<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
FOR THE QUARTER ENDED MARCH 31, 1999
Commission File Number 1-10741
PROVENA FOODS INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
California 95-2782215
- ----------------------------------------------- --------------------------------------
(State or other jurisdiction of incorporation (I.R.S. employer identification number)
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)
</TABLE>
Indicate by checkmark 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 2,927,353
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PROVENA FOODS INC.
1999 Form 10-Q First Quarter Report
Table of Contents
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<CAPTION>
Item Page
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PART I. FINANCIAL INFORMATION
------------------------------
1. Financial Statements.....................................................1
Condensed Statements of Income........................................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.............................................................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......................7
5. Other Information........................................................8
Common Stock Repurchase and Sale......................................8
American Stock Exchange Listing.......................................8
Cash Dividends Paid...................................................8
Management Stock Transactions.........................................8
6. Exhibits and Reports on Form 8-K.........................................8
Signature................................................................8
</TABLE>
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Part I. FINANCIAL INFORMATION
------------------------------
ITEM I. FINANCIAL STATEMENTS
PROVENA FOODS INC.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
<S> <C> <C>
Net sales $4,935,510 7,353,290
Cost of sales 4,959,679 6,212,139
--------- ---------
Gross profit (loss) (24,169) 1,141,151
Operating expenses:
Distribution 284,052 262,977
General and administrative 345,847 302,463
--------- ---------
Operating profit (loss) (654,068) 575,711
Interest expense net (2,322) (249)
Other income, net 1,081,624 35,745
--------- ---------
Earnings before income taxes 425,234 611,207
Income tax expense 170,000 243,000
--------- ---------
Net earnings $ 255,234 368,207
========= =========
Earnings per share:
Basic $ .09 .13
========= =========
Diluted $ .09 .13
========= =========
Weighted average number of shares outstanding:
Basic 2,922,756 2,873,301
--------- ---------
Diluted 2,934,669 2,921,584
--------- ---------
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1999 1998
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(Unaudited)
<S> <C> <C>
Current Assets:
Cash and marketable securities $ 1,613,179 116,306
Accounts receivable, less allowance for doubtful
accounts of $12,000 at 1999 and $0 at 1998 1,712,744 1,638,022
Insurance recovery receivable 1,241,257 2,204,738
Inventories 1,636,679 1,458,369
Prepaid expenses 365,815 59,118
----------- -----------
Total current assets 6,569,674 5,476,553
----------- -----------
Restricted cash 246,637 3,960,224
Deferred tax asset 73,504 73,504
Property and equipment, net 10,140,224 7,602,040
Other assets 130,164 167,342
----------- ----------
$17,160,203 17,279,663
=========== ==========
Liabilities and Shareholders' Equity
-------------------------------------
Current liabilities:
Accounts payable $ 1,163,111 1,118,294
Accrued liabilities 551,536 989,443
Income taxes payable 173,911 107,960
----------- ---------
Total current liabilities 1,888,558 2,215,697
----------- ---------
Long-term debt 4,000,000 4,000,000
Deferred tax liability 584,519 584,519
Shareholders' equity:
Capital shock, no par value; authorized 10,000,000
shares; issued and outstanding 2,927,353 at 1999
and 2,913,098 at 1998 4,612,747 4,572,482
Retained earnings 6,074,379 5,906,965
----------- -----------
Total shareholders' equity 10,687,126 10,479,447
---------- ----------
$17,160,203 17,279,663
=========== ==========
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Condensed Statements of Cash Flows
(Unaudited)
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<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 255,234 368,207
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 110,121 130,783
Provision for bad debts 12,000 22,934
Decrease (increase) in accounts receivable (86,722) 496,241
Decrease in insurance recovery receivable 963,481 --
Increase in inventories (178,310) (309,048)
Increase in prepaid expenses (306,697) (136,570)
Decrease (increase) in other assets 37,178 (4,140)
Increase (decrease) in accounts payable 44,817 (259,107)
Decrease in accrued liabilities (437,907) (542,592)
Increase in income taxes payable 65,951 143,413
Decrease in deferred income -- (1,392)
---------- ---------
Net cash provided by (used in)
operating activities 479,146 (91,271)
---------- ---------
Cash flows from investing activities:
Additions to property and equipment (2,648,305) (223,175)
---------- ---------
Net cash used in investing activities (2,648,305) (223,175)
---------- ---------
Cash flows from financing activities:
Payments on long term debt -- (2,115)
Decrease in restricted cash 3,713,587 --
Proceeds from sale of capital stock 40,266 34,634
Cash dividends paid (87,821) (86,297)
---------- ---------
Net cash provided by (used in)
financing activities 3,666,032 (53,778)
---------- ---------
Net increase (decrease) in cash and cash equivalents 1,496,873 (368,224)
Cash and cash equivalents at beginning of period 116,306 1,089,957
---------- ---------
Cash and cash equivalents at end of period $1,613,179 721,733
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 44,222 14,442
Income taxes 104,048 99,589
========== =========
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Notes to Condensed Financial Statements
March 31, 1999 and 1998
(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
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,
1998. 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 ended
March 31, 1999 are not necessarily indicative of results to be expected for the
full year.
(2) Inventories
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Inventories at March 31, 1999 and December 31, 1998 consist of:
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<CAPTION>
1999 1998
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<S> <C> <C>
Raw materials $ 304,153 335,725
Work-in-process 343,434 115,034
Finished goods 989,092 1,007,610
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$1,636,679 1,458,369
========== =========
</TABLE>
(3) Segment Data
- -----------------
Business segment sales and income for the three months ended March 31, 1999 and
1998 and assets at March 31, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Net sales to unaffiliated customers:
Swiss American Sausage division $ 2,857,852 4,592,558
Royal-Angelus Macaroni division 2,077,658 2,760,732
---------- ---------
Total sales $4,935,510 7,353,290
========== =========
Operating income (loss):
Swiss American Sausage division $ (845,686) 252,395
Royal-Angelus Macaroni division 224,860 343,447
Corporate (33,242) (20,131)
----------- ----------
Operating income (loss) $ (654,068) 575,711
=========== ==========
Identifiable assets:
Swiss American Sausage division $10,663,627 12,651,307
Royal-Angelus Macaroni division 4,448,674 4,405,736
Corporate 2,047,902 222,620
----------- ----------
Total assets $17,160,203 17,279,663
=========== ==========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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<CAPTION>
Results of Operations Three Months Ended
March 31
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1999 1998
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(Unaudited) (amounts in thousands)
<S> <C> <C>
Net sales by division:
Swiss American $2,858 $4,592
Royal-Angelus 2,078 2,761
------ ------
Total $4,936 $7,353
===== =====
Sales in thousands of
pounds by division:
Swiss American 2,014 3,013
Royal-Angelus 4,131 5,924
</TABLE>
Swiss American Sausage Co. Meat Division
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Sales by the processed meat division decreased about 38% in dollars and 33% in
pounds in the 1st three months of 1999 over the same period in 1998. Sales in
dollars decreased proportionately more than in pounds because of lower selling
prices reflecting lower meat costs. An August 1, 1998 fire destroyed Swiss's
main meat plant. Swiss has been purchasing processed products from other
suppliers in an attempt to maintain volume until its new plant is operational,
but sales have been substantially lower since the fire. The new meat plant is
expected to be completed about mid-year 1999. Swiss has operated at a loss
since the fire, realizing a pre-tax profit only after taking into account the
benefits of business interruption insurance.
Plant employees are represented by United Food and Commercial Workers Union
Local 101, AFL-CIO, under a collective bargaining agreement which expires
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 decreased about 25% in dollars and 30% in pounds in
the 1st quarter of 1999 compared to the 1st quarter of 1998. Sales decreased
because of competition from increasing industry capacity. The percent decrease
was lower in dollars than in pounds because of higher average selling prices
from a lower proportion of high volume-lower priced sales. Royal's operating
profit for the 1st quarter of 1999 was down about 35% from its operating profit
for the 1st quarter of 1998 because of the lower sales. Royal's sales in the 1st
quarter of 1999 essentially equalled its sales in the 1st quarter of 1997, but
its operating profit for the 1st quarter of 1999 was triple its operating profit
for the 1st quarter of 1997 because of higher production labor efficiency and
lower flour costs.
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The Company
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Company sales were down about 33% and the Company realized a net profit of
$255,234 in the 1st quarter of 1999 compared to $368,207 for the 1st quarter of
1998. Both divisions contributed to the reduced sales and profits. The
Company's margin for the 1st quarter of 1999 was a negative .5% compared to a
15.5% margin a year ago. The reduction in the margin was caused by operating
losses at Swiss. Royal's margin increased nominally.
Administrative expense was up about $43,000 for the 1st quarter of 1999 compared
to the same period in 1998, primarily from a large increase in health benefit
costs and smaller increases in officer and clerical payroll and bank charges.
Distribution expense was up about $21,000 because of increased salesmen payroll,
salesmen expense and promotional expense, partially offset by lower freight on
lower sales. Net interest expense increased about $2,000 from interest on the
industrial development bonds partially offset by interest income on higher cash
balances. Other income increased because of recognition of business
interruption insurance proceeds.
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
March 31, 1999, the Company had no borrowings under its $2,000,000 bank line of
credit with Comerica Bank-California. 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 the 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 issued a $4,060,000 letter of
credit to support $4,000,000 of industrial development bonds issued in 1998 for
costs of the Company's new meat plant. The bonds bear a variable rate of
interest payable monthly and set weekly at a market rate -- 2.85% per annum at
March 31, 1999. 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. Monthly payments of bond principal begin May 1, 2000, total
$76,700 the first year and increase about 5.6% each year until May 1, 2022, when
$813,500 of remaining principal is payable in 18 equal monthly payments.
The proposed credit facility also contemplates an up to $1,200,000 term loan for
a new pasta line, an up to $1,000,000 term loan for equipment at the new meat
plant and an additional $4,000,000 term loan for completion of the new meat
plant. The Company expects the $4,000,000 term loan to be implemented and
substantially disbursed during the 2nd quarter of 1999. 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 is 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. The Company is not in violation of any financial covenants.
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Cash increased $1,496,873 in the 1st quarter of 1999 compared to a decrease of
$368,224 in the 1st quarter of 1998. Operating activities produced $479,146 of
cash primarily from a decrease in insurance recovery receivable, supplemented by
earnings, depreciation, increases in accounts payable and income taxes payable
and a decrease in other assets, and diminished by increases in accounts
receivable, inventories, and prepaid expenses and a decrease in accrued
liabilities. The insurance recovery receivable is unpaid insurance proceeds
relating to the fire. Although accounts receivable and inventories increased
since year end, they are substantially lower than a year ago because of the
fire. Investing activities used $2,648,305 of cash for additions to property and
equipment, primarily Swiss's new plant. Financing activities produced $3,666,032
of cash primarily from a decrease in restricted cash. The restricted cash is
industrial development bond proceeds disbursable for construction costs.
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.
Year 2000
- ---------
Many computer programs use only the last two digits of a year to store or
process dates. This is the Y2K defect and programs with it may treat dates
after 1999 as earlier than dates before 2000. The Company uses computers for
accounting, payroll, display and analysis of information, word processing and
other clerical activities, as well as some production process control. The
Company has examined its computer usage and found only that its accounting
programs exhibit the Y2K defect, which could adversely affect routines such as
calculating depreciation or aging accounts receivable. The Company has engaged
a computer programmer to correct the defect, which is expected to be corrected
before the year 2000 for under $20,000. 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. Programs being acquired for
production at the pasta plant and the new meat plant are specified to be free
of the defect. The Company's customers, suppliers and service providers may use
computer programs with the Y2K defect 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. The Company is
not aware of any customers, suppliers or service providers with Y2K problems
likely to have a material adverse effect, individually or in the aggregate, on
the Company's operations, but the Company has limited information about other
companies' Y2K problems and no means to audit or direct correction of them.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
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ITEM 5. OTHER INFORMATION
Common Stock Repurchase and Sale
- --------------------------------
During the 1st three months of 1999 the Company did not purchase any shares of
its common stock under its stock repurchase program.
During the 1st three months of 1999 the Company sold 14,255 newly issued shares
of its common stock under its 1988 Employee Stock Purchase Plan, at an average
selling price of $2.83 per share. From inception of the Plan through March 31,
1999, employees have purchased a total of 451,537 shares.
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 March 31, 1999 to shareholders of
record March 10, 1999.
Management Stock Transactions
- -----------------------------
No purchases or sales of the Company's common stock by officers or directors
were reported during the 1st quarter of 1999, except 18 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 March 31,
1999.
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: April 28, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,840,075
<SECURITIES> 19,741
<RECEIVABLES> 2,966,001
<ALLOWANCES> 12,000
<INVENTORY> 1,636,679
<CURRENT-ASSETS> 6,569,674
<PP&E> 13,992,455
<DEPRECIATION> 3,852,231
<TOTAL-ASSETS> 17,160,203
<CURRENT-LIABILITIES> 1,888,558
<BONDS> 4,000,000
0
0
<COMMON> 4,612,747
<OTHER-SE> 6,074,379
<TOTAL-LIABILITY-AND-EQUITY> 17,160,203
<SALES> 4,935,510
<TOTAL-REVENUES> 6,061,315
<CGS> 4,959,679
<TOTAL-COSTS> 629,899
<OTHER-EXPENSES> 2,282
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,222
<INCOME-PRETAX> 425,234
<INCOME-TAX> 170,000
<INCOME-CONTINUING> 255,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 255,234
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
