<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
________________________________________________________________________________
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Commission File Number 1-10741
PROVENA FOODS INC.
(Exact name of registrant as specified in its charter)
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<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
________________________________________________________________ ______________________________________
(Address of principal executive offices) (ZIP Code)
(909) 627-1082
_________________________________________________________________________________________________________
(Registrant's telephone number, including area code)
</TABLE>
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 registration 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 the period covered by this report was:
COMMON STOCK 2,899,822
<PAGE>
PROVENA FOODS INC.
1998 Form 10-Q Third Quarter Report
Table of Contents
-----------------
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
PART I. FINANCIAL INFORMATION
-----------------------------
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
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 5
Results of Operations.......................................... 5
Swiss American Sausage Co. Meat Division....................... 5
Royal-Angelus Macaroni Company Pasta Division.................. 5
The Company.................................................... 6
Liquidity and Capital Resources................................ 6
Year 2000...................................................... 8
Recent Accounting Pronouncements............................... 8
PART II. OTHER INFORMATION
--------------------------
1. Legal Proceedings.................................................. 8
2. Changes in Securities.............................................. 8
3. Defaults Upon Senior Securities.................................... 8
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................................ 9
Cash Dividend Paid............................................. 9
Management Stock Transactions.................................. 9
6. Exhibits and Reports on Form 8-K................................... 9
Signature...................................................... 9
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
PROVENA FOODS INC.
Condensed Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $5,867,974 8,126,492 19,628,955 21,198,493
Cost of sales 5,172,059 6,980,219 16,930,855 18,878,445
---------- --------- ---------- ----------
Gross profit 695,915 1,146,273 2,698,100 2,320,048
Operating expenses:
Distribution 269,480 239,028 803,738 683,646
General and administrative 319,684 247,791 919,391 800,702
---------- --------- ---------- ----------
Operating income 106,751 659,454 974,971 835,700
Interest income (expense), net 12,500 (11,795) 10,729 (50,363)
Other income, net 519,056 149,461 586,005 253,607
---------- --------- ---------- ----------
Earnings before
income taxes 638,307 797,120 1,571,705 1,038,944
Income tax expense 255,000 317,800 626,000 413,000
---------- --------- ---------- ----------
Net earnings $ 383,307 479,320 945,705 625,944
========== ========= ========== ==========
Earnings per share:
Basic $ .13 .17 .33 .22
========== ========= ========== ==========
Diluted $ .13 .17 .32 .22
========== ========= ========== ==========
Shares used in computing
earnings per share:
Basic 2,895,422 2,845,379 2,884,569 2,828,509
---------- --------- ---------- ----------
Diluted 2,918,484 2,845,736 2,923,639 2,829,584
---------- --------- ---------- ----------
</TABLE>
See accompanying Notes to Condensed Financial Statements.
-1-
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PROVENA FOODS INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
------ -------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,259,062 1,089,957
Accounts receivable, trade, less allowance for doubtful
accounts of $50,205 at 1998 and $10,934 at 1997 1,787,069 3,112,520
Other receivables 1,081,464 --
Inventories 1,743,244 2,679,118
Prepaid expenses 74,767 45,460
Income taxes receivable 5,042 --
---------- -----------
Total current assets 5,950,648 6,927,055
---------- -----------
Deferred tax asset 98,477 101,279
Property and equipment, net 5,057,784 4,467,521
Other assets 36,960 43,203
---------- -----------
$11,143,869 11,539,058
========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ -- 8,460
Accounts payable 965,813 1,123,820
Accrued expenses 943,598 1,122,068
Income taxes payable -- 98,545
---------- -----------
Total current liabilities 1,909,411 2,352,893
---------- -----------
Deferred income 773 7,752
Long-term debt, less current portion -- 743,275
Shareholders' equity:
Capital stock, no par value, authorized 10,000,000
shares; issued and outstanding 2,899,822 at 1998
and 2,865,981 at 1997 4,535,431 4,422,647
Retained earnings 4,698,254 4,012,491
---------- -----------
Total shareholders' equity 9,233,685 8,435,138
---------- -----------
$11,143,869 11,539,058
========== ===========
</TABLE>
See accompanying Notes to Condensed Financial Statements.
-2-
<PAGE>
PROVENA FOODS INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 945,705 625,944
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 387,658 431,273
Provision for bad debts 50,205 36,000
Decrease (increase) in accounts receivable 1,275,246 (1,295,129)
Increase in other receivables (1,081,464) --
Decrease in inventories 935,874 136,882
Increase in income taxes receivable (5,042) --
Increase in prepaid expenses (29,307) (30,153)
Decrease in other assets 6,243 3,071
Increase (decrease) in accounts payable (158,007) 471,986
Decrease in accrued expenses (178,470) (137,141)
Increase (decrease) in income taxes payable (98,545) 24,145
Decrease in deferred income (6,979) (6,979)
--------- ---------
Net cash provided by operating activities 2,043,117 259,899
--------- ---------
Cash flows from investing activities:
Addition to property and equipment (975,119) (165,583)
--------- ---------
Net cash used in investing activities (975,119) (165,583)
--------- ---------
Cash flows from financing activities:
Payments on note payable to bank (751,735) (206,345)
Proceeds from sale of capital stock 112,784 129,458
Cash dividends paid (259,942) (255,070)
--------- ---------
Net cash used in financing activities (898,893) (331,957)
--------- ---------
Net increase (decrease) in cash and cash equivalents 169,105 (237,641)
Cash and cash equivalents at beginning of period 1,089,957 245,205
--------- ---------
Cash and cash equivalents at end of period $1,259,062 7,564
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 33,795 58,623
Income taxes $ 729,589 388,855
========= ========
</TABLE>
See accompanying Notes to Condensed Financial Statements.
-3-
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PROVENA FOODS INC.
Notes to Condensed Financial Statements
September 30, 1998 and 1997
(1) Basis of Presentation
- ---------------------------
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 statement
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 nine months ended
September 30, 1998 are not necessarily indicative of results to be expected for
the full year.
(2) Inventories
- ----------------
Inventories at September 30, 1998 (unaudited) and December 31, 1997 consist of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 343,738 1,220,151
Work-in-process 101,506 674,400
Finished goods 1,298,000 784,567
---------- ---------
$1,743,244 2,679,118
========== =========
</TABLE>
(3) New Accounting Standards
- -----------------------------
Effective December 31, 1997 and January 1, 1998, respectively, the Company
adopted Statements of Financial Accounting Standards No. 128, "Earnings per
Share" and No. 130, "Reporting Comprehensive Income."
(4) Industrial Development Bonds
- ---------------------------------
On October 7, 1998, $4,000,000 of industrial development bonds maturing October
1, 2023 were issued, producing $3,909,485 of net proceeds for acquisition and
construction of the Company's new meat plant. The Company is obligated to pay
principal and interest on the bonds, supported by a $4,060,000 letter of credit
issued by Comerica Bank-California expiring October 15, 2003. The letter of
credit is secured by substantially all of the Company's assets and the Company
is obligated to maintain a like letter of credit for the term of the bonds. The
bonds are initially demand obligations remarketed upon repayment and bear a
variable rate of interest payable monthly and set weekly at a market rate,
initially 3.15% per annum and currently 2.9%. The Company pays a 1.5% per annum
fee on the amount of the letter of credit and fees of the bond trustee
estimated at 0.5% of the bond principal per year.
(5) Meat Plant Fire Loss
- -------------------------
The August 1, 1998 fire at the Company's main meat plant destroyed $1,002,516
net book value of inventory and $474,835 net book value of equipment and
leasehold improvements. The Company has recognized $2,081,465 of insurance claim
proceeds included in other receivables on the balance sheet, reduced by
$1,000,000 paid by the insurance company toward the claims. Included in other
income is $494,194 of the proceeds for business interruption in August and
September 1998. The business interruption claims are ongoing and there has been
no final settlement of any of the claims.
-4-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Results of Operations September 30, September 30,
- --------------------- ------------------- --------------------
(Unaudited) 1998 1997 1998 1997
(amounts in thousands)
<S> <C> <C> <C> <C>
Net sales by division:
SWISS AMERICAN $3,594 $5,852 $12,521 $14,829
ROYAL-ANGELUS 2,274 2,274 7,108 6,369
------ ------ ------- -------
Total $5,868 $8,126 $19,629 $21,198
====== ====== ======= =======
Sales in thousands of
pounds by division:
SWISS AMERICAN 2,514 3,784 8,513 9,602
ROYAL-ANGELUS 4,587 5,314 14,733 13,944
</TABLE>
Swiss American Sausage Co. Meat Division
- ----------------------------------------
Sales by the processed meat division for the 1st nine months of 1998 decreased
about 16% in dollars and about 11% in pounds, and for the 3rd quarter of 1998
decreased 39% in dollars and 34% in pounds, compared to the same periods of
1997. Sales in dollars have decreased proportionately more than in pounds
because of lower selling prices on lower meat costs. Swiss was experiencing
modest growth and increased profits until the August 1, 1998 fire destroyed its
main meat plant. Swiss is having some success purchasing product from other
suppliers for its customers, but has operated at a loss since the fire and
realized a pre-tax profit for the 3rd quarter of 1998 only after taking into
account the benefits of business interruption insurance. Completion of the new
meat plant is scheduled for the 1st half of 1999. The annual cost to Swiss of
the new meat plant will exceed the annual cost of its old meat plant, and
reduced volume because of the fire will increase the difficulty of building the
volume at the new plant to profitable levels.
Plant employees are represented by United Food and Commercial Workers Union
Local 101, AFL-CIO, under a collective bargaining agreement renewed October 2,
1998 effective April 1, 1998 to expire March 31, 2002. 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 in the 1st nine months of 1998 increased about 12% in
dollars and 6% in pounds, and in the 3rd quarter of 1998 were level in dollars
but decreased 14% in pounds, compared to the same periods of 1997. Sales in
pounds have decreased in both the 2nd and 3rd quarters of 1998, reflecting
competition resulting from increasing industry capacity. Sales in dollars have
benefitted from a lower proportion of high volume-lower priced sales, resulting
in higher average selling prices. Royal's operating profits and margins for the
1st nine months and the 3rd quarter of 1998 were higher than for the same
periods of 1997.
-5-
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The Company
- -----------
Company sales for the 1st nine months of 1998 were down about 7% and for the 3rd
quarter of 1997 were down about 28%, compared to the same periods of 1997, the
declines resulting from decreased sales at Swiss after the plant fire. Net
earnings for the 1st nine months of 1998 were $945,705 compared to $625,944 last
year, and net earnings for the 3rd quarter were $383,307 compared to $479,320 a
year ago. Margins increased to 13.7% from 10.9% for the 1st nine months but
decreased to 11.8% from 14.1% for the 3rd quarter, comparing the same periods
this year to last. Margins for both periods of 1998 were reduced by decreased
margins at Swiss since the fire.
General and administrative expense was up about $119,000 for the 1st nine months
of 1998 compared to the same period in 1997, due to increased officer and
clerical payroll and financial printing costs. Distribution expense was up about
$120,000 for the nine months 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 changed from
an expense to income because of the absence of borrowing under the bank line, a
lower balance on the term loan, prepayment of the term loan and interest income
on higher cash balances. Other income increased because of recognition of
business interruption insurance proceeds compared to a reimbursement for removal
of a storage tank in last year's 1st nine months.
Liquidity and Capital Resources
- -------------------------------
The Company has generally satisfied its normal working capital requirements with
funds derived from operations and borrowings under a bank line of credit. The
Company had a $2,000,000 unsecured bank line of credit with Wells Fargo Bank, NA
which was replaced by a $2,000,000 line of credit with Comerica Bank-California
on September 1, 1998. The Company has had no borrowings under either line for
over 15 months. The Company also had a term loan with Wells Fargo Bank, NA
secured by the 2nd Royal building with a balance of $747,505 at June 30, 1998,
which the Company prepaid on July 31, 1998, using funds on hand.
The Comerica line of credit is part of a credit facility proposed by Comerica
for the Company's financial needs, including the need to finance the acquisition
and construction of a new meat plant. The line is payable on demand, is subject
to annual review, and bears interest at a variable annual rate, at the Company's
option, of either 1.75% over Comerica's cost of funds or 0.25% under its "Base
Rate." Also as part of the credit facility. Comerica has issued a $4,060,000
letter of credit securing payment of principal and interest on $4,000,000 of
industrial revenue bonds issued October 7, 1998 and maturing October 1, 2023.
The net proceeds of the bonds are to be used for the new meat plant and the
Company is obligated to pay principal and interest on the bonds. The letter of
credit expires October 15, 2003 and Comerica is not obligated to renew the
letter of credit, but the Company is obligated to maintain a like letter of
credit until the bonds mature.
The bonds are demand obligations which prior to maturity are repurchased at the
option of a holder and remarketed. They bear a variable rate of interest payable
monthly and set weekly at the minimum rate at which the bonds can be sold at
par. The current rate of interest on the bonds is 2.9% per annum. The Company
also pays Comerica 1.5% per annum of the amount
-6-
<PAGE>
of the letter of credit and pays administrative fees of the bond trustee
estimated at 0.5% per annum of the bond principal. The Company has the option
to convert the bonds to bonds with principal payable only at maturity and
interest payable semi-annually at a fixed rate set at the minimum rate of
interest at which the converted bonds can be sold at par. Upon conversion, all
outstanding bonds are purchased at par and the converted bonds are remarketed.
The proposed credit facility also contemplates an up to $1,200,000 term loan for
a new pasta line, an additional $4,000,000 term loan for completion of the new
meat plant and an up to $1,000,000 term loan for equipment at the new meat
plant. All parts of the credit facility are or will be secured by substantially
all of the Company's assets, including accounts receivable, inventory, equipment
and fixtures, the Company's two Chino buildings and the new meat plant, none of
which are otherwise encumbered. The credit facility prohibits mergers,
acquisitions, disposal of assets, borrowing, granting security interests, and
changes of management and requires a tangible net worth greater than $7,500,000,
a debt to tangible net worth ratio less than 2, a quick ratio greater than 0.90,
and cash flow coverage greater than 1.30.
On September 30, 1998, the Company purchased a 5.3 acre parcel of land in the
city of Lathrop, county of San Joaquin, California, for a purchase price of
$484,821 plus fees and commissions, as the site for the new meat plant.
Construction of the approximately 85,000 square foot building to house the new
meat plant has commenced. The estimated cost of acquisition and construction of
the new meat plant is currently over $8,500,000, including over $3,800,000 for
general construction by A.P. Thomas Construction, Inc., the general contractor,
over $3,300,000 for electrical, refrigeration, and specialty installations by
other contractors under direct contract with the Company and the balance
primarily for site cost, developer fees, commissions, utility fees, and
architectural and engineering fees.
Cash increased $169,105 during the 1st nine months of 1998 compared to a
$237,641 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 earnings, a large decrease in accounts receivable compared to a large
increase last year and a large decrease in inventories, offset by a large
increase in other receivables and decreases in accounts payable and income taxes
payable versus increases the prior year. Other receivables increased because of
a large insurance receivable as the result of the fire. The insurance
receivable is a recognition of unpaid insurance proceeds, reasonably certain to
be payable in the opinion of management. The insurance company has paid
$1,000,000 toward fire claims for loss of inventory, leasehold improvements and
equipment, demolition and interruption of business. Inventories have declined
since year end because of reduced inventories at Swiss as a result of the fire.
More cash was used in investing for capital expenditures, including production
and packaging equipment at Royal and equipment replacement and land purchase,
progress payments and other capitalized costs of a new plant at Swiss.
Financing activities used more cash because of prepayment of the term loan.
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 fully implemented.
-7-
<PAGE>
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
will be able to manually perform the tasks affected without a material adverse
effect on the Company's operations, if the defect is not corrected. 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.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
ITEM 5. OTHER INFORMATION
Common Stock Repurchase and Sale
- --------------------------------
The Company did not purchase any of its shares during the 1st nine months
of 1998 under its stock repurchase option.
During the 1st nine months of 1998 the Company sold 30,683 newly issued
shares of its common stock under its 1988 Employee Stock Purchase Plan, at an
average selling price of $3.80 per share. From inception of the Plan through
September 30, 1998, employees have purchased a total of 425,006 shares.
8
<PAGE>
American Stock Exchange Listing
- -------------------------------
The Company's stock trades on the American Stock Exchange under the ticker
symbol "PZA".
Cash Dividend Paid
- ------------------
A cash dividend of $0.03 per share was paid September 30, 1998 to shareholders
of record September 10, 1998.
Management Stock Transactions
- -----------------------------
No purchases or sales of the Company's common stock by officers or directors
were reported during the 3rd quarter of 1998, except 13 shares purchased by John
M. Boukather, director, under a broker's dividend reinvestment program and 4,500
shares purchased by Joseph W. Wolbers, director.
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) The Company filed Forms 8-K dated August 1, 1998 regarding the meat plant
fire and October 7, 1998 regarding the issuance of industrial revenue bonds for
a new meat plant.
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.
Dated: November 5, 1998 P R O V E N A F O O D S I N C.
By /s/ Thomas J. Mulroney
------------------------------
Thomas J. Mulroney
Vice President and
Chief Financial Officer
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,239,591
<SECURITIES> 19,471
<RECEIVABLES> 2,918,738
<ALLOWANCES> 50,205
<INVENTORY> 1,743,244
<CURRENT-ASSETS> 5,950,648
<PP&E> 8,731,984
<DEPRECIATION> 3,674,200
<TOTAL-ASSETS> 11,143,869
<CURRENT-LIABILITIES> 1,909,411
<BONDS> 0
0
0
<COMMON> 4,535,431
<OTHER-SE> 4,698,254
<TOTAL-LIABILITY-AND-EQUITY> 11,143,869
<SALES> 19,628,955
<TOTAL-REVENUES> 20,286,131
<CGS> 16,930,855
<TOTAL-COSTS> 1,723,129
<OTHER-EXPENSES> 17,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,660
<INCOME-PRETAX> 1,571,705
<INCOME-TAX> 626,000
<INCOME-CONTINUING> 945,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 945,705
<EPS-PRIMARY> .33
<EPS-DILUTED> .32
</TABLE>
