<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
- --------------------------------------------------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTER ENDED JUNE 30, 1998
Commission File Number 1-10741
PROVENA FOODS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-2782215
- ----------------------------------------------------------------- ---------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification number)
5010 EUCALYPTUS AVENUE, CHINO, CALIFORNIA 91710
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(Address of principal executive offices) (ZIP Code)
</TABLE>
(909) 627-1082
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(Registrant's telephone number, including area code)
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 number of shares of Provena Foods Inc. Common Stock outstanding as of the
close of business of the period covered by this report was:
COMMON STOCK 2,888,320
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PROVENA FOODS INC.
1998 Form 10-Q Second Quarter Report
Table of Contents
-----------------
<TABLE>
<CAPTION>
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
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<S> <C>
1. Financial Statements .................................................................... 1
Condensed Statements of Earnings ................................................... 1
Condensed Balance Sheets ........................................................... 2
Condensed Statements of Cash Flows ................................................. 3
Notes to Condensed Financial Statements ............................................ 4
(1) Basis of Presentation .................................................. 4
(2) Inventories ............................................................ 4
(3) Earnings per Share ..................................................... 4
(4) Comprehensive Income ................................................... 4
2. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 4
Results of Operations .............................................................. 4
Swiss American Sausage Co. Meat Division ........................................... 5
Royal-Angelus Macaroni Company Pasta Division ...................................... 5
The Company ........................................................................ 5
Liquidity and Capital Resources .................................................... 6
Year 2000 .......................................................................... 7
Recent Accounting Pronouncements ................................................... 7
PART II. OTHER INFORMATION
--------------------------
1. Legal Proceedings ....................................................................... 7
2. Changes in Securities ................................................................... 7
3. Defaults Upon Senior Securities ......................................................... 7
4. Submission of Matters to a Vote of Security Holders ..................................... 8
5. Other Information ....................................................................... 8
Common Stock Repurchase and Sale ................................................... 8
American Stock Exchange Listing .................................................... 8
Cash Dividend Paid ................................................................. 8
Management Stock Transactions ...................................................... 9
6. Exhibits and Reports on Form 8-K ........................................................ 9
Signature ............................................................................... 9
</TABLE>
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PART I. FINANCIAL INFORMATION
-----------------------------
ITEM I. FINANCIAL STATEMENTS
PROVENA FOODS INC.
Condensed Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $6,407,691 6,517,624 13,760,981 13,072,001
Cost of sales 5,546,657 5,936,402 11,758,796 11,898,226
---------- --------- ---------- ----------
Gross profit 861,034 581,222 2,002,185 1,173,775
Operating expenses:
Distribution 271,281 227,439 534,258 444,618
General and administrative 297,244 274,392 599,707 552,911
---------- --------- ---------- ----------
Operating income 292,509 79,391 868,220 176,246
Interest expense, net (1,522) (20,836) (1,771) (38,568)
Other income, net 31,204 76,722 66,949 104,146
---------- --------- ---------- ----------
Earnings before
income taxes 322,191 135,277 933,398 241,824
Income tax expense 128,000 53,200 371,000 95,200
---------- --------- ---------- ----------
Net earnings $ 194,191 82,077 562,398 146,624
========== ========= ========== ==========
Earnings per common share:
Basic $ .07 .03 .20 .05
========== ========= ========== ==========
Diluted $ .07 .03 .19 .05
========== ========= ========== ==========
Weighted average number of
common shares outstanding:
Basic 2,884,742 2,830,264 2,879,053 2,819,934
---------- --------- ---------- ----------
Diluted 2,933,913 2,830,967 2,924,088 2,822,964
---------- --------- ---------- ----------
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
------ ----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and marketable securities $ 1,890,192 1,089,957
Accounts receivable, less allowance for doubtful
accounts of $28,934 at 1998 and $10,934 at 1997 1,866,745 3,112,520
Inventories 2,507,609 2,679,118
Prepaid expenses 101,678 45,460
Income taxes receivable 50,042 --
----------- ------------
Total current assets 6,416,266 6,927,055
----------- ------------
Deferred tax asset 99,411 101,279
Property and equipment, net 4,537,646 4,467,521
Other assets 46,230 43,203
----------- ------------
$11,099,553 11,539,058
=========== ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 8,460 $ 8,460
Accounts payable 705,313 1,123,820
Accrued expenses 745,004 1,122,068
Income taxes payable -- 98,545
----------- ------------
Total current liabilities 1,458,777 2,352,893
----------- ------------
Deferred income 3,099 7,752
Long-term debt, less current portion 739,045 743,275
Shareholders' equity:
Capital stock, no par value, authorized 10,000,000
shares; issued and outstanding 2,888,320 at 1998
and 2,865,981 at 1997 4,496,690 4,422,647
Retained earnings 4,401,942 4,012,491
----------- ------------
Total shareholders' equity 8,898,632 8,435,138
----------- ------------
$11,099,553 11,539,058
=========== ============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 562,398 146,624
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 273,907 308,527
Provision for bad debts 28,934 24,000
Decrease (increase) in accounts receivable 1,216,841 (617)
Decrease in inventories 171,509 203,796
Increase in income taxes receivable (50,042) (14,195)
Increase in prepaid expenses (56,218) (33,857)
Increase in other assets (3,027) (290)
Increase (decrease) in accounts payable (418,507) 112,600
Decrease in accrued expenses (377,064) (657,242)
Decrease in income taxes payable (98,545) (24,460)
Decrease in deferred income (4,653) (4,653)
---------- -------
Net cash provided by
operating activities 1,245,533 60,233
---------- -------
Cash flows from investing activities:
Addition to property and equipment (342,164) (150,505)
---------- -------
Net cash used in investing activities (342,164) (150,505)
---------- -------
Cash flows from financing activities:
Payments on note payable to bank (4,230) (4,230)
Proceeds from sale of capital stock 74,043 93,507
Cash dividends paid (172,947) (169,558)
---------- -------
Net cash used in financing activities (103,134) (80,281)
---------- -------
Net increase (decrease) in cash and cash equivalents 800,235 (170,553)
Cash and cash equivalents at beginning of period 1,089,957 265,529
---------- -------
Cash and cash equivalents at end of period $1,890,192 94,976
========== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 28,877 40,866
Income taxes $ 519,589 133,855
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Notes to Condensed Financial Statements
June 30, 1998 and 1997
(1) Basis of Presentation
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The accompanying unaudited financial statements have been prepared in accordance
with the requirements of Form 10-Q and, therefore, do not include all
information and footnotes which would be presented were such financial
statements prepared in accordance with generally accepted accounting principles.
These statements should be read in conjunction with the audited financial
statements presented in the Company's Form 10-K for the year ended December 31,
1997. In the opinion of management, the accompanying financial statements
reflect all adjustments which are necessary for a fair presentation of the
results for the interim periods presented. Such adjustments consisted only of
normal recurring items. The results of operations for the three months and six
months ended June 30, 1998 are not necessarily indicative of results to be
expected for the full year.
(2) Inventories
- ---------------
Inventories at June 30, 1998 (unaudited) and December 31, 1997 consist of:
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Raw materials $ 776,315 1,220,151
Work-in-process 523,669 674,400
Finished goods 1,207,625 784,567
---------- ----------
$2,507,609 $2,679,118
========== ==========
</TABLE>
(3) Earnings per Share
- ----------------------
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share."
(4) Comprehensive Earnings
- --------------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
Results of Operations Three Months Ended Six Months Ended
- --------------------- June 30, June 30,
--------------------- --------------------
(Unaudited) 1998 1997 1998 1997
(amounts in thousands)
<S> <C> <C> <C> <C>
Net sales by division:
SWISS AMERICAN $4,335 $4,508 $ 8,927 $ 8,977
ROYAL-ANGELUS 2,073 2,010 4,834 4,095
------ ------ ------- -------
Total $6,408 $6,518 $13,761 $13,072
====== ====== ======= =======
Sales in thousands of
pounds by division:
SWISS AMERICAN 2,986 2,910 5,999 5,819
ROYAL-ANGELUS 4,222 4,451 10,146 8,629
</TABLE>
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Swiss American Sausage Co. Meat Division
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Sales by the processed meat division decreased about 1% in dollars but increased
3% in pounds in the 1st six months of 1998 and decreased 4% in dollars but
increased 3% in pounds in the 2nd quarter of 1998, compared to the same periods
of 1997. Sales in dollars declined while sales in pounds rose because of lower
selling prices on lower meat costs. The increases in sales in pounds reflect
modest growth at Swiss and Swiss's operating profit and margins were up for both
the 1st half and 2nd quarter of 1998, compared to those periods of 1997.
Plant employees are represented by United Food and Commercial Workers Union
Local 101, AFL-CIO, under a collective bargaining agreement which expired March
31, 1998. Negotiations to renew the agreement are in progress and are expected
to be successful. There has been no significant labor unrest at the division's
plants and the Company believes it has a satisfactory relationship with its
employees.
Royal-Angelus Macaroni Company Pasta Division
- ---------------------------------------------
The pasta division's sales increased about 18% in both dollars and pounds in the
1st half of 1998 and increased 3% in dollars but decreased 5% in pounds in the
2nd quarter of 1998, compared to the same periods of 1997. The decreased sales
in pounds in the 2nd quarter reflect price competition resulting from increasing
industry capacity. Royal's government contract sales were down in the 2nd
quarter of 1998 compared to the 2nd quarter of last year because Royal was
under-bid. The result was a lower proportion of high volume-low priced sales.
Sales in dollars increased on higher average selling prices. Royal's operating
profit and margins were up for the 1st half and 2nd quarter of 1998 over those
periods of 1997.
The Company
- -----------
Company sales were up 5% in the 1st half of 1998 compared to the 1st half of
1997 but were down 2% in the 2nd quarter of 1998 compared to the 2nd quarter of
1997. The decrease in sales in dollars in the 2nd quarter resulted from lower
sales in dollars on lower meat costs at Swiss in spite of increased sales in
pounds, operating profits and margins at Swiss. Net earnings for the 1st half of
1998 were $562,398 compared to $146,624 a year ago and earnings for the 2nd
quarter of 1998 were $194,191 compared to $82,077 a year ago. Margins for the
1st half of 1998 were 14.6% compared to 9% a year ago. Margins of 13.4% for the
2nd quarter of 1998 were up from 8.9% for the 2nd quarter of 1997. Both
divisions contributed to the increases in earnings and margins for the 1st half
and 2nd quarter.
General and administrative expense was up about $47,000 for the 1st half of 1998
compared to the same period in 1997, primarily from increased officer payroll.
Distribution expense was up about $90,000 or 20% on a 5% sales increase, because
of increased salesmen payroll, salesmen expense and promotional expense at Swiss
and increased officer payroll, sales with pre-paid freight and sales commissions
at Royal. Net interest expense decreased $37,000 because of the
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absence of borrowing under the bank line, a lower balance on the term loan and
interest income on higher cash balances. Other income decreased $37,000 because
a $45,024 state reimbursement for the 1991 removal of a gasoline storage tank
was included in last year's 1st half.
Liquidity and Capital Resources
- -------------------------------
The Company has accepted a proposal from Comerica Bank-California to provide a
credit facility for the Company's financial needs. The proposal is to provide a
$2,000,000 line of credit, an up to $750,000 term loan on the 2nd pasta
building, an up to $8,000,000 term loan on the new meat plant, an up to
$1,000,000 term loan for equipment at the new meat plant, and an up to
$1,200,000 term loan for a new pasta line. All parts of the credit facility
would be secured by all of the Company's assets. The proposal is subject to
legal review for the bank, appraisals, execution of loan documents and other
material conditions.
The Company has opened an escrow to purchase a 5.3 acre parcel of land in the
city of Lathrop, county of San Joaquin, California, for a purchase price of
$484,821, as the site for a new meat plant. Acquisition of the parcel is
conditioned upon title, governmental approval of plans and specifications, a
building permit and other material conditions.
The Company has selected a contractor and entered into an agreement with the
contractor and a developer to build the new meat plant. Commencement and
completion of construction is subject to acquisition of the site, preparation of
final plans, final agreement on a construction price and other material
conditions.
The Company has generally satisfied its normal working capital requirements with
funds derived from operations and borrowings under its bank line of credit. The
Company has a $2,000,000 unsecured bank line of credit with Wells Fargo Bank,
NA, which expired June 1, 1998 and was extended on an interim basis to September
1, 1998. The Company has had no borrowings under the line for over a year. The
Company also has a term loan with Wells Fargo Bank, NA with a balance of
$747,505 at June 30, 1998 secured by the 2nd Royal building, which is occupied
40% by the pasta division and 60% by a tenant. The Company intends to prepay the
term loan in full without penalty on July 31, 1998, using funds on hand.
Cash increased $800,235 during the 1st half of 1998 compared to a $170,553
decrease a year ago, the difference resulting primarily from increased cash
provided by operating activities, reduced by more cash used in investing and
financing activities. Operating activities produced more cash because of
increased net earnings and a large decrease in accounts receivable, supplemented
by a smaller decrease in accrued expenses and partially offset by a decrease in
accounts payable. At the end of 1997, accounts receivable were high because of a
4th quarter surge in sales and were lower at the end of the 2nd quarter of 1998
because of a more moderate level of sales. Inventories have declined slightly
since year end. More cash was used in investing for capital expenditures,
including production and packaging equipment at Royal and
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equipment replacement and capitalized costs of a new plant at Swiss. Financing
activities used more cash primarily because more stock options were exercised
last year.
The Company believes that its operations and bank line of credit will provide
adequate working capital to satisfy the normal needs of its operations for the
foreseeable future, including the financing of a new meat plant, assuming the
proposed credit facility is implemented.
The Company has no long-term debt except the $747,505 secured by the 2nd Royal
building. All of its other assets are currently unencumbered.
Year 2000
- ---------
Many computer programs use only the last two digits of a year to store or
process dates, including the accounting programs used by both divisions of the
Company. As a result, the programs may treat dates after 1999 as earlier than
dates before 2000, which could adversely affect routines such as calculating
depreciation or aging accounts receivable. The Company has engaged a computer
programmer to correct this defect in the Company's programs and expects the
defect will be corrected without material cost before the year 2000. The
Company's customers, suppliers and service providers may use computer programs
with similar defects, which, to the extent not corrected, could adversely affect
the Company's operations, such as the receipt of supplies, services, purchase
orders and payments of accounts receivable.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 is effective for interim
financial statements beginning 1999 and for other financial statements
beginning 1998. In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Application of these Standards, in the opinion of
management, will not have a material effect on the information presented.
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS No significant litigation.
ITEM 2. CHANGES IN SECURITIES None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on Tuesday, April 21, 1998,
at 11:00 a.m. at the Company's principal office. Shareholders representing
2,733,103 or 95.1% of the 2,876,587 shares entitled to vote were present in
person or by proxy, with 11,445 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>
Without
Nominee For Withheld Authority
------- --- -------- ---------
<S> <C> <C> <C>
John D. Determan 2,723,403 7,200 2,500
Theodore L. Arena 2,730,603 -0- 2,500
Ronald A. Provera 2,729,003 1,600 2,500
Santo Zito 2,730,603 -0- 2,500
Thomas J. Mulroney 2,730,603 -0- 2,500
Louis A. Arena 2,730,403 200 2,500
Joseph W. Wolbers 2,730,603 -0- 2,500
John M. Boukather 2,722,003 8,600 2,500
</TABLE>
ITEM 5. OTHER INFORMATION
Common Stock Repurchase and Sale
- --------------------------------
The Company did not purchase any of its shares during the 1st half of 1998 under
its stock repurchase program.
During the 1st half of 1998 the Company sold 19,181 newly issued shares of its
common stock under its 1988 Employee Stock Purchase Plan, at an average selling
price of $3.98 per share. From inception of the Plan through June 30, 1998,
employees have purchased a total of 413,504 shares. In addition, during the 1st
half of 1998, Incentive Stock Options were exercised to purchase 6,000 newly
issued shares of common stock at the exercise price of $2.25 per share, for
which the Company received 2,842 shares in payment of the exercise price at a
fair market value of $4.75 per share.
American Stock Exchange Listing
- -------------------------------
The Company's stock trades on the American Stock Exchange under the ticker
symbol "PZA".
Cash Dividends Paid
- -------------------
A cash dividend of $0.03 per share was paid June 30 to shareholders of record
June 10, 1998.
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Management Stock Transactions
- -----------------------------
No purchases or sales of the Company's common stock by officers or directors
were reported during the 2nd quarter of 1998, except 12 shares purchased by John
M. Boukather, director, under a broker's dividend reinvestment program.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The only exhibit filed with this report is the EDGAR Financial Data Schedule
of Exhibit 27.
(b) No reports on Form 8-K were filed during the three months ended June 30,
1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 28, 1998 PROVENA FOODS INC.
By /s/ Thomas J. Mulroney
------------------------
Thomas J. Mulroney
Vice President and
Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,870,720
<SECURITIES> 19,472
<RECEIVABLES> 1,895,679
<ALLOWANCES> 28,934
<INVENTORY> 2,507,609
<CURRENT-ASSETS> 6,416,266
<PP&E> 9,910,366
<DEPRECIATION> 5,372,720
<TOTAL-ASSETS> 11,099,553
<CURRENT-LIABILITIES> 1,458,777
<BONDS> 739,045
0
0
<COMMON> 4,496,690
<OTHER-SE> 4,401,942
<TOTAL-LIABILITY-AND-EQUITY> 11,099,553
<SALES> 13,760,981
<TOTAL-REVENUES> 13,861,103
<CGS> 11,758,796
<TOTAL-COSTS> 1,133,965
<OTHER-EXPENSES> 6,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,847
<INCOME-PRETAX> 933,398
<INCOME-TAX> 371,000
<INCOME-CONTINUING> 562,398
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 562,398
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
</TABLE>
