<PAGE>
PROVENA FOODS INC.
1995
ANNUAL REPORT
<PAGE>
PROVENA FOODS INC.
- --------------------------------------------------------------------------------
5010 EUCALYPTUS AVENUE CHINO, CA 91710 TELEPHONE (909) 627-1082
March 11, 1996
Fellow shareholders:
The year 1995 was another difficult year for our Company. The basic
trends continued with increased sales at the pasta division and decreased sales
at the meat division. We were profitable for the year, but at a much lower
level than 1994. Losses at the meat division increased substantially while
profits at the pasta division decreased slightly. We are continuing to expand
the pasta division and are continuing to take steps directed toward improving
the performance of the meat division.
THE ROYAL-ANGELUS PASTA DIVISION
- --------------------------------
Our Royal-Angelus Macaroni Company pasta division's sales increased 12% in
dollars and 13% in pounds in 1995 over 1994. The increase reflects continuing
growth of the pasta division. We continue to increase Royal's capabilities to
provide high quality specialty pasta items with superior customer service, and
believe Royal's growth trend will continue.
The U.S. pasta industry has seen a significant decrease in operating profits
over the past three years. The high cost of durum semolina flour, increased
domestic production capacity and low priced imports have reduced industry
margins. During this difficult period, Royal's margins have decreased only
slightly, and we believe our margins have held up well above the industry
average.
On May 12, 1995, three of the U.S.'s largest pasta companies filed a petition
with the U.S. Trade Commission alleging dumping of pasta by Italy and Turkey.
The investigation is ongoing and it appears that duties will be applied to some
pasta imports. This would benefit the U.S. pasta industry as a whole and Royal
should share in the benefit.
We purchased and are installing a used short goods dryer expected to be
operational by early summer, which will increase our capacity by about 5,000,000
pounds and enable us to run more specialty items. In addition, our growing
sales of private label products for the retail market has increased our needs
for packaging equipment capable of filling a variety of packages, and we have
purchased a long goods cartoning machine and a short goods form fill machine.
As a result of these additions, we could use additional plant space. We
purchased the building adjacent to the pasta plant to provide additional space
as needed and will currently occupy 40% of the building, leasing 60% to a tenant
for 3 years.
<PAGE>
THE SWISS AMERICAN MEAT DIVISION
- --------------------------------
Our Swiss American Sausage Co. meat division's sales decreased 21% in dollars
and 15% in pounds in 1995 from 1994. Sales in dollars decreased proportionately
more than in pounds because of lower meat costs and price competition. The
decline in sales is attributed to intense competition for pepperoni sales and
reduced growth in pizza consumption.
Despite declining sales, we believe the meat division has a solid customer base
and an excellent reputation for quality and service. To reduce our dependency
on our core pizza topping business, we are increasing our emphasis on
diversifying our product line to other industry segments.
Non-pizza products being developed include retail private label products,
chorizo, meat components for food processors such as producers of frozen
dinners, and new cooked sausage and frozen crumbles products. Swiss is also
developing a cooked poultry product for both pizza and non-pizza customers, and
is considering an expansion of its specialty and retail packaging capabilities,
which would enable Swiss to offer new items to both its pizza topping customers
and new non-pizza customers.
THE COMPANY
- -----------
The Company has engaged a consultant to help find a specialty meat business
complementary to Swiss to be combined with Swiss. The ideal combination would
increase volume to a profitable level and result in a meat business which could
offer more diverse product lines to existing and new customers. The Company is
currently investigating several prospects.
Because of 1995's lower earnings and the possible need to finance an acquisition
for Swiss, management is taking steps to enhance liquidity. Cost reductions are
being implemented. The board has declared a reduced dividend of $.025 per share
payable March 31, 1996 to shareholders of record March 10, 1996. We plan to
increase the dividend to the prior level as soon as circumstances permit.
The Company has two businesses that are highly regarded in their industries with
excellent potential for growth and earnings. We have a strong management team
capable of developing that potential. We are firmly committed to finding a
compatible business to combine with Swiss. We will continue to pursue growth at
the pasta division and diversity at the meat division. We are fully prepared to
meet the challenges of 1996.
/s/ John D. Determan
John D. Determan
Chairman
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
- --------------------------------------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Commission File Number 1-10741
PROVENA FOODS INC.
(Exact name of registrant as specified in its charter)
California 95-2782215
- ------------------------------------------ ----------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
5010 Eucalyptus Avenue, Chino, California 91710
- ------------------------------------------ ----------------------------
(Address of principal executive offices) (Zip Code)
(909) 627-1082
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the act: None
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The aggregate market value of Provena Foods Inc. Common Stock held by
non-affiliates as of February 27, 1996 was $8,236,707.
The number of shares of Provena Foods Inc. Common Stock outstanding on
February 27, 1996 was 2,745,569.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
<PAGE>
PROVENA FOODS INC.
1995 FORM 10-K ANNUAL REPORT
Table of Contents
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C> <C>
PART I
------
1. Business............................................................ 1
2. Properties.......................................................... 4
3. Legal Proceedings................................................... 5
4. Submission of Matters to a Vote of Security Holders................. 5
PART II
-------
5. Market for the Registrant's Common Stock and Related Stockholder
Matters............................................................ 5
6. Selected Financial Data............................................. 7
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 8
8. Financial Statements and Supplementary Data......................... 11
9. Disagreements on Accounting and Financial Disclosure................ 11
PART III
--------
10. Directors and Executive Officers of the Registrant.................. 11
11. Executive Compensation.............................................. 12
12. Security Ownership of Certain Beneficial Owners and Management...... 14
13. Certain Relationships and Related Transactions...................... 14
PART IV
-------
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 15
________________
Signatures.......................................................... 16
</TABLE>
-ii-
<PAGE>
PART I
------
ITEM 1. BUSINESS
General
- -------
Registrant (the "Company") is a California-based specialty food processor
engaged in the supply of food products to other food processors, distributors
and canners. Its primary products are pepperoni and Italian-style sausage sold
to frozen pizza processors, pizza restaurant chains and food distributors and
dry pasta sold to food processors and canners, private label producers and food
distributors. The Company's products are sold throughout the United States but
primarily in the Western United States.
The Company's meat processing business is conducted through the Swiss
American Sausage Co. Division ("Swiss American"), and its pasta business is
conducted through the Royal-Angelus Macaroni Company Division ("Royal-Angelus").
The Company acquired its present businesses between 1972 and 1975. The
predecessor of Swiss-American was founded in 1922 and the two predecessors to
Royal-Angelus, Royal Macaroni Company and Angelus Macaroni Mfg. Co., were
founded in 1878 and 1946, respectively. The Company was incorporated in 1972 in
California with an initial capitalization of about $12,000.
In 1991 the Company discontinued and sold certain assets of its Sav-On Food
Co. Division ("Sav-On") food product distribution business, acquired in 1973.
Historical financial information in this report reflects Sav-On as a
discontinued operation.
The Company's competitive strategy is to emphasize providing products of
predictable quality and consistency at competitive prices as well as prompt and
reliable service. The Company attempts to establish, refine and maintain
procedures to assure that the Company's products comply with its customers'
specifications and are delivered in a manner that will satisfy their delivery
and production requirements.
For financial information about each of the Company's two divisions, see the
segment data contained in Note 12 of Notes to Financial Statements.
Swiss American
- --------------
During the years ended December 31, 1995 and 1994, sales by Swiss American
accounted for 58.3% and 66.2%, respectively, of the Company's net sales. The
Company's processed meat products are sold primarily to pizza restaurant chains,
pizza processors and food service distributors. Pizza processors produce
prepared pizza which is sold primarily as frozen pizza in food markets. Food
service distributors supply food to delicatessens, restaurants and other retail
businesses offering prepared food. The Company's meat products are sold
nationally, but most of its sales are made to customers located in the Western
United States. The Company also sells processed meat products to the U. S.
Government. The Company does not have supply agreements with its major
customers, many of whom purchase some of their meat products from other
suppliers.
Swiss American competes with numerous producers of processed meats, many of
which are larger and have greater financial resources than the Company. Swiss
American's competitors include large national meat packers such as Geo. A.
Hormel & Co., as well as smaller regional meat processors. Pizza processors
that manufacture their own meat products diminish the market for Swiss
American's products. The Company competes in the meat processing business by
emphasizing predictable quality and consistency.
The meat processing activities of the Company are conducted in its plants
located in San Francisco, California. The meat processing activities of Swiss
American are typified by its processing of pepperoni, its principal product,
which consists of the following steps: (i) the purchase of frozen beef and pork
trimmings with a guaranteed lean content; (ii) the blending of the meat into the
Company's meat product while carefully controlling the consistency and content
of the product; (iii) the addition of spices and preservatives to the product;
(iv) the extrusion of the product into sausage casings; (v) the oven cooking of
the product in the casings; and (vi) the drying of the cooked product.
Throughout the production process, the Company subjects its meat products to
quality control inspection for the purposes of satisfying U.S. Department of
Agriculture regulations, meeting customer specifications and assuring a
consistent quality of the products to the Company's customers.
-1-
<PAGE>
In addition to pepperoni and sausage, the Company processes a relatively
small amount of other meat products, including crumbles which are quick-frozen
nuggets of a pre-cooked meat product, such as the sausage on a sausage pizza.
The Company's crumbles line, which became operational in 1993, extrudes the
ground and blended ingredients into nuggets which are cooked and quick-frozen in
one continuous operation.
The Company estimates its processing capacity in its San Francisco plants to
be 27,000,000 pounds per year. Although the Company does not have space within
its San Francisco plants to further increase its capacity to produce its
processed meat products, the plants' capacity is adequate for the currently
contemplated needs of the Company.
Royal-Angelus
- -------------
During the years ended December 31, 1995 and 1994, sales by Royal-Angelus
accounted for 41.7% and 33.8%, respectively, of the Company's net sales. The
Company sells its pasta products primarily to food processors and canners,
private label customers, food service distributors, and specialty food
distributors.
Royal-Angelus' food processor and canner customers use the Company's pasta to
produce retail products in which pasta is an ingredient, such as pasta salads,
soups and entrees. Royal-Angelus' private label customers are regional and
national food suppliers that sell pasta under their own labels, purchased in
bulk from the Company or packaged by the Company. Royal-Angelus' food service
distributor customers supply pasta to restaurants, institutional purchasers, and
some retail establishments. The Company also sells its pasta products to
government agencies, the military, schools and other pasta manufacturers.
Beginning in the latter part of 1987, the Company's pasta products have been
produced at Royal-Angelus' production plant in Chino, California. The Company
purchased the new plant in October, 1987 using proceeds from the Company's
initial public offering of its shares. The plant has production capacity
estimated at 25,000,000 pounds per year, adequate for current production needs.
Additional space will eventually be required if pasta sales continue to
increase.
In the basic pasta production process, durum semolina flour is mixed with
water and the mixture is extruded into one of many shapes, cut to the proper
length, dried, packaged and shipped to the Company's customers. If required by
the particular variety of pasta, a different flour is used or flour is blended
with egg powder, vegetable powder or other ingredients before the water is
added. No preservatives are used in making pasta.
Royal-Angelus competes with several national and regional pasta
manufacturers, many of which have greater financial resources than the Company.
The Company competes in the pasta business by emphasizing predictable quality
and consistency and by its capability of producing a larger variety of pastas
with shorter lead times and production runs than most of its larger competitors.
Suppliers
- ---------
The primary ingredients used by the Company in processed meat products are
beef, pork, spices and casings and in pasta products are flour, egg powder and
vegetable powder. The ingredients are purchased from suppliers at prevailing
market prices. The Company has not recently experienced any shortages in the
supply of ingredients and generally expects the ingredients to continue to be
available for the foreseeable future.
Patents, Trademarks and Licenses
- --------------------------------
The Company owns no patents. It owns the United States registered trademarks
"Royal" with the crown design and "Vegeroni" for use on pasta products and
licenses from the Del Monte Company until 2009 the United States registered
trademark "Capo di Monte" for use on meat products. Registrations of the
trademarks owned by the Company must be and are renewed from time to time.
Royal and Vegeroni are used on consumer products in limited distribution. Capo
di Monte is not used on consumer products. No substantial portion of the
Company's sales is dependent upon any trademark.
-2-
<PAGE>
Commodity Price Fluctuations and Availability
- ---------------------------------------------
The Company contracts to sell its products at a fixed price for production
and delivery in the future (generally four to six months or less). The Company
is, therefore, subject to the risk of price fluctuations with respect to its
product ingredients from the time the Company contracts with its customers until
the time the Company purchases the commodities used to fill the orders. Prices
for meat and flour, the Company's major product ingredients, fluctuate widely
based upon supply, market speculation, governmental trade and agricultural
policies, and other unpredictable factors. The price of durum semolina flour,
the pasta division's primary ingredient, increased about 50% following the
storms in the Midwest in 1993 and remained up during 1994 and 1995.
The Company is able to contract at fixed prices for delivery of domestic beef
and pork up to 30 days in advance, imported beef and sometimes pork up to 90
days in advance, and flour up to 90 days or more in advance. The Company
generally covers its committed sales by purchasing commodities at fixed prices
for future delivery, but is subject to the risk of commodity price fluctuations
when it contracts for sales beyond the period it can cover or when it orders
commodities in anticipation of sales.
Effects of Inflation
- --------------------
It is the Company's general policy, subject to current competitive
conditions, to pass on increases in costs of commodities used in production by
increasing prices of the products it sells to its customers. However, because
the Company agrees on the price of its products to its customers in advance of
purchasing the product ingredients, there may be a delay in passing on
increasing commodity costs to customers, temporarily decreasing profit margins.
Competitive conditions may limit the Company's ability to pass on commodity
price increases to its customers, prolonging or increasing the adverse effect on
profit margins.
Marketing and Distribution
- --------------------------
The Company's processed meat and pasta products have been marketed primarily
by the Company's management personnel, food brokers, and three full-time
salaried salesmen. Because the Company sells most of its processed meat and
pasta products to customers who either further process the products before they
reach the consumer or sell the products under private labels, the Company does
not advertise its products in a manner designed to reach the ultimate consumer.
Dependency on a Limited Number of Large Customers
- -------------------------------------------------
A substantial portion of the Company's revenues has in recent years resulted
from sales to a few customers. See Note 12 of Notes to Financial Statements.
The Company does not enter into continuing sales contracts with its customers,
and has different major customers from time to time. The following table shows,
by division and for the Company, the percentage of sales represented by the
Company's largest customers for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Number of Division Company
Division Customers Sales % Sales %
- -------- --------- --------- --------
<S> <C> <C> <C>
Swiss American 3 52% 30%
Royal-Angelus 3 27% 12%
- --
Totals 6 42%
</TABLE>
The Company fills orders as they are received from its customers, normally
within a few weeks or less, and does not have a meaningful backlog of orders for
its products. The Company carries significant inventories of its products for
only a few major customers, and does not provide extended payment terms to
customers.
Food Industry Risks
- -------------------
The business of the Company is subject to the risks inherent in the food
industry, including the risk that a food product or ingredient may be banned or
its use limited or declared unhealthful, that product tampering or contamination
will require
-3-
<PAGE>
a recall or reduce sales of a product, or that a product's acceptability will
diminish because of generally perceived health concerns or changes in consumer
tastes.
Employees
- ---------
As of December 31, 1995, the Company employed 131 full-time employees,
67 in production at Swiss American in San Francisco, California, 52 in
production at Royal-Angelus in Chino, California, 4 in clerical and office
functions, 2 in sales activities, and 6 in management activities.
The Company's San Francisco plant employees are represented by the
United Food and Commercial Workers Union Local 101, AFL-CIO, under a collective
bargaining agreement renewed July 10, 1995 to expire March 31, 1998. There has
been no significant labor unrest at the division's plants and the Company
believes it has a satisfactory relationship with its employees.
Health Benefits
- ---------------
From April 1, 1991 to December 31, 1993, the Company was totally self-
funded for Company provided health insurance benefits for its non-union
employees. On January 1, 1994, the Company became partially insured for the
excess over $30,000 of claims of any covered person incurred and paid during the
year, increased to $40,000 for 1996, but remains self-funded for claims up to
$40,000. The Company is exposed to the risk of an extraordinary number of
significant claims but not one or more very large claims.
Regulation
- ----------
Food products purchased, processed and sold by the Company are subject
to various federal, state and local laws and regulations, including the federal
Meat Inspection Act and the Federal Food, Drug and Cosmetic Act. Since 1984,
the Company has qualified for the U. S. Department of Agriculture's Total
Quality Control System Program which enables the Company to self-inspect its
meat products and production conditions and techniques. As required by law,
U.S. Department of Agriculture employees visit the Company's plants in San
Francisco to inspect meat products processed by the Company and to review the
Company's self-inspection records. The Company is also subject to various
federal, state and local regulations regarding workplace health and safety,
environmental protection, equal employment opportunity and other matters. The
Company maintains quality control departments at both its San Francisco and
Chino facilities for purposes of testing product ingredients and finished
products to ensure the production of products of predictable quality and
consistency, as well as compliance with applicable regulations and standards.
ITEM 2. PROPERTIES
The Company's main meat processing plant is an approximately 48,000
square foot facility located in San Francisco occupied under a lease which
expires in 1998. In 1990 the Company occupied under a lease expiring in 2001,
an approximately 45,000 square foot facility nearby its main plant which it
improved by building a dryer and relocating its slicing operations. The 1990
expansion increased the annual capacity of the division from an estimated
16,000,000 pounds per year to 20,000,000 pounds. In 1993 the Company added a
new crumbles line at its original facility, increasing the estimated capacity of
the division to 27,000,000 pounds per year, adequate for the currently
contemplated needs of the division.
The Company's pasta production plant is an approximately 41,000 square
foot facility located in Chino, California, occupied by the Company since 1987.
The plant was built for lease to the Company, but was purchased by the Company
in October 1987. During 1990 the Company added a second short goods production
line, raising the capacity of the plant from about 14,000,000 pounds to about
25,000,000 pounds annually. In January 1996, the Company began the installation
of a third short goods production line expected to be completed by mid-year at a
cost of about $100,000, adding about 5,000,000 pounds of annual capacity. The
Chino plant has capacity to fulfill the Company's near term production needs,
but additional space would currently be useful and will become essential if
pasta sales continue to increase.
In April 1995, the Company purchased an approximately 44,000 square foot
building adjacent to the pasta plant at a cost of $1,283,000, using funds from
working capital and a $975,000 term loan. The building was purchased subject to
an
-4-
<PAGE>
existing lease to a tenant extending to October 31, 1998. In December 1995, the
Company and the tenant agreed to terminate the lease effective February 29,
1996. The Company has leased 60% of the building to a cold storage manufacturer
for 3 years beginning March 1, 1996 and intends to occupy the remaining 40% as
part of its pasta plant.
The Company has not carried earthquake insurance on any of its
properties, except its original pasta plant building beginning in 1993.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine claims and litigation incidental to
its business. Management believes that none will have a material adverse effect
on the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on Tuesday, April
25, 1995, at 11:00 a.m. at the Company's principal office. Shareholders
representing 2,554,500 or 94.7% of the 2,698,696 shares entitled to vote were
present in person or by proxy, with 27,327 broker non-votes. The following
persons were nominated and elected directors, with votes for, withheld from
specified nominees, or without authority to vote for directors, as indicated:
<TABLE>
<CAPTION>
Without
Nominee For Withheld Authority
------- --- -------- ---------
<S> <C> <C> <C>
John D. Determan 2,547,792 -0- 6,708
Theodore L. Arena 2,547,792 -0- 6,708
Ronald A. Provera 2,547,192 600 6,708
Santo Zito 2,547,792 -0- 6,708
Thomas J. Mulroney 2,547,792 -0- 6,708
James P. McClune 2,546,492 1,300 6,708
Louis A. Arena 2,545,692 100 6,708
Joseph W. Wolbers 2,547,792 -0- 6,708
John M. Boukather 2,547,792 -0- 6,708
</TABLE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on the over-the-counter market
and was reported on The National Market System of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") from January 19, 1988
through May 9, 1991, when the Company's common stock was admitted to trading on
the American Stock Exchange under the symbol "PZA". The following table sets
forth high and low prices as traded on the American Stock Exchange:
<TABLE>
<CAPTION>
Quarter of Fiscal Year Ended December 31
First Second Third Fourth
------- ------- ------- ------
<S> <C> <C> <C> <C>
1993 High 2-7/16 2-5/8 3-11/16 3-3/8
Low 1-3/4 2 2-1/2 2-7/8
1994 High 3-1/4 2-15/16 3 3
Low 2-13/16 2-11/16 2-3/8 2-1/4
1995 High 2-13/16 2-3/4 3-1/16 5-3/8
Low 2-3/8 2-1/4 2-5/16 2-7/16
</TABLE>
The closing price on December 31, 1995 was $3-1/2.
-5-
<PAGE>
Common Stock
- ------------
The Company's Articles of Incorporation as amended authorize the Company
to issue up to 10,000,000 shares of common stock, without par value. The
Company is not authorized to issue any class or series of shares except shares
of common stock. At December 31, 1995 the Company had issued and outstanding
2,738,631 shares held by 248 shareholders of record. In addition, the Company
estimates that there are approximately 800 shareholders holding shares in street
or nominee names.
Holders of the Company's common stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. The Company commenced paying quarterly cash dividends in
March 1988, and has paid the following annual amounts per share:
1995 1994 1993 1992 1991 1990 1989 1988
DIVIDENDS $0.18 $0.1725 $0.1625 $0.16 $0.14 $0.125 $0.11 $0.10
The declaration and timing of future dividends, if any, will depend on the
Company's financial condition and results of operations and other factors deemed
relevant by the Board.
All outstanding shares of common stock are fully paid and nonassessable
and are not subject to redemption. Holders of common stock are entitled to one
vote for each share held of record and have cumulative voting rights in the
election of directors. Holders of common stock do not have preemptive rights
and have no right to convert their shares into any other security. Upon
liquidation of the Company, the holders of common stock would share ratably in
all assets of the Company after the payment of all liabilities.
The transfer agent and registrar for the Company is First Interstate
Bank of California, 707 Wilshire Boulevard W11-2, Los Angeles, CA 90017, (800)
522-6645, with mailing addresses for: transfers - P.O. Box 54261, Los Angeles,
CA 90054; change of address - P.O. Box 54263, Los Angeles, CA 90054; general,
missing dividends and lost certificates - P.O. Box 30609, Los Angeles, CA 90030.
Common Stock Repurchase and Sales
- ---------------------------------
The Company has had an announced intention to repurchase shares of its
common stock since January 11, 1988. Currently, purchases are authorized up to
the number of shares issued under the Company's 1988 Employee Stock Purchase
Plan. Purchases are made from time to time on the open market or in privately
negotiated transactions. In addition, the Company must accept outstanding
shares at fair market value in payment of the exercise price of options under
the Company's 1987 Incentive Stock Option Plan.
In 1995, the Company received 18,500 shares in payment of the exercise
price of options at an average fair market value of $3.84. In addition, in 1995
the Company purchased 52,289 shares of its common stock at an average cost of
$2.71 per share. Since January 1988 the Company has repurchased 220,985 shares
at an average cost of $3.14 per share, excluding shares used to exercise
options.
Under the Employee Stock Purchase Plan, in 1995 employees purchased
57,223 newly issued shares at an average price of $2.70 per share. Employees
have purchased a total of 286,978 shares under the plan through December 31,
1995, at an average price of $3.12 per share. Employee contributions plus
Company matching funds are used monthly to purchase shares at the market price
under the plan and are accumulating at a rate of about $140,000 per year.
Employees exercised Incentive Stock Options in 1995 to purchase 53,555
shares at an exercise price of $2.25 per share.
-6-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the headings STATEMENT
OF OPERATIONS DATA and BALANCE SHEET DATA for, and as of the end of, each of the
years in the five-year period ended December 31, 1995 is derived from the
financial statements of the Company, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
selected financial data should be read in conjunction with ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the
financial statements for, and as of the end of, each of the years in the three-
year period ended December 31, 1995, and the report thereon, included in a
separate section at the end of this report beginning on Page F-1. Financial
reports are the responsibility of management, and are based on corporate records
maintained by management, which maintains an internal control system, the
sophistication of which is considered in relation to the benefits received.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------ ------- -------
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $23,424 26,265 22,924 22,570 30,080
Cost of sales 21,348 23,812 21,155 20,743 27,505
------- ------ ------ ------ ------
Gross profit 2,076 2,453 1,769 1,827 2,575
Distribution, general and
administrative expenses 2,021 2,082 1,954 1,984 1,980
------- ------ ------ ------ ------
Operating income (loss) 55 371 (185) (157) 595
Interest income (expense), net (66) (7) 3 (7) (163)
Other income, net 184 156 161 80 64
------- ------ ------ ------ ------
Earnings (loss) before
income tax expense (benefit) 173 520 (21) (84) 496
Income tax expense (benefit) 84 200 (5) (24) 182
------- ------ ------ ------ ------
Earnings (loss) from
continuing operations 89 320 (16) (60) 314
Earnings from discontinued operations (1) - - - - 476
------- ------ ------ ------ ------
Net earnings (loss) $ 89 320 (16) (60) 790
======= ====== ====== ====== ======
Earnings (loss) per share:
From continuing operations $.03 .12 (.01) (.02) .12
From discontinued operations - - - - .18
------- ------ ------ ------ ------
Total earnings (loss) per share $.03 .12 (.01) (.02) .30
======= ====== ====== ====== ======
Cash dividends paid per common share $.18 .1725 .1625 .16 .145
Weighted average number of common
shares outstanding (2) 2,705 2,669 2,653 2,628 2,598
BALANCE SHEET DATA (end of period):
Working capital $ 2,832 3,180 3,029 3,438 3,450
Property and equipment (net) 5,083 4,070 4,258 4,276 4,668
Total assets 10,050 9,036 9,126 9,238 10,293
Shareholders' equity 6,915 7,245 7,274 7,694 8,098
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Sav-On Food Co. division was sold September 30, 1991, is shown as a
discontinued operation net of applicable income taxes, and includes sale of
the Sav-On warehouse on December 27, 1991 for an after tax gain of
$475,056.
(2) The Company sold shares under its employee stock purchase plan, sold shares
under its incentive stock option plan, received shares in exercise of
incentive stock options and repurchased outstanding shares in the years as
shown:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Purchase Plan Shares Sold 57,223 54,461 46,485 41,201 34,722
Incentive Option Shares Sold 53,555 52,000 - - -
Received in Exercise of Options 18,500 31,457 - - -
Outstanding Shares Repurchased 52,289 28,757 32,736 16,692 6,387
</TABLE>
-7-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth operating data for the years ended December 31,
1995, 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales $23,424 100.0% $26,265 100.0% $22,924 100.0%
Cost of sales 21,348 91.1 23,812 90.7 21,155 92.3
------- ----- ------- ----- ------- -----
Gross profit 2,076 8.9 2,453 9.3 1,769 7.7
Distribution, general and administrative expenses 2,021 8.7 2,082 7.9 1,954 8.5
------- ----- ------- ----- ------- -----
Operating income (loss) 55 .2 371 1.4 (185) (.8)
Interest income (expense), net (66) (.3) (7) - 3 -
Other income, net 184 .8 156 .6 161 .7
------- ----- ------- ----- ------- -----
Earnings (loss) before income tax expense (benefit) 173 .7 520 2.0 (21) (.1)
Income tax expense (benefit) 84 .3 200 .8 (5) -
------- ----- ------- ----- ------- -----
Net earnings (loss) $ 89 .4% $ 320 1.2% $ (16) (.1)%
======= ===== ======= ===== ======= =====
Sales in thousands of pounds by division
SWISS AMERICAN 9,990 11,753 10,691
ROYAL-ANGELUS 18,825 16,688 14,850
</TABLE>
Comparison of Years Ended December 31, 1995 and 1994
- ----------------------------------------------------
1995 sales of $23,424,000 were down 11% from 1994 sales of
$26,265,000, despite record sales by the Royal-Angelus pasta division.
The Swiss American meat division's sales were down about 21% in
dollars and 8.5% in pounds in 1995 versus 1994 and Swiss had an operating loss
in 1995 substantially greater than in 1994. Swiss's sales for the 4th quarter
of 1995 were down 1.4% in dollars but up 6.2% in pounds compared to the 4th
quarter of 1994. Sales decreased proportionately more in dollars than in pounds
because of a combination of lower meat costs and intense competition.
The decrease in sales and profitability at Swiss is a continuation of
a long term erosion in sales and profitability which began in 1991 and is
attributed to over-capacity to produce pepperoni for pizza, reduced growth in
pizza consumption and intense competition. The most likely way to improve
Swiss's performance would be to increase its sales. Management has concluded
that there is no reasonable prospect of growing Swiss back to profitability and
has engaged a consultant to seek a specialty meat processing business
complementary to Swiss which could be combined with Swiss to result in a
profitable meat business by having a meat plant operating near capacity.
The Company plans to adopt an accounting standard in 1996 which
requires a review of the carrying amount of an operating asset when events
indicate the carrying amount may not be recoverable. Swiss has about $1,000,000
of fixed assets which may not be considered fully recoverable if Swiss's
operating losses are not reduced. The Company believes that its bank would
waive a failure to maintain the minimum tangible net worth required under the
Company's bank line of credit caused by a write-down of Swiss assets.
The Royal-Angelus pasta division's sales increased about 10% in
dollars and 13% in pounds in 1995 over 1994, record annual sales in both dollars
and pounds for Royal. The pasta division's sales for the 4th quarter of 1995
were up 4.2% in dollars and 22% in pounds over the same quarter of 1994. The
percent increases were lower in dollars than in pounds because of sales of a
higher proportion of high volume rather than specialty products and the
continuing effect of the high cost of flour.
-8-
<PAGE>
The cost of semolina flour began rising in 1993 and has been up about
50% from pre-1993 levels since then. This cost increase puts pressure on
margins and prices, because if the full increase is passed on to the consumer,
less consumption may result and if it is passed on to the Company's customers,
they may seek a cheaper supplier. This pressure on margins and prices caused
Royal's operating profit to be 6% lower in 1995 than 1994, despite increased
sales.
The Company's gross profit for 1995 was $2,076,000 or 8.9% of net
sales compared to $2,453,000 or 9.3% of net sales for 1994. Gross profit
decreased absolutely and as a percent of sales because of continuing pressure on
margins at both divisions and the inefficiency of operating at low volumes at
Swiss. Distribution, general and administrative expenses for 1995 were down
about 3% from 1994. Distribution expense was down about $76,000 or 8% compared
to an 11% decrease in sales, because salesmen payroll did not decrease and the
Company bore the freight on a higher proportion of sales at both divisions.
Administrative expense was up about $15,000 primarily because of an increase in
bad debt expense.
Other income increased about $27,000 and net interest expense
increased about $60,000 primarily because of rent from the building adjacent to
the pasta plant purchased in 1995 and interest on the term loan used to purchase
it.
Comparison of Years Ended December 31, 1994 and 1993
- ----------------------------------------------------
1994 sales of $26,265,000 were up 14.6% from 1993 as the result of
increased sales of the Swiss American meat division and record sales of the
Royal-Angelus pasta division.
The meat division's sales were up 9.3% in dollars and 9.9% in pounds
in 1994 versus 1993 and Swiss's increased sales resulted in the improved
performance of the Company in 1994. However, Swiss's sales declined in dollars
and pounds in each quarter of 1994 compared to the preceding quarter, primarily
as a result of a general decline in purchases by Swiss's customers. Swiss's 4th
quarter sales were down 20% in dollars and 18% in pounds compared to the 4th
quarter of 1993.
Swiss added discrete new sales which resulted in increasing sales in
the 3rd and 4th quarters of 1993 and the 1st quarter of 1994. But sales
declined during 1994 because of an underlying long term erosion in sales
attributed to an over-capacity to produce pepperoni for pizza, reduced growth in
pizza consumption and intense price competition.
The pasta division sales increased about 27% in dollars and 12% in
pounds in 1994 over 1993, record annual sales in both dollars and pounds for
Royal. The higher percentage increase in dollars reflects increased flour costs
and a higher proportion of sales of specialty rather than bulk products. During
the latter part of the 3rd quarter of 1993, following the storms in the Midwest,
the price of durum semolina flour, the pasta division's primary ingredient,
increased and remained up about 50% during all of 1994. The pasta division's
sales for the 4th quarter of 1994 were up 19% in dollars but down 21% in pounds
over the same quarter of 1993, the increase in dollars despite a decrease in
pounds resulting from the increased sale of specialty items with higher average
selling prices.
Gross profit for 1994 was $2,453,000 or 9.3% of net sales compared to
$1,769,000 or 7.7% of net sales for 1993. Gross profit increased absolutely and
as a percent of sales because of increased margins at Swiss on higher sales.
Royal's gross profit was up slightly in 1994, but down as a percent of sales
because of increased flour costs. Distribution, general and administrative
expenses for 1994 were up about 6.5% from 1993. Distribution expense was up
about $100,000 or 11% compared to a 15% increase in sales, because Royal's
higher prices did not produce higher shipping costs. Administrative expense was
up about $30,000 for 1994 compared with 1993, mainly due to a $60,000 increase
in officer payroll and a $40,000 increase in health care expense, offset by a
$60,000 reduction in bad debt expense.
Other income decreased slightly because of reduced royalties
associated with the discontinued Sav-On distribution division. Net interest
declined $10,000 from income in 1993 to an expense in 1994 due to higher bank
borrowings, but the Company had no borrowings under its bank line from October
26, 1994 to December 31, 1994.
Liquidity and Capital Resources
- -------------------------------
The Company has generally satisfied its normal working capital
requirements with funds derived from operations and borrowings under its bank
line of credit. At December 31, 1995 the Company had no borrowings under its
$2,000,000 unsecured bank line of credit with Wells Fargo Bank, NA. The line
was renewed in May 1995 to expire June 1, 1996, and bears interest at a variable
rate of 3/8% over prime. The line as renewed prohibits mergers, acquisitions,
lending, borrowing, guaranteeing, annual capital expenditures over $500,000 and
new annual lease obligations over $100,000 and requires a
-9-
<PAGE>
minimum tangible net worth of $6,890,000, a maximum debt to tangible net worth
ratio of 0.75, a minimum debt coverage ratio of 1.75, a minimum current ratio of
2, profitable operations on a cumulative quarterly basis and a zero balance for
30 days during the term. The last requirement was fulfilled during the 3rd
quarter of 1995.
On April 7, 1995, the Company purchased an approximately 44,000 square
foot building adjacent to the Company's pasta plant at a cost of $1,283,000,
using funds from working capital and $975,000 borrowed from Wells Fargo Bank,
NA, under a 5 year term loan bearing interest at 2% over the bank's "LIBOR"
rate. The loan is secured by the property, is payable in monthly payments of
$705 principal plus accrued interest and will have a $932,700 principal balance
payable at the end of the term. At December 31, 1995 the loan had a $968,655
balance, including the $8,460 current portion. The building was purchased
subject to an existing lease to a tenant extending to October 31, 1998. In
December 1995, the Company and the tenant agreed to terminate the lease
effective February 29, 1996. The Company has leased 60% of the building to a
cold storage manufacturer for 3 years beginning March 1, 1996 and intends to
occupy the remaining 40% as part of its pasta plant.
The Company's pasta plant in Chino, California has an estimated
production capacity of 25,000,000 pounds per year compared to about 18,825,000
pounds sold in 1995. The plant's excess capacity has varied between short goods
(e.g., macaroni) and long goods (e.g., spaghetti). The Company has from time to
time increased whichever capacity appeared most likely to become deficient. In
January 1996, the Company began the installation of a third short goods
production line expected to be completed by mid-year at a cost of $100,000,
adding about 5,000,000 pounds of annual capacity. There is space in the plant
to expand the long goods capacity at the sacrifice of needed warehouse space.
The plant has the capacity to fulfil the Company's near term production needs,
but additional space would currently be useful and will become essential if
pasta sales continue to increase. The building adjacent to the pasta plant was
purchased to provide this additional space.
Swiss American Sausage division's San Francisco meat processing plant
has an estimated production capacity of 27,000,000 pounds per year, including
about 7,000,000 per year of crumbles and 20,000,000 of sausage and other meat
products, compared to about 9,990,000 pounds sold in 1995. The meat plant's
present capacity is adequate for the currently contemplated needs of the
division.
Additions to property and equipment of about $300,000 are anticipated
for 1996, including the pasta plant short goods line.
In 1993 cash decreased about $534,000. Operating activities produced
about $207,000, essentially depreciation plus the small decreases in inventories
and prepaid expenses less the loss and less the excess of the increase in
receivables over the increases in payables and accrued expenses. Investing
activities used $437,000 for capital improvements and financing activities used
$304,000 for dividends less net stock proceeds and less $100,000 borrowed under
the bank line.
In 1994 cash decreased about $51,000. Operating activities produced
about $700,000 of cash from earnings, depreciation, reduced receivables and
increased accrued expenses, offset by higher inventories and lower accounts
payable. Investing activities used $302,000 for net capital expenditures and
financing activities used $450,000 for dividends and reduction of bank debt,
less net stock proceeds.
In 1995 cash increased about $294,000. Operating activities produced
about $1,297,000 primarily from earnings, depreciation, a decrease in
inventories and increases in accounts payable and accrued expenses. Investing
activities used $578,000 for net capital expenditures and financing activities
used $425,000 for dividends offset by net stock proceeds.
In the latter part of 1993, especially the 4th quarter, the Company's
business expanded, and accounts receivable increased with increasing sales,
offset by a smaller increase in payables from increased purchases of raw
materials. Inventories did not increase because production did not keep up with
increased sales. The Company also made substantial capital improvements in 1993
at both plants, including the new crumbles line at Swiss.
In 1994, for the first 3 quarters, both divisions had higher sales in
dollars and pounds than in the same quarter of 1993, but in the 4th quarter of
1994 Swiss's sales declined compared with the 4th quarter of 1993, resulting in
higher inventories at year end than desired.
During 1995 Company sales decreased and inventories were reduced by
over $500,000. The Company purchased the building adjacent to the pasta plant
in 1995, incurring $975,000 of long term debt and using about $300,000 of cash.
In 1996 quarterly cash dividends will continue to be paid if the Board
believes that earnings and cash flow are adequate.
-10-
<PAGE>
The Company adopted an employee stock purchase plan in 1988 to provide
employees with the incentive of participation in the performance of the Company
and to retain their services. Under the plan, employees other than officers and
directors may authorize weekly payroll deductions which are matched by the
Company and used monthly to purchase shares from the Company at the market
price. The weekly payroll deduction is from $5 to $50 for each participant.
The matching funds are an expense incurred by the Company, but the plan results
in net cash flow to the Company because amounts equal to twice the matching
funds are used to purchase shares from the Company. Cash flow to the Company
from the plan was $154,630 in 1995 and may be as much as $140,000 or more in
1996.
The Company believes that its operations and bank line of credit will
provide adequate working capital to satisfy the needs of its operations for the
foreseeable future.
The Company has no long term debt other than the $968,655 secured by
the land and building adjacent to the pasta plant. All of its other assets,
including inventories, receivables, equipment and its original Chino pasta plant
are unencumbered, and could be borrowed against as a source of liquidity if an
unforeseen need arises.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are submitted in a
separate section at the end of this report beginning with the Index to Financial
Statements and Schedule on Page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The name, age, principal position for the past five years and other
relevant information for each of the current directors and executive officers of
the Company is as follows:
JOHN D. DETERMAN, age 63, has been a vice president and director of
the Company since its formation in 1972, General Counsel from 1986 to 1992, and
Chairman and Chief Executive Officer since 1992. He is a member of the audit
and option committees.
THEODORE L. ARENA, age 53, has been the General Manager of Swiss
American since 1976 and has been the President and a director of the Company
since 1985. He is the nephew of Louis A. Arena, a director of the Company.
RONALD A. PROVERA, age 58, has been the secretary and a director of
the Company since its formation in 1972 and was the General Manager of Sav-On
from its formation in 1960 until its liquidation in 1991. He is currently
providing sales support to Royal-Angelus. He is a member of the option
committee.
SANTO ZITO, age 59, has been the Company's plant engineer since 1976,
and a vice president and director of the Company since its formation in 1972.
He is currently providing engineering support to Royal-Angelus. He is a member
of the option committee.
THOMAS J. MULRONEY, age 50, has been the Company's chief accountant
since 1976, the Chief Financial Officer since 1987, a vice president since 1991,
and a director since 1992.
JAMES P. MCCLUNE, age 45, has been the General Manager of the pasta
division since 1989, its operations manager from 1987 to 1989, a vice president
since 1991, and a director since 1992.
LOUIS A. ARENA, age 73, has been a director of the Company since 1972,
a vice president from 1972 to 1989, and General Manager of the Royal-Angelus
Macaroni Co. division from 1975 until his retirement in 1989.
-11-
<PAGE>
JOSEPH W. WOLBERS, age 66, has been a director of the Company and
Chairman of the audit committee since 1990. He retired in 1989 as a vice
president of First Interstate Bank where he had been employed since 1950.
JOHN M. BOUKATHER, age 59, is a management consultant. He was the
Director of Operations of PW Supermarkets from 1993 to 1994, Vice President,
Retail Sales, of Certified Grocers of California, Ltd. from 1992 to 1993 and
president of Pantry Food Markets from 1983 to 1987. He has been a director of
the Company and member of the audit committee since 1987.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 1995,
1994 and 1993, all compensation of all executive officers of the Company serving
at December 31, 1995.
<TABLE>
<CAPTION>
Annual SEP/IRA
Name and Position Year Salary Contributions
- ----------------- ----- -------- -------------
<S> <C> <C> <C>
John D. Determan, 1995 $ 63,098 $ 9,465
Chief Executive Officer 1994 100,686 15,103
1993 61,263 9,189
Theodore L. Arena, 1995 105,887 15,883
President 1994 104,973 15,745
1993 102,842 15,426
Ronald A. Provera, 1995 103,338 15,501
Secretary 1994 102,474 15,371
1993 102,242 15,336
Santo Zito, 1995 111,586 16,738
Vice President 1994 104,548 15,682
1993 103,220 15,483
James P. McClune, 1995 100,484 15,073
Vice President 1994 100,413 15,062
1993 87,516 13,127
Thomas J. Mulroney, 1995 101,693 15,254
Chief Financial Officer 1994 101,262 15,189
1993 88,460 13,269
</TABLE>
See Incentive Stock Option Plan below for information on Incentive
---------------------------
Stock Options. See Simplified Employee Pension Plan below for more information
--------------------------------
on SEP/IRA Contributions.
The Company does not currently pay bonuses or deferred compensation to
any executive officer and does not provide them with automobiles, other
perquisites, employment contracts or "golden parachute" arrangements. Officers
who are over 5% shareholders have not received an increase in their basic weekly
wage since 1986, except that the compensation of John D. Determan, currently at
the same basic wage as it had been since 1986, was increased only for the year
1994 to $100,000. The annual salary is as reported on Form W-2 and includes the
cost of life insurance and other costs taxable to the officer.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Company has no compensation committee. All executive officers are
members of the Board and participate in the Board's deliberations concerning
executive compensation.
-12-
<PAGE>
Simplified Employee Pension Plan
- --------------------------------
In 1988, the Company adopted a Simplified Employee Pension-Individual
Retirement Accounts ("SEP-IRA") plan and executed SEP-IRA Agreements with Wells
Fargo Bank, N.A. and Dean Witter Reynolds Inc., covering all employees at least
18 years old who have worked at least six months and earned at least $300 during
the year, except certain union employees.
The Company makes contributions under the plan at the discretion of
the Board, allocated in proportion to compensation, to an Individual Retirement
Account ("IRA") established by each eligible employee.
Contributions, up to 15% of eligible compensation, are deductible by
the Company and not taxable to the employee. An employee may withdraw SEP-IRA
funds from the employee's IRA. Withdrawals are taxable as ordinary income, and
withdrawals before age 59-1/2 may be subject to tax penalties.
For 1995, the Company contributed $393,196 to IRA's under the plan.
Incentive Stock Option Plan
- ---------------------------
In April 1987, the Company adopted an Incentive Stock Option Plan
under Section 422A of the Internal Revenue Code of 1986. Under the plan, as
amended in 1988, for a period of 10 years from the date of adoption, an Option
Committee appointed by the Board of Directors is authorized in its discretion to
grant to key management employees options to purchase up to an aggregate of
261,704 shares of common stock of the Company. The options may become
exercisable in such installments as may be established by the Option Committee.
The purchase price of shares covered by an option may not be less than the
market value of the shares on the date of grant. The term of an option may not
exceed 10 years and an option may not become exercisable in any year with
respect to the purchase of more than $100,000 worth of shares based on the
market value on the date of grant.
In August 1987, options were granted under the plan to purchase
185,000 shares at a price of $7.00 per share, 125,000 to Theodore L. Arena,
30,000 to Thomas J. Mulroney and 30,000 to another employee. In June 1988,
those options were terminated and options were granted to purchase 230,000
shares at a price of $3-5/8 per share, 155,000 to Mr. Arena, 30,000 to Mr.
Mulroney, 10,000 to James P. McClune and the balance to two other employees. In
December 1992, the outstanding options were terminated and options were granted
to purchase 260,000 shares at a price of $2-1/4 per share, 150,000 to Mr. Arena,
30,000 to Mr. Mulroney, 30,000 to Mr. McClune and the balance to three other
employees.
No options were exercised prior to 1994. In 1994, options were
exercised to purchase 52,000 shares, including 30,000 by Mr. Arena, 6,000 by Mr.
Mulroney and 6,000 by Mr. McClune. In 1995, options were exercised to purchase
53,555 shares. The following table shows, for the three executive officers, the
number of shares acquired on exercise of options in 1995, the value realized on
exercise of the options based on the year end closing price of $3-1/2, the
number of unexercised options held on January 1, 1996, the number exercisable
and unexercisable and their aggregate value based on the year end closing price.
Aggregate Option Exercises in 1995 and Option Values at January 1, 1996
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
Shares Acquired Value Options at 1/1/96 Money Options at 1/1/96
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------- --------------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Theodore L. Arena 30,000 $37,500 90,000/ -0- $112,500/ -0-
Thomas J. Mulroney 6,000 $ 7,500 18,000/ -0- $ 22,500/ -0-
James P. McClune 7,555 $ 9,444 16,445/ -0- $ 20,556/ -0-
</TABLE>
Compensation of Directors
- -------------------------
Directors who are not officers or employees are paid a fee of $500 for
each board meeting or board committee meeting attended.
-13-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management Stock Ownership
- --------------------------
The following table sets forth, for each officer, director and 5%
shareholder of the Company and for all officers and directors as a group (9
persons), the number and percent of outstanding shares of common stock of the
Company owned on December 31, 1995.
<TABLE>
<CAPTION>
Shares Beneficially Owned
--------------------------------------------
Without Options(3) Options Exercised(4)
-------------------- ---------------------
Name or Category(1) Number Percent Number Percent
------------------ --------- -------- ---------- --------
<S> <C> <C> <C> <C>
John D. Determan 335,327 12.2% 335,327 11.7%
Penny S. Bolton (2) 378,463 13.8% 378,463 13.2%
Theodore L. Arena 140,994 5.2% 230,994 8.1%
Ronald A. Provera 322,330 11.8% 322,330 11.3%
Santo Zito 342,530 12.5% 342,530 12.0%
Thomas J. Mulroney 20,900 .8% 38,900 1.4%
James P. McClune 15,711 .6% 32,156 1.1%
Louis A. Arena 288,030 10.5% 288,030 10.1%
John M. Boukather 1,500 .1% 1,500 .1%
Joseph W. Wolbers 6,650 .2% 6,650 .2%
Officers and Directors 1,473,972 53.8% 1,598,417 55.8%
Shares Outstanding 2,738,631 100% 2,863,076 100%
- -------------------------------------------------------------------------------------
</TABLE>
(1) The address for each person is c/o Provena Foods Inc., 5010 Eucalyptus
Avenue, Chino, Ca. 91710.
(2) Penny S. Bolton is the widow of James H. Bolton, former chairman of the
Company. Her shares are not included in the group's shares.
(3) Excludes options under the Company's Incentive Stock Option Plan to
Theodore L. Arena to purchase 90,000 shares, to Thomas J. Mulroney to
purchase 18,000 shares, to James P. McClune to purchase 16,445 shares and
to all officers and directors as a group to purchase 124,445 shares.
(4) The options of Messrs. Arena, Mulroney, McClune and the group are deemed
exercised.
No other person is known to the Company to own beneficially more than 5% of
the outstanding shares of the Company.
Management Stock Transactions
- -----------------------------
During the specified quarter of 1995, officers and directors purchased the
following numbers of shares of the Company's common stock: 1st quarter, none;
2nd quarter, Santo Zito, vice president and director - 4,600 shares, Thomas J.
Mulroney, Chief Financial Officer and director - 4,000 by exercise of incentive
stock options; 3rd quarter, James P. McClune, General Manager of the pasta
division and director - 5,000, including 4,000 by exercise of options, Mr.
Mulroney - 1,440 by exercise of options; 4th quarter, Theodore L. Arena,
President, General Manager of the meat division and director - 30,000 by
exercise of options, Mr. McClune - 3,555 by exercise of options, Mr. Mulroney -
1,820 by exercise of options. Officers and directors reported sales during the
year of the following numbers of shares of the Company's common stock: Louis A.
Arena, director - 18,900 shares; a corporation 50% owned by Mr. Zito - 4,900;
and Theodore L. Arena - 500. Also Theodore L. Arena used 11,250 shares and Mr.
McClune used 5,000 shares to pay the exercise price of incentive stock options.
Based on copies of filed forms and written representations, the Company
believes that all officers, directors and 10% shareholders have timely filed all
Forms 3, 4 and 5 required for 1995 and (except as previously disclosed) prior
years by Section 16(a) of the Securities Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no transactions with related parties required to be disclosed under
the above caption in this report.
-14-
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
Financial Statements and Schedules
- ----------------------------------
The Financial Statements and Schedule filed with this report are in a
separate section at the end of this report beginning with the Index to Financial
Statements and Schedule on page F-1.
<TABLE>
<CAPTION>
Exhibits
- --------
<C> <S>
3.7 Bylaws of the Company, as in effect on January 16, 1989 (1), (3)
3.8 Amended and restated Articles of Incorporation of the Company as filed
with the California Secretary of State on June 17, 1987 (2)
3.9 Amendment to Articles of Incorporation of the Company re Liability of
Directors and Indemnification as filed with the California Secretary of
State on January 17, 1989 (6)
3.10 Amendment to Bylaws of the Company re Liability of Directors and
Indemnification effective January 17, 1989 (6)
3.11 Amendment to Bylaws of the Company re Annual Meeting in April (7)
3.12 Amendment to Bylaws of the Company re relocating Principal Executive
Office to Chino, California (8)
4.3 Form of Certificate evidencing common stock (8)
10.2 1987 Incentive Stock Option Plan, as amended to date (1)
10.4 Lease Agreement dated October 27, 1978 between the Company, as the
successor in interest to the Lessee, Swiss-American Sausage Co., and
Alfredo L. Caceres and Doris Caceres, as Lessor, of the first Swiss
American San Francisco Plant (1)
10.20 1988 Stock Purchase Plan of the Company (4)
10.22 Dean Witter Simplified Employee Pension Plan Employer Agreement dated
August 8, 1988 (5)
10.23 Wells Fargo Bank Simplified Employee Pension Plan Adoption Agreement
dated July 18, 1988 (5)
10.26 Lease Agreement dated May 28, 1990 between the Company and Alexander M.
and June L. Maisin, as Lessor, of the second Swiss American San
Francisco Plant (7)
10.35 Credit Agreement dated February 1, 1995 between the Company and Wells
Fargo Bank, National Association and First Amendment thereto dated April
10, 1995 (32 PAGES)
10.36 Standard Industrial/Commercial Single-Tenant Lease - Gross dated
December 18, 1995 between the Company, as Lessor, and R-Cold, Inc. and
Therma-Lok, Inc., as Lessee of a portion of 5060 Eucalyptus Avenue,
Chino, CA (17 PAGES)
10.37 Consultant Agreement dated December 4, 1995 between the Company and
Stephen Horowitz & Associates, Inc. to find a business to be combined
with Swiss American (2 PAGES)
10.38 Collective Bargaining Agreement dated December 6, 1995, between the
Company and United Food and Commercial Workers Union Local 101, AFL-CIO
(30 PAGES)
24.1 Report and Consent of KPMG Peat Marwick LLP (1 PAGE)
27 EDGAR Financial Data Schedule (1 PAGE)
- --------------------------------------------------------------------------------
</TABLE>
(1) Exhibit to Form S-1 Registration Statement filed May 11, 1987
(2) Exhibit to Amendment No. 2 to Form S-1 Registration Statement filed June
17, 1987
(3) Exhibit to Amendment No. 3 to Form S-1 Registration Statement filed July
29, 1987
(4) Exhibit to 1987 Form 10-K Annual Report
(5) Exhibit to 1988 Form 10-K Annual Report
(6) Exhibit to 1989 Form 10-K Annual Report [Exhibits filed with the 10-K
(7) Exhibit to 1990 Form 10-K Annual Report report are not reproduced in
(8) Exhibit to 1991 Form 10-K Annual Report this Annual Report, but will
be provided for $.10 per page
plus postage. The number of
pages is shown in BOLD at the
right margin.]
Reports on Form 8-K
- -------------------
During the year ended December 31, 1995 the Company filed one report on
Form 8-K in April 1995 for the April 7, 1995 purchase of the building adjacent
to the pasta plant.
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: February 27, 1996 PROVENA FOODS INC.
By /s/ John D. Determan
--------------------------------
John D. Determan
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ------- ------
<S> <C> <C>
/s/ John D. Dterman Chairman of the Board (Principal February 27, 1996
- ----------------------------- Executive Officer) and Director
John D. Determan
/s/ Theodore L. Arena President and Director February 27, 1996
- -----------------------------
Theodore L. Arena
/s/ Ronald A. Provera Vice President, Sales, Secretary and February 27, 1996
- ----------------------------- Director
Ronald A. Provera
/s/ Santo Zito Vice President and Director February 27, 1996
- -----------------------------
Santa Zito
/s/ Thomas J. Mulroney Chief Financial Officer (Principal February 27, 1996
- ----------------------------- Financial and Accounting Officer)
Thomas J. Mulroney
/s/ James P. McClune Vice President and Director February 27, 1996
- -----------------------------
James P. McClune
/s/ Louis A. Arena Director February 27, 1996
- -----------------------------
Louis A. Arena
/s/ Joseph W. Wolbers Director February 27, 1996
- -----------------------------
Joseph W. Wolbers
/s/ John M. Boukather Director February 27, 1996
- -----------------------------
John M. Boukather
</TABLE>
-16-
<PAGE>
PROVENA FOODS INC.
SEC Form 10-K
Items 8 and 14 (a)(1)
Financial Statements and Schedule
December 31, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
-17-
<PAGE>
PROVENA FOODS INC.
Items 8 and 14(a)(1)
Index to Financial Statements and Schedule
------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Balance Sheets - December 31, 1995 and 1994 F-3
Statements of Operations - Years ended December 31, 1995, 1994 and 1993 F-4
Statements of Shareholders' Equity - Years ended December 31, 1995, 1994 and 1993 F-5
Statements of Cash Flows - Years ended December 31, 1995, 1994 and 1993 F-6
Notes to Financial Statements F-8
Schedule
- --------
II--Valuation and Qualifying Accounts and Reserves F-16
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Provena Foods Inc.:
We have audited the accompanying balance sheets of Provena Foods Inc. as of
December 31, 1995 and 1994, and the related statements of operations,
shareholders equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. In connection with our audits of the financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
statement schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Provena Foods Inc. at December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Orange County, California
February 6, 1996
F-2
<PAGE>
PROVENA FOODS INC.
Balance Sheets
--------------
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 350,843 56,593
Accounts receivable, less allowance for
doubtful accounts of $54,700 in 1995
and $17,000 in 1994 (note 12) 2,199,671 2,021,095
Inventories (note 2) 2,297,322 2,799,819
Prepaid expenses (note 9) 67,053 58,347
Income taxes receivable (note 9) 2,342 --
----------- ---------
Total current assets 4,917,231 4,935,854
----------- ---------
Property and equipment, net (notes 3 and 6) 5,082,899 4,070,035
Other assets (note 9) 49,384 30,412
----------- ---------
$10,049,514 9,036,301
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,460 --
Accounts payable 793,755 669,725
Accrued expenses (note 7) 1,283,026 1,086,040
----------- ---------
Total current liabilities 2,085,241 1,755,765
----------- ---------
Deferred income (note 4) 89,004 35,667
Long-term debt, net of current portion (note 6) 960,195 --
Shareholders' equity (notes 8 and 11):
Capital stock, no par value; authorized
10,000,000 shares; 2,738,631 and 2,698,642
shares issued and outstanding at
December 31, 1995 and 1994, respectively 4,104,173 4,041,695
Retained earnings 2,814,169 3,212,912
Note receivable from shareholder (note 8) (3,268) (9,738)
----------- ---------
Total shareholders' equity 6,915,074 7,244,869
Commitments and contingencies
(notes 5, 10, 13 and 14)
----------- ---------
$10,049,514 9,036,301
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PROVENA FOODS INC.
Statements of Operations
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Net sales (note 12) $23,424,677 26,265,478 22,924,100
Cost of sales 21,348,187 23,812,347 21,154,612
----------- ---------- ----------
Gross profit 2,076,490 2,453,131 1,769,488
----------- ---------- ----------
Operating expenses:
Distribution 880,316 956,399 857,941
General and administrative (note 10) 1,140,709 1,125,395 1,096,491
----------- ---------- ----------
2,021,025 2,081,794 1,954,432
----------- ---------- ----------
Operating income (loss) 55,465 371,337 (184,944)
Interest expense, net (66,089) (7,408) 2,773
Other income, net (note 3) 183,640 156,499 160,989
----------- ---------- ----------
Earnings (loss) from operations
before income tax expense
(benefit) 173,016 520,428 (21,182)
Income tax expense (benefit) (note 9) 84,224 200,200 (4,700)
----------- ---------- ----------
Net earnings (loss) $ 88,792 320,228 (16,482)
=========== ========== ==========
Net earnings (loss) per share $ .03 .12 (.01)
=========== ========== ==========
Weighted average number of shares
outstanding $ 2,705,398 2,669,336 2,652,522
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PROVENA FOODS INC.
Statements of Shareholders' Equity
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Capital stock Note
------------------------- receivable Total
Shares Retained from shareholders'
issued Amount earnings shareholder equity
----------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $2,638,646 3,913,803 3,802,007 (21,443) 7,694,367
Repurchase of capital stock (32,736) (95,199) -- -- (95,199)
Sale of capital stock 46,485 117,034 -- -- 117,034
Cash dividends paid, $.1625 per share -- -- (431,140) -- (431,140)
Payment on shareholder note receivable (note 8) -- -- -- 5,655 5,655
Net loss -- -- (16,482) -- (16,482)
----------- ----------- ---------- ------------ -------------
Balance at December 31, 1994 2,652,395 3,935,638 3,354,385 (15,788) 7,274,235
Repurchase of capital stock (60,214) (167,577) -- -- (167,577)
Sale of capital stock 54,461 156,634 -- -- 156,634
Exercise of shares under stock
option plan (note 11) 52,000 117,000 -- -- 117,000
Cash dividends paid, $.1725 per share -- -- (461,701) -- (461,701)
Payment on shareholder note receivable (note 8) -- -- -- 6,050 6,050
Net earnings -- -- 320,228 -- 320,228
----------- ----------- ---------- ------------ -------------
Balance at December 31, 1994 2,698,642 4,041,695 3,212,912 (9,738) 7,244,869
Repurchase of capital stock (70,789) (212,651) -- -- (212,651)
Sale of capital stock 57,223 154,630 -- -- 154,630
Exercise of shares under stock
option plan (note 11) 53,555 120,499 -- -- 120,499
Cash dividends paid, $.18 per share -- -- (487,535) -- (487,535)
Payment on shareholder note receivable (note 8) -- -- -- 6,470 6,470
Net earnings -- -- 88,792 -- 88,792
----------- ----------- ---------- ------------ -------------
Balance at December 31, 1995 $ 2,738,631 4,104,173 2,814,169 (3,268) 6,915,074
=========== =========== ========== ============ =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PROVENA FOODS INC.
Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 88,792 320,228 (16,482)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 539,796 490,469 455,352
Provision for bad debts 91,212 -- 52,611
Decrease (increase) in accounts receivable (269,788) 133,579 (573,367)
Decrease (increase) in inventories 502,497 (308,766) 25,389
Decrease (increase) in prepaid expenses (8,706) 10,703 32,127
(Increase) decrease in income taxes receivable (2,342) 9,164 17,874
Decrease (increase) in other assets (18,972) 1,732 1,732
Increase (decrease) in accounts payable 124,030 (202,907) 162,955
Increase in accrued expenses 196,986 252,264 54,538
Increase (decrease) in deferred income 53,337 (5,569) (5,569)
---------- -------- --------
Net cash provided by operating activities 1,296,842 700,897 207,160
---------- -------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 4,900 19,041 --
Additions to property and equipment (582,560) (321,084) (437,499)
---------- -------- --------
Net cash used in investing activities (577,660) (302,043) (437,499)
---------- -------- --------
Cash flows from financing activities:
Net borrowings (payments) on bank credit line -- (100,000) 100,000
Payments on note payable to bank (6,345) -- --
Repurchase of capital stock (212,651) (167,577) (95,199)
Proceeds from sale of capital stock 154,630 156,634 117,034
Exercise of stock options 120,499 117,000 --
Payments received on note from shareholder 6,470 6,050 5,655
Cash dividends paid (487,535) (461,701) (431,140)
---------- -------- --------
Net cash used in financing activities (424,932) (449,594) (303,650)
---------- -------- --------
Net increase (decrease) in cash and cash equivalents 294,250 (50,740) (533,989)
Cash and cash equivalents at beginning of period 56,593 107,333 641,322
---------- -------- --------
Cash and cash equivalents at end of period $ 350,843 56,593 107,333
========== ======== ========
</TABLE>
(Continued)
F-6
<PAGE>
PROVENA FOODS INC.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 67,747 11,147 --
Income taxes 150,083 136,800 800
======== ======= ===
Supplemental disclosure of non-cash
investing and financing activities--
building acquired for debt $975,000 -- --
======== ======= ===
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1995, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Provena Foods Inc. (the Company) is a California-based specialty food
processor. The Company grants credit to its customers in the normal
course of business. The Company's meat processing business is conducted
through its Swiss American Sausage Division (the Swiss American
Division), and the Company's pasta business is conducted through its
Royal-Angelus Macaroni Division (the Royal-Angelus Division).
INVENTORIES
Inventories consist principally of food products and are stated at the
lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets acquired prior to 1981
and subsequent to 1986 are depreciated on the straight-line method. For
assets acquired during the period from 1981 through 1986, accelerated
methods of depreciation are used. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings and improvements 31.5-39 years
Machinery and equipment 10 years
Delivery equipment 5 years
Office equipment 7 years
</TABLE>
COMMODITY FUTURES
In 1993 and prior years, the Company engaged in limited commodity futures
trading. This activity was discontinued in 1994. For the years ended
December 31, 1994 and 1993, the Company recognized gains and (losses) of
approximately $(4,200) and $55,000, respectively, related to this
activity.
CASH AND CASH EQUIVALENTS
For purposes of the Statements of Cash Flows, the Company considers
excess cash invested in highly liquid money market funds to be cash
equivalents.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are based on the weighted average number of
common shares outstanding during the year. Common equivalent shares
(stock options) are not included in the computation of earnings per share
as their effect would be immaterial. Fully diluted earnings per share
approximate primary earnings per share.
F-8
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
ACCOUNTING PRONOUNCEMENT TO BE ADOPTED
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," effective for financial statements for fiscal years
beginning after December 15, 1995. SFAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company plans to adopt SFAS 121 in 1996.
The Company has incurred operating losses at its Swiss American division
and is attempting to locate a potential acquisition candidate to combine
with the operations of Swiss. The Company is currently evaluating the
impact of SFASE 121 in light of the operating losses of the Swiss
American division and the plan for supplementing Swiss' operations.
Management believes that, should it be successful in obtaining an
acquisition to combine with the operations of Swiss, the carrying amounts
of Swiss' assets would be recoverable.
RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform to the
current year presentation.
(2) INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Raw materials $ 797,990 866,608
Work in process 575,957 507,127
Finished goods 923,375 1,426,084
---------- ----------
$2,297,322 2,799,819
========== ==========
</TABLE>
F-9
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
(3) PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Land $ 551,985 297,343
Buildings and improvements 3,265,644 2,237,076
Machinery and equipment 5,042,767 4,846,657
Delivery equipment 28,599 28,599
Office equipment 113,712 97,694
Construction in progress 86,132 30,671
---------- ---------
9,088,839 7,538,040
Less accumulated depreciation 4,005,940 3,468,005
---------- ---------
$5,082,899 4,070,035
========== =========
</TABLE>
The Company leases certain real property to outside parties under
noncancelable operating leases. Rental income, included in other income,
totaled approximately $129,112, $75,000 and $73,000 in 1995, 1994 and
1993, respectively.
(4) DEFERRED INCOME
In 1978, the Company sold real property and certain machinery to an
unrelated third party and simultaneously entered into a 20-year
noncancelable operating lease (note 13). The sale resulted in a gain of
$186,098 which has been deferred and is being amortized on the straight-
line method over the term of the lease as an adjustment to rental
expense.
(5) LINE OF CREDIT
The Company has a $2,000,000 unsecured bank line of credit, at an
interest rate of bank prime (8.5% at December 31, 1995) plus .375%, which
expires on June 1, 1996. Following is a summary of activity under the
line of credit:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Note payable balance at December 31 $ -- -- 100,000
Maximum amount outstanding at
any month-end 550,000 700,000 100,000
Average amount of month-end
borrowings 142,000 170,050 8,333
Weighted average interest rate
during the year 9.359% 7.513% 6.375%
</TABLE>
F-10
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
The bank line of credit agreement includes covenants limiting certain
activities of the Company. Among these covenants are restrictions as to
mergers and expenditures for capital assets in excess of $500,000 per
year. In addition, the loan agreement requires that the Company maintain
minimum tangible net worth and total debt to tangible net worth ratios.
The Company was in compliance with all such covenants at December 31,
1995.
(6) LONG-TERM DEBT
Long-term debt consists of a mortgage note payable secured by a deed of
trust on land and building, bearing interest at 2% over the Bank's LIBOR
rate (8.03% at December 31, 1995); payable in monthly installments of
principal and interest ($7,408 at December 31, 1995) through February 1,
2000, when a balloon payment of all unpaid principal and interest is due
and payable.
(7) ACCRUED LIABILITIES
A summary of accrued liabilities at December 31 follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Accrued profit sharing (note 10) $ 393,196 365,934
Accrued retirement 137,342 141,621
Accrued compensation 164,472 158,138
Other 588,016 420,347
---------- ---------
$1,283,026 1,086,040
========== =========
</TABLE>
(8) SHAREHOLDERS' EQUITY
In 1976, the Company sold 105 shares of stock of a predecessor company to
two employees in exchange for cash and notes receivable. These shares were
exchanged for 214,200 shares of Provena Foods Inc. when the predecessor
merged into the Company in 1985. One note remains, and is shown as a
reduction to shareholders' equity, bears interest at 6.75% annually,
provides for monthly principal and interest payments of $578 and is secured
by capital stock.
In 1995, 1994 and 1993, the Company repurchased shares in negotiated
transactions and retired the shares purchased. The Company sold shares to
employees under its 1988 employee stock purchase plan in 1995, 1994 and
1993.
F-11
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
(9) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
Current:
Federal $73,043 158,940 (13,435)
State 20,245 27,324 800
Deferred (9,064) 13,936 7,935
------- -------- -------
$84,224 200,200 (4,700)
======= ======== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset and deferred income tax expense
are presented below:
<TABLE>
<CAPTION>
Deferred
income tax Deferred
December 31, expense December 31, income tax December 31,
1995 (benefit) 1994 expense 1993
------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 25,976 18,615 7,361 13,131 20,492
Deferred income (note 4) 10,581 (4,863) 15,444 4,163 19,607
Depreciation 33,358 12,466 20,892 421 21,313
State taxes 6,883 6,883 -- -- --
--------- ------- ------- ------- -------
76,798 33,101 43,697 17,715 61,412
Valuation allowance (47,613) (24,037) (23,576) 3,779 (27,355)
--------- ------- ------- ------- -------
Net deferred tax asset $ 29,185 (9,064) 20,121 13,936 34,057
========= ======= ======= ======= =======
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based on
the Company's historical results of operations, a valuation allowance has
been established.
Included in other assets are net deferred tax assets of $10,535 and
$14,321 at December 31, 1995 and 1994, respectively. The balance of net
deferred tax assets is included in prepaid expenses.
F-12
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
Actual income tax expense (benefit) differs from the "expected" tax
amount, computed by applying the U.S. Federal corporate tax rate of 34%
to earnings (loss) from operations before income tax expense (benefit),
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- ---------------- -----------------
Amount % Amount % Amount %
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 58,825 34.0 176,945 34.0 (7,202) (34.0)
State income taxes, net of Federal
income tax benefit 13,362 7.7 31,746 6.1 800 3.7
State N.O.L. carryforward -- -- (4,422) (.8) -- --
Change in valuation allowance 24,037 13.9 (3,779) (.7) (653) 3.1
Other (12,000) (6.9) (290) (.1) 2,355 11.1
-------- ---- ------- ---- ------ -----
$ 84,224 48.7 200,200 38.5 (4,700) (22.3)
======== ==== ======= ==== ====== =====
</TABLE>
The Company utilized a California state net operating loss carryforward
of $72,491 in 1994.
(10) EMPLOYEE BENEFIT PLANS
In 1988, the Company adopted a Simplified Employee Pension - Individual
Retirement Account (SEP IRA) plan covering all full-time, nonunion
employees. The Company makes contributions under the plan at the
discretion of the Board of Directors. The Company's contributions to the
SEP IRA for 1995, 1994 and 1993 were $393,196, $365,934 and $318,704,
respectively.
In 1988, the Company adopted a stock purchase plan, enabling
substantially all nonunion employees except officers and directors to
purchase shares of the Company's capital stock through periodic payroll
deductions. Employees may contribute up to $50 per week and all
contributions are 100% matched by the Company; the combined funds are
used in the subsequent month to purchase whole shares of capital stock at
current market prices. Stock purchases under this Plan result in net cash
flow to the Company as the contributions and employer matching
contributions are used to purchase stock from the Company.
The Company provides partial coverage for medical costs to its employees
under a self-insured plan. Additionally, the Company carries a
catastrophic policy that covers claims in excess of $40,000 for any
covered individual. The Company has accrued the estimated liability for
its self-funded costs (see note 14).
(11) INCENTIVE STOCK OPTION PLAN
Under a stock option plan adopted in 1987, the Company has awarded
options to certain of its key employees to purchase common stock at
prices which approximate the fair market value of the stock at the date
of grant. The plan provides for a maximum grant of 261,704 shares. In
F-13
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
December 1993, options were issued to purchase 260,000 shares at $2.25
per share, of which 124,445 were exercisable at December 31, 1995.
53,555 and 52,000 options were exercised in 1995 and 1994, respectively,
at $2.25 per share. Therefore, at December 31, 1995, options to purchase
154,445 shares remained outstanding.
(12) SEGMENT DATA AND MAJOR CUSTOMERS
The following table represents financial information about the Company's
business segments for the three years ended December 31, 1995.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Sales to unaffiliated customers:
Swiss American Division $13,654,028 17,392,931 15,911,626
Royal-Angelus Division 9,770,649 8,872,547 7,012,474
----------- ---------- ----------
Total sales $23,424,677 26,265,478 22,924,100
=========== ========== ==========
Operating income (loss):
Swiss American Division $ (682,899) (381,820) (924,270)
Royal-Angelus Division 775,855 825,953 954,007
Corporate (37,491) (72,796) (214,681)
----------- ---------- ----------
Operating income (loss) $ 55,465 371,337 (184,944)
=========== ========== ==========
Identifiable assets:
Swiss American Division $ 4,394,837 4,891,700 5,024,773
Royal-Angelus Division 5,249,632 4,039,621 3,944,379
Corporate 405,045 104,980 156,463
----------- ---------- ----------
Total assets $10,049,514 9,036,301 9,125,615
=========== ========== ==========
Capital expenditures:
Swiss American Division $ 42,558 155,411 212,136
Royal-Angelus Division 1,501,562 149,232 224,447
Corporate 13,440 16,441 916
----------- ---------- ----------
Total capital expenditures $ 1,557,560 321,084 437,499
=========== ========== ==========
Depreciation and amortization:
Swiss American Division $ 210,766 200,994 183,688
Royal-Angelus Division 323,925 286,374 269,686
Corporate 5,105 3,101 1,978
----------- ---------- ----------
Total depreciation and
amortization $ 539,796 490,469 455,352
=========== ========== ==========
</TABLE>
F-14
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
The Company had major customers during 1995 and 1994 that accounted for a
significant portion of net sales. Each accounted for more than 10% of sales
and purchased products from Swiss American.
<TABLE>
<CAPTION>
Accounts receivable
balance at
1995 1994 December 31
-------------- ---------------- ------------------
Customer Sales % Sales % 1995 1994
------- ------- ---- ---------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
A 3,093,216 13% 3,350,109 13% 419,625 303,785
B 2,673,067 11% 2,938,731 11% 205,104 174,454
C 1,341,681 6% 2,815,861 11% 140,284 168,361
</TABLE>
In 1993, no one customer accounted for 10% of net sales.
(13) COMMITMENTS
The following table summarizes future minimum lease commitments required
under the lease described in note 3 and other noncancelable operating
leases:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Year ending December 31:
1996 $ 386,370
1997 395,619
1998 379,384
1999 260,114
2000 270,519
Thereafter 114,552
----------
$1,806,558
==========
</TABLE>
Rent expense for all leases was approximately $388,000, $380,000 and
$354,000 in the years ended December 31, 1995, 1994 and 1993,
respectively.
As of December 31, 1995, 48% of the Company's employees are covered by a
collective bargaining agreement which expires March 31, 1998.
(14) SELF-INSURED HEALTH BENEFITS
The Company is totally self-funded for Company provided health insurance
benefits for its non-union employees. The profit or loss effects of
self-insuring cannot be foreseen and may be adverse. As of January 1,
1994, the Company purchased a reinsurance policy which covers claims in
excess of $30,000 for any covered individual, increasing to $40,000
January 1, 1996.
F-15
<PAGE>
Schedule II
PROVENA FOODS INC.
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Charged to
-----------------------
Balance Other Deductions: Balance
at beginning costs and Accounts: uncollectible at end
Description of period expenses recoveries accounts of period
----------- ------------ ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful receivables:
Year ended December 31:
1995 $ 17,000 91,454 242 53,512 54,700
=========== ====== === ====== ======
1994 $ 47,000 62 426 29,636 17,000
=========== ====== === ====== ======
1993 $ 59,400 52,611 -- 65,011 47,000
=========== ====== === ====== ======
</TABLE>
F-16
