<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
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 identification number)
incorporation or organization)
5010 EUCALYPTUS AVENUE, CHINO, CALIFORNIA 91710
- ------------------------------------------ ----------------------------------
(Address of principal executive offices) (ZIP code)
(909) 627-1082
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(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 22, 1997 was $7,383,348.
The number of shares of Provena Foods Inc. Common Stock outstanding on
February 22, 1997 was 2,812,704.
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. [_]
<PAGE>
PROVENA FOODS INC.
1996 FORM 10-K ANNUAL REPORT
Table of Contents
<TABLE>
<CAPTION>
Item Page
- ---- ---
PART I
------
<C> <S> <C>
1. Business................................................................................... 1
2. Properties ................................................................................ 4
3. Legal Proceedings.......................................................................... 5
4. Submission of Matters to a Vote of Security Holders........................................ 5
PART II
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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
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14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 15
--------------
Signatures................................................................................. 16
</TABLE>
<PAGE>
PART I
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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.
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, 1996 and 1995, sales by Swiss American
accounted for 68.1% and 58.3%, 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 plant
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.
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.
1
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The Company estimates the theoretical production capacity of its San
Francisco plant to be 27,000,000 pounds per year. Although the Company does not
have space within its San Francisco plant to further increase its capacity, the
plant's capacity is adequate for the currently contemplated needs of Swiss
American.
Royal-Angelus
- -------------
During the years ended December 31, 1996 and 1995, sales by Royal-Angelus
accounted for 31.9% and 41.7%, 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. In April
1995, the Company purchased a building adjacent to the pasta plant and currently
occupies 40% of the building as part of its pasta plant and leases 60% to a
tenant through February 1999. The pasta plant has a theoretical production
capacity estimated at 30,000,000 pounds per year, adequate for the foreseeable
production needs of Royal-Angelus.
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.
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,
2
<PAGE>
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 has remained up since then, decreasing slightly in 1996, but remaining
well above pre-1993 levels.
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 two 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, 1996:
<TABLE>
<CAPTION>
Number of Division Company
Division Customers Sales % Sales %
-------- --------- -------- -------
<S> <C> <C> <C>
Swiss American 3 57% 39%
Royal-Angelus 3 31% 10%
--- ---
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 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.
3
<PAGE>
Employees
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As of December 31, 1996, the Company employed 150 full-time employees, 83 in
production at Swiss American in San Francisco, California, 55 in production at
Royal-Angelus in Chino, California, 5 in clerical and office functions, 2 in
sales activities, and 5 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 after 1995, 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
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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 original 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
theoretical production capacity of the meat plant is estimated at 27,000,000
pounds per year, adequate for the currently contemplated needs of the division,
but the plant does not have space to increase the production capacity or the
variety of meat products which can be produced. In 1998, the Company intends to
move the meat plant into a newly leased or purchased building with the same
capacity as the present plant, but with the capability of expansion to increase
capacity or product variety.
The Company's pasta production plant is an approximately 41,000 square foot
facility located in Chino, California, occupied by the Company since 1987. In
April 1995, the Company purchased an approximately 44,000 square foot building
adjacent to the pasta plant and currently occupies 40% of the building for pasta
warehousing and leases 60% to a cold storage manufacturer through February 1999.
The Chino plant, after the addition of a third short goods production line in
1996, has a theoretical production capacity estimated at 30,000,000 pounds
annually, adequate to fulfill the foreseeable needs of the of the pasta
division, and with the capability of expansion.
The Company has not carried earthquake insurance on any of its properties,
except its original pasta plant building beginning in 1993.
4
<PAGE>
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 23,
1996, at 11:00 a.m. at the Company's principal office. Shareholders representing
1,794,772 or 65.2% of the 2,749,289 shares entitled to vote were present in
person or by proxy, with 97,785 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 1,780,490 -0- 14,272
Theodore L. Arena 1,776,790 3,700 14,272
Ronald A. Provera 1,779,890 600 14,272
Santo Zito 1,780,490 -0- 14,272
Thomas J. Mulroney 1,780,490 -0- 14,272
James P. McClune 1,492,260 288,230 14,272
Louis A. Arena 1,780,490 -0- 14,272
Joseph W. Wolbers 1,491,660 288,830 14,272
John M. Boukather 1,491,260 289,230 14,272
</TABLE>
PART II
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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>
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
1996 High 4 3-1/4 2-3/4 2-3/4
Low 2-5/16 2-5/16 2-1/4 2-3/8
</TABLE>
The closing price on December 31, 1996 was $2-7/16.
Common Stock
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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, 1996 the Company had issued and outstanding 2,798,021
shares held by 235 shareholders of record. In addition, the Company estimates
that there are approximately 800 shareholders holding shares in street or
nominee names.
5
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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:
1996 1995 1994 1993 1992 1991 1990 1989 1988
DIVIDENDS $0.10 $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.
Shareholder communications regarding transfers, changes of address, missing
dividends, lost certificates or similar matters should be directed to the
Company's transfer agent and registrar, ChaseMellon Shareholder Services LLC,
Stock Transfer Department, Washington Bridge Station, P.O. Box 469, New York, NY
10033, (800) 522-6645.
Common Stock Repurchase and Sales
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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 1996, the Company purchased no shares under its stock repurchase program,
but received 8,600 shares in payment of the exercise price of options at an
average fair market value of $2.50 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 1996 employees purchased 51,990
newly issued shares at an average price of $2.68 per share. Employees have
purchased a total of 338,968 shares under the plan through December 31, 1996, at
an average price of $3.05 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 1996 to purchase 16,000 shares
at an exercise price of $2.25 per share.
6
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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, 1996 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, 1996, 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,
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $28,895 23,424 26,265 22,924 22,570
Cost of sales 26,037 21,348 23,812 21,155 20,743
------- ------- ------- ------- -------
Gross profit 2,858 2,076 2,453 1,769 1,827
Distribution, general and administrative expenses 2,002 2,021 2,082 1,954 1,984
------- ------- ------- ------- -------
Operating income (loss) 856 55 371 (185) (157)
Interest income (expense), net (75) (66) (7) 3 (7)
Other income, net 113 184 156 161 .80
------- ------- ------- ------- -------
Earnings (loss) before income tax expense (benefit) 894 173 520 (21) (84)
Income tax expense (benefit) 332 84 200 (5) (24)
------- ------- ------- ------- -------
Net earnings (loss) $ 562 89 320 (16) (60)
======= ======= ======= ======= =======
Earnings (loss) per share $ .20 .03 .12 (.01) (.02)
======= ======= ======= ======= =======
Cash dividends paid per common share $ .10 .18 .1725 .1625 .16
Weighted average number of
common shares outstanding (1) 2,767 2,705 2,669 2,653 2,628
BALANCE SHEET DATA (end of period):
Working capital $ 3,571 2,832 3,180 3,029 3,438
Property and equipment (net) 4,705 5,083 4,070 4,258 4,276
Total assets 10,414 10,050 9,036 9,126 9,238
Long-term debt 960 969 - - -
Shareholders' equity 7,357 6,915 7,245 7,274 7,694
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company sold shares under its employee stock purchase plan, sold
received shares in exercise of incentive stock options and shares under
its incentive stock option plan, repurchased outstanding shares in the
years as shown:
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Purchase Plan Shares Sold 51,990 57,223 54,461 46,485 41,201
Incentive Option Shares Sold 16,000 53,555 52,000 - -
Received in Exercise of Options 8,600 18,500 31,457 - -
Outstanding Shares Repurchased - 52,289 28,757 32,736 16,692
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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales $28,895 100.0% $23,424 100.0% $26,265 100.0%
Cost of sales 26,037 90.1 21,348 91.1 23,812 90.7
------- ----- ------- ----- ------- -----
Gross profit 2,858 9.9 2,076 8.9 2,453 9.3
Distribution, general and administrative expenses 2,002 6.9 2.021 8.7 2,082 7.9
------- ----- ------- ----- ------- -----
Operating income 856 3.0 55 .2 371 1.4
Interest income, net (75) (.3) (66) (.3) (7) -
Other income, net 113 .4 184 .8 156 .5
------- ----- ------- ----- ------- -----
Earnings before income tax expense 894 3.1 173 .7 520 2.0
Income tax expense 332 1.1 84 .3 200 .8
------- ----- ------- ----- ------- -----
Net earnings $ 562 1.9% $ 89 .4% $ 320 1.2%
======= ===== ======= ===== ======= =====
Sales in thousands of pounds by division
SWISS AMERICAN 13,475 9,990 11,753
ROYAL-ANGELUS 18,213 18,825 16,688
</TABLE>
Comparison of Years Ended December 31, 1996 and 1995
- ----------------------------------------------------
In 1996, sales of $28,895,372 were up 23% from 1995 sales of $23,424,677, as
the result of increased sales at the Swiss American meat division.
The meat division's sales were up about 44% in dollars and 35% in pounds in
1996 over 1995 and Swiss had a substantial operating profit in 1996 versus a
substantial loss in 1995. Swiss's sales for the 4th quarter of 1996 were up 41%
in dollars and 26% in pounds over the 4th quarter of 1995. Sales increased
proportionately more in dollars than in pounds because of higher selling prices
reflecting higher meat costs.
The increase in sales and profitability at Swiss resulted from special pizza-
chain orders and a reversal of a long term erosion in sales and profitability
which began in 1991. The Company continues to seek a meat processing business
complementary to Swiss which could be combined with Swiss to enhance Swiss's
profitability, but currently has no likely prospect.
The Royal-Angelus pasta division's sales decreased about 6% in dollars and 3%
in pounds in 1996 over 1995, after record annual sales in both dollars and
pounds in 1995. The pasta division's sales for the 4th quarter of 1996 were down
5.6% in dollars and 1.1% in pounds over the same quarter of 1995. The percent
decreases were higher in dollars than in pounds because of a higher proportion
of sales of bulk products rather than retail-packaged products.
The cost of semolina flour increased about 50% in 1993 and has remained up
since then, decreasing slightly in 1996 but remaining well above pre-1993
levels. This cost increase puts pressure on margins and prices, because if
passed on to consumers they might reduce consumption, and if passed on to
customers, they might seek a cheaper supplier. At the same time, increasing
industry capacity is causing increased price competition, adversely affecting
sales and prices. The high flour prices and increased price competition caused
Royal's operating income to be 35% lower in 1996 than 1995.
The Company's gross profit for 1996 was $2,858,000 or 9.9% of net sales
compared to $2,076,000 or 8.9% of net sales for 1995. Gross profit increased
absolutely and as a percent of sales because Swiss's sales increased but its
production
8
<PAGE>
costs increased less than proportionate to its sales. Distribution, general and
administrative expenses for 1996 were down about 1% from 1995. Distribution
expense was up about $14,000 or 2% despite increased freight on a 23% increase
in sales, because of decreases in Swiss's salesmen payroll and sales
commissions. Administrative expense was down about $33,000 because of lower bad
debt expense and collections on doubtful accounts, partially offset by higher
clerical payroll, consulting fees relating to Swiss and other outside services.
Other income decreased about $70,000 because a lease of a vacant lot being
sublet and a space sharing arrangement at Swiss both ended. Net interest
expense increased about $9,000 because of interest on the term loan used to
purchase the 2nd Royal building.
Comparison of Years Ended December 31, 1995 and 1994
- ----------------------------------------------------
In 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 was 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 concluded that there was
no reasonable prospect of growing Swiss back to profitability and 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 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.
The cost of semolina flour began rising in 1993 and was up about 50% from
pre-1993 levels through 1995. This cost increase put pressure on margins and
prices, because if the full increase was passed on to the consumer, less
consumption might result and if it was passed on to the Company's customers,
they might 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.
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, 1996 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 1996 to expire June 1, 1997, and bears interest at a variable rate of 3/8%
over prime. The line provides that if a financial covenant is violated, the
Company agrees to grant the bank a security interest in receivables, inventories
and equipment. The line prohibits mergers, acquisitions,
9
<PAGE>
lending, borrowing, guaranteeing, annual capital expenditures over $500,000 and
new annual lease obligations over $100,000 and requires a minimum tangible net
worth of $6,790,000, 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 in early July 1996. The Company
is not in violation of any financial covenants.
In April 1995, Wells Fargo Bank, NA made a 5 year term loan of $975,000 to
the Company to purchase the 2nd Royal building, secured by the building, bearing
interest at 2% over the bank's "LIBOR" rate, with a $960,195 balance at December
31, 1996, including the $8,460 current portion. The loan 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. The pasta division occupies
40% of the building and 60% is leased to a tenant.
The Company's pasta plant in Chino, California, after the addition of a third
short goods line in 1996, has a theoretical production capacity estimated at
30,000,000 pounds per year compared to about 18,213,000 pounds sold in 1996.
The plant has the capacity to fulfil the foreseeable needs of the pasta division
with adequate space for expansion.
Swiss American Sausage division's San Francisco meat processing plant has a
theoretical production capacity estimated at 27,000,000 pounds per year,
compared to about 13,475,000 pounds sold in 1996. The meat plant's present
capacity is adequate for the currently contemplated needs of the division, but
the plant does not have space to increase its capacity or the variety of meat
products which can be produced. The lease of the main production building
expires in 1998 and in 1998 the Company intends to move the plant into a newly
leased or purchased building with the same capacity as the present plant, but
with the capability of increasing capacity or product variety.
Accomplishing the move requires locating and acquiring a suitable building,
improving the building for use as a meat processing plant, installing meat
processing equipment, arranging for a lessor or lender or both to finance the
acquisition and improvement of the building and installation of equipment, and
obtaining the consent of Wells Fargo Bank, NA to the transaction, all of which
remain to be done. The annual cost to Swiss of the new plant building will
exceed the annual cost of its two current buildings and Swiss will bear the cost
of rent on its 2nd building until the lease expires in 2001, less any amount
received from subletting the 2nd building.
Additions to property and equipment of about $300,000 are anticipated for
1997.
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. For the first 3 quarters of 1994, 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.
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. Company sales decreased during 1995 and
inventories were reduced by over $500,000. The Company purchased the 2nd Royal
building in 1995, incurring $975,000 of long term debt and using about $300,000
of cash.
In 1996 cash decreased about $85,000. Operating activities produced about
$238,000, principally from earnings and depreciation offset by increases in
receivables and inventories and a decrease in payables. Investing activities
used $194,000 for net capital expenditures and financing activities used
$129,000 for dividends offset by net stock proceeds. The Company's inventories
and receivables normally reflect the level of its sales, and in 1996 sales were
up 23%, resulting in a $209,000 increase in receivables and a $631,000 increase
in inventories, following a $502,000 reduction in inventories in 1995 on reduced
sales.
In 1997 quarterly cash dividends will continue to be paid if the Board
believes that earnings and cash flow are adequate.
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
10
<PAGE>
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
$139,087 in 1996 and may be as much as $140,000 or more in 1997.
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 except the $960,195 secured by 2nd Chino
building. All of its other assets, including inventories, receivables,
equipment and its original Chino pasta plant are unencumbered.
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 64, 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 54, 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 59, has been the secretary and a director of the
Company since its formation in 1972 and was the General Manager of Sav-On Food
Co., the Company's distribution business, 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 60, 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 the General Manager of the pasta division. He is a member of the
option committee.
THOMAS J. MULRONEY, age 51, 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.
LOUIS A. ARENA, age 74, 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.
JOSEPH W. WOLBERS, age 67, 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 60, 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.
11
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 1996, 1995
and 1994, all compensation of all executive officers of the Company serving at
December 31, 1996.
<TABLE>
<CAPTION>
Annual SEP/IRA
Name and Position Year Salary Contributions
- ----------------- ---- ------ -------------
<S> <C> <C> <C>
John D. Determan, 1996 $ 62,791 $ 9,419
Chief Executive Officer 1995 63,098 9,465
1994 100,686 15,103
Theodore L. Arena, 1996 107,135 16,070
President 1995 105,887 15,883
1994 104,973 15,745
Ronald A. Provera, 1996 103,568 15,535
Secretary 1995 103,338 15,501
1994 102,474 15,371
Santo Zito, 1996 106,246 15,937
Vice President 1995 111,586 16,738
1994 104,548 15,582
Thomas J. Mulroney, 1996 102,161 15,324
Chief Financial Officer 1995 101,693 15,254
1994 101,262 15,189
</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.
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 1996, the Company contributed $393,880 to IRA's under the plan.
12
<PAGE>
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 and the
balance to three 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, and the balance to
four 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 and 6,000 by Mr. Mulroney.
In 1995, options were exercised to purchase 53,555 shares, including 30,000 by
Mr. Arena and 6,000 by Mr. Mulroney. In 1996, options were exercised to
purchase 16,000 shares, none by executive officers. The following table shows,
for the two executive officers, the number of unexercised options held on
January 1, 1997, the number exercisable and unexercisable and their aggregate
value based on the year end closing price of $2-7/16.
Option Values at January 1, 1997
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
Options at 1/1/97 Money Options at 1/1/97
Name Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C>
Theodore L. Arena 60,000/ -0- $11,250/ -0-
Thomas J. Mulroney 12,000/ -0- $ 2,250/ -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 (8 persons), the
number and percent of outstanding shares of common stock of the Company owned on
December 31, 1996.
<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 12.0% 335,327 11.5%
Penny S. Bolton (2) 378,463 13.5% 378,463 13.0%
Theodore L. Arena 140,994 5.0% 230,994 7.9%
Ronald A. Provera 322,330 11.5% 322,330 11.1%
Santo Zito 352,330 12.6% 352,330 12.1%
Thomas J. Mulroney 20,900 .7% 38,900 1.3%
Louis A. Arena 288,030 10.3% 288,030 9.9%
John M. Boukather 1,644 .1% 1,644 .1%
Joseph W. Wolbers 6,650 .2% 6,650 .2%
Officers and Directors 1,468,205 52.5% 1,570,205 54.0%
Shares Outstanding 2,798,021 100% 2,908,466 100%
- -------------------------------------------------------------------------------
</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 and to all officers and directors as a group to
purchase 108,000 shares.
(4) The options of Messrs. Arena, Mulroney 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 1996, officers and directors purchased the
following numbers of shares of the Company's common stock: 1st quarter, John M.
Boukather, director - 16 shares; 2nd quarter, Mr. Boukather - 13; 3rd quarter,
Mr. Boukather - 15, Santo Zito, vice president and director - 9,800; 4th
quarter, Mr. Boukather - 16. No other purchases and no sales of the Company's
common stock by officers or directors were reported during the year.
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 1996 and (except as previously disclosed) prior
years by Section 16(a) of the Securities Exchange Act, except that Mr. Boukather
filed a Form 4 in March 1996 for 99 shares purchased during 1995 and January
1996 under a broker's dividend reinvestment program.
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.
Exhibits
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 Plant (1) the first
Swiss American San Francisco
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 (9)
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 (9)
10.38 Collective Bargaining Agreement dated December 6, 1995, between the
Company and United Food and Commercial Workers Union Local 101, AFL-CIO
(9)
10.39 Third Amendment to Credit Agreement dated June 1, 1996 between the
Company and Wells Fargo Bank, NA
24.1 Report and Consent of KPMG Peat Marwick LLP
27 EDGAR Financial Data Schedule
- --------------------------------------------------------------------------------
(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 June
29, 1987
(4) Exhibit to 1987 Form
(5) Exhibit to 1988 Form
(6) Exhibit to 1989 Form 10-K Annual Report
(7) Exhibit to 1990 Form 10-K Annual Report
(8) Exhibit to 1991 Form 10-K Annual Report
(9) Exhibit to 1995 Form 10-K Annual Report
Reports on Form 8-K
- -------------------
During the year ended December 31, 1996 the Company filed no reports on Form
8-K.
15
<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 22, 1997 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. DETERMAN Chairman of the Board (Principal
- ------------------------------------ Executive Officer) and Director February 22, 1997
John D. Determan
/s/ THEODORE L. ARENA
- ------------------------------------ President and Director February 22, 1997
Theodore L. Arena
/s/
- ------------------------------------ Vice President, Sales, Secretary and
Ronald A. Provera Director February , 1997
/s/ SANTO ZITO
- ------------------------------------ Vice President and Director February 22, 1997
Santo Zito
/s/ THOMAS J. MULRONEY Chief Financial Officer (Principal
- ------------------------------------ Financial and Accounting Officer) February 22, 1997
Thomas J. Mulroney
/s/ LOUIS A. ARENA
- ------------------------------------ Director February 22, 1997
Louis A. Arena
/s/ JOSEPH W. WOLBERS
- ------------------------------------ Director February 22, 1997
Joseph W. Wolbers
/s/ JOHN M. BOUKATHER
- ------------------------------------ Director February 22, 1997
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, 1996 and 1995
(With Independent Auditors' Report Thereon)
17
<PAGE>
PROVENA FOODS INC.
Index to Financial Statements and Schedule
------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Balance Sheets--December 31, 1996 and 1995 F-3
Statements of Earnings--Years ended December 31, 1996, 1995 and 1994 F-4
Statements of Shareholders' Equity--Years ended December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994 F-6
Notes to Financial Statements F-8
Schedule
- --------
II--Valuation and Qualifying Accounts and Reserves F-17
</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, 1996 and 1995 and the related statements of earnings, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. 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, 1996 and 1995 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996 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
January 24, 1997
F-2
<PAGE>
PROVENA FOODS INC.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 265,529 350,843
Accounts receivable, less allowance for doubtful accounts of
$0 in 1996 and $54,700 in 1995 (note 12) 2,408,297 2,199,671
Inventories (note 2) 2,928,678 2,297,322
Prepaid expenses (note 9) 57,159 67,053
Income taxes receivable (note 9) - 2,342
----------- ----------
Total current assets 5,659,663 4,917,231
Property and equipment, net (notes 3 and 6) 4,704,602 5,082,899
Other assets (note 9) 49,581 49,384
----------- ----------
$10,413,846 10,049,514
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 6) $ 8,460 8,460
Accounts payable 670,594 793,755
Accrued liabilities (note 7) 1,384,925 1,283,026
Income tax payable (note 9) 24,460 -
----------- ----------
Total current liabilities 2,088,439 2,085,241
----------- ----------
Deferred income (note 4) 17,057 89,004
Long-term debt, net of current portion (note 6) 951,735 960,195
Shareholders' equity (notes 8 and 11):
Capital stock, no par value; authorized 10,000,000 shares;
2,798,021 and 2,738,631 shares issued and outstanding at
December 31, 1996 and 1995, respectively 4,257,760 4,104,173
Retained earnings 3,098,855 2,814,169
Note receivable from shareholder - (3,268)
----------- ----------
Total shareholders' equity 7,356,615 6,915,074
Commitments and contingencies (notes 5, 10, 13 and 14)
----------- ----------
$10,413,846 10,049,514
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PROVENA FOODS INC.
Statements of Earnings
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Net sales (note 12) $28,895,372 23,424,677 26,265,478
Cost of sales 26,037,541 21,348,187 23,812,347
----------- ---------- ----------
Gross profit 2,857,831 2,076,490 2,453,131
----------- ---------- ----------
Operating expenses:
Distribution 893,834 880,316 956,399
General and administrative (note 10) 1,107,581 1,140,709 1,125,395
----------- ---------- ----------
2,001,415 2,021,025 2,081,794
----------- ---------- ----------
Operating income 856,416 55,465 371,337
Interest expense, net (75,437) (66,089) (7,408)
Other income, net (note 3) 113,339 183,640 156,499
----------- ---------- ----------
Earnings from operations before
income tax expense 894,318 173,016 520,428
Income tax expense (note 9) 332,416 84,224 200,200
----------- ---------- ----------
Net earnings $ 561,902 88,792 320,228
=========== ========== ==========
Net earnings per share $ .20 .03 .12
=========== ========== ==========
Weighted average number of shares
outstanding 2,767,156 2,705,398 2,669,336
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PROVENA FOODS INC.
Statements of Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
<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, 1993 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
Repurchase of capital stock (8,600) (21,500) - - (21,500)
Sale of capital stock 51,990 139,087 - - 139,087
Exercise of shares under stock option
plan (note 11) 16,000 36,000 - - 36,000
Cash dividends paid, $.10 per share - - (277,216) - (277,216)
Payment on shareholder note receivable
(note 8) - - - 3,268 3,268
Net earnings - - 561,902 - 561,902
--------- ---------- --------- ------- ---------
Balance at December 31, 1996 2,798,021 $4,257,760 3,098,855 - 7,356,615
========= ========== ========= ======= =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PROVENA FOODS INC.
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $561,902 88,792 320,228
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 572,459 539,796 490,469
Provision for bad debts - 91,212 -
Decrease (increase) in accounts
receivable (208,626) (269,788) 133,579
Decrease (increase) in inventories (631,356) 502,497 (308,766)
Decrease (increase) in prepaid
expenses 9,894 (8,706) 10,703
(Increase) decrease in income taxes
receivable 2,342 (2,342) 9,164
Decrease (increase) in other assets (197) (18,972) 1,732
Increase (decrease) in accounts
payable (123,161) 124,030 (202,907)
Increase in accrued liabilities 101,899 196,986 252,264
Increase in income tax payable 24,460 - -
Increase (decrease) in deferred
income (71,947) 53,337 (5,569)
-------- --------- --------
Net cash provided by operating
activities 237,669 1,296,842 700,897
-------- --------- --------
Cash flows from investing activities:
Proceeds from sale of property and
equipment 1,200 4,900 19,041
Additions to property and equipment (195,362) (582,560) (321,084)
-------- --------- --------
Net cash used in investing
activities (194,162) (577,660) (302,043)
-------- --------- --------
</TABLE>
(Continued)
F-6
<PAGE>
PROVENA FOODS INC.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings on bank credit line $ - - (100,000)
Payments on note payable to bank (8,460) (6,345) -
Repurchase of capital stock (21,500) (212,651) (167,577)
Proceeds from sale of capital stock 139,087 154,630 156,634
Exercise of stock options 36,000 120,499 117,000
Payments received on note from
shareholder 3,268 6,470 6,050
Cash dividends paid (277,216) (487,535) (461,701)
-------- --------- --------
Net cash used in financing
activities (128,821) (424,932) (449,594)
-------- --------- --------
Net increase (decrease) in cash
and cash equivalents (85,314) 294,250 (50,740)
Cash and cash equivalents at beginning
of period 350,843 56,593 107,333
-------- --------- --------
Cash and cash equivalents at end of
period $265,529 350,843 56,593
======== ========= ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 81,081 67,747 11,147
Income taxes 287,600 150,083 136,800
======== ========= ========
Supplemental disclosure of noncash
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, 1996 and 1995
(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 to 39 years
Machinery and equipment 10 years
Delivery equipment 5 years
Office equipment 7 years
</TABLE>
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 per Share
Earnings 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.
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.
F-8
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses are measured at cost which
approximates their fair value.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed their fair values. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position or results of operations.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No.E25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted SFAS No.E123,
"Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No.E123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and
provide proEforma net income and proEforma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company adopted the latter alternative method. There was no difference
between reported earnings and proEforma earnings in 1996 or 1995.
F-9
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
(2) Inventories
A summary of inventories follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Raw materials $ 935,835 797,990
Work in process 689,650 575,957
Finished goods 1,303,193 923,375
---------- ---------
$2,928,678 2,297,322
========== =========
</TABLE>
(3) Property and Equipment
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Land $ 551,985 551,985
Buildings and improvements 3,249,666 3,265,644
Machinery and equipment 5,338,432 5,042,767
Delivery equipment 28,599 28,599
Office equipment 114,301 113,712
Construction in progress - 86,132
---------- ---------
9,282,983 9,088,839
Less accumulated depreciation 4,578,381 4,005,940
---------- ---------
$4,704,602 5,082,899
========== =========
</TABLE>
The Company leases certain real property to outside parties under
noncancelable operating leases. Rental income, included in other income,
totaled approximately $103,774, $129,112 and $75,000 in 1996, 1995 and 1994,
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.
F-10
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
(5) Line of Credit
The Company has a $2,000,000 unsecured bank line of credit, at an interest
rate of bank prime (8.25% at December 31, 1996) plus .375%, which expires on
June 1, 1997. Following is a summary of activity under the line of credit:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Balance at December 31 $ - - -
Maximum amount outstanding at any
month-end 390,000 550,000 700,000
Average amount of month-end borrowings 58,000 142,000 170,050
Weighted average interest rate during
the year 8.625% 9.359% 7.513%
======== ======= =======
</TABLE>
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 certain total debt to tangible net worth ratios. The
Company was in compliance with all such covenants at December 31, 1996.
(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 (7.53% at December 31, 1996); payable in monthly installments of
principal and interest ($7,250 at December 31, 1996) 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>
1996 1995
---------- ----------
<S> <C> <C>
Accrued profit sharing (note 10) $ 393,880 393,196
Accrued retirement 135,151 137,342
Accrued compensation 207,677 164,472
Other 648,217 588,016
---------- ----------
$1,384,925 1,283,026
========== ==========
</TABLE>
F-11
<PAGE>
PROVINA FOODS INC.
Notes to Financial Statements, Continued
(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. At December 31, 1995, one note remained and
was shown as a reduction to shareholders' equity. This note was paid in full
at December 31, 1996.
In 1995 and 1994, 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 1996, 1995 and 1994.
(9) Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal $277,807 73,043 158,940
State 76,945 20,245 27,324
Deferred (22,336) (9,064) 13,936
-------- ------ -------
$332,416 84,224 200,200
======== ====== =======
</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 Deferred
income tax income tax
December 31, expense December 31, expense December 31,
1996 (benefit) 1995 (benefit) 1994
------------ ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $ - (25,976) 25,976 18,615 7,361
Deferred income (note 4) 6,847 (3,734) 10,581 (4,863) 15,444
Depreciation 2,386 (30,972) 33,358 12,466 20,892
State taxes 26,161 19,278 6,883 6,883 -
-------- ------- ------- ------- -------
35,394 (41,404) 76,798 33,101 43,697
Valuation allowance (28,545) 19,068 (47,613) (24,037) (23,576)
-------- ------- ------- ------- -------
Net deferred tax asset $ 6,849 (22,336) 29,185 9,064 20,121
======== ======= ======= ======= =======
</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.
F-12
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
Included in other assets are net deferred tax assets of $6,849 and $10,535
at December 31, 1996 and 1995, respectively. The balance of net deferred tax
assets, if any, is included in prepaid expenses.
Actual income tax expense differs from the "expected" tax amount, computed
by applying the U.S. Federal corporate tax rate of 34% to earnings from
operations before income tax expense, as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- -------------------
Amount % Amount % Amount %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax expense $304,068 34.0 $ 58,825 34.0 $176,945 34.0
State income taxes, net of Federal
income tax benefit 50,784 5.7 13,362 7.7 31,746 6.1
State N.O.L. carryforward - - - - (4,422) (.8)
Change in valuation allowance (19,068) (2.1) 24,037 13.9 (3,779) (.7)
Other (3,368) (.4) (12,000) (6.9) (290) (.1)
-------- ---- -------- ---- -------- ----
$332,416 37.2 $ 84,224 48.7 $200,200 38.5
======== ==== ======== ==== ======== ====
</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
1996, 1995 and 1994 were $393,880, $393,196 and $365,934, 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).
F-13
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
(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 December 1993,
options were granted to purchase 260,000 shares at $2.25 per share, of
which 102,445 were exercisable at December 31, 1996. A total of 16,000,
53,555 and 52,000 options were exercised in 1996, 1995 and 1994,
respectively, at $2.25 per share. At December 31, 1996, options to purchase
138,445 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, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
Swiss American Division $19,677,706 13,654,028 17,392,931
Royal-Angelus Division 9,217,666 9,770,649 8,872,547
----------- ---------- ----------
Total sales $28,895,372 23,424,677 26,265,478
=========== ========== ==========
Operating income (loss):
Swiss American Division $ 425,280 (682,899) (381,820)
Royal-Angelus Division 507,914 775,855 825,953
Corporate (76,778) (37,491) (72,796)
----------- ---------- ----------
Operating income $ 856,416 55,465 371,337
=========== ========== ==========
Identifiable assets:
Swiss American Division $ 4,920,249 4,394,837 4,891,700
Royal-Angelus Division 5,185,553 5,249,632 4,039,621
Corporate 308,044 405,045 104,980
----------- ---------- ----------
Total assets $10,413,846 10,049,514 9,036,301
=========== ========== ==========
Capital expenditures:
Swiss American Division $ - 42,558 155,411
Royal-Angelus Division 194,775 1,501,562 149,232
Corporate 587 13,440 16,441
----------- ---------- ----------
Total capital expenditures $ 195,362 1,557,560 321,084
=========== ========== ==========
</TABLE>
F-14
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Depreciation and amoritzation:
Swiss American Division $213,892 210,766 200,994
Royal-Angelus Division 352,669 323,925 286,374
Corporate 5,898 5,105 3,101
-------- ------- -------
Total depreciation and amortization $572,459 539,796 490,469
======== ======= =======
</TABLE>
The Company had major customers during 1996 and 1995 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
1996 1995 1994 December 31
----------------- ----------------- ----------------- --------------------
Customer Sales % Sales % Sales % 1996 1995
- ----------- ----------------- ----------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A $7,043,135 24 $3,093,216 13 $3,350,109 13 $259,433 419,625
B 3,158,942 11 2,673,067 11 2,938,731 11 318,671 205,104
C - - 1,341,681 6 2,815,861 11 - 140,284
========== == ========== == ========== == ======== =======
</TABLE>
(13) Commitments
The following table summarizes future minimum lease commitments required
under the lease described in note 4 and other noncancelable operating
leases:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Year ending December 31:
1997 $ 395,619
1998 379,384
1999 260,114
2000 270,519
2001 114,552
----------
$1,420,188
==========
</TABLE>
Rent expense for all leases was approximately $387,000, $388,000 and
$380,000 in the years ended December 31, 1996, 1995 and 1994, respectively.
As of December 31, 1996, 50% of the Company's employees are covered by a
collective bargaining agreement which expires March 31, 1998.
F-15
<PAGE>
PROVENA FOODS INC.
Notes to Financial Statements, Continued
(14) Self-Insured Health Benefits
The Company is totally self-funded for Company provided health insurance
benefits for its nonunion employees. The profit or loss effects of self-
insuring cannot be foreseen and may be adverse. The Company has a
reinsurance policy which covers claims in excess of $40,000 for any covered
individual.
F-16
<PAGE>
Schedule II
PROVENA FOODS INC.
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Charged (credited) 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:
1996 $ 54,700 (20,831) 22,806 11,063 -
========= ======= ====== ====== ======
1995 $ 17,000 91,454 242 53,512 54,700
========= ======= ====== ====== ======
1994 $ 47,000 62 426 29,636 17,000
========= ======= ====== ====== ======
</TABLE>
F-17
<PAGE>
EXHIBIT 10.39
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into
as of June 1, 1996, by and between PROVENA FOODS INC., a California corporation
("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
--------
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of February 1, 1995, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.1.(a) is hereby amended by deleting "June 1, 1996" as the last
day on which Bank will make advances under the Line of Credit, and by
substituting for said date "June 1, 1997," with such change to be effective upon
the execution and delivery to Bank of a promissory note substantially in the
form of Exhibit A attached hereto (which promissory note shall replace and be
deemed the Line of Credit Note defined in and made pursuant to the Credit
Agreement) and all other contracts,
<PAGE>
instruments and documents required by Bank to evidence such change.
2. Section 4.9.(b) is hereby deleted in its entirety, and the following
substituted therefor:
"(b) Tangible Net Worth not at any time less than Six Million Seven Hundred
Ninety Thousand Dollars ($6,790,000.00), with "Tangible Net Worth" defined
as the aggregate of total stockholders' equity plus subordinated debt less
any intangible assets."
3. The following is hereby added to the Credit Agreement as Section 4.11.:
"Section 4.11. VIOLATION OF ANY FINANCIAL COVENANT. Provide to Bank a
security interest of first priority in all Borrower's accounts receivable,
other rights to payment and general intangibles, inventory and equipment
upon the violation of any financial covenant."
4. Except as specifically provided herein, all terms and conditions of the
Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
5. Borrower hereby remakes all representations and warranties contained in
the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
PROVENA FOODS INC. NATIONAL ASSOCIATION
By: /s/ Thomas J. Mulroney By: /s/ Sandra D. Martin
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Sandra D. Martin
Title: CFO Vice President
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<PAGE>
EXHIBIT A
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
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$2,000,000.00 Irvine, California
June 1, 1996
FOR VALUE RECEIVED, the undersigned PROVENA FOODS INC. ("Borrower") promises
to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its
office at Orange Coast RCBO, 2030 Main Street Suite 900, Irvine, CA 92714, or at
such other place as the holder hereof may designate, in lawful money of the
United States of America and in immediately available funds, the principal sum
of $2,000.000.00, or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
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interest at a rate per annum (computed on the basis of a 360-day year, actual
days elapsed) .37500% above the Prime Rate in effect from time to time. The
"Prime Rate" is a base rate that Bank from time to time establishes and which
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto. Each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change is announced
within Bank.
(b) Payment of Interest. Interest accrued on this Note shall be payable on the
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1st day of each month, commencing July 1, 1996.
(c) Default Interest. From and after the maturity date of this Note, or such
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earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to 4% above the rate of
interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the term of
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this Note borrow, partially or wholly repay its outstanding borrowings, and
reborrow, subject to all of the limitations, terms and conditions of this Note
and of the Credit Agreement between Borrower and Bank defined below; provided
however, that the total outstanding borrowings under this Note shall not at any
time exceed the principal amount stated above. The unpaid principal balance of
this obligation at any time shall be the total amounts advanced hereunder by the
holder hereof less the amount of principal payments made hereon by or for any
Borrower, which balance may be endorsed hereon from time to time by the holder.
The outstanding principal balance of this Note shall be due and payable in full
on June 1, 1997.
(b) Advances. Advances hereunder, to the total amount of the principal sum
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available hereunder, may be made by the holder at the oral or written request of
(i) THOMAS J. MULRONEY or JOHN D. DETERMAN, any one acting alone, who are
authorized to request advances and direct the disposition of any advances until
written notice of the revocation of such authority is received by the holder at
the office designated above, or (ii) any person, with respect to advances
deposited to the credit of any account of any Borrower with the holder, which
advances, when so deposited, shall be conclusively presumed to have been made to
or for the benefit of each Borrower regardless of the fact that persons other
than those authorized to request advances may have authority to draw against
such account. The holder shall have no obligation to determine whether any
person requesting an advance is or has been authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall be credited
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first, to any interest then due and second, to the outstanding principal balance
hereof.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrower and Bank dated as of February 1,
1995, as amended from time to time (the "Credit Agreement"). Any default in the
payment or performance of any obligation under this Note, or any defined event
of default under the Credit Agreement, shall constitute an "Event of Default"
under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default as defined in the
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Credit Agreement, the holder of this Note, at the holder's option, may declare
all sums of principal and interest outstanding hereunder to be immediately due
and payable without presentment, demand, protest or notice of dishonor, all of
which are expressly waived by each Borrower, and the obligation, if any, of the
holder to extend any further credit hereunder shall immediately cease and
terminate. Each Borrower shall pay to the holder immediately upon demand the
full amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of the holder's in-house counsel), incurred by the holder in connection
with the enforcement of the holder's rights and/or the collection of any amounts
which become due to the holder under this Note, and the prosecution or defense
of any action in any way related to this Note, including without limitation, any
action for declaratory relief, and including any of the foregoing incurred in
connection with any bankruptcy
Revolving Line of Credit Note, Page 1
<PAGE>
proceeding relating to any Borrower.
(b) Obligations Joint and Several. Should more than one person or entity sign
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this Note as a Borrower, the obligations of each such Borrower shall be joint
and several.
(c) Governing Law. This Note shall be governed by and construed in accordance
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with the laws of the State of California, except to the extent Bank has greater
rights or remedies under Federal law, whether as a national bank or otherwise,
in which case such choice of California law shall not be deemed to deprive Bank
of any such rights and remedies as may be available under Federal law.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
PROVENA FOODS INC.
By:
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Title:
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Revolving Line of Credit Note, Page 2
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
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The Board of Directors
Provena Foods Inc.:
We consent to the incorporation by reference in the registration statement
(No.33-23852) on Form S-8 of Provena Foods Inc. of our report dated January 24,
1997, relating to the balance sheets of Provena Foods Inc. as of December 31,
1996 and 1995, and the related statements of earnings, shareholders' equity, and
cash flows and related schedule for each of the years in the three-year period
ended December 31, 1996, which report appears in the December 31, 1996 annual
report on Form 10-K of Provena Foods Inc.
KPMG PEAT MARWICK LLP
Orange County, California
February 24, 1997
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 245,205
<SECURITIES> 20,324
<RECEIVABLES> 2,408,297
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