Baja California Norte and Baja California Sur.  In 2002, its sales were 46% to supermarkets,35% to wholesalers, and 19% to brokers. Its main selling season is July through November.  Bionova Produce of Texas, Inc. is adistributor located in McAllen, Texas that distributes produce grown in Mexicoand currently is concentrating on the importation and distribution of papaya,melons and hothouse tomatoes.

 

*RegionalDistributors*

 

PremierFruits & Vegetables, BBL Inc. which is an 80%-owned subsidiary of IPHC, hadrevenues of U.S. $52.4 million in 2002. Premier distributes produce throughout eastern Canada, and its saleswere approximately 70% to supermarkets, and the remaining 30% went toindependent retailers, wholesalers, and brokers in 2002.

 

PremierFruits and Vegetables (USA), Inc., an 80%-owned subsidiary of IPHC, was formedin February, 2000 to market tomatoes and other vegetables, including theCompany’s branded line of cherry tomatoes and peppers, in the eastern UnitedStates.  Premier Fruits and Vegetables(USA), Inc. sources its products through and operates under the direction ofPremier in Canada.

 

In 2002 the Distributionsegment (including national and regional distributors) generated an operatingprofit of $1.3 million.  In 2001 and2000 the Distribution segment incurred operating losses of $5.9 million and$2.1 million, respectively. Significantly impacting the operating loss in 2001 was a $5.7 millioncharge for the impairment of all of the goodwill in this segment of thebusiness along with losses recorded on the sales of Tanimura Distributing, Inc.and Interfruver of $0.4 million and $5.0 million, respectively.

 

**Researchand Development**

 

The Company’s researchand development activities had been carried out by DNAP, a wholly ownedsubsidiary acquired in September 1996. The mission of DNAP was to develop andcommercialize genetic crop 

 

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protection solutions forspecialty crops, including the major vegetables and fruits, such as strawberry,grape, banana, and pineapple.

 

In 2002 the Company spentapproximately $1.4 million and $0.6 million on Company and customer-sponsoredresearch and development activities prior to the shut down of these activitiesin June 2002.  Since June 2002, DNAP hasbeen seeking to sell or license its patents and other intellectual property.

 

Forfurther information, see “Note 21 of Item 8. Financial Statements and Supplementary Data,” which sets forth certaininformation with respect to the Company’s segments and operations in differentgeographic areas.

 

**Proprietary Protection**

 

TheCompany uses trade secret protection for certain of IPHC’s distribution companieswhich market produce under the Master’s Touch and Showcase brand names.   ABSA and Bionova Produce, Inc. haveregistered the Master’s Touch name as a trademark in Mexico and the UnitedStates, respectively.  Bionova Mexicohas registered the Master’s Touch name as a trademark in the Benelux countries,the European Community, Canada, Hong Kong, Indonesia, South Korea, Japan,Sweden and the United Kingdom.

# ** **

DNAPholds a U.S. patent and patents in a number of foreign countries on its vinesweet mini pepper.  In 2002 DNAPextended to Seminis a non-exclusive license to produce on a worldwide basis,and an exclusive license to sell the vine sweet mini pepper in Europe and Asia.

 

# **Competition**

 

Thoughthe fresh produce industry in general, and the tomato industry in particular,are characterized by numerous competitors and low barriers to entry at theproduction level, Bionova Holding believes that a small group of participantsdistributes a substantial portion of the tomatoes sold in the United States. Inthe United States, the Company competes directly with the larger tomato andpepper growers in Florida during the winter, and in California in the summerand fall.  Both the Mexican and the U.S.tomato industries are characterized by numerous competitors.  Major Florida growers include Six L’s,DiMare, Pacific Tomatoes Growers and NTGargiulo.  The major growers in California include DiMare, NTGargiulo, LiveOak, Pacific Tomatoes Growers, Ocean Side, Giumarra Brothers, and CentralTomato.

 

# **Employees**

 

The Company and itssubsidiaries have a total of 211 employees.

 

ABSA has noemployees.  Siembra provides labor andadministrative services to ABSA pursuant to a contractual agreement, and ABSApays a fee to Siembra based on Siembra’s costs incurred in connection with providingsuch services.  The number of personsproviding such services through Siembra to ABSA ranges from a minimum of 1,179to a maximum during the Culiacan harvesting season (January-April) ofapproximately 2,098.  The 60 employeesof Siembra that are full-time are not unionized.  All of the other Siembra employees are temporary workers, andthey are represented by a labor union. No other employees in Bionova Holding are represented by a union.

 

Thelabor union contracts for the temporary employees are reviewed on an annualbasis.  Both the union and ABSA mayterminate the contract at any time upon 60 days notice to the other party.

 

# **Controlling Stockholder; Conflicts of Interest**

 

Approximately78.9% of the outstanding shares of common stock of the Company are owned ofrecord by Ag-Biotech Capital, LLC, a wholly-owned subsidiary of Savia.  Savia has the power to elect a majority ofthe Company’s board of directors and to determine the outcome of any actionrequiring the approval of the holders of the Company’s common stock.  This ownership and management structure willinhibit the taking of any action by the Company which is not acceptable to thecontrolling stockholder.

 

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Certainof the Company’s directors and executive officers are also currently serving asboard members or executive officers of Savia or companies related to Savia, andit is expected that each will continue to do so.  Such management interrelationships and intercorporaterelationships may lead to possible conflicts of interest.

 

TheCompany and other entities that may be deemed to be controlled by or affiliatedwith Savia sometimes engage in (i) intercorporate transactions such asguarantees, management and expense sharing arrangements, shared feearrangements, joint ventures, partnerships, loans, options, advances of fundson open account and sales, leases and exchanges of assets, including securitiesissued by both related and unrelated parties and (ii) common investment andacquisition strategies, business combinations, reorganizations,recapitalizations, securities repurchases and purchases and sales (and otheracquisitions and dispositions) of subsidiaries, divisions or other businessunits, which transactions have involved both related and unrelatedparties.  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, taxand other objectives then relevant, it is possible that the Company might be aparty to one or more of such transactions in the future in addition to thosecurrently in force.  In connection withthese activities the Company might consider issuing additional equity securitiesor incurring additional indebtedness. The Company’s acquisition activities may in the future includeparticipation in the acquisition or restructuring activities conducted by othercompanies that may be deemed to be controlled by Savia.

 

**ITEM 2.  PROPERTIES**

 

ABSAowns approximately 4,764 acres in Sinaloa, Sonora, Baja California Sur,Michoacan, and several other states in Mexico. ABSA leases approximately 1,474 acres of land in Baja California.  ABSA currently is trying to sell 146 acresof the land it owns in Sinaloa as this land is no longer considered importantto the ongoing operations of its business. ABSA also is trying to settle a mortgage obligation with a Mexican bankby exchanging the land in Michoacan for a release from this mortgage obligation.  (See Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations – ContractualObligations” below.)   Some of ABSA’sland is the subject of a legal dispute. (See “Legal Proceedings” below.)

 

BionovaProduce, Inc. owns warehouse and office space in Nogales, Arizona.  The other subsidiaries of IPHC lease officeand warehouse space.

 

**ITEM 3.  LEGALPROCEEDINGS**

 

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 ofBionova Holding 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..

 

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DNAP has been named as adefendant in several lawsuits asserting claims against DNAP relating to researchDNAP performed from 1983 through 1994 for Brown & Williamson TobaccoCompany (“B&W”).  In general, thecases allege that DNAP engaged in unfair business practices under Californialaw and/or participated in an alleged conspiracy among cigarette manufacturersto 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 ofoperations.  DNAP denies any wrongdoingor liability in these matters and intends to vigorously contest these lawsuits.

 

ABSA owns one hundredhectares (approximately 247 acres) of rural land in the State of Sinaloa,Mexico, which is the subject of a judicial proceeding pending in Mexicoinitiated by a group of campesinos.  Thepetitioners asserted that a previous owner of the subject land, Miguel AngelSuárez, owned rural land in excess of the maximum that was then allowed by lawand that therefore the land rightfully belonged to them.  On September 25, 1996, the court upheld thepetition and ordered the land turned over to the petitioners.  The court also ruled that the transfer ofthe property to Olga Elena Batiz Esquer on June 2, 1990 was null and void,which would mean that the transfer of the land by Ms. Batiz to ABSA in 1993 wasineffective.  OnOctober 23, 1996, Ms. Batiz, who was a party to the trial courtproceeding, filed a challenge to the judicial determination based on allegedviolations of her constitutional rights and procedural and substantive errorsin the trial court proceedings.  In theFall of 2002, the Court ruled in favor of Ms. Batiz.

 

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.

 

In 2000, ABSA filed alawsuit against Santa Cruz Empacadora, S. de R.L. de C.V., in the Civil Courtfor the First Judicial District of the State of Nuevo Leon, Mexico.  In this proceeding ABSA is seeking toenforce an agreement dated December 31, 1999 in which Santa Cruz Empacadoraexpressly acknowledged its debt to ABSA and granted a security interest in landand equipment to ABSA to secure the debt. ABSA is seeking to recover $10.1 million in principal and interest andto compel Santa Cruz to comply with the terms of the Agreement.

 

**ITEM 4**.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

Notapplicable.

 

9

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** **

**PART II**

 

**ITEM 5****.  MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

### ** **

The Company’s Common Stock currently is quoted onthe American Stock Exchange under the symbol “BVA.”

### ** **

Public trading of the Company’s Common Stockcommenced on September 27, 1996, the date after the Company acquired DNAP andfrom that date through November 3, 1999 was listed on the Nasdaq NationalMarket.  Prior to that date, there wasno public market for the Common Stock. On November 4, 1999 Bionova Holding Corporation’s common stock begantrading on the American Stock Exchange.

 

Thefollowing table sets forth the high and low trading prices per share for theCommon Stock as reported on the American Stock Exchange for the periodsindicated.

 

|                 |   | **HIGH** |      | **LOW** |   |
|----------------------|--------|----------|-----------|---------|--------|
| **2002**             |   |     |      |    |   |
| First Quarter        |   | $        | 0.92      |    | $      | 0.25 |   |
| Second Quarter       |   | 0.84     |      | 0.35    |   |
| Third Quarter        |   | 0.58     |      | 0.26    |   |
| Fourth  Quarter |   | 0.39     |      | 0.10    |   |
|                 |   |     |      |    |   |
| **2001**             |   |     |      |    |   |
| First Quarter        |   | $        | **2.188** |    | $      | **1.100** |   |
| Second Quarter       |   | 1.600    |      | 1.060   |   |
| Third Quarter        |   | 1.400    |      | 0.400   |   |
| Fourth Quarter       |   | 0.750    |      | 0.100   |   |

 

OnApril 8, 2003 the last reported sale price of the Common Stock on the AmericanStock Exchange was $0.20.  As of March18, 2003 there were 1,534 shareholders of record of the Common Stock.

 

TheCompany has never paid cash dividends. Management intends to retain any futureearnings for payment of outstanding indebtedness and for the operation andexpansion of the Company’s business and does not anticipate paying any cashdividends in the foreseeable future.

 

10

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# **EquityCompensation Plans**

 

The following tablerepresents the Company’s equity compensation plans, including both stockholderapproved plans and stockholder plans not approved by shareholders. 

 
| **Plan Category**                                             |   | **Number of  Securities  to be Issued Upon  Exercise of  Outstanding Options,  Warrants and Rights  (a)** |   | **Weighted-average  Exercise Price of  Outstanding Options,  Warrants and Rights  (b)** |   | **Number of  Securities  Remaining Available for   Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected in  Column (a))  (c)** |      |
|---------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| Equity  Compensation Plans Approved   by Security Holders     |   | 141,000                                                                                                   |   | $                                                                                       | 6.68   |                                                                                                                                                         | 1,872,200 |   |
|                                                          |   |                                                                                                      |   |                                                                                    |   |                                                                                                                                                         |      |
| Equity  Compensation Plans Not Approved   by Security Holders |   | None                                                                                                      |   | —                                                                                  |   | None                                                                                                                                                         |      |
|                                                               |        |                                                                                                           |        |                                                                                         |        |                                                                                                                                                              |           |  |

 

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**ITEM 6****.  SELECTEDCONSOLIDATED FINANCIAL DATA**

 

Theselected consolidated financial data set forth below for each of the years inthe five year period ended December 31, 2002, are derived from the auditedconsolidated financial statements of Bionova Holding.  The consolidated balance sheets as of December 31, 2002 and 2001,and the consolidated statements of operations for the three years in the periodended December 31, 2002, are derived from the audited consolidated financialstatements and are included in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K, and theselected consolidated financial information set forth below should be read inconjunction with such financial statements and related notes and with “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

**Income and expense items in thefollowing consolidated statement of operations data reflect only those fromcontinuing operations for the years ended December 31, 2002, 2001, 2000, 1999,and 1998. **The total assets in the consolidated balance sheetdata exclude the net assets associated with the discontinued operations of theresearch and development segment for 2002 and 2001 only.

 

Thousandsof U.S. Dollars

(exceptper share amounts)

 

**CONSOLIDATED STATEMENT OF OPERATIONS DATA**

** **
|                                                                                    |   | **Year Ending December 31,** |    |
|-----------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                    |   | **2002**                     |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                                    |   |                         |    |   |   |   |   |   |   |   |   |
| Total revenues                                                                          |   | $                            | 129,445 |   | $ | 204,471 |   | $ | 222,789 |   | $ | 236,827 |   | $ | 254,062 |   |
| Impairment of assets                                                                    |   | —                       |    | (14,328 | ) | — |   | — |   | — |   |
| Loss from continuing  operations before discontinued operations and extraordinary items |   | (17,670                      | )       | (31,090 | ) | (34,192 | ) | (21,376 | ) | (5,025 | ) |
| Loss from operations  of research and development business segment                      |   | (1,942                       | )       | (24,371 | ) | (7,056 | ) | (5,702 | ) | (2,403 | ) |
| Interest expense, net                                                                   |   | (7,471                       | )       | (7,778 | ) | (15,371 | ) | (14,183 | ) | (6,697 | ) |
| Extraordinary gain due  to interest reversal                                            |   | —                       |    | — |   | 9,852 |   | — |   | — |   |
| Extraordinary loss on  retirement of floating rate notes                                |   | —                       |    | — |   | (1,917 | ) | — |   | — |   |
| Net loss                                                                                |   | (20,415                      | )       | (56,594 | ) | (32,411 | ) | (38,649 | ) | (15,605 | ) |
| Net loss per common  share - basic and diluted                                          |   | $                            | (0.87   | ) | $ | (2.40 | ) | $ | (1.37 | ) | $ | (1.64 | ) | $ | (0.80 | ) |
| Weighted average  number of common shares outstanding                                   |   | 23,480,408                   |    | 23,588,031 |   | 23,588,031 |   | 23,588,031 |   | 23,588,031 |   |

 

**CONSOLIDATED BALANCE SHEET DATA**

 
|                                 |   | **December 31,** |   |
|--------------------------------------|--------|------------------|--------|
|                                 |   | **2002**         |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                 |   |             |   |   |   |   |   |   |   |   |   |
| Total assets                         |   | $                | 80,750 |   | $ | 96,194 |   | $ | 155,307 |   | $ | 161,953 |   | $ | 167,686 |   |
| Short-term bank loans                |   | 9,818            |   | 9,550 |   | 21,878 |   | 25,903 |   | 81,309 |   |
| Long-term debt                       |   | —           |   | 558 |   | 203 |   | 100,252 |   | 4,225 |   |
| Stockholders’ equity  (deficit) |   | (42,332          | )      | (21,820 | ) | 35,188 |   | 3,384 |   | 42,117 |   |
|                                      |        |                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

12

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**ITEM 7****.  MANAGEMENT ́SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND****RESULTS OFOPERATIONS**

 

Thefollowing discussion should be read in conjunction with the selectedconsolidated financial information of Bionova Holding and the consolidatedfinancial statements and related notes of Bionova Holding included elsewhere in“Item 8. Financial Statements and Supplementary Data” in this Form 10-K.  

 

**OVER****VIEW**

 

Foroperating and financial reporting purposes, Bionova Holding Corporation(together with its subsidiaries, unless the context requires otherwise,“Bionova Holding” or the “Company”) historically has classified its businessinto three fundamental areas:  (1) ***Farming***, whichconsists principally of interests in 100% Company-owned fresh produceproduction facilities and joint ventures or contract growing arrangements withother growers in Mexico; (2) ***Distribution****,* consisting principally of interests insales and distribution companies in the United States, and Canada; and (3) ***Research and Development (orTechnology),*** which until its shut down in June 2002 consisted ofbusiness units focused on the development of fruits and vegetables andintellectual properties associated with these development efforts.  Therefore, the Research and Developmentsegment has been reclassified as discontinued operations.  The Farming and Distribution segmentscollectively are referred to as the Fresh Produce Business.

 

**RecentAccounting Pronouncements**

 

InApril 2002, the Financial Accounting Standards Board (‘‘FASB’’) issuedStatement of Financial Accounting Standards (“SFAS”) No. 145, ‘‘Rescission ofFASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections’’ which eliminates inconsistencies between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions.  SFAS No.145 also amends other existing authoritative pronouncements to make varioustechnical corrections, clarify meanings, or describe their applicability underchanged conditions.  The provisions ofSFAS No. 145 are effective for fiscal years beginning after May 15, 2002 andfor transactions occurring after May 15, 2002. The Company does not expect adoption of SFAS No. 145 to have a materialimpact on its financial statements.

 

InJune 2002, the FASB issued SFAS No. 146, ‘‘Accounting for Exit or DisposalActivities’’ which addresses the recognition, measurement, and reporting ofcosts that are associated with exit and disposal activities, includingrestructuring activities that are currently accounted for pursuant to theguidance that the EITF has set forth in EITF Issue No. 94-3, ‘‘LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).’’  SFAS No. 146 will be effective for exit ordisposal activities that are initiated after December 31, 2002.  The Company does not expect adoption of SFASNo. 146 to have a material impact on its financial statements.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation, Transition and Disclosure.”  SFAS No. 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect ofusing the fair value method of accounting for stock-based employee compensationbe displayed more prominently and in a tabular format.  Additionally, SFAS No. 148 requiresdisclosure of the pro forma effect in interim financial statements.  The transition and annual disclosurerequirements of SFAS No. 148 are effective for fiscal years ended afterDecember 15, 2002.  The interim disclosure requirements are effective forinterim periods beginning after December 15, 2002.  The adoption of thisstandard had no material impact on the Company’s financial statements.

 

In November 2002, the FASB issued FASB InterpretationNo. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others.”  FIN 45 requires that a liability be recordedin the guarantor’s balance sheet upon issuance of a guarantee.  In addition, FIN 45 requires disclosuresabout the guarantees that an entity has issued, including a reconciliation ofchanges in the entity’s product warranty liabilities.  The initialrecognition and initial measurement provisions of FIN 45 are applicable on aprospective basis to guarantees issued or modified after December 31, 2002,irrespective of the guarantor’s fiscal year-end.  The disclosurerequirements of FIN 45 are effective for financial statements of interim

 

13

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or annual periods ending after December 15, 2002. The adoption of this standard had no material impact on the Company’sfinancial statements.

 

InJanuary 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”),“Consolidation of Variable Interest Entities, an Interpretation of ARB No.51.”  FIN 46 requires certain variableinterest entities to be consolidated by the primary beneficiary of the entityif the equity investors in the entity do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties.  FIN 46 iseffective immediately for all new variable interest entities created oracquired after January 31, 2003.  Forvariable interest entities created or acquired prior to February 1, 2003, theprovisions of FIN 46 must be applied for the first interim or annual periodbeginning after June 15, 2003.  TheCompany is currently evaluating the impact that the adoption of this standardwill have on its financial statements.

 

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus onIssue No. 00-21, “Revenue Arrangements with Multiple Deliverables.”  EITF Issue No. 00-21 provides guidance onhow to account for arrangements that involve the delivery or performance ofmultiple products, services and/or rights to use assets. The provisions of EITFIssue No. 00-21 will apply to revenue arrangements entered into in fiscalperiods beginning after June 15, 2003.  The Company believes that theadoption of this standard will have no material impact on its financialstatements.

 

**Impairment of Goodwill andIntangible Assets**

 

InDecember 2001, in connection with its ongoing review of business operations,the Company conducted a strategic and financial examination of its businesssegments.  This examination triggered animpairment review of certain long-lived assets, including goodwill, patents andtrademarks.  The Company calculated thepresent value of expected cash flows of its fresh produce and technologybusinesses to determine the fair value of those assets.  Accordingly, the Company recorded charges of$21.9 million and $8.0 million for the impairment of its goodwill and patentsand trademarks, respectively, related to the fresh produce and technologybusinesses.  The Company’s technologyassets became impaired because of (i) the decision to terminate VPP’s breedingprogram and disposal of the related assets and (ii) the change in DNAP’stechnology strategy from a focus on quality trait improvements and thecommercialization of fruits and vegetables using these traits to a technologyprogram focused on disease and nematode resistance traits with value derivingfrom the sale or licensing of these traits. The Company’s fresh produce assets were determined to have becomeimpaired based on the future outlook for cash flows of the fresh producebusiness taking into account its failure to generate a positive annual cashflow in each of the past six years and an analysis of the reasons underlyingthis performance failure.  The variouscomponents of these impairment charges are broken out by business segment inthe discussion which follows.

 

**RESULTS OF OPERATIONS**

** **

**Year Ended December 31, 2002Compared to Year Ended December 31, 2001**

 

Consolidatedtotal revenues declined to $129.4 million for the year ended December 31, 2002from $204.5 million in 2001, consolidated gross profit (sales less cost ofsales) declined from $20.2 million in 2001 to $5.5 million in 2002, and theCompany’s consolidated operating loss from continuing operations declined from$21.9 million in 2001 to $10.1 million in 2002.

 

FARMINGsegment revenues, the majority of which are eliminated in consolidation, forthe year ended December 31, 2002 were $53.4 million as compared with $57.5million during 2001.  Farming segmentgross profit deteriorated from a profit of $0.4 million in 2001 to a loss of$5.2 million in 2002.  The operatingloss in this segment decreased from $13.4 million in 2001 to $9.2 million in2002.  For the first three quarters of2002 as compared with 2001 production volumes had increased by 3.8%, averageselling prices for the Company’s fresh produce declined by 6.3%, but overallthe farming segment’s revenues were only $1.3 million lower than the prioryear.  In the fourth quarter, due to thecash constraints imposed because of a reduction in bank financing during themonths of October and November, the farming segment concentrated a verysignificant proportion of its available resources on the vine sweet minipepper. ABSA subsequently experienced production problems caused by pestinfestation which caused it to significantly curtail the harvest of thiscrop.  And, while the prices of othercommodity products were very good during the fourth quarter, the smallerquantities harvested in this quarter of 2002 were

 

14

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significantlylower than the fourth quarter of 2001.Consequently, margin losses wereencountered due to these factors along with write offs of third party growerpayments because the financing was not available to fulfill ABSA’s commitmentsto continue to fund production and harvesting requirements.The effect of themargin deterioration from 2001 to 2002 was more than offset in the comparisonof the operating loss for 2001 versus 2002 due to the $8.6 million write off ofthe goodwill of the farming segment in 2001.

 

Revenuesof the DISTRIBUTION segment declined by $78.7 million to $119.4 million foryear ended December 31, 2002 from $198.1 million for the year ended December31, 2001.  This decline was entirelyattributable to the divestiture of Interfruver de Mexico, S.A. de C.V. inNovember 2001, which accounted for $78.8 million of sales for the ten monthsthat it was a part of the Company in 2001. (Interfruver still serves as theCompany’s distributor of fresh produce harvested by ABSA, but sales toInterfruver are now recorded as revenues from unaffiliated customers of theFarming segment).  Revenues of the U.S.distribution companies decreased by $7.5 million, or 10.5%, for the year endedDecember 31, 2002 as compared with the year ended December 31, 2001.  This decline was due largely to asignificant contraction in volumes, particularly in the fourth quarter of 2002as compared with 2001.  This contractionin fourth quarter volumes was a consequence of the delay in obtaining new credit facilitiesto support ABSA’s growing activities and those of third party growers for the2002-2003 winter growing season. Revenues of Premier Fruits & Vegetables, BBL Inc. in Canadaincreased by $9.3 million, or 21.5%. Gross profit relating to the Distribution Segment decreased from $21.7million for the ended December 31, 2001 to $10.7 million for the year endedDecember 31, 2002 due to (i), the impact of the divestiture of Interfruver(gross profit for 2001 was $6.1 million); (ii) a decrease of $6.2 million inthe gross profit generated by the U.S. distribution companies; and (iii) offsetin part by a $1.3 million increase in the gross profit of Premier Fruits &Vegetables, BBL Inc. in Canada.  Sellingand administrative expenses relating to the Distribution segment decreased by$4.2 million for the year ended December 31, 2002  as compared with the year ended December 31, 2001.  The decrease was a result of (i) thedivestiture of Interfruver (selling and administrative expenses in 2001 were$3.8 million) and (ii) a reduction of $0.4 million in expenses, mainly relatedto salaries.  The Distribution segmentgenerated an operating profit of $1.3 million in 2002 as compared with anoperating loss of $5.9 million in 2001. The operating profit and loss comparisons from 2001 to 2002 were verymuch influenced by the $5.7 million charge recorded to write off all of thegoodwill in this segment of the business and the $5.4 million of lossesincurred on the sale of the TDI and Interfruver businesses in 2001.

 

Revenuesof the discontinued operations of the RESEARCH AND DEVELOPMENT segment declinedfrom $3.1 million for the year ended December 31, 2001 to $1.9 million for theyear ended December 31, 2002, which was due to the shut down of the operationsin June 2002.  The operating loss of theresearch and development segment declined from $23.4 million for the year endedDecember 31, 2001 to $1.8 million for the year ended December 31, 2002.  The great majority of the reduction in theoperating loss in 2002 as compared with 2001 was a consequence of the writeoffs of goodwill and patents and trademarks in 2001.  The write off of goodwill in 2001 amounted to $7.6 million atDNAP.  Losses on the sale of strawberryassets in 2001 associated with the discontinuation of VPP’s breeding businesstotaled $3.4 million, and impairment losses of the patents and trademarks ofDNAP in 2001 resulted in a write off of $8.0 million.  The research and development segment did not incur any impairmentlosses or losses associated with the sale of assets in 2002.  Other factors contributing to the loweroperating loss in 2002 as compared with 2001 were staffing reductionsundertaken during the second quarter of 2001 in an effort to conserve cash, thesubsequent shut down of the Company’s research and development operations inJune 2002, the reduction in amortization expense associated with write offs andimpairment charges recorded for goodwill and patents and trademarks in 2001,and a gain on sale of land in Brentwood, California.

 

Interestexpense declined from $9.8 million in 2001 to $8.8 million in 2002 due to alower average level of bank debt outstanding and lower interest rates in 2002as compared with 2001.  Interest incomedeclined from $2.0 million in 2002 to $1.4 million in 2001 due to a loweraverage level of grower advances outstanding and lower interest rates in 2002 ascompared with 2001.

 

Dueto a relatively stronger Mexican peso and Canadian dollar, the Companyexperienced a net foreign exchange loss of $0.2 million in 2002 as compared with a net foreignexchange loss of $0.5 million in 2001. Current monetary assets are translated at year-end exchange rates whilenon-monetary assets are translated at historical rates.

 

For2002, the share of profits in subsidiaries allocable to minority interests was$0.2 million as compared with $0.5 million that was the share of profits insubsidiaries allocable to minority interests in 2001.  These

 

15

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allocationsof profits and losses for the years of 2002 and 2001, respectively, wereconsistent with the minority positions held across the operating subsidiariesof the Company.

 

**Year Ended December 31, 2001Compared to Year Ended December 31, 2000**

 

Consolidatedtotal revenues declined to $204.5 million for the year ended December 31, 2001from $222.8 million in 2000, consolidated gross profit (sales less cost ofsales) increased from $9.7 million in 2000 to $20.2 million in 2001, and theCompany’s consolidated operating loss from continuing operations increased from$19.0 million in 2000 to $21.9 million in 2001.

 

FARMINGsegment revenues, the majority of which are eliminated in consolidation, forthe year ended December 31, 2001 were $57.5 million as compared with $41.4million during 2000.  Farming segmentgross profit improved from a loss of $3.1 million in 2000 to a profit of $0.4 millionin 2001.  The operating loss in thissegment increased from $12.7 million in 2000 to $13.4 million in 2001.  Improved weather and significantly bettermarket pricing were the most important factors in the improved production andsales from Culiacan during the first quarter of 2001 as compared with the samequarter in 2000.  Production volumes inthis region increased by 18%, and sales improved by 36%, or $8.5 million.  In conjunction with the Company’s strategy tobetter manage its risk of production, ABSA significantly curtailed its own productionof “commodity” products in favor of establishing production contracts withthird party growers who then shipped their product to be packaged by ABSA anddistributed by the Company’s distribution operations.  ABSA’s production on its own land is now concentrated on highervalue products (e.g., mini-sweet peppers and full flavor tomatoes) for whichthe Company holds proprietary rights or has some other form of competitiveadvantage in production.  Other significantcomponents of the overall improvement in ABSA’s sales were the addition of 494acres of production from Obregon, which accounted for $2.8 million inincremental sales between 2000 and 2001, and incremental grape sales of $2.6million, which had been down significantly in 2000 due to an onslaught ofChilean grapes exported to the U.S. markets during that year.

 

Theimprovement in gross margin stemmed directly from the improved sales.  And, the increase in ABSA’s operating lossfrom 2000 to 2001 was a consequence of the $8.6 million write off of goodwilltaken at year-end 2001.  This goodwillemanated from Bionova Mexico’s purchase of 50.004% of ABSA in 1993 (which wascontributed to Bionova Holding in 1996) and increased when Bionova Holding,together with Savia, bought out all of the remaining minority interests in ABSAthat had been held by the Batiz family in 1997.

 

Revenuesof the DISTRIBUTION segment declined from $222.6 million for the year endedDecember 31, 2000 to $198.1 million for the year ended December 31, 2001.Distribution segment gross profit increased 52% from $12.4 million in 2000 to$18.8 million in 2001, while the operating loss for this segment increased from$2.1 million in 2000 to $5.9 million in 2001. The revenue decline was a consequence of the sale of Taminura DistributingInc. in February 2001 which had sales of $30.4 million in 2000 (none wererecorded for TDI in 2001 due to the provisions of the contract of sale) andInterfruver, in November 2001, which sold $22.2 million more on behalf of theCompany in 2000 as compared with the January through October period of2001.  These declines were offset inpart by $19.6 million in higher revenues of the U.S. and Canadian distributioncompanies in 2001 as compared with 2000, which was attributable to 13% higheraverage prices for the Company’s fresh produce products in these markets in2001.  The increase in the operatingloss from 2000 to 2001 was directly attributable to the $5.7 million chargerecorded to write off all of the goodwill in this segment of the business and$5.4 million of losses incurred on the sale of the TDI and Interfruverbusinesses in 2001.  These charges wereoffset in part by a significantly reduced level of write offs of growerfinanced production, higher volumes, and the better pricing environment in 2001as compared with 2000.

 

Revenuesof the discontinued operations of the RESEARCH AND DEVELOPMENT segment declinedfrom $3.5 million for the year ended December 31, 2000 to $3.1 million for theyear ended December 31, 2001, and the operating loss in this segment increasedfrom $7.1 million in 2000 to $23.4 million in 2001.  The decline in revenues was attributable to a lower level ofactivity performed with Seminis. Seminis contract revenues on a monthly basis were reduced by 45% inconjunction with the staff reductions undertaken during the second quarter of2001 to conserve cash resources and refocus the technology group on morepromising long-term technology opportunities. Research work on behalf of Seminis was charged at direct costs ofscientists working on the projects plus an allocation of overhead, andaccordingly, generated very little profit for DNAP.  This 45% reduction in the revenues arising from the Seminiscontract was expected to continue through 2002, such that full year 2002revenues were expected to be lower than 2001. The staffing reductions resulted in a positive $1.2 million impact onthe bottom

 

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line,as the $0.4 million restructuring expenses generated a $1.6 million savings incompensation-related costs in 2001 as compared with 2000.  The higher operating loss in 2001 ascompared with 2000 was a consequence of the write offs of goodwill and patentsand trademarks in 2001.  The write offof goodwill amounted to $7.6 million at DNAP, losses on the sale of strawberryassets associated with the discontinuation of VPP’s breeding business totaled$3.4 million, and impairment losses of the patents and trademarks of DNAPresulted in a write off of $8.0 million.

 

Interestexpense declined from $17.5 million in 2000 to $9.8 million in 2001 due to thelower average level of debt outstanding in 2001 as compared with 2000.  The lower level of debt came about due tothe capitalization of $63.7 million of the Company’s debt completed on December28, 2000.

 

Dueto a decline in the current monetary assets (which excludes inventories) and anincrease in non-monetary assets of the Company’s foreign subsidiaries in 2001,the Company experienced a net foreign exchange loss of $0.5 million in 2001 ascompared with a net foreign exchange gain of $0.4 million in 2000.  Current monetary assets are translated atyear-end exchange rates while non-monetary assets are translated at historicalrates.  While both the Mexican peso andCanadian dollar strengthened in 2001, the decline in monetary assets and theincrease in non- monetary assets more than offset the improvement in theexchange rates of these foreign currencies.

 

For2001, the share of profits in subsidiaries allocable to minority interests was$0.5 million as compared with $1.5 million that was the share of losses insubsidiaries allocable to minority interests in 2000.  These allocations of profits and losses for the years of 2001 and2000, respectively, were consistent with the minority positions held across theoperating subsidiaries of the Company.

** **

**Quarterly Results of Operations**

** **

Thefollowing table sets forth selected items from Bionova Holding's consolidatedstatements of operations for each of the four quarters ended December 31, 2002and each of the four quarters ended December 31, 2001.  This data has been derived from unauditedconsolidated financial statements that, in the opinion of management, includeall adjustments, consisting only of normal recurring adjustments necessary fora fair presentation of such information when read in conjunction with theaudited consolidated financial statements and notes thereto appearing elsewherein this Form 10-K.  The operatingresults for any quarter are not necessarily indicative of results for anyfuture period. 

** **
|                         |   | **Thousands of U. S. Dollars  (except per share amounts)** |       |
|------------------------------|--------|------------------------------------------------------------|------------|
|                         |   | **Dec. 31, 2002**                                          |       | **Sep. 30, 2002** |   | **Jun. 30,****2002** |   | **Mar. 31,********2002** |   | **Dec. 31, 2001** |   | **Sep. 30, 2001** |   | **Jun. 30,****2001** |   | **Mar. 31,********2001** |   |
|                         |   |                                                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Sales                        |   | 23,414                                                     |       | 17,697 |   | 42,447 |   | 45,887 |   | 43,593 |   | 41,507 |   | 61,739 |   | 65,398 |   |
| Gross  profit (loss)         |   | (245                                                       | )          | (508 | ) | (514 | ) | 6,813 |   | 12,401 |   | 3,039 |   | 3,365 |   | 9,147 |   |
| Net  profit (loss)           |   | (5,394                                                     | )          | (8,196 | ) | (7,602 | ) | 777 |   | (44,703 | ) | (6,489 | ) | (6,158 | ) | 756 |   |
| Net  profit (loss) per share |   | (0.23                                                      | )          | (0.35 | ) | (0.32 | ) | 0.03 |   | (1.89 | ) | (0.28 | ) | (0.26 | ) | 0.03 |   |

 

**OffBalance Sheet Arrangements**

 

TheCompany does not currently have any off-balance sheet arrangements that have orare reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat is material to investors.

** **

**CapitalExpenditures**

** **

During 2002, the Companymade capital investments of $4.1 million in property, plant and equipment, ofwhich $3.7 million was spent in the FARMING segment of the Company’s business,$0.3 million in the DISTRIBUTION segment, and $0.1 million in RESEARCH ANDDEVELOPMENT.  Major investment projects

 

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in 2002 included (i) thepurchase of stakes used to grow ABSA’s tomato and pepper products, (ii) andconstruction of growing facilities in Todo Santos, and (iii) the acquisition of$2.3 million of agricultural land from Libra, SA de C.V. (see "ContractualObligations" below).

 

**Liquidityand Capital Resources**

** **

For the year endedDecember 31, 2002, $2.6 million of cash was provided by operatingactivities.  The most significant itemscontributing to this cash generation were the net loss for the Company of $20.4million, which was more than offset by (i) a $12.0 million reduction inaccounts receivable and advances to growers, (ii) the continuing deferral ofthe interest on the Savia debt of $9.0 million, and (iii) the $3.1 million addback of depreciation.

 

For the year endedDecember 31, 2002, the Company used $1.1 million in investing activities, whichincluded the $4.1 million spent on property, plant, and equipment, as discussedabove.  The Company received $3.0million from the sales of assets in 2002, of which $2.5 million was generatedfrom the sale of land in Sinaloa, Mexico and $0.4 million was generated fromthe sale of land in California owned by DNAP.

 

Net cash provided byfinancing activities in 2002 totaled $1.6 million.  As discussed below, the Company’s fresh produce subsidiariesrefinanced the bank debt that supports the ongoing operations of thebusiness.  Accounts due to relatedparties declined by $1.3 million, excluding the $9.0 million of interest that wasdeferred on the Savia debt.  Payments toSavia and its subsidiaries of $3.3 million was offset in part by a $2.0 millionadvance from  Seminis, Inc. on futureroyalty payments related to a non-exclusive right to sell DNAP’s patented sweetmini peppers in Europe and Asia (see Item 8. Financial Statements andSupplementary Data, Note 19 — Balances and Transactions with Related Parties).

 

On December 23, 2002,IPHC entered into an agreement with E. I. du Pont de Nemours and Company andits wholly owned subsidiary, DuPont Chemical and Energy Operations, Inc.(collectively referred to as “Dupont”), to buy all of the 575,000 BionovaHolding shares held by these two companies. The price IPHC agreed to pay to Dupont was $0.05 per share, or a totalof $28,750.  Dupont was provided with apromissory note in exchange for its shares on December 23, 2002.  This note was paid in full on January 14,2003.

 

*BankDebt*.  In December2002, Bionova Produce, Inc., Bionova Produce of Texas, Inc. and R.B. Packing ofCalifornia, Inc., the Company’s major distributors of fresh produce in theUnited States, signed agreements for a new set of credit facilities with WellsFargo Business Credit, Inc. which run through April 2006.  There are three separate, but related loancomponents associated with these credit facilities.  First, Bionova Produce, Inc. was extended a “permanent term loan”of $1.75 million, which will be amortized over 10 years.  Interest is charged at the Wells Fargo prime rateof interest plus 1.5%, and interest and principal amortization payments aremade on a monthly basis.  The secondcomponent is a “seasonal term loan” of $1.75 million, although only $1.25million will be extended at this time. Interest is charged at the Wells Fargo prime rate of interest plus 1.5%,and interest payments are made on a monthly basis.  The principal on this seasonal term loan is amortized each yearduring the months of January through April, and may then be borrowed again infull on May 1 provided no default has occurred.  The third component is a $7 million revolving line of credit tosupport working capital requirements of the fresh produce business.  The revolving line of credit must be paiddown to a maximum of $1.5 million for a 30 day period between July 1 andSeptember 30 each year.  Interest onthis revolving line of credit is charged at the Wells Fargo prime rate ofinterest plus 1.0%.  All threecomponents of the credit facilities are secured by all of the real andintangible assets of the three U.S. distributing companies and are guaranteedby both Bionova Holding and its parent company, Savia.The key covenantsassociated with these credit facilities are that the three distributingcompanies as a group must maintain a minimum net worth of $8.75 million, a debtservice coverage ratio of at least 1.25 to 1, achieve minimum levels ofquarterly earnings before taxes to be agreed between the Company and WellsFargo 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 may permit Wells Fargo Business Credit,Inc. to declare an event of default if Savia fails to complete therestructuring of its debt facilities with its banks.  As of the date of the filing of this 10-K, the Company believesit is in compliance with all of the covenants of these facilities with theexception of the Savia covenant.  WhileSavia believes it now has reached a verbal understanding with its creditors andexpects to move ahead with the corresponding documentation to solidify anagreement, the restructuring is not yet complete.  Bionova Holding is in discussions with Wells Fargo BusinessCredit in an effort to reach an accommodation on this issue.  Accordingly, since the Company hastechnically incurred an event of default, the long-term component of the debthas been reclassified as a component of the short-term bank loans.

 

18

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In addition to these credit facilities Bionova Produce,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.  As Bionova Produce is in theprocess of trying to sell this airplane, this asset has been classified asbeing held for sale and the debt has been reclassified as a component of theshort-term banks loans.

 

*Debtto Savia*.  At December31, 2002 Bionova Holding and its subsidiaries were indebted to Savia and itssubsidiaries (other than Bionova Holding) in a total amount of $96.9million.  Of this total $19.8 millionwas owed by ABSA and is accruing interest at a rate of approximately 9% perannum.  Bionova Holding had debt of$72.2 million to Savia.  The BionovaHolding debt currently is accruing interest at a rate of approximately 12.5%per annum.  Other subsidiaries ofBionova Holding had related party accounts due to Savia and its subsidiaries thataccounted for the remaining balance of $4.9 million.  All of the Bionova Holding debt originally was due to be paid byDecember 31, 2002, but was extended by agreement between Bionova Holding andSavia until December 31, 2003.  Theother related party accounts due to Savia and its subsidiaries have varyingmaturities, and most of these are due at various times in 2003.  At this time, Bionova Holding does not knowhow this indebtedness will be handled.

 

Due to the lengthy negotiation required to obtainnew credit facilities from Wells Fargo, the Company’s U.S. distributingcompanies were forced to scale back their plans to fund certain third partygrowers for the 2002-2003 winter growing season.  As a result of these cutbacks, ABSA and the U.S. distributingcompanies had been expecting their revenues for the fourth quarter of 2002 andthe first quarter of 2003 to be lower than comparable periods in prioryears.  Further, ABSA concentrated amuch higher proportion of its production on its vine sweet mini pepper due tothe limited financial resources that were available.  ABSA subsequently experienced yield problems due to pestinfestation of its mini pepper crop in Todos Santos in late December 2002,causing the harvest to be significantly lower than had been forecasted.  While commodity prices were much higher thananticipated for tomatoes and some of the other fresh produce ABSA harvested inthe months of November 2002 through January 2003 in Todos Santos, these higherprices served to offset only a portion of the loss realized on the mini peppercrop.  The Culiacan harvest, which will end in April 2003, isprogressing well from a production standpoint, but revenues are runningsomewhat below forecast.

 

Theseevents have put an ever-increasing strain on the Company’s cash resources andits ability going forward to fund the spring and summer harvests for which itis currently planning.  Management hasbeen and is continuing to address the Company’s financial condition by sellingnon-core assets of the fresh produce business and selling and licensing itsintellectual property.  Companymanagement also has been entertaining discussions with investment bankers andother advisors regarding possible strategic combinations and other optionsfor  the Company to undertake afinancial re-structuring.  Completingone or more such transactions is now deemed essential for the Company tocontinue as a going concern.

 

There can be no assurancethat these actions will result in sufficient working capital to significantlyimprove the Company’s current financial position or its results ofoperations.  The Company also must finda solution to the $96.9 million of debt plus the interest which is accruingthat is due to Savia and its subsidiaries during 2003.  While the Company is actively seeking todevelop alternative sources of funding, there can be no assurance the Companywill be able to meet its obligations in 2003 nor secure funds to take it beyondthe 2003 calendar year. Additional financing may not be available to the Companyon favorable terms, if at all.  If theCompany is unable to obtain financing, or to obtain it on acceptable terms,Bionova Holding may be unable to execute its business plan.

 

Asa result of the Company’s currentfinancial position caused by its operating losses during the prior years andits financial projections for this year and beyond, there is substantial doubtabout the Company’s ability to continue as a going concern.  The consolidated financial statementsdo not include any adjustments that might result from the outcome of thisuncertainty.

 

19

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**Contractual Obligations**

** **
|                                  |   | **Total** |                  | **Payments  Due by Period********(in thousands)** |           |
|---------------------------------------|--------|-----------|-----------------------|---------------------------------------------------|----------------|
|                                  |   |      | **Less  than 1 year** |                                              | **1-3  Years** |   | **3-5  Years** |   | **More  than 5 Years** | ** ** |
| Long-Term Debt Obligations(1)         |   | $         | —                |                                              | $              | — |   | $ | — |   | $ | — |   | $ | — |   |
| Capital Lease Obligations (2)         |   | 439       |                  | 439                                               |           | — |   | — |   | — |   |
| Operating Lease Obligations(3)        |   | 4,806     |                  | 910                                               |           | 1,660 |   | 1,214 |   | 1,022 |   |
| Purchase Obligations(4)               |   | 350       |                  | 350                                               |           | — |   | — |   | — |   |
| Other Long-Term Liabilities Reflected |   | —    |                  | —                                            |           | — |   | — |   | — |   |
| **Total**                             |   | 5,245     |                  | 1,349                                             |           | 1,660 |   | 1,214 |   | 1,022 |   |
|                                       |        |           |                       |                                                   |                |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) L*ong Term Debt Obligation* means a paymentobligation under long-term borrowings referenced in FASB Statement of FinancialAccounting Standards No. 47 *Disclosure ofLong-Term Obligations* (March1981), as may be modified or supplemented.

 

(2)*Capital Lease Obligation* means a paymentobligation under a lease classified as a capital lease pursuant to FASBStatement of Financial Accounting Standards No. 13 *Accounting for Leases*(November 1976), as may be modified orsupplemented.  

 

(3) *Operating Lease Obligation*means a paymentobligation under a lease classified as an operating lease and disclosedpursuant to FASB Statement of Financial Accounting Standards No. 13 *Accounting for Leases*, as may be modifiedor supplemented.  

 

(4) *Purchase Obligation*means an agreement topurchase goods or services that is enforceable and legally binding on theregistrant that specifies all significant terms, including: fixed or minimumquantities to be purchased; fixed, minimum or variable price provisions; andapproximate timing of the transaction.

 

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”) in an effort to recover aportion of the $4.5 million outstanding receivable due to Bionova Produce byLibra Exportaciones.  This receivablearose because Bionova Produce had advanced Libra monies during the 1999 and 2000growing seasons, but the crops that were grown, harvested, shipped, andsubsequently sold by Bionova Produce failed to cover the advances.  (This receivable was fully reserved for inthe Company’s accounts in 2000).  ThisOctober 3, 2001 agreement called for (i) ABSA or whoever it might designate toacquire all of the shares of Libra with all of its goods, rights, obligationsand liens, (ii) ABSA to pay on behalf of Libra $350,000 to a Mexican bank whichheld a lien on certain property held by the Alvarez family (who were the ownersof Libra), (iii) the Alvarez family to transfer four separate pieces of land toABSA, and (iv) ABSA to assume a $2.3 million mortgage obligation to a secondMexican bank in conjunction with certain of the pieces of land beingtransferred.  Aside from the value ofthe land being transferred, the shares of Libra were believed to haveconsiderable value, as much as $700,000, due to tax losses this company hadincurred over the years.  Because thetwo Mexican banks had never signed agreements accepting this arrangement, onMarch 7, 2003, 

 

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a new agreement wassigned by Libra, the Alvarez family, and ABSA. While the two Mexican banks are not parties to this agreement, they havegiven their verbal approval (though verbal approvals are not binding contractsin Mexico) to the terms of this second arrangement.  This March 7, 2003 agreement calls for (i) ABSA to make paymentof the final $150,000 that was withheld by Bionova Produce of the original$350,000 to the Alvarez family in exchange for a release from the first Mexicanbank which holds a lien on the property of the Alvarez family, (ii) ABSA togive the four pieces of land it received from Libra stemming from the October3, 2001 agreement to the second Mexican bank in exchange for a release from the$2.3 million mortgage obligation, (iii) the Alvarez family will drop its claimagainst Bionova Produce for failure to make payment of the $150,000, and (iv)the Alvarez family to provide an indemnity letter with regard to the statedassets and liabilities of Libra.  Theterms of this second agreement must be completed by the signing parties within90 days, or the agreement will be terminated. Bionova Holding has accounted for the current arrangements byrecognizing an expense of $150,000 in 2002 (it had already recognized the first$200,000 in 2001) because of the claim against it and the likelihood that theMarch 7, 2003 agreement will be completed. The Company also has recognized the land assets that have already beentransferred to ABSA by Libra at a value of $2.3 million as well as theliability to the second Mexican bank in an equal amount of $2.3 million.

 

**CriticalAccounting Policies**

** **

Bionova Holding’sdiscussion and analysis of its financial condition and results of operationsare based upon its consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.  The preparation ofthese financial statements requires the Company to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to revenues and costs of revenues,receivables, inventories, and intangible assets.  The Company bases its estimates on historical experience and onvarious other assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources.  Actual results may differ fromthese estimates under different assumptions or conditions.  The Company believes the following criticalaccounting policies affect its more significant judgments and estimates used inthe preparation of its consolidated financial statements.  For further information, see “Note 2 of Item8.  Financial Statements andSupplementary Data.”

 

*Revenues, Cost of Sales, and Inventories*

 

Revenue from productdevelopment activities is recognized during the period the Company performs thedevelopment efforts in accordance with the terms of the agreements andactivities undertaken.  The revenue isrecognized as earned over the term of the agreement, in accordance with theperformance effort.  Revenue that isrelated to future performance under such agreements is deferred and recognizedas revenue when earned.  Revenue fromfresh produce sales is recognized when the product is shipped, net of anallowance for estimated returns.  Costis determined by using the first-in, first-out method for finishedproduce.  Cost of growing crops includesdirect material and labor and an allocation of indirect costs and are accumulateduntil the time of the harvest, subject to lower of cost or marketadjustments.  The recognition of cost ofsales for the delivered products is done based upon estimates of the total costof the crop for the growing season divided by the number of units that areexpected to be harvested, packed, and sold. Under this approach, we comparecosts incurred to date plus estimated costs to complete and deliver the entirecrop with the total net revenue expected to be generated from the crop.  Estimates of the net revenues from the croprequire projections of production yields from the field and the packaginglines, quality grades of the product to be delivered, and market prices duringthe months that constitute the crop harvest season.  Each month, the Company re-estimates the cost of sales per unitof product sold based on any revisions to the estimated total cost of the cropand the units of output expected.  Ifthe total cost of sales for the crop season is expected to be greater than thetotal revenues to be generated, taking into account the units of productionstill remaining to be harvested, the entire estimated loss is charged tooperations in the period the loss first becomes known.  Such changes to these estimates have oncertain occasions been material to our quarterly results of operations duringthe three year period ended December 31, 2002. Inventories are stated at the lower of cost or market.  Our reserve for excess or obsolete inventoryis primarily based upon forecasted demand for our products and any change tothe reserve arising from forecast revisions is reflected in cost of sales inthe period the revision is made.

 

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The complexity of theestimation process and all issues related to the assumptions, risks anduncertainties inherent with the application of the units of output method ofaccounting affect the amounts reported in our consolidated financialstatements.  A number of internal andexternal factors affect our revenue, cost of sales estimates and inventoryreserves, including weather conditions, competitive production from differentgrowing areas, labor availability and costs, and customer demand for ourproducts.  If our business conditionswere different, or if we used different assumptions in the application of thisand other accounting policies, it is likely that materially different amountswould be reported in our consolidated financial statements.

 

*Advances to Growers*

 

Advances to growers aremade for supplies, seed, and other growing and harvesting costs.  The advances are interest bearing andnon-interest bearing and repaid from amounts withheld from sales proceeds dueto growers.  All of the growers’ produceis sold by the Company’s distribution subsidiaries.  As sales are made and collections from customers are generated,the Company’s distribution subsidiaries deduct their commissions and the amountof money advanced to the grower on a per unit basis before any monies from thesale and collection process are passed along to the grower.  If the Company determines that the harvestof the grower will not generate sufficient output and revenues to pay back anyadvances that have been made to the grower, a review is then undertaken todetermine the likelihood that the grower will be able to pay back theseadvances, plus any interest owed on the advances.  If the Company determines that the grower may not be able to paythe advances back to the Company, a reserve is recorded in an amount that isdetermined to be at risk on the collection of the grower advance.  In 2000 and then again in 2002 the Companyrecorded significant allowances for doubtful accounts of grower receivables andre-classified one grower receivable to a long-term asset on which it is tryingto collect through a lawsuit it initiated in 2000.  The Company did not write off any grower receivables in 2001.

* *

*Impairment of Long-Lived Assets*

* *

EffectiveJanuary 1, 2002, the Company accounts for long-lived assets under SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS No.144”), which requires the Company to review for impairment its long-livedassets whenever events or changes in circumstances indicate that the carryingamount of an asset might not be recoverable. When such an event occurs, management determines whether there has beenan impairment by comparing the anticipated undiscounted future net cash flowsto the related asset’s carrying value. If an asset is considered impaired, the asset is written down to fairvalue, which is determined based either on discounted cash flows or appraisedvalue, depending on the nature of the asset. Prior to January 1, 2002, each year, management determined whether anylong-lived assets had been impaired based on the criteria established inStatement of Financial Accounting Standards No.  121  (SFAS121),“Accounting for the Impairment of Long-Lived Assets and Long-Lived Assetsto be disposed of.”  The carrying amountof a long-lived asset was considered impaired when the estimated undiscountedcash flow from each asset was less than its carrying amount.  In that event, the Company recorded a lossequal to the amount by which the carrying amount exceeds the fair value of thelong-lived asset.  Changes in theCompany’s projected cash flows as well as differences in the discount rate usedin the calculation could have a material effect on the financialstatements.  Due to changes in businessstrategy and the financial condition of the Company, it was determined at year-end2001 that all of the goodwill in both the fresh produce and technologybusinesses was impaired alongwith certain technology patents.  TheCompany re-examined its patents as circumstances dictated in 2002 and concludedthat no additional adjustment was required.

 

*LegalProceedings and Loss Contingencies*

 

The Company is involvedin routine legal and administrative matters that arise from the normal conductof business.  Other matters containallegations that are not routine and involve compensatory, punitive, and trebledamages.  The outcome of theseproceedings are not within the Company’s control, are often difficult topredict and often are resolved over long periods of time.  The Company maintains insurance with thirdparties to mitigate any loss that is related to certain claims.  Loss contingencies are recorded asliabilities in the financial statements when it is determined that we haveincurred a loss that is probable and the amount of the loss is reasonablyestimable, in accordance with SFAS 5 “Accounting for Contingencies”.  As of December 31, 2002 the Company had notrecorded any liabilities for legal contingencies as we believe that we do nothave any potential losses that are probable; this could change in the futuredepending on the ultimate outcome of these matters.

 

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**RISKFACTORS**

** **

**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 secondquarter 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 December 31, 2002 our accumulateddeficit was $213.9 million.  For theyear ended December 31, 2002, we had a net loss of $20.4 million.  The factors that caused these losses,including factors described in this section, may continue to limit our abilityto make a profit in the future.

 

**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 December 31, 2002 wehad a working capital deficit of $86.6 million and a stockholders deficit of$42.3 million.  We had $9.8 million ofdebt with banks and $96.9 million of debt with Savia and Savia’s subsidiaries.  This level of indebtedness may posesubstantial risks to our company and to our stockholders, including thepossibility that we may not generate sufficient cash flow to pay ouroutstanding debts.  Our level ofindebtedness may also adversely affect our ability to incur additionalindebtedness and finance our future operations and capital needs, which maylimit our ability to pursue other 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 March 31, 2003.  Any failure tomeet these covenants could result in an event of default and the calling in ofthese loan facilities.  If such an eventwere to occur, it would significantly affect the current and future operationsand financial performance of the Company and possibly even require that we shutdown all operations.  At March 31, 2003Savia had not yet completed its restructuring, though it believes ithas reached a verbal understanding with its creditors and expects to move aheadwith the corresponding documentation to solidify an agreement.  Bionova is in discussions with the bank inan effort to reach an accommodation on this issue.

 

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**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, necessary relocationand relatively low pay.  If it becomesnecessary to pay more to attract labor to farm work, our labor costs willincrease.

 

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 tolabor disturbances.  As a result,delivery delays caused by labor disturbances in the trucking industry or anyother reason could limit our ability to get fresh produce to market before itspoils.

 

**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 by residentsof rural communities, which in some cases could lead to the owner being forcedto surrender its land.  ABSA has beeninvolved in land dispute proceedings as part of its ordinary course ofbusiness.  ABSA has never lost any moneyin these land disputes, but if ABSA were ever required to surrender any of itsland, the volume of fresh fruits and vegetables it produces would decline andadversely affect our profitability.

 

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**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 moreexpensive in peso terms and therefore more difficult to sell in the Mexicanmarket; and (ii) inflation that generally accompanies reductions in the valueof the peso reduces the purchasing power of Mexican consumers, which reducesthe demand for all products including produce and, in particular, imported,branded or other premium-quality produce.Conversely, if the value of the pesoincreases relative to the value of the dollar, Mexican production costsincrease in dollar terms, which results in lower margins or higher prices withrespect to produce grown in Mexico and sold in 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.

 

**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 severallawsuits relating to the 1996 merger transaction (the “Merger”) in which DNAPbecame a subsidiary of the Company.  Inthose lawsuits, the former preferred stockholders of DNAP alleged they shouldhave received much more consideration for their shares in the Merger than theydid.  One of these cases is stillpending.  If the Company is ultimately foundto be liable in this case, the value of the potential judgment could be farmore than the Company could afford to pay. For further information, see “Item 3. Legal Proceedings,” which discusses this lawsuit in greater detail.  

 

25

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**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 theExchange.  We have submitted a plan tothe Exchange to come back into compliance by June 30, 2003, which the Exchangehas accepted.  However, our listing isbeing continually 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.

 

**ITEM 7A****. QUANTITATIVE AND 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 onDecember 31, 2002.  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. 

 
|                                                     |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Total** |   | **Fair  Value** |   |
|----------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|-----------|--------|-----------------|--------|
| Short-term  debt:                                        |   |     |   |     |   |     |   |     |   |     |   |      |   |            |   |
| ($US  equivalent in millions)  U.S. dollar variable rate |   | $        | 7.5    |     | — |     | — |     | — |     | — |      | $      | 7.5             |   | $ | 7.5 |   |
| Average  interest rate                                   |   | 6        | %      |     |   |     |   |     |   |     |   | 6         | %      | 6               | %      |
| Peso  variable rate (in $US)                             |   | 2.3      |   | —   |   | —   |   | —   |   | —   |   | 2.3       |   | 2.3             |   |
| Long-term  debt:                                         |   |     |   |     |   |     |   |     |   |     |   |      |   |            |   |
| U.S.  dollar fixed rate                                  |   | —   |   | —   |   | —   |   | —   |   | —   |   | —    |   | —          |   |
| Average  interest rate                                   |   |     |   |     |   |     |   |     |   |     |   |      |   |            |   |
| U.S.  dollar variable rate                               |   | —   |   | —   |   | —   |   | —   |   | —   |   | —    |   | —          |   |
|                                                          |        |          |        |          |        |          |        |          |        |          |        |           |        |                 |        |  |  |  |

 

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.  AtDecember 31, 2002 the Company had no debt denominated in Mexican pesos.  To minimize exchange risk associated withthe importation of products, the Company will enter into forward exchangecontracts where the functional currency to be used in the transaction isdollars.

 

26

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**Exchange Rate Risk**

** **

At year-end 2002 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 |   |

 

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.

 

27

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**ITEM 8****.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

** **

TheReport of Independent Accountants and the consolidated financial statements ofthe Company and the notes thereto appear on the following pages.

 

**INDEXTO FINANCIAL STATEMENTS**

** **
| (1)  Consolidated Financial Statements                                                                                           |
|----------------------------------------------------------------------------------------------------------------------------------|
| Report of Independent  Accountants                                                                                               |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                                    |
| Consolidated  Statements of Operations and Comprehensive Income and Loss for the years  ended December 31, 2002, 2001 and 2000   |
| Consolidated  Statements of Changes in Stockholders’ Equity (Deficit) for the years ended  December 31, 2002, 2001 and 2000 |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000                                      |
| Notes to  the Consolidated Financial Statements                                                                                  |
|                                                                                                                             |
| (2)Financial  Statement Schedule:                                                                                                |
| Schedule  II:  Valuation and Qualifying Accounts  and Reserves for the three years ended December 31, 2002                  |

 

28

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**Report of Independent Accountants**

** **

To****theBoard of Directors

andStockholders of

BionovaHolding Corporation:

 

In our opinion, theconsolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of Bionova HoldingCorporation and its subsidiaries****at December 31, 2002 and 2001, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2002****in conformity with accounting principlesgenerally accepted in the United States of America.  In addition, in our opinion, the financial statement schedulelisted in the accompanying index presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements and the financial statement schedule are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

Theaccompanying consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern.  As discussed in Note 1to the consolidated financial statements, the Company has incurred significantlosses from operations and operating cash flow deficiencies for each of thethree years in the period ended December 31, 2002.  These matters raise substantial doubt about the Company’s abilityto continue as a going concern. Management’s plans in regard to these matters are also described in Note1.  The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

PRICEWATERHOUSECOOPERSLLP

SanJose, California

April29, 2003

 

29

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**BIONOVA HOLDING CORPORATIONCONSOLIDATED BALANCE SHEETSThousands of U.S. Dollars(except share and per share amounts)**

 
|                                                                                                                                                                      |   | **December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
|                                                                                                                                                                      |   | **2002**         |   | **2001** |   |
| ASSETS                                                                                                                                                                    |   |             |   |   |   |
| Current  assets:                                                                                                                                                          |   |             |   |   |   |
| Cash  and cash equivalents                                                                                                                                                |   | $                | 2,130  |   | $ | 2,177 |   |
| Accounts  receivable, net                                                                                                                                                 |   | 13,644           |   | 19,978 |   |
| Advances  to growers, net                                                                                                                                                 |   | 3,313            |   | 8,999 |   |
| Net  assets of discontinued operations                                                                                                                                    |   | 1,165            |   | 3,325 |   |
| Inventories,  net                                                                                                                                                         |   | 11,218           |   | 12,785 |   |
| Assets  held for sale (see Note 9)                                                                                                                                        |   | 3,025            |   | 4,245 |   |
| Other  current assets                                                                                                                                                     |   | 1,575            |   | 931 |   |
| Total  current assets                                                                                                                                                     |   | 36,070           |   | 52,440 |   |
| Property,  plant and equipment, net                                                                                                                                       |   | 32,852           |   | 32,995 |   |
| Other  assets                                                                                                                                                             |   | 11,828           |   | 10,729 |   |
| Total  assets                                                                                                                                                             |   | $                | 80,750 |   | $ | 96,194 |   |
|                                                                                                                                                                      |   |             |   |   |   |
| LIABILITIES,  MINORITY INTEREST, AND STOCKHOLDERS’EQUITY (DEFICIT)                                                                                                   |   |             |   |   |   |
| Current  liabilities:                                                                                                                                                     |   |             |   |   |   |
| Accounts  payable and accrued expenses                                                                                                                                    |   | $                | 16,006 |   | $ | 18,528 |   |
| Accounts  due to related parties                                                                                                                                          |   | 96,857           |   | 89,184 |   |
| Short-term  bank loans                                                                                                                                                    |   | 9,818            |   | 9,389 |   |
| Current  portion of long-term debt                                                                                                                                        |   | —           |   | 161 |   |
| Total  current liabilities                                                                                                                                                |   | 122,681          |   | 117,262 |   |
| Long-term  bank debt                                                                                                                                                      |   | —           |   | 558 |   |
| Total  liabilities                                                                                                                                                        |   | 122,681          |   | 117,820 |   |
| Minority  interest                                                                                                                                                        |   | 401              |   | 164 |   |
| Commitments  and contingencies (see Note 20)                                                                                                                              |   |             |   |   |   |
| Stockholders’  equity (deficit):                                                                                                                                     |   |             |   |   |   |
| Preferred stock, $0.01 par value, 5,000 shares  authorized, 200 shares issued and outstanding at both December 31, 2002 and  2001, 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 December 31, 2002 and 2001,  respectively       |   | 229              |   | 236 |   |
| Additional  paid-in capital                                                                                                                                               |   | 171,574          |   | 171,597 |   |
| Accumulated  deficit                                                                                                                                                      |   | (213,914         | )      | (193,499 | ) |
| Accumulated  other comprehensive income (loss)                                                                                                                            |   | (221             | )      | (154 | ) |
| Total  stockholders’ equity (deficit)                                                                                                                                |   | (42,332          | )      | (21,820 | ) |
| Total  liabilities, minority interest, and stockholders’ equity (deficit)                                                                                            |   | $                | 80,750 |   | $ | 96,194 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements. 

 

30

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**BIONOVAHOLDING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME AND LOSS**

**Thousandsof U.S. Dollars**

**(exceptshare and per share amounts)**

 
|                                                                                             |   | **Year ended  December 31,** |    |
|--------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                             |   | **2002**                     |    | **2001** |   | **2000** |   |
|                                                                                             |   |                         |    |   |   |   |   |
| Total  revenues                                                                                  |   | $                            | 129,445 |   | $ | 204,471 |   | $ | 222,789 |   |
|                                                                                             |   |                         |    |   |   |   |   |
| Cost  of sales                                                                                   |   | 123,900                      |    | 184,285 |   | 213,057 |   |
| Selling  and administrative expenses                                                             |   | 15,088                       |    | 21,557 |   | 26,946 |   |
| Loss  on sale of assets (see Note 5)                                                             |   | 532                          |    | 5,418 |   | 550 |   |
| Impairment  of assets (see Note 11)                                                              |   | —                       |    | 14,328 |   | — |   |
| Amortization  of goodwill, patents and trademarks                                                |   | —                       |    | 744 |   | 1,251 |   |
|                                                                                             |   | 139,520                      |    | 226,332 |   | 241,804 |   |
|                                                                                             |   |                         |    |   |   |   |   |
| Operating  loss                                                                                  |   | (10,075                      | )       | (21,861 | ) | (19,015 | ) |
|                                                                                             |   |                         |    |   |   |   |   |
| Interest  expense                                                                                |   | (8,821                       | )       | (9,760 | ) | (17,512 | ) |
| Interest  income                                                                                 |   | 1,350                        |    | 1,982 |   | 2,141 |   |
| Exchange  gain (loss), net                                                                       |   | (196                         | )       | (536 | ) | 381 |   |
| Shareholder  litigation expense                                                                  |   | —                       |    | (1,300 | ) | — |   |
| Other  non-operating (expense) income, net                                                       |   | 72                           |    | 385 |   | (187 | ) |
|                                                                                             |   | (7,595                       | )       | (9,229 | ) | (15,177 | ) |
|                                                                                             |   |                         |    |   |   |   |   |
| Loss  from continuing operations before discontinued operations                                  |   | (17,670                      | )       | (31,090 | ) | (34,192 | ) |
|                                                                                             |   |                         |    |   |   |   |   |
| Discontinued  operations (see Note  4):                                                     |   |                         |    |   |   |   |   |
| Loss  from operations of research and development business segment                               |   | (1,942                       | )       | (24,371 | ) | (7,056 | ) |
|                                                                                             |   |                         |    |   |   |   |   |
| Loss  before extraordinary items, taxes, and minority interest                                   |   | (19,612                      | )       | (55,461 | ) | (41,248 | ) |
|                                                                                             |   |                         |    |   |   |   |   |
| Extraordinary  items, net of tax:                                                                |   |                         |    |   |   |   |   |
| Extraordinary  gain due to interest reversal (net of applicable income taxes of $0)              |   | —                       |    | — |   | 9,852 |   |
| Extraordinary  loss on retirement of floating rate notes (net of applicable income taxes of  $0) |   | —                       |    | — |   | (1,917 | ) |
|                                                                                             |   |                         |    |   |   |   |   |
| Loss  before income taxes                                                                        |   | (19,612                      | )       | (55,461 | ) | (33,313 | ) |
| Income  tax expense                                                                              |   | 572                          |    | 672 |   | 643 |   |
|                                                                                             |   |                         |    |   |   |   |   |
| Loss  before minority interest                                                                   |   | (20,184                      | )       | (56,133 | ) | (33,956 | ) |
| Minority  interest in net loss (income) of subsidiaries, net                                     |   | (231                         | )       | (461 | ) | 1,545 |   |
|                                                                                             |   |                         |    |   |   |   |   |
| Net  loss                                                                                        |   | (20,415                      | )       | (56,594 | ) | (32,411 | ) |
|                                                                                             |   |                         |    |   |   |   |   |
| Other  comprehensive income (expense) net of tax:                                                |   |                         |    |   |   |   |   |
| Foreign  currency translation adjustment                                                         |   | (67                          | )       | (414 | ) | 536 |   |
|                                                                                             |   |                         |    |   |   |   |   |
| Comprehensive  loss                                                                              |   | $                            | (20,482 | ) | $ | (57,008 | ) | $ | (31,875 | ) |
|                                                                                             |   |                         |    |   |   |   |   |
| Loss  per share from continuing operations                                                       |   | $                            | (0.79   | ) | $ | (1.37 | ) | $ | (1.41 | ) |
| Loss  per share from discontinued operations                                                     |   | (0.08                        | )       | (1.03 | ) | (0.30 | ) |
| Gain  per share from extraordinary items                                                         |   | —                       |    | — |   | 0.34 |   |
| Net  loss per share -basic and diluted                                                           |   | $                            | (0.87   | ) | $ | (2.40 | ) | $ | (1.37 | ) |
|                                                                                             |   |                         |    |   |   |   |   |
| Weighted  average number of common shares outstanding                                            |   | 23,480,408                   |    | 23,588,031 |   | 23,588,031 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**BIONOVAHOLDING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

**Thousandsof U.S. Dollars**

**(exceptshare amounts)**

** **
|                                                                                                 |   | **Preferred   Shares  Outstand-  ing** |   | **Preferred   Stock** |         | **Common  Shares  Outstand-  ing** |       | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Accumulated    Other  Comprehen-  sive  Income   (Loss)** |    | **Accumulated    Deficit** |   | **Total  Stockholders  Equity  (Deficit)** |    |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|-----------------------|--------------|------------------------------------|------------|-------------------|--------|----------------------------------|--------|-------------------------------------------------------------|---------|----------------------------|--------|--------------------------------------------|---------|
|                                                                                                 |   |                                   |   |                  |         |                               |       |              |   |                             |   |                                                        |    |                       |   |                                       |    |
| Balance at December 31, 1999                                                                         |   | —                                 |   | $                     | —— |                               | 23,588,031 |              | $      | 236                              |   | $                                                           | 107,918 |                       | $      | (276                                       | )       | $ | (104,494 | ) | $ | 3,384 |   |
| Shares issued to Bionova International, Inc., and  additional capital contributions, net of expenses |   | 200                                    |   | —                |         | —                             |       | —            |   | 63,679                           |   | —                                                      |    | —                     |   | 63,679                                     |    |
| Net loss                                                                                             |   | —                                 |   | —                |         | —                             |       | —            |   | —                           |   | —                                                      |    | (32,411                    | )      | (32,411                                    | )       |
| Cumulative translation adjustment                                                                    |   | —                                 |   | —                |         | —                             |       | —            |   | —                           |   | 536                                                         |    | —                     |   | 536                                        |    |
| Balance at December 31, 2000                                                                         |   | 200                                    |   | —                |         | 23,588,031                         |       | 236               |   | 171,597                          |   | 260                                                         |    | (136,905                   | )      | 35,188                                     |    |
| Net loss                                                                                             |   | —                                 |   | —                |         | —                             |       | —            |   | —                           |   | —                                                      |    | (56,594                    | )      | (56,594                                    | )       |
| Cumulative translation adjustment                                                                    |   | —                                 |   | —                |         | —                             |       | —            |   | —                           |   | (414                                                        | )       | —                     |   | (414                                       | )       |
| Balance at December 31, 2001                                                                         |   | 200                                    |   | —                |         | 23,588,031                         |       | 236               |   | 171,597                          |   | (154                                                        | )       | (193,499                   | )      | (21,820                                    | )       |
| Net loss                                                                                             |   |                                   |   |                  |         |                               |       |              |   |                             |   |                                                        |    |                       |   |                                       |    |
| Purchase of shares held by Grace Brothers in  conjunction with settlement of lawsuit                 |   | —                                 |   | —                |         | (107,623                           | )          | (1                | )      | —                           |   | —                                                      |    | —                     |   | (1                                         | )       |
| Purchase by IPHC of shares held by Dupont                                                            |   | —                                 |   | —                |         | (575,000                           | )          | (6                | )      | (23                              | )      | —                                                      |    | —                     |   | (29                                        | )       |
| Net loss                                                                                             |   | —                                 |   | —                |         | —                             |       | —            |   | —                           |   | ——                                                |    | (20,415                    | )      | (20,415                                    | )       |
| Cumulative translation adjustment                                                                    |   | —                                 |   | —                |         | —                             |       | —            |   | —                           |   | (67                                                         | )  | —                     |   | (67                                        | )  |
| Balance at December 31, 2002                                                                         |   | 200                                    |   | $                     | —       |                               | 22,905,408 |              | $      | 229                              |   | $                                                           | 171,574 |                       | $      | (221                                       | )       | $ | (213,914 | ) | $ | (42,332 | ) |

 

The accompanyingnotes are an integral part of these consolidated financial statements. 

 

32

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**BIONOVA HOLDING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Thousands of U.S. Dollars**

** **
|                                                                                                                               |   | **Year Ended  December 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                               |   | **2002**                     |    | **2001** |   | **2000** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                                                              |   |                         |    |   |   |   |   |
| Net loss                                                                                                                           |   | $                            | (20,415 | ) | $ | (56,594 | ) | $ | (32,411 | ) |
| Adjustments to  reconcile net loss to net cash used by continuing operations:                                                      |   |                         |    |   |   |   |   |
| Minority  interest                                                                                                                 |   | 231                          |    | 461 |   | (1,545 | ) |
| Depreciation                                                                                                                       |   | 3,128                        |    | 4,363 |   | 4,820 |   |
| Amortization of  goodwill, patents and trademarks                                                                                  |   | —                       |    | 3,174 |   | 3,501 |   |
| Deferred income  taxes                                                                                                             |   | —                       |    | (894 | ) | (8 | ) |
| Amortization of  prepaid commissions on floating rate notes                                                                        |   | —                       |    | — |   | 1,917 |   |
| Loss (gain) from  sale of property, plant and equipment                                                                            |   | 285                          |    | 4,054 |   | 550 |   |
| Interest accrued  on advances from Savia and Bionova International, Inc                                                            |   | 8,957                        |    | 8,133 |   | 9,852 |   |
| Impairment of  goodwill and patents and trademarks (see Note 11)                                                                   |   | —                       |    | 29,953 |   | 2,644 |   |
| Loss on sale of  assets (see Note 5)                                                                                               |   | —                       |    | 6,608 |   | — |   |
| Other non-cash  items                                                                                                              |   | (1,044                       | )       | (1,562 | ) | (14 | ) |
| Net changes  (exclusive of acquisitions) in:                                                                                       |   |                         |    |   |   |   |   |
| Accounts  receivable and advances to growers, net                                                                                  |   | 12,019                       |    | 642 |   | (6,029 | ) |
| Inventories                                                                                                                        |   | 1,567                        |    | (344 | ) | (692 | ) |
| Net assets of discontinued operations                                                                                              |   | 2,160                        |    | — |   | — |   |
| Other assets                                                                                                                       |   | (1,745                       | )       | (1,480 | ) | 1,032 |   |
| Accounts payable  and accrued expenses                                                                                             |   | (2,522                       | )       | (14 | ) | 6,563 |   |
| NET CASH USED IN  OPERATING ACTIVITIES                                                                                             |   | 2,621                        |    | (3,500 | ) | (9,820 | ) |
|                                                                                                                               |   |                         |    |   |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                                                              |   |                         |    |   |   |   |   |
| Payment for  acquisition of intellectual property                                                                                  |   | —                       |    | — |   | (3,000 | ) |
| Purchases of  property, plant and equipment                                                                                        |   | (4,073                       | )       | (5,437 | ) | (6,024 | ) |
| Payments  received for sale of assets, net of cash divested                                                                        |   | 3,007                        |    | 656 |   | — |   |
| NET CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES                                                                               |   | (1,066                       | )       | (4,781 | ) | (9,024 | ) |
|                                                                                                                               |   |                         |    |   |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                                                              |   |                         |    |   |   |   |   |
| Short term  borrowing                                                                                                              |   | 7,683                        |    | 9,300 |   | 5,207 |   |
| Repayments of  short-term debt                                                                                                     |   | (7,855                       | )       | (19,687 | ) | (9,232 | ) |
| Repayments of  long-term debt                                                                                                      |   | (1,867                       | )       | (220 | ) | (100,187 | ) |
| Proceeds from  long-term debt                                                                                                      |   | 1,750                        |    | 730 |   | 138 |   |
| Accounts due to  related parties, net                                                                                              |   | (1,284                       | )       | 17,085 |   | 48,717 |   |
| Restricted cash                                                                                                                    |   | —                       |    | — |   | 9,548 |   |
| Proceeds from  issuance of Series A convertible preferred stock and additional capital  contribution by Bionova International, Inc |   | —                       |    | — |   | 63,679 |   |
| Purchase of  common stock                                                                                                          |   | (29                          | )       | — |   | — |   |
| NET CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES                                                                               |   | (1,602                       | )       | 7,208 |   | 17,870 |   |
|                                                                                                                               |   |                         |    |   |   |   |   |
| Net decrease in  cash and cash equivalents                                                                                         |   | (47                          | )       | (1,073 | ) | (974 | ) |
| Cash at  beginning of year                                                                                                         |   | 2,177                        |    | 3,536 |   | 4,510 |   |
| Cash at end of  year                                                                                                               |   | $                            | 2,130   |   | $ | 2,463 |   | $ | 3,536 |   |
|                                                                                                                               |   |                         |    |   |   |   |   |
| SUPPLEMENTAL  CASH FLOW DATA                                                                                                       |   |                         |    |   |   |   |   |
| Interest paid                                                                                                                      |   | $                            | 664     |   | $ | 842 |   | $ | 4,195 |   |
| Income taxes  paid                                                                                                                 |   | 576                          |    | 180 |   | 807 |   |
| NON-CASH  INVESTING AND FINANCING ACTIVITIES                                                                                       |   |                         |    |   |   |   |   |
| Acquisition of  Monsanto Company’s strawberry development program                                                             |   | —                       |    | — |   | 3,000 |   |
| Additional  capital contribution due to reversal of interest accrual on advances from  Savia and Bionova International, Inc        |   | —                       |    | — |   | 9,852 |   |

** **

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

 

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BIONOVA HOLDING CORPORATION

 

Notesto the Consolidated Financial Statements

 

**Note 1 - Basis of Presentation**

 

BionovaHolding Corporation, a Delaware corporation (together with its subsidiaries,“Bionova Holding” or the “Company”), an indirect subsidiary of Savia, S.A. deC.V. (“Savia”), a Mexican corporation, was formed on January 12, 1996.  Today, the Company acts as a holding companyfor (i) Agrobionova, S.A. de C.V., of which the Company owns 98.6%(“ABSA”),  (ii) International ProduceHolding Company, of which the Company owns 100% (“IPHC”), (iii) DNA PlantTechnology Corporation, of which the Company owns 100% (“DNAP”), and (iv) VPPCorporation, of which the Company owns 100% (“VPP”).

 

**Going Concern**

 

TheCompany incurred a net loss of $20.4 million, but generated cash from opertionsof $2.6 million for the year ended December 31, 2002. The Company sustainedsignificant operating losses and operating cash flow deficiencies in 2001 and2000.  At December 31, 2002 the Companyhad a negative working capital position of $86.6 million.

 

Management has been and is continuing to address theCompany’s financial condition by selling non-core assets of the fresh producebusiness, and by selling and licensing its intellectual property.The Companyalso closed down its research and development operations in June 2002 toeliminate the ongoing expense in this segment of the business (see Note4).  The Company also must find asolution to the $96.9 million of debt plus the interest accruing in 2003 thatis due to Savia and its subsidiaries during 2003.  There can be no assurance that these actions will result insufficient working capital to significantly improve the Company’s currentfinancial position or its results of operations nor can there be any assurancethe Company will be able to meet its obligations in 2003 nor secure funds totake it beyond the 2003 calendar year. This raises substantial doubt aboutthe Company’s ability to continue as a going concern.  The consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

**Note 2 — Summary of SignificantAccounting Policies**

** **

a.  Consolidation

 

The consolidatedfinancial statements include Bionova Holding Corporation and all of itswholly-owned and majority-owned subsidiaries (the Company).  All significant intercompany accounts andtransactions have been eliminated.

 

b.  Management’s estimates and assumptions

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities at the date of the financialstatements, and reported amounts of revenues and expenses during the reportingperiod.  Actual results could differfrom such estimates.

 

c.  Revenue recognition

 

Revenue from productdevelopment activities is recognized during the period the Company performs thedevelopment efforts in accordance with the term of the agreements andactivities undertaken.  The revenue isrecognized as earned over the term of the agreement, in accordance with theperformance effort.  Revenue that isrelated to future performance under such agreements is deferred and recognizedas revenue when earned.

 

Revenue from productsales is recognized when the product is shipped, net of an allowance forestimated returns.

 

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d.  Cash and cash equivalents

 

The Company considers allhighly liquid and temporary cash investments with original maturities of threemonths or less to be cash equivalents. The Company’s policy is to place its cash and cash equivalents withlarge creditworthy financial institutions to limit the amount of creditexposure.

 

e.  Advances to growers

 

Advances to growers aremade for supplies, seed, and other growing and harvesting costs.  The advances are interest bearing andnon-interest bearing and repaid from amounts withheld from sales proceeds dueto growers.

 

f.  Association agreements

 

The Company has enteredinto certain agreements with growers under which the Company shares in theprofits and losses associated with growing activities.  The Company records these participationagreements under the equity method of accounting.

 

g.  Inventories

 

Inventories are stated atthe lower of cost or market.  Cost isdetermined by using the first-in, first-out method for finished produce.  Cost of growing crops includes directmaterial and labor and an allocation of indirect costs and are accumulateduntil the time of the harvest, subject to lower of cost or market adjustments.

 

h.  Property, plant and equipment

 

Property, plant andequipment are stated at their acquisition cost. Additions to property, plantand equipment, including significant improvements and renewals, arecapitalized.  Maintenance and repaircosts are charged to expense as incurred. Depreciation is computed using the straight-line method over theestimated useful lives of the assets, which range between 3 and 25 years.  Leasehold improvements are amortized usingthe straight-line method over the estimated useful life of the improvement, orthe lease term if shorter.  Gains andlosses upon asset disposal are reflected in operations in the year ofdisposition.

 

i.  Goodwill

 

Goodwill consistsprincipally of excess purchase price over the fair value of tangible andidentifiable intangible assets of businesses acquired.  Goodwill has been amortized on thestraight-line basis over twenty years. Amortization of goodwill of continuing operations amounted to $0.000million, $0.744 million, and $1.251 million, in 2002, 2001, and 2000,respectively.

 

j.  Patents and trademarks

 

Thecosts of obtaining patents are expensed as incurred.  The acquired patents held by Bionova Holding, DNAP, and VPP wererecognized as being impaired at the end of 2001, and an impairment charge wastaken at that time (see note 2k below). As licenses and sales have occurred in 2002, the value of the patentshave been reviewed on an ongoing basis and charges made based on the estimatedpotential value remaining inthese patents.  The estimated realizablevalue of the patents are reflected in the assets of the discontinuedoperations.  The value of these patentsas of December 31, 2002 and 2001 was $1.2 million and $3.0 million,respectively.

 

k. Impairment of Long-Lived Assets

 

Effective January 1,2002, the Company accounts for long-lived assets under SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS No.144”), which requires the Company to review for impairment its long-livedassets whenever events or changes in circumstances indicate that the carryingamount of an asset might not be recoverable. When such an event occurs, management determines whether there has beenan impairment by comparing the anticipated undiscounted future net cash flowsto the related asset’s carrying value. If an asset is considered impaired, the asset is written down to fairvalue, which is determined based either on

 

35

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discountedcash flows or appraised value, depending on the nature of the asset.  Prior to January 1, 2002, each year,management determined whether any long-lived assets had been impaired based onthe criteria established in Statement of Financial Accounting Standards No.  121 (SFAS 121),“Accounting for the Impairment of Long-Lived Assets andLong-Lived Assets to be disposed of.” The carrying amount of a long-lived asset was considered impaired whenthe estimated undiscounted cash flow from each asset was less than its carryingamount.  In that event, the Companyrecorded a loss equal to the amount by which the carrying amount exceeds thefair value of the long-lived asset. During fiscal year 2001, management determined that goodwill associatedwith its technology business and its fresh produced business was impaired.  The fair value of the goodwill was estimatedusing discounted cash flows. Accordingly, the Company recorded an impairment charge on the goodwillof the fresh produce business in the amount of $14.3 million in 2001.  An additional $7.6 million goodwill impairmentcharge was taken on the discontinued operations of the research and developmentsegment of the business.  The Companyalso determined that the value of the patents and trademarks of its researchand development business had become impaired in 2001.  The Company recorded an impairment charge on its patents andtrademarks in the discontinued operations of the research and developmentsegment in an amount of $8.0 million in 2001. (See Note 11)

 

l.  Research and product development costs

 

Allresearch and product development costs incurred or acquired are expensed.

 

m.  Stock-based compensation

 

The Company accounts forstock-based employee compensation arrangements in accordance with provisions ofAccounting Principles Board Opinion No. 25, Accounting for Stock Issued toEmployees (APB No. 25) and complies with the disclosure provisions ofStatement of Financial Accounting Standards No. 123, Accounting for Stock-BasedCompensation (SFAS No. 123), as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation, Transition and Disclosure.” Under APB No. 25, unearned stockcompensation is based on the difference, if any, on the date of grant, betweenthe fair value of the Company’s common stock and the exercise price.

 

n.  Concentration of credit risks

 

Financial instrumentswhich potentially subject the Company to concentrations of credit risk consistprincipally of cash and cash equivalents, trade receivables and advances togrowers.  The Company’s cash and cash equivalentsare deposited in financial institutions in the United Sates and Mexico and mayexceed the amount of insurance provided on such deposits.  Credit risk associated with tradereceivables is limited due to the large number of customers comprising theCompany’s customer base.  There can beno assurance that an event outside of the Company’s control will not occur andcause these trade receivables or advances to be at risk.  The Company performs ongoing creditevaluations of its customers’ and growers’ financial condition to determine theneed for an allowance for uncollectible accounts.

 

o.  Income taxes

 

Current income taxexpense or benefit represents the amount of income taxes expected to be payableor refundable for the current year.  Adeferred income tax liability or asset is established for the expected futuretax consequences of temporary differences between the financial reporting andincome tax bases of assets and liabilities. Deferred income tax expense or benefit represents the net change duringthe year in the deferred income tax liabilities or assets.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be morelikely than not realized in future tax returns.

 

p.  Fair value of financial instruments

 

The carrying value of theCompany’s financial instruments, including cash and cash equivalents, tradereceivables and payables, and advances to growers, approximate their fairmarket value due to their short-term maturities.  Based on borrowing rates currently available to the Company forloans with similar terms, the carrying value of its debt obligationsapproximates fair value.

 

36

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q.  Translation of financial statements

 

The financial statementsfor subsidiaries whose functional currency is not the U.S. dollar aretranslated in the following manner: assets and liabilities at the year-endrates, stockholders’ equity at historical rates and results of operations atthe monthly average exchange rates.  Theeffects of exchange rate changes are reflected as a separate component ofstockholders’ equity.

 

For subsidiaries whoseactivities are recorded in currencies which are not their functional currency,the components of the financial statements are translated as follows:

 
| **Balance Sheet:**                  |             |
|-------------------------------------|------------------|
| Current  assets, except inventories | year-end         |
| Inventories                         | historical       |
| Liabilities                         | year-end         |
| Property,  plant and equipment      | historical       |
| Stockholders’  equity          | historical       |
|                                |             |
| **Results of Operations:**          |             |
| Sales                               | historical       |
| Cost  of sales                      | historical       |
| Depreciation  and amortization      | historical       |
| Interest                            | monthly  average |
| Other  expenses and income          | monthly  average |
| Income  taxes                       | monthly  average |

 

Gains and losses inre-measurement arise mainly from the effect of exchange rate fluctuations onnet monetary items denominated in pesos and are included in results ofoperations.

 

r.  Net loss per common share

 

Basic net income (loss)per common share is computed as net income (loss) divided by the weightedaverage number of common shares outstanding during the period.  Diluted net income (loss) per common shareis computed as net income (loss) divided by the weighted average number ofcommon shares and potential commonshares outstanding during the period,using the treasury stock method, if their effect is dilutive.

 

The following table setsforth the potential shares of common stock that are not included in the dilutednet loss per share attributable to common stockholders because to do so wouldbe anti-dilutive for the periods indicated (in thousands):

 
|                                     |   | **(Thousands of Shares)  Year Ended December 31** |   |
|------------------------------------------|--------|---------------------------------------------------|--------|
|                                     |   | **2002**                                          |   | **2001** |   | **2000** |   |
|                                     |   |                                              |   |   |   |   |   |
| Effect of dilutive  securities:          |   |                                              |   |   |   |   |   |
| Convertible preferred  stock outstanding |   | 23,156                                            |   | 23,156 |   | 23,156 |   |
| Stock options  outstanding               |   | 141                                               |   | 216 |   | 326 |   |

 

s. Employee benefit plan

 

The U.S distributioncompanies have a savings and retirement plan and trust (the “401(k) Plan”)available to all eligible employees of these companies.  An eligible employee may elect to defer, inthe form of contributions to the 401(k) Plan, between 1% and 15% (in 1%increments) of the total compensation that would otherwise be paid to theemployee, subject to annual contribution limitations.  An employee’s contributions are invested at the direction of theemployee in various investment options and are fully vested and non-forfeitableimmediately upon contribution.  The401(k) Plan provides for contributions in the form of common stock or cash, notto exceed 3% of

 

37

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elective salary deferralcontributions.  During 2002, 2001, and2000, the U.S distribution companies’ contributions to the 401(k) Plan wereless than $0.020 million each year.

 

t. Segment reporting

 

The Company reportssegment data based on the ****managementapproach****. The management approach designates the internalreporting used by management for making operating decisions and assessingperformance as the source of the Company’s reportable operating segments. TheCompany also discloses information about products and services, geographicalareas and major customers.

 

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u. Reclassification

 

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

 

**Note 3 — 2000 Purchase Agreement and Capitalization**

 

OnDecember 28, 2000 Bionova Holding Corporation (“ the Company”) and its parentcompany, Savia, S.A. de C.V., entered into a Purchase Agreement to whichSavia’s subsidiary, Bionova International, Inc. is also a party.  The Purchase Agreement called for theCompany to sell its fresh produce farming and distribution business segments(“fresh produce business”), including all of the debt and liabilities of thebusiness, to Savia for $48 million.  Thepurchase price for the business was to be paid by the application of $48million of advances previously made by Savia to the Company.Also, the PurchaseAgreement provided for a capitalization of other advances made to the Companyby Savia.  Consistent with thisagreement, on December 29, 2000 the Company issued 200 shares of convertible preferredstock to Bionova International for $63.7 million, which was paid through theapplication of all of the remaining outstanding advances previously made bySavia to the Company (other than the $48 million which was to be retired uponthe sale of the fresh produce business). These 200 shares of preferred stock are convertible into 23,156,116shares of common stock (a conversion ratio based on $2.75 per share) at any time after adoption and filing by the Company of a charteramendment increasing the authorized number of shares of Common Stock to atleast 70,000,000.  The Company will notreceive any additional consideration upon the conversion of the preferredstock.  (As of the date of thesefinancial statements, the Company has not, and has no plans to complete thesale of the Company’s fresh produce business to Savia.  In addition, the Company has not as of thisdate increased the authorized shares nor have the preferred shares beenconverted into common stock.)

** **

For accounting purposes,the sale of the fresh produce business and the sale of the Series A convertiblepreferred stock were accounted for as transactions between entities undercommon control.  No gain or loss wasrecognized on the transactions as any differences between cash received and assetstransferred to the parent are treated as capital contributions ordistributions.  In December 2001 theCompany made a decision to postpone the sale of the fresh produce business toSavia.

 

The Company accounted forthe $63.7 million in cash received (in the form of advances retired) from Saviaand its subsidiary, Bionova International, Inc., as follows:

 

1.     The sale of Series A convertible preferredstock was recorded at $34.7 million, which represents the market value of thecommon stock on December 29, 2000, the date of the transaction, into which theSeries A convertible preferred shares may be converted.

 

2.     The remaining $29.0 million was accountedfor as an additional capital contribution.

 

In addition, the Companyaccrued interest expense totaling $9.9 million related to the advances fromSavia and its subsidiary, Bionova International, Inc., from April 13 throughDecember 29, 2000.  As a result of thecapitalization transaction and the planned, but subsequently uncompletedtransaction to sell the fresh produce business, the interest was deemed notpayable in 2001 and the reversal of accrued interest was accounted for as anadditional capital contribution.

 

**Note 4 —Discontinued Operations:  Closing ofResearch and Development Operations**

 

On May 13, 2002 BionovaHolding announced it had begun closing down its research and developmentoperations, including all of the activities carried out through its whollyowned DNAP and VPP subsidiary companies.The focus of DNAP’s research during thepast year had been the production of transgenic plants which provide improveddisease resistance for fruit and vegetable crops.  Concerns about public acceptance of transgenic products in thesemarkets made producers reluctant to invest in the development of transgenicfruits and vegetables.  Further, theagricultural industry has suffered from low prices for its products over thepast few years, leading growers, food companies and other providers to delaynew research and development investment. Despite an intensive search, these factors made it difficult for DNAP todevelop new customers; and, with the absence of a customer base, DNAP was notable to obtain venture capital or other financing sufficient to continueoperations.  Accordingly, the researchand development operations were closed down during May and June, including theOakland facility, and all personnel were laid off.  DNAP shifted its focus to the licensing and sale of itsintellectual property.  The shutdown ofoperations was completed on June 30, 2002.

 

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

 

In October 2001, the FASB issued Statement ofFinancial Accounting Standards No. 144 (“SFAS No. 144”), “Accounting for theImpairment or Disposal of Long-Lived Assets,” which is effective for fiscalyears beginning after December 15, 2001 and interim periods within those fiscalperiods.  This Statement supersedes FASBStatement No. 121 and APB 30, however, this Statement retains the requirementof Opinion 30 to report discontinued operations separately from continuingoperations and extends that reporting to a component of an entity that eitherhas been disposed of (by sale, by abandonment, or in a distribution to owners)or is classified as held for sale. Management has been working on the plan and structure to enable thetransfer of the remaining patents and trademarks of DNAP and VPP to BionovaHolding and/or its other subsidiaries.

 

The presentation of thediscontinued operations includes segregation of the operating results in theConsolidated Statement of Operations and Comprehensive Income and Loss for theyears ended December 31, 2002, 2001, and 2000. The net assets of the discontinued operations are segregated in theConsolidated Balance Sheet at December 31, 2002 and 2001 and in theConsolidated Statement of Cash Flows for the year ended December 31, 2002.  Accordingly, the revenues, costs andexpenses, assets and liabilities and cash flows of these discontinuedoperations have been excluded from the respective captions in the ConsolidatedStatement of Operations and Comprehensive Income and Loss, Consolidated BalanceSheet and Consolidated Statement of Cash Flows and have been reported as “Lossfrom operations of research and development business segment,” as a componentof the “Assets held for sale,” and as “Net assets of discontinued operations”for the periods noted above.  Theresults of discontinued operations do not include any interest expense ormanagement fees allocated by the Company. Data presented for earnings per share reflect the reclassification ofthe discontinued operations.

 

The results of the Company’s research and developmentoperations through the appropriate measurement dates (in thousands of dollars)are summarized as follows:

 
|                                    |   | **(Thousands  of U.S. Dollars)** |   |
|-----------------------------------------|--------|----------------------------------|--------|
|                                    |   | **Year Ended  December 31,**     |   |
|                                    |   | **2002**                         |   | **2001** |   | **2000** |   |
|                                    |   |                             |   |   |   |   |   |
| Revenues                                |   | 1,920                            |   | 3,129 |   | 3,467 |   |
| Loss  before provision for income taxes |   | (1,942                           | )      | (24,371 | ) | (7,056 | ) |
| Income  tax expense                     |   | —                           |   | — |   | — |   |
| Net  loss                               |   | (1,942                           | )      | (24,371 | ) | (7,056 | ) |

 

Summary data relating to the assets and liabilities ofthe Company’s research and development operations at December 31, 2002 and 2001are shown below.

** **
|                                    |   | **(Thousands  of U.S. Dollars)** |   |
|-----------------------------------------|--------|----------------------------------|--------|
|                                    |   | **December  31,**                |   |
|                                    |   | **2002**                         |   | **2001** |   |
| Current  assets                         |   | $                                | 0      |   | $ | 0 |   |
| Total  assets                           |   | 1,249                            |   | 3,325 |   |
| Current  liabilities                    |   | 84                               |   | 0 |   |
| Total  liabilities                      |   | 84                               |   | 0 |   |
| Net  assets of Research and Development |   | $                                | 1,165  |   | $ | 3,325 |   |

 

The Company has been, and continues to work on thelicensing and sale of its patents and trademarks.  For the twelve months ended December 31, 2002 the Companyreceived more than $1.3 million in revenue associated with these activities.

 

40

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*The footnotes to these financial statements reflectbalances of continuing operations as of December 31, 2002 and 2001.  Income and expense disclosures in thefootnotes to these financial statements, unless otherwise noted, reflect onlythose from continuing operations for the years ended December 31, 2002, 2001,and 2000.*

 

**Note 5 – Divestitures of Agricultural Assets, SubsidiaryCompanies and Strawberry Assets**

 

During the fourth quarterof 2002 ABSA sold land in Sinaloa, Mexico for $2.5 million.  A loss was recorded on this sale of $0.433million.  ABSA also sold an airplane for$0.093 million.  A loss was recorded onthe sale of the airplane of $0.099 million.

 

On February 19, 2001,IPHC sold its entire 75% interest in Tanimura Distributing, Inc. (“TDI”), itsLos Angles based distributing company, back to TDI in exchange for a noteobligating TDI to pay IPHC $1.2 million, plus interest at 10.5% per annum, overa three year period.   IPHC recorded aloss on the sale of TDI of $0.4 million in the first quarter of 2001.

 

On November 1, 2001 ABSAsold its entire 50.01% interest in Interfruver, S.A. de C.V., ABSA’sdistributing subsidiary in Mexico, to members of the Bon Family who previouslyhad owned the remaining 49.99%.  Inconsideration for ABSA’s interests, the consideration accorded ABSA by the Bonsconsisted of both a fixed and variable component.  The fixed component was approximately $2.6 million, of which $1.1million was purchase price and the balance of $1.5 million was payment foroutstanding accounts receivable and for services provided by ABSA both prior tothe date of the purchase agreement and in 2002.  There is an additional variable component of the purchase pricedue to be paid through four annual payments in calendar years 2002-2005.  ABSA received $1.7 million in November 2001,$0.7 million in March 2002, and $0.2 million in August 2002.   ABSA recorded a loss on the sale ofInterfruver of $5.0 million in the fourth quarter of 2001.

 

During the second quarterof 2001 VPP shut down its strawberry breeding program, and in the fourthquarter sold the assets associated with this program.  VPP recorded a $3.4 million loss on the sale of these assets in2001, which is included in the Loss from operations of the research anddevelopment business segment.

 

**Note 6 – Accounts Receivable**

 

Accounts receivable werecomprised of the following:

 
|                                         |   | **(Thousands  of U.S. Dollars)** |   |
|----------------------------------------------|--------|----------------------------------|--------|
|                                         |   | **December  31,**                |   |
|                                         |   | **2002**                         |   | **2001** |   |
| Trade                                        |   | $                                | 11,093 |   | $ | 17,645 |   |
| Recoverable  value-added tax                 |   | 1,562                            |   | 1,728 |   |
| Officers  and employees                      |   | 38                               |   | 44 |   |
| Sundry  debtors                              |   | 1,691                            |   | 2,540 |   |
| Related  parties                             |   | 2,086                            |   | 873 |   |
|                                         |   | 16,470                           |   | 22,830 |   |
| Allowance  for doubtful accounts and returns |   | (2,826                           | )      | (2,852 | ) |
|                                         |   | $                                | 13,644 |   | $ | 19,978 |   |

 

The Company sells itsproduce primarily to retailers and wholesalers in the United States, Mexico andCanada.  No single customer accountedfor more than 10% of the Company’s sales, and there were no significantaccounts receivable from a single customer at December 31, 2002.

 

41

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**Note 7 – Advances to Growers**

 

Advances to growers werecomprised of the following:

 
|                             |   | **(Thousands  of U.S. Dollars)** |   |
|----------------------------------|--------|----------------------------------|--------|
|                             |   | **December  31,**                |   |
|                             |   | **2002**                         |   | **2001** |   |
| Advances  to growers             |   | $                                | 9,402  |   | $ | 13,652 |   |
| Advances  to related parties     |   | 233                              |   | 233 |   |
|                             |   | 9,635                            |   | 13,885 |   |
| Allowance  for doubtful accounts |   | (6,322                           | )      | (4,886 | ) |
|                             |   | $                                | 3,313  |   | $ | 8,999 |   |

 

The Company hadagreements in 2002 and 2001 with certain produce growers in Mexico whereby asignificant portion of growing costs were paid in advance by the Company.  The growing costs were recorded as advancesto growers and recognized as a component of cost of produce sales when theproduce is sold.  The advances in Mexicowere $1.3 million and $ 7.3 million at December 31, 2002 and 2001,respectively, and were secured by promissory notes and/or the right to use theacreage of the grower if the advances were not repaid.  Advances to growers in the United Stateswere $1.6 million and $ 2.4 million at December 31, 2002 and 2001,respectively, and generally were not collateralized.

 

**Note 8 –Inventories**

 

Inventories werecomprised of the following:

 
|                                 |   | **(Thousands  of U.S. Dollars)** |   |
|--------------------------------------|--------|----------------------------------|--------|
|                                 |   | **December  31,**                |   |
|                                 |   | **2002**                         |   | **2001** |   |
| Finished  produce                    |   | $                                | 762    |   | $ | 844 |   |
| Growing  crops                       |   | 2,660                            |   | 5,691 |   |
| Advances  to suppliers               |   | 1,732                            |   | 727 |   |
| Spare  parts and materials           |   | 2,340                            |   | 2,875 |   |
| Merchandise  in transit and other    |   | 3,724                            |   | 2,836 |   |
|                                 |   | 11,218                           |   | 12,973 |   |
| Allowance  for slow moving inventory |   | —                           |   | (188 | ) |
|                                 |   | $                                | 11,218 |   | $ | 12,785 |   |

 

**Note 9 – Assets Held for Sale**

 

Assets held for sale were comprised of the following:

** **
|                                              |   | **(Thousands  of U.S. Dollars)** |   |
|---------------------------------------------------|--------|----------------------------------|--------|
|                                              |   | **December  31,**                |   |
|                                              |   | **2002**                         |   | **2001** |   |
| Agricultural  land in Sinaloa, Mexico             |   | $                                | 322    |   | $ | 3,255 |   |
| Agricultural land in Guerrero, Mexico             |   | 825                              |   | 825 |   |
| Commercial  land in San Diego, California         |   | 580                              |   | — |   |
| Commercial  airplane held by Bionova Produce, Inc |   | 1,298                            |   | 165 |   |
|                                              |   | $                                | 3,025  |   | $ | 4,245 |   |

 

42

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**Note 10 – Property, Plant, and Equipment**

 

Property, plant andequipment was comprised of the following:

 
|                                       |   | **(Thousands  of U.S. Dollars)** |   |     |   |
|--------------------------------------------|--------|----------------------------------|--------|----------|--------|
|                                       |   | **December  31,**                |   |     |   |
|                                       |   | **2002**                         |   | **2001** |   | **Estimated  Useful life** |   |
| Land                                       |   | $                                | 8,042  |     | $      | 6,052 |   |   |   |
| Buildings                                  |   | 12,009                           |   | 11,875   |   | 25 years |   |
| Machinery  and equipment                   |   | 21,292                           |   | 21,238   |   | 15 years |   |
| Office  equipment                          |   | 3,441                            |   | 3,969    |   | 4 years |   |
| Transportation  equipment                  |   | 2,690                            |   | 3,918    |   | 10 years |   |
| Land  improvements and others              |   | 1,043                            |   | 739      |   | 13 years |   |
|                                       |   | 48,517                           |   | 47,791   |   |   |   |
| Accumulated  depreciation and amortization |   | (15,665                          | )      | (14,796  | )      |   |   |
|                                       |   | $                                | 32,852 |     | $      | 32,995 |   |   |   |

 

**Note 11 – Impairment of Goodwill and Intangible Assets**

 

In December 2001, inconnection with its ongoing review of business operations, the Companyconducted a strategic and financial examination of its business segments.  This examination triggered an impairmentreview of certain long-lived assets, including goodwill, patents andtrademarks.  The Company calculated thepresent value of expected cash flows of its fresh produce and technologybusinesses to determine the fair value of those assets.  Accordingly, the Company recorded animpairment charge on the goodwill of the fresh produce business in the amountof $14.3 million in 2001.  An additional$7.6 million goodwill impairment charge was taken on the discontinuedoperations of the research and development (technology) segment of thebusiness.  The Company also determinedthat the value of the patents and trademarks of its research and developmentbusiness had become impaired in 2001, and an $8.0 million charge was recordedfor the impairment of these assets.

 

The Company’s technologyassets became impaired because of (i) the decision to terminate VPP’s breedingprogram and dispose of the related assets and (ii) the change in DNAP’stechnology strategy from a focus on quality trait improvements and thecommercialization of fruits and vegetables using these traits to a technologyprogram focused on disease and nematode resistance traits with value derivingfrom the sale or licensing of these traits. The Company’s fresh produce assets were determined to have becomeimpaired based on the future outlook for cash flows of the fresh producebusiness taking into account its failure to generate a positive annual cashflow in each of the past six years and an analysis of the reasons underlyingthis performance failure.

 

**Note 12 – Other Assets, net**

 

Other assets werecomprised of the following:

 
|                             |   | **(Thousands  of U.S. Dollars)** |   |
|----------------------------------|--------|----------------------------------|--------|
|                             |   | **December  31,**                |   |
|                             |   | **2002**                         |   | **2001** |   |
| Notes  receivable from growers   |   | $                                | 9,961  |   | $ | 13,508 |   |
| Others                           |   | 1,867                            |   | 872 |   |
|                             |   | 11,828                           |   | 14,380 |   |
| Allowance  for doubtful accounts |   | —                           |   | (3,651 | ) |
|                             |   | $                                | 11,828 |   | $ | 10,729 |   |

 

43

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**Note 13 – Bank Loans and Long-Term Debt**

 

*Bank loans*

 

At December 31, 2002 allof the Company’s $9.8 million of bank debt, all of which was current, wasassociated with its U.S. distributing companies.

 

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 Business Credit,Inc. which run through April 2006. There are three separate, but related loan components associated withthese credit facilities.  First, BionovaProduce, Inc. was extended a “permanent term loan” of $1.75 million, which willbe amortized over 10 years.  Interest ischarged at the Wells Fargo prime rate of interest plus 1.5%, and interest andprincipal amortization payments are made on a monthly basis.  The second component is a “seasonal termloan” of $1.75 million, although only $1.25 million will be extended at thistime.  Interest is charged at the WellsFargo prime rate of interest plus 1.5%, and interest payments are made on amonthly basis.  The outstanding principalbalance on the seasonal term loan is amortized each year during the months of Januarythrough April, and may then be borrowed again in full on May 1.  The third component is a $7 millionrevolving line of credit to support working capital requirements of the freshproduce business.  The revolving line ofcredit must be paid down to a maximum of $1.5 million for a 30 day periodbetween July 1 and September 30 each year. Interest on this revolving line of credit is charged at the Wells Fargoprime rate of interest plus 1.0%.  Allthree components of the credit facilities are secured by all of the real andintangible assets of the three U.S. distributing companies and are guaranteedby both Bionova Holding and its parent company, Savia.   The key covenants associated with thesecredit facilities are that the three distributing companies as a group mustmaintain a minimum net worth of $8.75 million, a debt service coverage ratio ofat least 1.25 to 1, achieve minimum levels of quarterly earnings before taxesto be agreed between the Company and Wells Fargo annually, and the distributinggroup may not experience a net loss during any month that exceeds $0.5 millionor a net loss for a two month period that exceeds $0.3 million.  Also, there are provisions in the creditagreement that may permit Wells Fargo Business Credit, Inc. to declare an eventof default if Savia fails to complete the restructuring of its debt facilitieswith its banks.  As of the date of thesefinancial statements, the Company believes it is in compliance with all of thecovenants of these facilities with the exception of the Savia covenant.  While Savia believes it now has reached averbal understanding with its creditors and expects to move ahead with thecorresponding documentation to solidify an agreement, the restructuring is notyet complete.  Bionova Holding is indiscussions with Wells Fargo Business Credit in an effort to reach anaccommodation on this issue. Accordingly, since the Company has technically incurred an event ofdefault, the long-term component of the debt has been reclassified as acomponent of the current portion of long-term debt.

 

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.  As Bionova Produce is in theprocess of trying to sell this airplane, this asset has been classified asbeing held for sale and the debt has been reclassified as a component of thecurrent portion of long-term debt.

 

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 (see Note 20) inconjunction with certain pieces of land being transferred to ABSA.  OnMarch 7, 2003, a new agreement was signed by Libra, the Alvarez family (theformer owners of Libra), and ABSA whereby ABSA will transfer certain pieces ofland it received from Libra stemming from the October 3, 2001 agreement to theMexican financial institution in exchange for a release from the $2.3 millionmortgage obligation. The transfer of the land and the release of the mortgageobligation are expected to be completed during 2003 and therefore, the totaldebt obligation has been classified as short-term.

 

*Long-term debt*

 

On March 22, 1999, the Company issued $100 million ofSenior Guaranteed Floating Rate Notes due March 23, 2002.  The interest rate on this debt during thefirst quarter of 2000 was 12.28%.  Inaddition, the Company was charged a service fee of 1% by Savia relating to itsguarantee on these notes.   On April 13,2000 the entire amount of the $100 million of Senior Guaranteed Floating RateNotes was retired.  Financing for thisearly

 

44

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retirement of the notes was provided by Savia.  Savia agreed to provide this $100 million offinancing on terms no less favorable than the terms of the Floating RateNotes.   Savia also agreed that BionovaHolding could defer all interest payments until the final maturity date ofMarch 23, 2002, and that Bionova Holding would not be required to maintain anyfunds in an interest reserve account. On December 29, 2000 $52.0 million of the advances from Savia wascapitalized and the balance of $48 million remains as an advance towards thesale of the fresh produce business to Savia.

 

Upon retirement of the $100 million of the SeniorGuaranteed Floating Rate Notes, the Company recorded an extraordinary loss of$1.9 million to write off the remaining debt issuance costs included in otherassets.

 

As a result of the capitalization and saletransaction, $9.9 million of accrued interest that would otherwise have beenpayable was reversed and treated as part of Savia’s capital contribution foraccounting purposes.

 

Consolidated obligationsunder long-term debt arrangements are denominated in U.S. dollars and werecomprised of:

 

45

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|                                                                                                                                       |   | **(Thousands  of U.S. Dollars)** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                       |   | **December  31,**                |   |
|                                                                                                                                       |   | **2002**                         |   | **2001** |   |
|                                                                                                                                       |   |                             |   |   |   |
| Capital  lease obligations secured by the related equipment acquired, bearing interest  at variable annual rates (14% at December 31, 2001 |   | $                                | — |   | $ | 19 |   |
|                                                                                                                                       |   |                             |   |   |   |
| Mortgage  notes payable to banks secured by real property, interest at prime plus 1.5%  (5.75% and 8.25% at December 31, 2002 and 2001)    |   | —                           |   | 700 |   |
|                                                                                                                                       |   | —                           |   | 719 |   |
| Less  current portion                                                                                                                      |   | —                           |   | 161 |   |
| Long-term  debt                                                                                                                            |   | $                                | — |   | $ | 558 |   |

 

**Note 14 – Accounts Payable and Accrued Expenses**

 

Accounts payable andaccrued expenses were comprised of the following:

 
|                  |   | **(Thousands  of U.S. Dollars)** |   |
|-----------------------|--------|----------------------------------|--------|
|                  |   | **December  31,**                |   |
|                  |   | **2002**                         |   | **2001** |   |
| Trade                 |   | $                                | 9,812  |   | $ | 10,789 |   |
| Payables  to growers  |   | 1,527                            |   | 1,137 |   |
| Accrued  compensation |   | 635                              |   | 483 |   |
| Accrued  interest     |   | 85                               |   | 83 |   |
| Income  taxes payable |   | 1,669                            |   | 1,077 |   |
| Sundry  creditors     |   | 2,278                            |   | 4,959 |   |
|                  |   | $                                | 16,006 |   | $ | 18,528 |   |

 

**Note 15 – Income Taxes**

 

The (charges) credits forincome taxes are summarized as follows:

 
|                |   | **(Thousands  of U.S. Dollars)** |   |
|---------------------|--------|----------------------------------|--------|
|                |   | **Year ended  December 31,**     |   |
|                |   | **2002**                         |   | **2001** |   | **2000** |   |
| Current             |   |                             |   |   |   |   |   |
| United States       |   |                             |   |   |   |   |   |
| Federal             |   | $                                | (26    | ) | $ | — |   | $ | — |   |
| State               |   | —                           |   | — |   | (48 | ) |
| Foreign             |   | (550                             | )      | (1,570 | ) | (933 | ) |
|                |   | $                                | (576   | ) | $ | (1,570 | ) | (981 | ) |
| Deferred            |   |                             |   |   |   |   |   |
| United  States      |   |                             |   |   |   |   |   |
| Federal             |   | $                                | — |   | $ | — |   | $ | — |   |
| State               |   | —                           |   | — |   | 257 |   |
| Foreign             |   | 4                                |   | 898 |   | 81 |   |
|                |   | 4                                |   | 898 |   | 338 |   |
| Income  tax expense |   | $                                | (572   | ) | $ | (672 | ) | $ | (643 | ) |

 

46

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Income tax (expense)benefit differs from the amounts computed by applying the statutory federalincome tax rate (35% in Mexico and 34% in United States) to pretax income as aresult of the following:

 
|                                                                                 |   | **(Thousands  of U.S. Dollars)** |   |
|--------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                 |   | **Year ended  December 31,**     |   |
|                                                                                 |   | **2002**                         |   | **2001** |   | **2000** |   |
| Tax  benefit at statutory rate in the United States (34%)                            |   | $                                | 6,941  |   | $ | 18,959 |   | $ | 14,251 |   |
| Effect  of lower tax rate of 17% for agricultural businesses in Mexico               |   | (1,780                           | )      | (2,288 | ) | (3,259 | ) |
| Change  in valuation allowance of deferred tax assets                                |   | 70                               |   | (28,677 | ) | (18,281 | ) |
| Taxable  inflationary gains in Mexico                                                |   | (68                              | )      | 27 |   | 110 |   |
| Depreciation  on inflation-indexed value of property, plant, and equipment in Mexico |   | 37                               |   | (3 | ) | 20 |   |
| State  taxes                                                                         |   | 4                                |   | — |   | 291 |   |
| Effect  of change in ABSA’s tax filing status                                   |   | (6,385                           | )      | 8,651 |   | 4,972 |   |
| Other                                                                                |   | 609                              |   | 2,659 |   | 1,253 |   |
|                                                                                 |   | $                                | (572   | ) | $ | (672 | ) | $ | (643 | ) |

 

Significant components ofthe Company’s deferred tax liabilities and assets at December 31, 2001 and 2000are shown below:

 
|                            |   | **(Thousands  of U.S. Dollars)** |   |
|---------------------------------|--------|----------------------------------|--------|
|                            |   | **December  31,**                |   |
|                            |   | **2002**                         |   | **2001** |   |
| Deferred  tax assets            |   |                             |   |   |   |
| Tax  loss carryforwards         |   | $                                | 77,226 |   | $ | 77,748 |   |
| Other                           |   | 3,856                            |   | 1,281 |   |
| Total  deferred tax assets      |   | 81,082                           |   | 79,029 |   |
| Valuation  allowance            |   | (74,108                          | )      | (79,029 | ) |
| Net  deferred tax assets        |   | 6,974                            |   | — |   |
| Deferred  tax liabilities       |   |                             |   |   |   |
| Inventories                     |   | (676                             | )      | — |   |
| Other                           |   | (6,298                           | )      | — |   |
| Total  deferred tax liabilities |   | (6,974                           | )      | — |   |
| Net  deferred tax liabilities   |   | $                                | — |   | $ | — |   |

 

The Mexican asset tax of1.8% on certain net assets is not applied during the first three years after anasset is placed in service.  This tax,once applied, is due if Mexican federal income taxes are not in excess of theasset tax and can be reduced by tax credits for certain property, plant andequipment investments.  Asset taxes paidcan be recovered in future years from taxes on future income in excess offuture asset taxes.  Through December31, 2002, investment tax credits have offset applicable asset taxes.

 

Effective for the year ended December 31, 1999, ABSAchanged to a simplified tax filing status for agricultural businesses aspermitted by Mexican tax law.  Under thesimplified filing status, taxable income is calculated as stockholders’ equityover and above common stock and additional paid-in-capital and is payable whendividends are paid to stockholders.  Asa result, deferred tax assets generated under the simplified tax filing statusconsist of the accumulated deficit recorded on the books of ABSA and areincluded in tax loss carryforwards.

 

At December 31, 2002, theCompany had total tax loss carryforwards of approximately$262.6 million.  Tax losscarryforwards from the Company’s Mexican subsidiaries can be inflation-indexedin Mexico until the date of their application against future taxable profits.The tax loss carryforwards expire from 2003 to 2009.  The tax loss carryforwards are contained in the Company’s Mexicansubsidiaries ($145.7 million), U.S. subsidiaries ($116.9 million),and other foreign subsidiaries ($0.0 million).

 

47

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DNAP had tax losscarryforwards at the date of the Merger whose utilization is limited to $27.8million.  A full valuation allowance hasbeen provided with respect to these tax loss carryforwards.

 

**Note 16 – Purchase of Common Stock**

 

On December 23, 2002,IPHC entered into an agreement with E. I. du Pont de Nemours and Company andits wholly owned subsidiary DuPont Chemical and Energy Operations, Inc.(collectively referred to as “Dupont”) to buy all of the 575,000 BionovaHolding shares held by these two companies. The price IPHC agreed to pay to Dupont was $0.05 per share, or a totalof $28,750.  Dupont was provided with apromissory note in exchange for its shares on December 23, 2002.  This note was paid in full on January 14,2003.

 

**Note 17 – Convertible Preferred Stock**

 

The rights, preferences and privileges of the Series A preferred stockare as follows:

 

*Dividends*

 

The holders of shares of the Series A preferredstock are entitled to receive dividends payable when and as declared by theBoard of Directors of the Company at a rate determined by the Board ofDirectors.  No dividend shall be paid oncommon stock unless dividends have been paid or declared upon all shares ofSeries A preferred stock at a rate per share equal to the dividend payment onthe common stock into which each share of Series A preferred stock isconvertible.  As of December 31, 2002,no dividends had been declared or paid.

 

*LiquidationPreference*

 

In certain events, including liquidation,dissolution or winding up of the Company, the holders of Series A preferredstock have a preference in liquidation over the common stockholders of $10,000per share, plus any dividends declared but unpaid thereon.  If the assets of the Company are notsufficient to fulfill the liquidation amount, the stockholders will share inthe distribution of the assets on a pro rata basis based on the liquidationamount.

 

*VotingRights*

 

Each holder of preferred stock shall be entitledto one vote for each share held. Holders of Series A preferred stock are limited to votes on (i) acreation or adjustment to securities senior to the Series A preferred stock, or(ii) amendments to the Company’s Certificate of Incorporation that wouldadversely affect the rights and preferences of the Series A preferred stock.

 

*Conversion*

 

The Series A preferred stock is convertible intocommon stock at the option of the holder at any time after adoption and filingby the Company of a charter amendment increasing the authorized number ofshares of Common Stock to at least 70,000,000. Each share of preferred stock is convertible into 115,780.58 shares ofcommon stock, subject to customary adjustments to protect against dilution.

 

**Note 18 – Stock Options and Warrants**

 

*Stock Option Plans*

 

As a result of the Mergerthe Company assumed DNAP’s existing stock option plans.  The number of shares and option exerciseprices were adjusted to give effect to the exchange ratio stipulated in themerger agreement.  The six plans are the1982 Stock Option Plan, 1986 Stock Option Plan, 1994 Stock Option Plan, theNon-Employee Directors Stock Option Plan, the Incentive Stock Option Plan, andthe Non-Qualified Stock Option Plan. ** **Approximately13,200 options were outstanding at December 31, 2002 under all of these stockoption plans.  The Company does notexpect to award any new options under any of these plans.

 

48

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The 1986 Plan and 1994Plan provided for the granting of incentive stock options, as defined under theInternal Revenue Code, and non-qualified stock options, restricted stock andstock appreciation rights to officers and employees of, and consultants andadvisors to DNAP (and now the Company), at prices which were generally not lessthan the fair market value of the common stock on the date of grant andexpiring ten years from the date of grant.

 

The Directors’ Planprovided for initial and annual grants of non-qualified stock options to eachnon-employee director at prices which were equal to 90% and 100%, respectively,of the fair market value of DNAP’s (and now the Company’s) common stock on thedate of grant and expiring ten years from the date of grant.  An initial director’s option becameexercisable in five equal annual installments, beginning one year from the dateof grant, and the annual awards became fully exercisable within one year fromthe date of grant.

 

In addition to theoptions plans assumed at the time of the Merger, the first awards were madeunder Bionova Holding Corporation’s 1998 Long-Term Incentive Plan in 1999.  This plan provides for the issuance of stockoptions and other forms of stock-based awards to all employees and directors ofthe Company.  The maximum number ofshares of common stock that are available for grant of awards under this planis not to exceed 2,000,000 shares.  AtDecember 31, 2002 there were 127,800 options outstanding under this plan.  These options vest in equal amounts of 25%per year over a four-year period.

 

A summary of the activityunder all of the Company’s stock option plans during 2000, 2001, and 2002 is asfollows:

 
|                                      |   | **Stock  Options** |   |
|-------------------------------------------|--------|--------------------|--------|
|                                      |   |               |   |
| Outstanding  on December 31, 1999         |   | 362,092            |   |
| Expired  and canceled                     |   | (36,447            | )      |
| Outstanding  on December 31, 2000         |   | 325,645            |   |
| Expired  and canceled                     |   | (109,625           | )      |
| Outstanding  on December 31, 2001         |   | 216,020            |   |
| Expired  and canceled                     |   | (75,020            | )      |
| Outstanding  on December 31, 2002         |   | 141,000            |   |
| Available  for grant at December 31, 2002 |   | 1,872,200          |   |
| Exercisable  at December 31, 2002         |   | 109,050            |   |
| Option  prices per share:                 |   |               |   |
| Expired  or canceled                      |   | $ 3.25 to $65.25   |   |
| Outstanding                               |   | $ 3.25 to $56.25   |   |

 

The following tablesummarizes information about the outstanding stock options at December 31,2002.

 
| **Range of exercise prices** |   | **Options  Outstanding** |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number of  Exercisable  Options** |    | **Weighted  Average  Exercise  Price** |   |
|------------------------------|--------|--------------------------|--------|-----------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------|---------|----------------------------------------|--------|
|                         |   |                     |   |                                                |   |                                   |   |                                |    |                                   |   |
|   $ 3.25                |   | 127,800                  |   | 6.33 Yrs.                                           |   | $                                      | 3.25   |                                | 95,850  |                                   | $      | 3.25 |   |
| $  20.31                     |   | 3,500                    |   | 2.41 Yrs.                                           |   | $                                      | 20.31  |                                | 3,500   |                                   | $      | 20.31 |   |
| $  38.75 – $56.25       |   | 9,700                    |   | 0.67 Yrs.                                           |   | $                                      | 47.10  |                                | 9,700   |                                   | $      | 47.10 |   |
| Total                        |   | 141,000                  |   | 6.76 Yrs.                                           |   | $                                      | 6.68   |                                | 109,050 |                                   | $      | 9.53 |   |

 

*Fair Value Disclosures*

 

The fair value of optionsgranted in 1999 was estimated using the Black-Scholes model with the following weighted averageassumptions:  dividend yield of 0%,expected volatility of 114%, risk free interest rate of 5.2%, and an expectedlife of 7 years.

 

49

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As discussed in Note 2, the Company accounts for itsstock-based compensation using the method prescribed by APB No. 25. Had theCompany determined its stock-based compensation based on the fair value at thegrant dates for the awards under a method prescribed by SFAS No. 123, theCompany’s net loss would have been increased to the FAS 123 adjusted amountsindicated below, as amended by SFAS No. 148:

 
|                                                                                                        |   | **Thousands  of U.S. Dollars  (except per share amounts)  Year Ended  December 31,** |    |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|---------|
|                                                                                                        |   |                                                                                 |    |   |   |   |   |
|                                                                                                        |   | **2002**                                                                             |    | **2001** |   | **2000** |   |
|                                                                                                        |   |                                                                                 |    |   |   |   |   |
| Net  loss, as reported                                                                                      |   | $                                                                                    | (20,415 | ) | $ | (56,594 | ) | $ | (32,411 | ) |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards |   | (25                                                                                  | )  | (85 | ) | (207 | ) |
| Net  loss – FAS 123 adjusted                                                                           |   | (20,440                                                                              | )       | (56,679 | ) | (32,618 | ) |
| Net  loss per common share – basic and diluted                                                         |   |                                                                                 |    |   |   |   |   |
| As  reported                                                                                                |   | (0.87                                                                                | )       | (2.40 | ) | (1.37 | ) |
| Pro  forma                                                                                                  |   | (0.87                                                                                | )       | (2.40 | ) | (1.38 | ) |
|                                                                                                             |        |                                                                                      |         |  |  |  |  |  |  |  |

 

**Note 19 – Balances and Transactions with Related Parties**

 

The Company believes thatthe terms of the related party transactions discussed in this section were atleast as favorable to Bionova Holding as those that could have been secured inarm’s length transactions.

 

*Debt Facilities with Savia and Accounts due to Savia’s  Subsidiaries*

 

At December 31, 2002 and2001 ABSA was indebted to Savia in a total amount of $19.8 million and $19.1million, respectively.  ABSA’s debt withSavia came about due to funds provided by Savia which enabled ABSA to pay downits entire $20.0 million of debt with Mexican commercial banks in December 2000and January 2001.  ABSA’s debt withSavia currently is accruing interest at a rate of approximately 9.0% per annumand is due on December 31, 2003.

 

At December 31, 2002 and 2001, Bionova Holding wasindebted to Savia in a total amount of $72.2 million and $62.9 million,respectively.  This debt arose from$48.0 million of advances made prior to 2001, $7.5 million advanced during 2001under a cash support agreement for the payment of expenses incurred in 2001 forits technology business and corporate overhead, and interest that has beenaccruing on these advances.  This debtcurrently is continuing to accrue interest at a rate of 12.25% per annum, andinterest and principal are due on December 31, 2003.

 

At December 31, 2002 and2001 DNAP was indebted to Savia for $1.3 million due to Savia’s agreement tosettle the Grace Brothers lawsuit on behalf of DNAP.

 

At December 31, 2002 and2001, other subsidiary companies of Bionova Holding associated with the freshproduce business had related party advances from Savia and its subsidiaries ina total amount of $3.6 million and $6.0 million, respectively.

 

*Administrative Services Agreement*

 

On July 1, 1996, BionovaHolding and Bionova, S.A. de C.V. (“Bionova Mexico”) entered into anAdministrative Services Agreement.  Thisagreement provided that Bionova Mexico will render certain administrative andclerical services to Bionova Holding and its subsidiaries in return for paymentequivalent to the compensation, benefits, and other overhead attributable tothe employees of Bionova Mexico performing these services, all of which will beperformed in Mexico.  This agreement wasterminated as of August 31, 2001.

 

50

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Amounts billed in 2001 and 2000 by Bionova Mexico under this agreementwere $0.743 million and $4.500 million, respectively.  At December 31,2002 and 2001, the Company had no outstanding payable due to Bionova Mexico.

 

An AdministrativeServices Agreement between Comercializadora Premier, S.A. de C.V. (“PremierMexico”) a wholly-owned subsidiary of ABSA, and Savia was entered into onSeptember 1, 2001.  This agreementprovides that Savia will render certain administrative and clerical services toPremier Mexico (and other Bionova Holding subsidiaries) in return for paymentequivalent to the compensation, benefits, and other overhead attributable tothe employees of Savia performing these services, all of which will beperformed in Mexico.  The term of thisagreement will continue until either Premier Mexico or Savia elects toterminate the agreement.  Amounts billedin 2002 and 2001 by Savia under this agreement were $0.0 and $0.252 million,respectively.  As of December 31, 2002and 2001, the Company had a payable to Savia outstanding of $0.252 million and$0.252 million, respectively, on this agreement.  The outstanding balances bear interest at variable ratescomparable to those prevailing in the marketplace.

 

*Long-term Funded Research Agreement*

 

DNAP and Seminis Vegetable Seeds, Inc., a subsidiaryof Savia, entered into a Long-Term Research Agreement effective January 1,1997, which provided that Seminis and DNAP would agree on research projects tobe conducted by DNAP for Seminis which would result in payments to DNAP of $25million over a ten-year period, with minimum funding (subject to carryforwards) of $7.5 million in any three-year period.  Unless otherwise agreed by the parties, payments of at least$0.625 million in respect of Seminis’s obligation to fund research projectswere to be paid to DNAP at the beginning of each calendar quarter during theterm of the Long Term Funded Research Agreement.  During 2001 Seminis reduced the amount of research payments itmade to DNAP to a rate of $1.4 million per year.  During 2002, 2001, and 2000 Seminis paid DNAP $0.583 million,$2.130 million, and $2.390 million, respectively, for work performed under thisagreement.  In conjunction with theclosing of the Company’s research and development operation, DNAP and Seministerminated their Long-Term Research Agreement. Seminis made a cash payment of $150,000 as part of the terminationagreement, and DNAP received certain technology rights.

 

*Royalty Advance for Rights to Produce and Sell DNAP Product*

 

In the third quarter of2002 DNAP executed a transaction with Seminis. This transaction provided Seminis with a non-exclusive right to produceon a worldwide basis, and an exclusive right to sell in Europe and Asia DNAP’spatented sweet mini peppers.  DNAPreceived an advance cash payment of $2 million against future royalty payments,which is included in Accounts due to related parties.  The agreement provides that after two years Seminis has the rightto terminate the agreement and that DNAP would be required to reimburse Seminisfor any unearned portion of the royalty advance.

# ** **

*Non-exclusive Contract Rights to Produce and Sell Products*

# ** **

# **During 2002 Bionova Holding’s fresh produce companiesentered into an agreement with Seminis whereby the fresh produce companies willhave a non-exclusive right to grow and sell certain high value productsproduced with seeds developed and grown by Seminis.  The fresh produce companies will be obligated to pay only for theprice of the seed.  While the Companyhas purchased a small quantity of seed in 2003, no products have yet been soldwith any of this Seminis seed.**

# ** **

# ***Purchase and Sale of Fresh Produce***

 

Bionova Produce of Texas, Inc. and Bionova Produce,Inc. purchase and sell papaya on behalf of Agromod, S.A. de C.V., awholly-owned subsidiary of Savia. Purchases in 2002 totaled $1.6 million. The Company earned commissions on these sales which amounted to $0.179million in 2002.

 

*Deferred Compensation and Loans from Management*

 

Beginning in the thirdquarter of 2002, and continuing into the fourth quarter, four of the Company’ssenior managers deferred receipt of their salary compensation because of theCompany’s tight cash situation.  Inaddition, the president of the Company’s fresh produce business loaned theCompany $0.2 million in the month of August 2002.  The compensation that was deferred along with the loan by thepresident were paid back in full by the Company in December 2002.

 

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*Legal Representation*

 

The Secretary of theCompany is a shareholder in the law firm which provides legal services to theCompany and several subsidiaries. During 2002, 2001, and 2000, the law firm billed approximately $0.375million, $0.908 million, and $0.578 million, respectively, to the Company.

 

**Note 20 – Commitments and Contingencies**

 

*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 ofBionova Holding 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 were entitledto receive, and seek specific performance of, special conversion privilegesunder the terms of the Certificate of Designation that established thePreferred Stock.  On March 8, 2000, thecourt 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 the 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 California statecourts.  In December 1999, B&W agreedto indemnify DNAP against all costs (including costs of defense and of costs ofany judgment or settlement) incurred by DNAP in connection with these cases andany 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 ofoperations.  DNAP denies any wrongdoingor liability in these 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 October 3, 2001 ABSA (as the Mexican designee ofBionova Produce, Inc.) entered into an agreement with Libra Exportaciones, S.A.de C.V. (“Libra”) whereby (i) ABSA or its designee would acquire all of theshares of Libra with all of its goods, rights, obligations and liens, (ii) ABSAwould pay on behalf of Libra $350,000 to a Mexican financial institution whichholds a lien on certain property held by the Alvarez family (who were the

 

52

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owners of Libra) ,(iii) ABSA would receive title to four separate pieces of land from the Alvarezfamily and (iv) ABSA would assume a $2.3 million mortgage obligation to aMexican financial institution in conjunction with certain pieces of land beingtransferred to ABSA.  During 2001, theCompany paid and expensed $200,000 of the original $350,000 to be paid to aMexican financial institution.  On March 7, 2003, a new agreement wassigned by Libra, the Alvarez family, and ABSA whereby  (i) ABSA would makepayment of the final $150,000 that was withheld on the original $350,000 thatwas due to a Mexican financial institution in exchange for a release from thefinancial institution which holds a lien on certain property held by theAlvarez family, (ii) ABSA would transfer the pieces of land it received from theAlvarez family stemming from the October 3, 2001 agreement to the Mexicanfinancial institution in exchange for a release from the $2.3 million mortgageobligation, (iii) the Alvarez family would drop its claim against BionovaProduce for failure to make payment of the $150,000 and (iv) the Alvarez familywould provide ABSA an indemnity letter with regards to the stated assets andliabilities of Libra.  During 2002, theCompany recognized the land that was transferred to ABSA by the Alvarez familyat a value of $2.3 million, a liability for the mortgage obligation assumed inthe amount of $2.3 million and a liability for $150,000 for the final paymentdue on the original $350,000 due to a Mexican institution.  The Company expects the terms of the March7, 2003 agreement to be completed during the second quarter of 2003.

 

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 make additional payments in an amount as great as $4.0 million inthe future.  The granting of theseadditional licenses is contingent on the conclusion of a lawsuit in whichMonsanto is involved.  The Company doesnot believe this case is likely to be decided for at least two to three years,and it is not possible to predict with any certainty whether Monsanto will winor lose the case.

 

*Commitments*

 

The Company leasescertain facilities and land under non-cancelable operating leaseagreements.  The leases expire atvarious dates through 2004 and provide that the Company pay the taxes,insurance and maintenance expenses related to the leased facilities.  The monthly rental payments are subject toperiodic adjustments.  Certain leasescontain fixed escalation clauses, and rent under these leases is chargedratably over the lease term.

 

The aggregate futureminimum lease obligations under capital and operating leases are as follows:

 
|                                 |   | **(Thousands  of U.S. Dollars)** |       |
|--------------------------------------|--------|----------------------------------|------------|
| For  the year ending December 31,    |   |                             | ** ** |
| 2003                                 |   | $                                | 1,349      |   |
| 2004                                 |   | 830                              |       |
| 2005                                 |   | 830                              |       |
| 2006                                 |   | 623                              |       |
| 2007                                 |   | 591                              |       |
| Thereafter                           |   | 1,022                            |       |
| Total  future minimum lease payments |   | $                                | 5,245      |   |

 

53

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**Note 21 - Information on Segments and Operations in DifferentGeographic Areas**

 

For operating andfinancial reporting purposes, the Company historically has classified itsbusiness into three fundamental areas: (1) ***Farming***,which consists principally of interests in Company-owned fresh produceproduction facilities and joint ventures or contract growing arrangements withother growers; (2) ***Distribution****,*consisting principally of interests in sales and distribution companies inMexico, the United States and Canada; and (3) ***Research and Development (or Technology),***consisting of business units focused on the development of fruits andvegetables and/or intellectual properties associated with these developmentefforts.  The Farming and Distributionsegments are referred to together as the Fresh Produce Business.

 

Information pertaining tothe operations of the different business segments is set forth below.  The Company evaluates performance based onseveral factors.  The most significantfinancial measure used to evaluate business performance is business segmentoperating income.  The accountingpolicies for each of the business segments are the same as those described inthe summary of significant accounting policies in Note 2.  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, as looked at from the point of view of the segmentpresidents, and all acquired goodwill has been pushed down to the companies andsegments that have made the acquisitions.

 
|                                          |   | **Farming**                      |   | **Distribution** |   | **Research  and  Development  (Discontinued  Operations)** |   | **Total of  Reportable  Segments** |   |
|-----------------------------------------------|--------|----------------------------------|--------|------------------|--------|------------------------------------------------------------|--------|------------------------------------|--------|
|                                          |   | **(Thousands  of U.S. Dollars)** |   |
| 2002                                          |   |                             |   |             |   |                                                       |   |                               |   |
| Revenues  from unaffiliated customers         |   | $                                | 10,058 |             | $      | 119,388                                                    |   | $                                  | 1,920  |   | $ | 131,366 |   |
| Inter-segment  revenues                       |   | 43,313                           |   | —           |   | —                                                     |   | 43,313                             |   |
| Total  revenues                               |   | 53,370                           |   | 119,388          |   | 1,920                                                      |   | 174,679                            |   |
| Operating  profit (loss)                      |   | (9,179                           | )      | 1,309            |   | (1,807                                                     | )      | (9,678                             | )      |
| Depreciation  and amortization                |   | 2,747                            |   | 381              |   | 501                                                        |   | 3,639                              |   |
| Identifiable  assets(1)                       |   | 65,764                           |   | 27,710           |   | 1,165                                                      |   | 94,638                             |   |
| Acquisition  of long-lived assets             |   | 3,656                            |   | 321              |   | 96                                                         |   | 4,073                              |   |
|                                          |   |                             |   |             |   |                                                       |   |                               |   |
| 2001                                          |   |                             |   |             |   |                                                       |   |                               |   |
| Revenues  from unaffiliated customers         |   | $                                | 6,372  |             | $      | 198,099                                                    |   | $                                  | 3,129  |   | $ | 207,600 |   |
| Inter-segment  revenues                       |   | 51,135                           |   | —           |   | —                                                     |   | 51,135                             |   |
| Total  revenues                               |   | 57,507                           |   | 198,099          |   | 3,129                                                      |   | 258,735                            |   |
| Operating  loss                               |   | (13,436                          | )      | (5,943           | )      | (23,371                                                    | )      | (42,750                            | )      |
| Depreciation  and amortization                |   | 4,288                            |   | 1,042            |   | 2,207                                                      |   | 7,537                              |   |
| Impairment  of goodwill and intangible assets |   | 8,624                            |   | 5,704            |   | 15,625                                                     |   | 29,953                             |   |
| Identifiable  assets(1)                       |   | 71,886                           |   | 37,200           |   | 3,325                                                      |   | 112,411                            |   |
| Acquisition  of long-lived assets             |   | 3,640                            |   | 1,701            |   | 96                                                         |   | 5,437                              |   |
|                                          |   |                             |   |             |   |                                                       |   |                               |   |
| 2000                                          |   |                             |   |             |   |                                                       |   |                               |   |
| Revenues  from unaffiliated customers         |   | $                                | 187    |             | $      | 222,602                                                    |   | $                                  | 3,467  |   | $ | 226,256 |   |
| Inter-segment  revenues                       |   | 41,186                           |   | —           |   | —                                                     |   | 41,186                             |   |
| Total  revenues                               |   | 41,373                           |   | 222,602          |   | 3,467                                                      |   | 267,442                            |   |
| Operating  loss                               |   | (12,706                          | )      | (2,141           | )      | (7,056                                                     | )      | (21,903                            | )      |
| Depreciation  and amortization                |   | 4,916                            |   | 1,165            |   | 2,240                                                      |   | 8,321                              |   |
| Identifiable  assets(1)                       |   | 85,049                           |   | 41,468           |   | 35,701                                                     |   | 162,218                            |   |
| Acquisition  of long-lived assets             |   | 6,757                            |   | 629              |   | 3,539                                                      |   | 10,925                             |   |

 

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1.               Identifiable assetsfor segments are defined as total assets less cash in banks, deferred incometaxes and investment in shares.

 

Reconciliation of thesegments to total consolidated amounts is set forth below:

 
|                                                            |   | **2002**                         |    | **2001** |   | **2000** |    |
|-----------------------------------------------------------------|--------|----------------------------------|---------|----------|--------|----------|---------|
|                                                            |   | **(Thousands  of U.S. Dollars)** |    |
| Revenues                                                        |   |                             |    |     |   |     |    |
| Total segment revenues                                          |   | $                                | 174,679 |     | $      | 258,735  |    | $ | 267,442 |   |
| Inter-segment revenues                                          |   | (43,313                          | )       | (51,135  | )      | (41,186  | )       |
| Revenues  of research and development (discontinued operations) |   | (1,920                           | )       | (3,129   | )      | (3,467   | )       |
| Consolidated  revenues                                          |   | 129,445                          |    | 204,471  |   | 222,789  |    |
|                                                            |   |                             |    |     |   |     |    |
| Income before taxes                                             |   |                             |    |     |   |     |    |
| Total  operating loss from reportable segments                  |   | (9,678                           | )       | (42,750  | )      | $        | (21,903 | ) |
| Total  operating loss from Bionova Holding Corporation(1)       |   | (2,736                           | )       | (3,482   | )      | (4,168   | )       |
| Interest,  net                                                  |   | (7,471                           | )       | (7,778   | )      | (15,371  | )       |
| Exchange  gain (loss), net                                      |   | (196                             | )       | (536     | )      | 381      |    |
| Shareholder  litigation expense                                 |   | —                           |    | (1,300   | )      | —   |    |
| Other  non-operating (expense) Income, net                      |   | 470                              |    | 385      |   | (187     | )       |
| Extraordinary  gain due to interest reversal                    |   | —                           |    | —   |   | 9,852    |    |
| Extraordinary  loss on retirement of floating rate notes        |   | —                           |    | —   |   | (1,917   | )       |
| Consolidated  loss before taxes                                 |   | (19,613                          | )       | (55,461  | )      | (33,313  | )       |
|                                                            |   |                             |    |     |   |     |    |
| Assets                                                          |   |                             |    |     |   |     |    |
| Total  segment identifiable assets                              |   | $                                | 94,638  |     | $      | 112,411  |    | $ | 162,218 |   |
| Unallocated  and corporate assets(2)                            |   | 2,354                            |    | 2,841    |   | 5,296    |    |
| Eliminations(3)                                                 |   | (16,242                          | )       | (19,058  | )      | (12,207  | )       |
| Consolidated  assets                                            |   | $                                | 80,750  |     | $      | 96,194   |    | $ | 155,307 |   |

 

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***Notes:***

**(1)*.******     ***Certainexpenses, such as shareholder litigation, investor relations, and Board andprofessional fees have not   been allocatedto the segments.  Management determinedthat these types of expenses have not been associated with, nor did the resultsof these activities benefit 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.

 

55

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Revenue from externalcustomers by product / service category is set forth below:

 
|                                         |   | **Farming**                      |       | **Distribution** |       | **Research  and  Development  (Discontinued  Operations)** |       | **Total of  Reportable  Segments** |       |
|----------------------------------------------|--------|----------------------------------|------------|------------------|------------|------------------------------------------------------------|------------|------------------------------------|------------|
|                                         |   | **(Thousands  of U.S. Dollars)** |       |
| 2002                                         |   |                             | ** ** |             | ** ** |                                                       | ** ** |                               | ** ** |
| Core vegetables(1)                           |   | $                                | 7,298      |             | $          | 59,513                                                     |       |                               | ** ** | $ | 66,811 | ** ** |
| Fruits and other fresh produce(2)            |   | 2,760                            |       | 59,875           |       |                                                       | ** ** | 62,635                             | ** ** |
| Contracted R&D revenue                   |   |                             |       |             | ** ** | $                                                          | 583        | ** **                         | 583        | ** ** |
| Licenses, sales, and royalties of technology |   |                             |       |             | ** ** | 1,337                                                      | ** ** | 1,337                              | ** ** |
|                                         |   |                             | ** ** |             | ** ** |                                                       | ** ** |                               | ** ** |
| 2001                                         |   |                             | ** ** |             | ** ** |                                                       | ** ** |                               | ** ** |
| Core  vegetables(1)                          |   | $                                | 2,981      |             | $          | 88,999                                                     |       |                               |       | $ | 91,980 |   |
| Fruits  and other fresh produce(2)           |   | 3,391                            |       | 109,100          |       | $                                                          | 571        |                               | 113,062    |   |
| Contracted  R&D revenue                  |   |                             |       |             |       | 2,130                                                      |       | 2,130                              |       |
| Licenses, sales, and royalties of technology |   |                             |       |             |       | 428                                                        |       | 428                                |       |
|                                         |   |                             |       |             |       |                                                       |       |                               |       |
| 2000                                         |   |                             |       |             |       |                                                       |       |                               |       |
| Core  vegetables(1)                          |   |                             |       | $                | 118,078    |                                                       |       |                               | $          | 118,078 |   |
| Fruits  and other fresh produce(2)           |   | $                                | 187        |             | 104,524    |                                                       |       |                               | 104,711    |   |
| Contracted  R&D revenue                  |   |                             |       |             |       | $                                                          | 2,405      |                               | 2,405      |   |
| Licenses, sales, and royalties of technology |   |                             |       |             |       | 1,062                                                      |       | 1,062                              |       |

 

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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.

 

Information about theCompany’s operations by geographic area is summarized below:

 
|                            |   | **Mexico**                       |   | **U.S.** |   | **Canada** |   | **Consolidated** |   |
|---------------------------------|--------|----------------------------------|--------|----------|--------|------------|--------|------------------|--------|
|                            |   | **(Thousands  of U.S. Dollars)** |   |
| 2002                            |   |                             |   |     |   |       |   |             |   |
| Total  revenues                 |   | $                                | 10,058 |     | $      | 68,860     |   | $                | 52,448 |   | $ | 131,366 |   |
| Identifiable  long-lived assets |   | 31,151                           |   | 5,246    |   | 729        |   | 37,126           |   |
|                            |   |                             |   |     |   |       |   |             |   |
| 2001                            |   |                             |   |     |   |       |   |             |   |
| Total  revenues                 |   | $                                | 85,138 |     | $      | 79,286     |   | $                | 43,176 |   | $ | 207,600 |   |
| Identifiable  long-lived assets |   | 32,269                           |   | 8,190    |   | 576        |   | 41,035           |   |
|                            |   |                             |   |     |   |       |   |             |   |
| 2000                            |   |                             |   |     |   |       |   |             |   |
| Total  revenues                 |   | $                                | 99,458 |     | $      | 88,978     |   | $                | 37,820 |   | $ | 226,256 |   |
| Identifiable  long-lived assets |   | 45,201                           |   | 33,484   |   | 637        |   | 79,322           |   |

 

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**ITEM9****.****                                                     DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

 

**PARTIII**

 

**ITEM 10.****               DIRECTORS AND EXECUTIVE OFFICERSOF THE COMPANY**

 

Certain background information regarding the currentdirectors and executive officers is set forth below.  Each director’s and officer’s term of office will expire on thedate of the Company’s annual meeting of stockholders for the year 2003.  All of the directors have had associationswith companies affiliated with the Company. Brief descriptions of these affiliated companies are as follows:

 

Pulsar Internacional,S.A. de C.V. (“Pulsar”) is a diversified Mexican holding company with interestsin the agriculture, construction, real estate, financial services, health careand other industries.

 

Savia, S.A. de C.V.(“Savia”) is a diversified Mexican holding company with interests in theagriculture, construction, and real estate industries.

 

Seminis, Inc. (“Seminis”)is the largest developer, producer and marketer of vegetable seeds in theworld.  Seminis is a majority-ownedsubsidiary of Savia.

 

Bernardo Jimenez –Mr.Jimenez (age 49) was the Chief Executive Officer of the Company from 1997through April 10, 2003.  He has alsobeen the Chief Financial Officer of Savia since April 2000.  From 1993 to 1996, he served as the head ofthe Industrial Banking Division at the Vector Group, a financial servicescompany in Mexico which is affiliated with Savia, and the Vice President of NewBusiness Development for Pulsar.  He isa director of both Savia and Seminis and he has served as a director of theCompany since 1996.

 

Dr. Eli Shlifer – Dr.Shlifer (age 71) has been a director of Seminis since January 1997.  Dr. Shlifer has been a member of theexecutive committee of Pulsar since 1989, has served as an advisor to manycompanies affiliated with Pulsar for more than ten years, and is a director ofSeminis.  Dr. Shlifer has served as adirector of the Company since 1999.

 

Alejandro Sanchez Mujica - Mr. Sanchez (age 48) has served asgeneral counsel of Pulsar since 1992. His experience as general counsel of Pulsar includes full in-house legalservices pertaining to banking, foreign investment, international trade, andmergers and acquisitions.  Mr. Sanchezhas also served as secretary and director of Pulsar and several of itsaffiliated companies, in Mexico and abroad, from 1992 until the present.  Mr. Sanchez has served as a director of theCompany since 2002.

 

Alejandro Perez – Mr. Perez (age 53) was the Vice President ofDiversification of Pulsar from 1991 until his retirement from Pulsar in2002.  He currently serves as an advisorto Pulsar.  He formerly served as adirector of WebLink Wireless, Inc., and currently serves as a director ofseveral privately held technology-based companies affiliated with Pulsar.  Mr. Perez is a member of the Board ofDirectors of Savia.  Mr. Perez served asa director of the Company from 1998 until 2000 and was re-elected a director ofthe Company in 2002.

### ** **

Adrian Rodriguez –Mr.Rodriguez (age 50) is currently Director of Monterrey Capital Partners, S.C.,an institutional private capital fund in Mexico.  Previously, he has served in various executive management,marketing and finance positions, including Executive Vice President and director of Grupo Vector; Director of Marketingand Logistics at Empresas La Moderna, one of Mexico’s leading tobaccocompanies; Director of Marketing and Logistics at Cervecería CuauhtemocMoctezuma, one of Mexico’s leading breweries; Managing Director of AJP, a U.S.frozen food company; and Managing Director of Quesos Caperucita.   He hasserved on the boards of directors of Seguros Comercial America, Mexico’sleading insurance company, and the Center for Private Sector Economic Studies,and he currently serves on the boards of Savia and Seminis.  Mr. Rodriguez has served as adirector of the Company since 2002.

 

57

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Jose Manuel Garcia –  Mr. Garcia (age 50) was elected ChiefExecutive Officer of the Company on April 10, 2003.  Mr. Garciahas been a director of Seminis since January 2001. He is also a Director ofSavia and was Chief Operating Officer of Savia’s Packaging Division from 1989to 2001. Mr. Garcia has been the Director of Special Development at Saviasince 2001.

 

Arthur H. Finnel - Mr. Finnel (age 52) was elected ChiefFinancial Officer of the Company on April 10, 2003.  Mr. Finnel had been the Treasurer and Chief Financial Officer ofthe Company from 1996 through January 2002. From 1995 to 1996, he was a financial planning consultant to Savia andBionova Mexico.  From 1982 to 1995 hewas an executive with Mars, Incorporated, where he held positions of GeneralManager and President of its Canadian pet food division and Vice President ofFinance of Uncle Ben’s, Inc.

 

Fidel Hoyos – Mr. Hoyos (age 46) was appointed President of the Company’s FreshProduce Business on June 1, 2001.  Mr.Hoyos first joined the Company in March 2000 as ABSA’s Executive Vice Presidentfor Farming Operations.  Prior tojoining the Company Mr. Hoyos served as an Executive Vice-President forCigarrera La Moderna, S.A. de C.V.

 

There are no family relationships between any of the directors orbetween any of the directors and any executive officer of the Company.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a) of the Securities Exchange Act of 1934,as amended, requires directors and officers of the Company, and persons whobeneficially own more than 10 percent of the Company’s Common Stock, par value$0.01 per share (‘‘Common Stock’’), to file with the SEC initial reports ofownership and reports of changes in ownership of the Common Stock.  Directors, officers and more than 10 percentstockholders are required by SEC regulations to furnish the Company with copiesof all Section 16(a) forms they file. To the Company’s knowledge, based solely on a review of the copies ofsuch reports furnished to the Company and written representations that no otherreports were required, during the year ended December 31, 2001, all Section16(a) filing requirements applicable to its directors, officers and more than10 percent beneficial owners were complied with.

 

**ITEM 11.****                                              EXECUTIVECOMPENSATION**

 

The following table sets forth certain informationwith respect to annual and long-term compensation paid or awarded to theCompany’s chief executive officer and of the other executive officers of theCompany (together, the “Named Executive Officers”) for or with respect to thefiscal years ended December 31, 2002, 2001, and 2000.

 
|                             |   |     |   | **Annual Compensation** |   | **Compensation  Awards** |   | **Other**                            |   |
|----------------------------------|--------|----------|--------|-------------------------|--------|--------------------------|--------|--------------------------------------|--------|
|                             |   |     |   |                    |   |                     |   |                                 |   |   |   |   |   |   |   |
| **Name and  Principal Position** |   | **Year** |   | **Base  Salary  ($)**   |   | **Bonus  ($)**           |   | **Other  Annual  Compensation  ($)** |   | **Restricted  Stock  Awards  ($)** |   | **Securities  Underlying  Options  (#)** |   | **All Other Comp  ($)** |   |
|                             |   |     |   |                    |   |                     |   |                                 |   |   |   |   |   |   |   |
| Bernardo Jimenez,                |   | 2002     |   | 120,000                 | (1)    | —                   |   | —                               |   |   |   | — |   | — |   |
| Chief  Executive Officer         |   | 2001     |   | 120,000                 | (1)    | —                   |   | —                               |   | — |   | — |   | — |   |
|                             |   | 2000     |   | 184,215                 | (1)    | —                   |   | —                               |   | — |   | — |   | — |   |
|                             |   |     |   |                    |   |                     |   |                                 |   |   |   |   |   |   |   |
| Fidel  Hoyos,                    |   | 2002     |   | 447,360                 |   | —                   |   | 11,820                               | (5)    | — |   | — |   | — |   |
| President  of Fresh              |   | 2001     |   | 418,935                 | (2)    | —                   |   | 12,680                               | (5)    | — |   | — |   | — |   |
| Produce  Business                |   |     |   |                    |   |                     |   |                                 |   |   |   |   |   |   |   |
|                             |   |     |   |                    |   |                     |   |                                 |   |   |   |   |   |   |   |
| Peter  Davis,                    |   | 2002     |   | 175,000                 | (3)    | —                   |   | —                               |   | — |   | — |   | — |   |
| President  of Technology         |   | 2001     |   | 200,000                 | (3)    | —                   |   |                                 |   |   |   |   |   |   |   |
|                             |   |     |   |                    |   |                     |   |                                 |   |   |   |   |   |   |   |
| Gabriel  Montemayor,             |   | 2002     |   | 110,895                 | (4)    | —                   |   | 2,144                                | (5)    | — |   | — |   | — |   |
| Treasurer  and Chief             |   |     |   |                    |   |                     |   |                                 |   |   |   |   |   |   |   |
| Financial  Officer               |   |     |   |                    |   |                     |   |                                 |   |   |   |   |   |   |   |
|                             |   |     |   |                    |   |                     |   |                                 |   |   |   |   |   |   |   |

 

58

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| (1) |   | Mr. Jimenez’s  compensation was charged at a flat rate of $10,000 per month, which was part  of an administrative service fee charged by subsidiaries of Savia to Bionova  Holding for services performed in 2001 and 2002.  In 2000, Mr. Jimenez’s compensation was charged to Bionova  Holding from January through April of 2000 only. Thereafter in 2000, Mr.  Jimenez received no compensation for his services as Chief Executive of  Bionova Holding. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Mr. Hoyos assumed his  responsibilities as President of the Fresh Produce Business on June 1, 2001.                                                                                                                                                                                                                                                                                                                                                                         |
| (3) |   | Dr. Davis assumed responsibilities  as President of the Technology Business on May 7, 2001.  He resigned this position with the shut  down of the Company’s research and development operations on June 30, 2002.                                                                                                                                                                                                                                                 |
| (4) |   | Mr. Montemayor assumed  his responsibilities as Chief Financial Officer on January 15, 2002.  Mr. Montemayor resigned his position upon  leaving the Company on August 19, 2002.                                                                                                                                                                                                                                                                                       |
| (5) |   | Represents certain  vacation and other allowances paid on behalf of the employees.                                                                                                                                                                                                                                                                                                                                                                                          |

 

**Option Grants in 2002**

 

No options were granted to any executive officerduring the fiscal year ended December 31, 2002.

 

**Aggregated Option Exercises in 2002 and Year-End OptionValues**

** **
| **Name**           |   | **Shares  Acquired  On Exercise  (#)** |            | **Value  Realized  ($)** |              | **Number of  Securities  Underlying Unexercised  Options at Year-End (#)** |   | **Value of  Unexercised In-the-Money Options at Year-End ($)** |   |
|--------------------|--------|----------------------------------------|-----------------|--------------------------|-------------------|----------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|
| **Exercisable**    |   | **Unexercisable**                      | **Exercisable** |                     | **Unexercisable** |
|               |   |                                   |            |                     |              |                                                                       |   |                                                           |   |   |   |   |   |
| Bernardo Jimenez   |   | 0                                      |            | 0                        |              | 77,850                                                                     |   | 25,950                                                         |   | 0 |   | 0 |   |
| Fidel  Hoyos       |   | 0                                      |            | 0                        |              | 0                                                                          |   | 0                                                              |   | 0 |   | 0 |   |
| Peter Davis        |   | 0                                      |            | 0                        |              | 0                                                                          |   | 0                                                              |   | 0 |   | 0 |   |
| Gabriel Montemayor |   | 0                                      |            | 0                        |              | 0                                                                          |   | 0                                                              |   | 0 |   | 0 |   |

 

**Compensation Committee Interlocks andInsider Participation**

 

During 2002, the members of the Compensation Committeewere Evelyn Berezin and Dr. Gerald Laubach, both of whom were non-employeedirectors and both of whom served until August 27, 2002, the date of theCompany’s annual meeting of shareholders. There were no Board deliberations concerning executive officercompensation during the remainder of 2002. In April 2003, the Board of Directors appointed Alejandro Perez andAdrian Rodriguez, both of whom are non-employee directors to serve as themembers of the Compensation Committee.

 

**Compensation of Directors**

 

Directors who are not officers of the Company or anyof its affiliates are entitled to receive an annual retainer of $6,000, a feeof $1,000 for each Board meeting attended and a fee of $500 for each committeeor telephone meeting in which the director participates.  The Company also reimburses directors fortravel, lodging and related expenses they incur in attending Board andcommittee meetings.

 

**Compensation Committee Report on Executive Compensation**

 

In accordance with the rules of the Securities andExchange Commission (the “Commission”), the following report of the CompensationCommittee of the Board of Directors and the information herein under“Performance Graph” shall not be deemed to be “soliciting material” or to be“filed” with the Commission, and such information shall not be deemed to beincorporated by reference into any statements or reports filed by the Companywith the Commission that do not specifically incorporate such information byreference, notwithstanding the incorporation by reference of this Form 10-Kinto any such statements or reports.

 

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**REPORT OF COMPENSATION COMMITTEE ONANNUAL COMPENSATION**

 

The Compensation Committee (the “Committee”) of theBoard of Directors of the Company is responsible for  (i) administering the Company’s stock option and stock incentiveplans, (ii) recommending to the Board matters pertaining to employmentagreements, salaries and bonuses for the Company’s executive officers andcontributions to any of the Company’s or its subsidiaries’ 401(k) InvestmentPlans, and (iii) carrying out any other duties delegated to the Committeeby the Board from time to time.  Thegoal of the Company’s executive compensation policy is to ensure that anappropriate relationship exists between executive pay and performance againstthe Company’s objectives and that the Company can attract, motivate and retainkey executives.

 

The Company’s executive compensation philosophy is asfollows: that (i) executive compensation packages should be designed in amanner whereby the Company can attract and retain high quality executive talentneeded to ensure the short-term and long-term success of its fresh produceagricultural and distribution business, (ii) significant incentives, bothshort-term and long-term, should become an increasing portion of executive compensationand awarded based on both company and individual performance, and (iii) analignment of interests between executives and shareholders will be createdthrough compensation structures that share the rewards and risks of strategicdecision-making and performance.

 

The key components of executive compensation arediscussed below.

 

*BaseSalary*.  The Companyhas determined that it will annually set base salary targets for its executiveofficers at levels competitive with persons holding comparable positions atother companies in the Company’s comparison set.  The Compensation Committee may also consider executivecompensation surveys with companies in its major fields of business and in itsgeographic area of operations, as well as the decision-making responsibilities,experience, work performance and the prior base salaries of itsexecutives.  The committee currently isreviewing the base salaries of all executives in the Company and expects tomake adjustments in 2003

 

*AnnualIncentive Bonus*.  Thecompensation policy of the Company is that a significant part of the annualcompensation of each executive will be related to and contingent upon theoverall performance of the Company, the performance of the subsidiaries ordivisions for which the executive is responsible, and individual objectivesestablished by the executive with the CEO at the beginning of the year.  These bonus targets range from 30% to 65% ofbase salary.  The Committee reviewedcompetitive data and determined that these bonuses were higher than the averagefor the market-competitive set.  Thecommittee is reviewing the range for the bonus targets and expects to makeadjustments in 2003.

 

*Long-termIncentives*.  The “1998Long-Term Incentive Plan” that was recommended by the Committee and approved byshareholders provides equity-based incentive awards designed to attract andretain executives who can make significant contributions to the Company’ssuccess, reward executives for such significant contributions, and giveexecutives a longer-term incentive to increase shareholder value.  Pursuant to this plan, the Committee has theauthority to grant a variety of long-term incentive awards based on the CommonStock of the Company, including stock options (both incentive options andnon-qualified options), stock appreciation rights, restricted stock, dividendequivalents, and other types of incentive awards.  Under the plan, the Committee has full authority to determine theprovisions associated with the awards and administer the plan.  The first grants under this Plan were madein April, 1999.  Employees who receivedthe grants included all officers of the Company, certain senior sales andadministrative employees in the fresh produce segment of the business, andcertain of the administrative employees and scientists in DNA Plant TechnologyCorporation (“DNAP”).  These grants weredetermined based on a survey and analysis of the competition and the market inan effort to achieve a level above the median. Approximately 400,000 options were awarded in this first year.  No options were granted in 2000, 2001, and2002.

 

*OtherCompensation*.  TheCompany provides executives, officers and management with health, retirementand other benefits under plans generally available to the Company’s employees.

 

*Compensationof Chief Executive Officer*. Mr. Jimenez became the Chief Executive Officer of the Company onOctober 1, 1997.  His compensationwas a carryover of his arrangement as Chief Operating Officer of theagrobiotechnology division of Savia. Mr. Jimenez received no bonus in 2000, 2001, or 2002 due to the poorfinancial performance of the Company during each of the preceding years.  The Committee approves the compensation ofthe Chief Executive Officer of the Company on an annual basis.

 

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*Bythe Members of the Compensation Committee*.

 

Adrian Rodriguez (Chairman) and Alejandro Perez.

 

**Performance Graph**

 

**The following graph reflects the total return, whichassumes reinvestment of dividends, of a $100 investment in the Company, theStandard & Poor’s 500 Stock Index, and a competitor group index on December31, 1998.  On that date the Company’sCommon Stock was trading on the Nasdaq National Market.  On November 4, 1999 Bionova HoldingCorporation’s common stock moved from the Nasdaq National Market to theAmerican Stock Exchange.**

 
|                         |   | **1997** |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                         |   |     |   |     |   |     |   |     |   |     |   |     |   |
| Bionova  Holding Corporation |   | 100.00   |   | 72.03    |   | 30.87    |   | 30.87    |   | 7.00     |   | 7.41     |   |
| Peer  Group Index            |   | 100.00   |   | 81.03    |   | 41.57    |   | 34.49    |   | 66.98    |   | 82.56    |   |
| S&P  Index               |   | 100.00   |   | 128.58   |   | 155.64   |   | 141.46   |   | 124.65   |   | 97.10    |   |

 

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**(1)  The Peer Groupis made up of the following companies: Chiquita Brands International, Inc.,Cyanotech Corp., Dole Food Company, Inc., Fresh Del Monte Produce, and NorthlandCranberries A.  Total returncalculations were weighted according to each company’s market capitalization.**

** **

**ITEM12**.               SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT

**ANDRELATED STOCKHOLDER MATTERS**

 

The table below sets forth as of April 28, 2003, theshares of Common Stock beneficially owned by each director, each of the NamedExecutive Officers, and by all directors and executive officers as a group.

 

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| **Name**                                                                                  |   | **Position  in  the Company or  other Offices  Held** |   | **Amount and  Nature of   Beneficial Ownership of  Common Stock as of  March 23, 2003** |   | **Percent of  Class** |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|-----------------------|
| Jose Manuel Garcia                                                                        |   | Chief Executive  Officer                              |   | 0                                                                                       |   | *                     |
| Arthur H. Finnel                                                                          |   | Chief Financial  Officer                              |   | 0                                                                                       |   | *                     |
| Fidel Hoyos                                                                               |   | President of  Fresh Produce Business                  |   | 0                                                                                       |   | *                     |
| Bernardo Jimenez                                                                          |   | Director                                              |   | 103,800(1)                                                                              |   | *                     |
| Alejandro Sanchez                                                                         |   | Director                                              |   | 0                                                                                       |   | *                     |
| Alejandro Perez                                                                           |   | Director                                              |   | 0                                                                                       |   | *                     |
| Adrian Rodriguez                                                                          |   | Director                                              |   | 0                                                                                       |   | *                     |
| Dr. Eli Shlifer                                                                           |   | Director                                              |   | 0                                                                                       |   | *                     |
| Dr. Peter Davis                                                                           |   | Former Director  and President of Technology Business |   | 0                                                                                       |   | *                     |
| Gabriel Montemayor                                                                        |   | Former Chief  Financial Officer                       |   | 0                                                                                       |   | *                     |
| All directors and  executive officers of the Company as a group (consisting of 8 persons) |   |                                                  |   | 103,800(2)                                                                              |   | *                     |

 

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*                           Representsless than 1% of Common Stock outstanding on April 28, 2003.

 

(1)                    Includesoptions to purchase shares of Common Stock that are currently exercisable orthat will be exercisable within sixty days as follows: Mr. Jimenez – 103,800shares

(2)                    Gives effectto the above footnotes.

 

Except as noted in the footnotes above, (i) noneof such shares is known by the Company to be shares with respect to which suchperson has the right to acquire beneficial ownership, and (ii) the Companybelieves the beneficial holders listed above have sole voting and investmentpower regarding the shares shown as being beneficially owned by them.

 

**Security Ownership of Certain Beneficial Owners**

 

The following table sets forth as of April 11, 2003,information with respect to the only person who was known to the Company to bethe beneficial owner of more than five percent of the outstanding shares ofCommon Stock, which is the Company’s only class of voting securities.

 
| **Name and Address  of Beneficial owner**                                               |   | **Number of  Shares  Beneficially Owned** |   | **Percent  of Class** |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------|
|                                                                                    |   |                                      |   |                  |
| Ag-Biotech Capital, LLC  (1)  9255 Customhouse Plaza  San Diego, California  92154 |   | 18,076,839                                |   | 78.9%                 |

 

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(1)           Ag-Biotech Capital, LLC, a Delawarelimited liability company, is a wholly-owned subsidiary of Savia, S.A. de C.V.(“Savia”), a corporation organized under the laws of the United Mexican States.

 

**Related Stockholder Matters**

 

For information regarding related stockholder matters,see “Item 5. Market for Registrant’s Common Equity and Related StockholderMatters,” which sets forth certain information with respect to the Company’sequity compensation plans.

 

**ITEM 13.**               CERTAIN RELATIONSHIPS AND RELATEDPARTY TRANSACTIONS

### ** **

**Indebtedness to Savia under theApril 2000 Funding Agreement**

 

On March 22, 1999, Bionova Holding issued $100 millionof Senior Guaranteed Floating Rate Notes due 2002.  Bionova Holding’s obligations under these notes were guaranteedby Savia, and Bionova Holding was charged a service fee of 1% by Savia relatingto its guarantee on these notes.   OnApril 13, 2000 the entire amount of the $100 million of Senior GuaranteedFloating Rate Notes was retired. Financing for this early retirement of the notes was provided by Saviapursuant to a Funding Agreement.  Saviaagreed to provide this $100 million of financing in the form of advances onterms no less favorable than the terms of the Floating Rate Notes.  Savia also agreed that Bionova Holding coulddefer all interest payments until the final maturity date of March 23, 2002,and that Bionova Holding would not be required to maintain any funds in aninterest reserve account.  On December29, 2000 $52.0 million of the advances from Savia, together with certain otherindebtedness to Savia, was capitalized. The maturity date for the remaining balance has been extended severaltimes and is currently due and payable to Savia on December 31, 2003.

 

**The Cash Support Agreement**

 

On December 28, 2000, Bionova Holding and Saviaentered into a Cash Support Agreement for 2001.  This agreement provided that, during 2001, Savia would advancefunds to Bionova Holding as requested to finance Bionova Holding’s technologybusiness.  During 2001, Savia advanced$7.5 million under this agreement.  Thematurity date for the remaining balance has been extended several times and iscurrently due and payable to Savia on December 31, 2003.

 

# **Other Transactions withSavia and its Affiliates**

 

# ***Research Agreement***

 

DNAP and Seminis Vegetable Seeds, Inc., a subsidiaryof Savia, entered into a Long-Term Research Agreement effective January 1,1997, which provided that Seminis and DNAP would agree on research projects tobe conducted by DNAP for Seminis which would result in payments to DNAP of $25million over a ten-year period, with minimum funding (subject to carryforwards) of $7.5 million in any three-year period.  Unless otherwise agreed by the parties, payments of at least$0.625 million in respect of Seminis’s obligation to fund research projectswere to be paid to DNAP at the beginning of each calendar quarter during theterm of the Long Term Funded Research Agreement.  During 2001 Seminis reduced the amount of research payments itmade to DNAP to a rate of $1.4 million per year.  During 2002, SVSI paid DNAP $0.583 million with respect to workunder this agreement.  In conjunctionwith the closing of the Company’s research and development operation, DNAP andSVSI terminated their Long-Term Research Agreement.  Seminis made a cash payment of $150,000 as part of thetermination agreement, and DNAP received certain technology rights.

 

*Royalty Advance for Rights to Produce and Sell DNAP Product*

 

In the third quarter of 2002 DNAP executed atransaction with Seminis, whereby DNAP provided Seminis with a non-exclusiveright to produce on a worldwide basis, and an exclusive right to sell in Europeand Asia DNAP’s patented bell peppers. DNAP received an advance cash payment of $2 million against futureroyalty payments.  The agreementprovides that after two years Seminis has the right to terminate the agreementand that DNAP would be required to reimburse Seminis for any unearned portionof the royalty advance.

# ** **

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*Non-exclusive Contract Rights to Produce and Sell Products*

# ** **

# **During 2002 Bionova Holding’s fresh produce companiesentered into an agreement with Seminis whereby the fresh produce companies willhave a non-exclusive right to grow and sell certain high value productsproduced with seeds developed and grown by Seminis.  The fresh produce companies will be obligated to pay only for theprice of the seed.  While the Companyhas purchased a small quantity of seed in 2003, no products have yet been soldwith any of this Seminis seed.**

 

# ***Purchase and Sale of Fresh Produce***

 

Bionova Produce of Texas, Inc. and Bionova Produce,Inc. purchase and sell papaya on behalf of Agromod, S.A. de C.V., awholly-owned subsidiary of Savia. Purchases in 2002 totaled $1.6 million.  The Company earned commissions on these sales which amounted to$0.2 million in 2002.

# ** **

# ***Financing Arrangements***

 

At December 31, 2002 Savia guaranteed all of the shortand long-term debt of Bionova Holding, including amounts due to banks undervarious lines of credit facilities.  Allof this debt is associated with the Company’s fresh produce business.  ABSA has pledged certain of its real estateassets to Savia to secure repayment to Savia of any amounts it may be requiredto pay under the guarantee.  Saviacharged Bionova Holding a service fee of 1.5% relating to its guarantee onthese notes.  During 2002, BionovaHolding incurred services fees of $0.079 million under these guaranteearrangements.

 

At December 31, 2002 ABSA was indebted to Savia in atotal amount of $19.8 million.  Thisdebt currently is accruing interest at a rate of approximately 9.0% per annum.

 

At December 31, 2002Bionova Holding was indebted to Savia in an amount of $72.2 million.  This debt currently is accruing interest ata rate of 12.25%.

 

At December 31, 2002 DNAPwas indebted to Savia for $1.3 million due to the monies advanced by Savia tosettle the Grace Brothers lawsuit on behalf of DNAP in December 2001.

 

At December 31, 2002, other subsidiary companies ofBionova Holding had related party advances from Savia and its subsidiaries in atotal amount of $3.6 million.

 

# ***Services Agreement***

 

An Administrative Services Agreement betweenComercializadora Premier, S.A. de C.V. (“Premier Mexico”), a wholly-ownedsubsidiary of ABSA, and Savia was entered into on September 1, 2001.  This agreement provides that Savia willrender certain administrative and clerical services to Premier Mexico (andother Bionova Holding subsidiaries) in return for payment equivalent to thecompensation, benefits, and other overhead attributable to the employees ofSavia performing these services, all of which will be performed in Mexico.  The term of this agreement will continueuntil either Premier Mexico or Savia elects to terminate the agreement.  Amounts billed in 2002 by Savia under thisagreement were $0.0.  As of December 31,2002, the Company had a payable to Savia outstanding of $0.252 million on thisagreement.  The outstanding balancesbear interest at variable rates comparable to those prevailing in themarketplace.

 

**Deferred Compensation and Loans from Management**

 

Beginning in the thirdquarter of 2002, and continuing into the fourth quarter, four of the Company’ssenior managers deferred receipt of their salary compensation because of theCompany’s tight cash situation.  Inaddition, the president of the Company’s fresh produce business loaned theCompany $0.2 million in the month of August 2002.  The compensation that was deferred along with the loan by thepresident were paid back in full by the Company in December 2002.

 

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**ITEM 14****.   Controls and Procedures**

 

*(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 14(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, management in conjunction with ourindependent accountants identified certain deficiencies in the Company’sinternal control procedures that would be deemed to be a material weaknessunder standards established by the American Institute of Certified PublicAccountants.  The deficiencies relate to(i) the Company’s accounting and financial reporting infrastructure forcollecting, analyzing, and consolidating information to prepare theconsolidated financial statements for the Company (ii) issues associated withtimely and consistent reconciliation of the Company’s and its subsidiaries’bank accounts, inventories, and intercompany accounts, (iii) the timely andcomplete revelation of material contracts entered into by subsidiaries of theCompany, and (iv) the impact of  theresignations of certain accounting personnel during the past year on thehistorical knowledge and understanding of accounting and consolidationinformation.  These matters have beendiscussed with our independent accountants and with the Audit Committee of theBoard of Directors of the Company.  Toaddress these weaknesses, the Company plans to (i) develop a new set ofconsolidating systems and procedures for financial statement preparation by theend of the third quarter of 2003, (ii) reinforce the procedures already inplace requiring reconciliation of all accounts and review these reconciliationsin conjunction with its independent accountants during the quarterly reviews ofthe Company’s consolidated financial statements, (iii) hold regular meetingswith officers of subsidiary companies to update and review all contracts beingentered into and reinforce the requirement of the Company to immediately informthe Chief Executive Officer and the Chief Financial Officer of such contracts,and (iv) develop a documented, historical data base for financial informationby December 31, 2003 so the critical accounting and financial information isindependent of the memory of specific individuals developing and preparing suchinformation.

 

### **PART IV**

 

**ITEM15****.****                                              EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(a)           Thefollowing documents are filed as a part of this report:

 

(1)           Financial Statements included in Item8 herein:

 

Report of IndependentAccountants

Consolidated BalanceSheets as of December 31, 2002 and 2001

Consolidated Statementsof Operations and Comprehensive Income and Loss for the years ended December31, 2002, 2001 and 2000

Consolidated Statementsof Changes in Stockholders’ Equity (Deficit) for the years ended December 31,2002, 2001 and 2000

Consolidated Statementsof Cash Flows for years ended December 31, 2002, 2001 and 2000

Notes to ConsolidatedFinancial Statements

 

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(2)           Financial Statement Schedulesrequired to be filed by Item 8 of Form 10-K or by paragraph (d):

 

Schedule II:  Valuation and Qualifying Accounts andReserves for the three years ended December 31, 2002

 

(3)                                  Exhibits:

 

The information requiredby this Item 15(a)(3) is set forth in the Index to Exhibits accompanying thisAnnual Report on Form 10-K.

 

(b)  Reports on Form 8-K

 

The Company did not fileany reports on Form 8-K during the last quarter of 2002.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Section 13 or15(d) of the Securities Exchange Act of 1934, Bionova Holding Corporation hasduly caused this Annual Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                       |   | BIONOVA HOLDING  CORPORATION |
|----------------------------|--------|------------------------------|
| Date:  April 29, 2003 |   |                         |
|                       |   |                         |
|                       |   | By:                          | /s/ JOSE MANUEL GARCIA |
|                       |   |                         | Jose Manuel Garcia, |
|                       |   |                         | Chief Executive Officer |
|                            |        |                              |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Annual Report has been signed by the followingpersons in the capacities and on the dates indicated.

 
| **Signature**                |   | **Title**                                      |   | **Date**       |
|------------------------------|--------|------------------------------------------------|--------|----------------|
|                         |   |                                           |   |           |
| /s/ JOSE MANUEL  GARCIA      |   | Chief Executive  Officer                       |   | April 29, 2003 |
| Jose Manuel  Garcia          |   | (Principal  Executive Officer)                 |   |           |
|                         |   |                                           |   |           |
| /s/ ARTHUR H.  FINNEL        |   | Chief Financial  Officer                       |   | April 29, 2003 |
| Arthur H. Finnel             |   | (Principal  Financial and  Accounting Officer) |   |           |
|                         |   |                                           |   |           |
|                         |   |                                           |   |           |
| /s/                          |   | Director                                       |   |           |
| Bernardo Jiménez        |   |                                           |   |           |
|                         |   |                                           |   |           |
| /s/ ALEJANDRO PEREZ          |   | Director                                       |   | April 29, 2003 |
| Alejandro Perez              |   |                                           |   |           |
|                         |   |                                           |   |           |
| /s/ ADRIAN RODRIGUEZ         |   | Director                                       |   | April 29, 2003 |
| Adrian Rodriguez             |   |                                           |   |           |
|                         |   |                                           |   |           |
| /s/ ALEJANDRO SANCHEZ MUJICA |   | Director                                       |   | April 29, 2003 |
| Alejandro  Sanchez Mujica    |   |                                           |   |           |
|                         |   |                                           |   |           |
| /s/                          |   | Director                                       |   |           |
| Eli Shlifer                  |   |                                           |   |           |

 

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**CERTIFICATIONOF CHIEF EXECUTIVE OFFICER PURSUANT TO**

**SECTION302 OF THE SARBANES-OXLEY ACT OF 2002**

** **

**BIONOVAHOLDING CORPORATION**

 

I, Jose Manuel Garcia,certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Bionova Holding Corporation;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have;

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

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6.               The registrant’s othercertifying officer and I have indicated in this annual report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: April 29, 2003

 

 
|   |   | /s/ JOSE MANUEL GARCIA      |
|--------|--------|-----------------------------|
|   |   |                        |
|   |   | Jose Manuel Garcia          |
|   |   | **Chief Executive Officer** |

 

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**CERTIFICATIONOF CHIEF FINANCIAL OFFICER PURSUANT TO**

**SECTION302 OF THE SARBANES-OXLEY ACT OF 2002**

 

**BIONOVAHOLDING CORPORATION**

 

I, Arthur H. Finnel,certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Bionova Holding Corporation;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have;

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the “EvaluationDate”); and

 

c.               presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

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6.               The registrant’sother certifying officer and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date:  April 29, 2003

 

 
|   |   |  /s/ ARTHUR H. FINNEL  |
|--------|--------|-----------------------------|
|   |   | Arthur H. Finnel            |
|   |   | **Chief Financial Officer** |

 

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Schedule II:  Valuation and Qualifying  Accounts and Reserves

### **Forthe three years ended December 31, 2002**

Thousands of U.S.Dollars

 
|                          |   | **Accounts  Receivable**                                 |    | **Advances  to  Growers**              |   | **Inventories**                            |    | **Other  Assets**                     |   |
|-------------------------------|--------|----------------------------------------------------------|---------|----------------------------------------|--------|--------------------------------------------|---------|---------------------------------------|--------|
|                          |   | **Allowance  for  Doubtful Accounts  And Sales Returns** |    | **Allowance  for  Doubtful  Accounts** |   | **Allowance  for  Slow Moving  Inventory** |    | **Allowance  for  Doubtful Accounts** |   |
|                          |   |                                                     |    |                                   |   |                                       |    |                                  |   |
| Balance  at December 31, 1999 |   | 3,573                                                    |    | 858                                    |   | 1,269                                      |    | 2,572                                 |   |
| Provision                     |   | 301                                                      |    | 5,021                                  |   |                                       |    |                                  |   |
| Write  –off              |   |                                                     |    |                                   |   | (1,047                                     | )       | (770                                  | )      |
| Balance  at December 31, 2000 |   | 3,874                                                    |    | 5,879                                  |   | 222                                        |    | 1,802                                 |   |
| Provision                     |   | 44                                                       |    |                                   |   | 16                                         |    | 1,849                                 |   |
| Write  –off              |   | (1,066                                                   | )       |                                   |   | (50                                        | )       |                                  |   |
| Recovery                      |   |                                                     |    | (993                                   | )      |                                       |    |                                  |   |
| Balance  at December 31, 2001 |   | 2,852                                                    |    | 4,886                                  |   | 188                                        |    | 3,651                                 |   |
| Provision                     |   |                                                     |    | 1,436                                  |   |                                       |    |                                  |   |
| Write  –off              |   | (26                                                      | )  |                                   |   | (188                                       | )  | (3,651                                | )      |
| Recovery                      |   |                                                     |    |                                   |   |                                       |    |                                  |   |
| Balance  at December 31, 2002 |   | 2,826                                                    |    | 6,322                                  |   | 0                                          |    | 0                                     |   |

 

INDEX TO EXHIBITS

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                          |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                     |
| 3.1*                |   | Certificate of  Incorporation of the Company                                                                                                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                     |
| 3.2                 |   | Certificate of  Amendment to the Certificate of Incorporation of the Company effective  September 26, 1996 (filed as an exhibit to the Company’s quarterly report on  Form 10-Q for the quarterly period ended June 30, 1996 and incorporated  herein by reference) |
|                |   |                                                                                                                                                                                                                                                                     |
| 3.3                 |   | Certificate of  Amendment to the Certificate of Incorporation of the Company effective April  28, 1999 (filed as an exhibit to the Company’s quarterly report on Form 10-Q  for the quarterly period ended March 31, 1999 and incorporated herein by  reference)    |
|                |   |                                                                                                                                                                                                                                                                     |
| 3.4**               |   | Bylaws of the Company                                                                                                                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                     |
| 4.1***              |   | Certificate of  Designations for Series A Convertible Preferred Stock                                                                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                     |
| 10.1*               |   | Loan Agreement dated as  of January 26, 1996, between the Company and DNAP                                                                                                                                                                                               |
|                |   |                                                                                                                                                                                                                                                                     |
| 10.2*               |   | Assignment of Patents  dated January 26, 1996, between the Company and DNAP                                                                                                                                                                                              |
|                |   |                                                                                                                                                                                                                                                                     |
| 10.3*               |   | Sole Patent License  Agreement dated as of January 26, 1996, between the Company and DNAP                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                     |
| 10.4*               |   | Non-Exclusive Patent  License Agreement dated as of January 26, 1996, between the Company and DNAP                                                                                                                                                                       |
|                |   |                                                                                                                                                                                                                                                                     |
| 10.5**              |   | Promissory Note made  January 25, 1999, by DNAP in favor of the Company                                                                                                                                                                                                  |

 

72

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|     |   |                                                                                                                                                                                                                       |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6     |   | Governance Agreement  dated as of September 26, 1996, between Savia and the Company (filed as an  exhibit to the Company’s current report on Form 8-K dated September 26, 1996  and incorporated herein by reference) |
|     |   |                                                                                                                                                                                                                       |
| 10.7**   |   | Long-Term Funded Research  Agreement dated as of January 1, 1997, between Seminis Vegetable Seeds, Inc.  and DNAP.                                                                                                         |
|     |   |                                                                                                                                                                                                                       |
| 10.8**   |   | Amendment to Governance  Agreement dated as of January 14, 1999, between Savia and the Company.                                                                                                                            |
|     |   |                                                                                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                       |
| 10.9     |   | DNAP Holding  Corporation 1998 Long-Term Incentive Plan (filed as an exhibit to the  Company’s proxy statement for the annual meeting of stockholders held on May  28, 1998 and incorporated herein by reference).    |
|     |   |                                                                                                                                                                                                                       |
| 10.10*** |   | Purchase Agreement  dated as of December 28, 2000 by and among BHC, Savia, S.A. de C.V. and  Bionova International, Inc.                                                                                                   |
|     |   |                                                                                                                                                                                                                       |
| 10.11*** |   | Cash Support Agreement  dated as of December 28, 2000 by and between BHC and Savia, S.A. de C.V.                                                                                                                           |
|     |   |                                                                                                                                                                                                                       |
| 10.12*** |   | Funding Agreement dated  as of April 12, 2000 by and between BHC and Savia, S.A. de C.V.                                                                                                                                   |
|     |   |                                                                                                                                                                                                                       |
| 21.1     |   | Subsidiaries                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                       |
| 23.1     |   | Consent of  PricewaterhouseCoopers LLP                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                       |
| 99.1     |   | Certificate  by Jose Manuel Garcia, Chief Executive Officer of the Company, dated April  29, 2003 as required by 10 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.            |
|     |   |                                                                                                                                                                                                                       |
| 99.2     |   | Certificate  by Arthur H. Finnel, Chief Financial Officer of the Company, dated April 29,  2003 as required by 10 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.              |

 

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*                                         Filedas an exhibit to the Company’s Registration Statement on Form S-4 (No.333-09975) and incorporated herein by reference.

 

**                                  Filedas an exhibit to the Company’s annual report on Form 10-K for the year endedDecember 31, 1998 and incorporated herein by reference.

 

***                           Filedas an exhibit to the Company’s current report of Form 8-K filed on January 12,2001 and incorporated herein by reference.

 

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