<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, 2000
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)
</TABLE>
5010 Eucalyptus Avenue, Chino, California 91710
--------------------------------------------------- ----------
(Address of principal executive offices) (ZIP Code)
(909) 627-1082
--------------------------------------------------------------------------------
(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 the period covered by this report was:
Common Stock 3,020,362
<PAGE>
PROVENA FOODS INC.
Form 10-Q Report for the Third Quarter Ended September 30, 2000
Table of Contents
-----------------
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C>
PART I. FINANCIAL INFORMATION
------------------------------
1. Financial Statements................................................................... 1
Condensed Statements of Operations................................................ 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
New Accounting Standards.......................................................... 7
3. Quantitative and Qualitative Disclosures About Market Risk............................. 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................................................... 8
Cash Dividend Paid................................................................ 8
Management Stock Transactions..................................................... 8
6. Exhibits and Reports on Form 8-K....................................................... 9
Signature.............................................................................. 9
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
------------------------------
ITEM I. FINANCIAL STATEMENTS
PROVENA FOODS INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $7,735,279 5,069,039 19,555,401 14,778,226
Cost of sales 7,372,229 5,412,748 18,686,243 15,376,235
---------- ---------- ---------- ----------
Gross profit (loss) 363,050 (343,709) 869,158 (598,009)
Operating expenses:
Distribution 307,845 371,873 862,169 951,571
General and administrative 352,293 387,817 1,050,587 1,071,306
---------- ---------- ---------- ----------
Operating loss (297,088) (1,103,399) (1,043,598) (2,620,886)
Interest income (expense), net (204,800) 641 (551,540) (39,976)
Other income, net 28,864 247,561 90,421 2,595,430
---------- ---------- ---------- ----------
Loss before income
tax benefit (473,024) (855,197) (1,504,717) (65,432)
Income tax benefit (188,000) (342,000) (599,000) (26,000)
---------- ---------- ---------- ----------
Net loss $ (285,024) (513,197) (905,717) (39,432)
========== ========== ========== ==========
Loss per share:
Basic $ (.09) (.17) (.30) (.01)
========== ========== ========== ==========
Diluted $ (.09) (.17) (.30) (.01)
========== ========== ========== ==========
Shares used in computing
loss per share:
Basic 3,014,159 2,955,054 2,997,670 2,938,827
---------- ---------- ---------- ----------
Diluted 3,014,159 2,955,054 2,997,670 2,938,827
---------- ---------- ---------- ----------
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
Assets 2000 1999
------ ------------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 341,467 834,154
Accounts receivable, less allowance for doubtful
accounts of $64,166 at 2000 and $32,166 at 1999 2,515,403 2,316,771
Inventories 2,845,034 2,852,657
Prepaid expenses 33,429 61,409
Income taxes receivable 574,953 318,353
----------- ----------
Total current assets 6,310,286 6,383,344
----------- ----------
Deferred tax assets 43,481 43,481
Property and equipment, net 16,234,475 16,118,648
Other assets 194,020 199,052
----------- ----------
$22,782,262 22,744,525
=========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Line of credit $ 2,766,247 2,000,000
Current portion of long-term debt 462,418 462,418
Accounts payable 1,161,191 1,122,394
Accrued liabilities 1,560,471 920,075
----------- ----------
Total current liabilities 5,950,327 4,504,887
----------- ----------
Long-term debt, net of current portion 6,984,788 7,329,991
Deferred tax liability 571,916 571,916
Shareholders' equity:
Capital stock, no par value; authorized 10,000,000
shares; issued and outstanding 3,020,362 at 2000
and 2,972,029 at 1999 4,860,207 4,746,716
Retained earnings 4,415,024 5,591,015
----------- ----------
Total shareholders' equity 9,275,231 10,337,731
----------- ----------
$22,782,262 22,744,525
=========== ==========
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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<PAGE>
PROVENA FOODS INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(905,717) (39,432)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 573,881 402,742
Provision for bad debts 32,000 36,000
Increase in accounts receivable (230,632) (429,981)
Decrease in insurance recovery receivable - 1,443,655
Decrease (increase) in inventories 7,623 (898,557)
Decrease in prepaid expenses 27,980 10,826
Increase in income taxes receivable (256,600) (344,089)
Decrease in other assets 5,032 34,427
Increase in accounts payable 38,797 7,638
Increase in accrued liabilities 640,396 228,913
Decrease in income taxes payable - (107,960)
--------- ----------
Net cash provided by (used in) operating activities (67,240) 344,182
--------- ----------
Cash flows from investing activities:
Additions to property and equipment (689,708) (8,499,620)
--------- ----------
Net cash used in investing activities (689,708) (8,499,620)
--------- ----------
Cash flows from financing activities:
Payments on long term debt (345,203) (23,810)
Issuance of long term debt - 4,974,330
Proceeds from line of credit 766,247 -
Decrease in restricted cash - 3,960,224
Proceeds from sale of capital stock 113,491 136,271
Cash dividends paid (270,274) (264,884)
--------- ----------
Net cash provided by
financing activities 264,261 8,782,131
--------- ----------
Net increase (decrease) in cash and cash equivalents (492,687) 626,693
Cash and cash equivalents at beginning of period 834,154 116,306
--------- ----------
Cash and cash equivalents at end of period $ 341,467 742,999
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 551,549 170,820
Income taxes $ - 426,048
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Notes to Condensed Financial Statements
September 30, 2000 and 1999
(1) Basis of Presentation
--------------------------
The accompanying unaudited condensed 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
for annual financial statement purposes. 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, 1999. 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,
2000 are not necessarily indicative of results to be expected for the full year.
(2) Inventories
----------------
Inventories at September 30, 2000 (unaudited) and December 31, 1999 consist of:
<TABLE>
<CAPTION>
2000 1999
---------- ---------
<S> <C> <C>
Raw materials $ 939,198 1,108,731
Work-in-process 788,842 660,204
Finished goods 1,116,994 1,083,722
---------- ---------
$2,845,034 2,852,657
========== =========
</TABLE>
(3) Segment Data
-----------------
Business segment sales and operating income (loss) for the three months and nine
months ended September 30, 2000 and 1999 and assets at September 30, 2000 and
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers:
Swiss American Sausage division $ 6,311,032 3,300,225 15,125,506 9,108,061
Royal-Angelus Macaroni division 1,424,247 1,768,814 4,429,895 5,670,165
----------- ---------- ---------- -----------
Total sales $ 7,735,279 5,069,039 19,555,401 14,778,226
=========== ========== ========== ===========
Operating income (loss):
Swiss American Sausage division $ (203,079) (1,129,747) (1,015,157) (2,930,759)
Royal-Angelus Macaroni division (101,530) 60,215 (52,453) 418,167
Corporate 7,521 (33,867) 24,012 (108,294)
----------- ---------- ---------- -----------
Operating loss $ (297,088) (1,103,399) (1,043,598) (2,620,886)
=========== ========== ========== ===========
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Identifiable assets:
Swiss American Sausage division $17,637,235 17,122,578
Royal-Angelus Macaroni division 4,118,959 4,286,900
Corporate 1,026,068 1,335,047
----------- ----------
Total assets $22,782,262 22,744,525
=========== ==========
</TABLE>
(4) Loss per Share
-------------------
Loss per share is net loss divided by the weighted average number of shares
outstanding during the period, and diluted loss per share is net loss divided by
the sum of the weighted average plus an incremental number of shares
attributable to outstanding options, except that the incremental shares are
excluded in calculating the diluted loss per share for each period presented
because that would reduce the loss per share. The number of incremental shares
excluded for the three and nine months ended September 30, 2000 are 30,125 and
14,122, respectively.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (285,024) (513,197) (905,717) (39,432)
========== ========== ========== ==========
Weighted average number of shares 3,014,159 2,955,054 2,997,670 2,938,827
Incremental shares for options - - - -
---------- ---------- ---------- ----------
Weighted average plus incremental shares 3,014,159 2,955,054 2,997,670 2,938,827
========== ========== ========== ==========
Basic loss per share $ (.09) (.17) (.30) (.01)
========== ========== ========== ==========
Diluted loss per share $ (.09) (.17) (.30) (.01)
========== ========== ========== ==========
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Results of Operations Three Months Ended Nine Months Ended
--------------------- September 30, September 30,
------------------- ------------------
(Unaudited) 2000 1999 2000 1999
---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C>
Net sales by division:
Swiss American $6,311 $3,300 $15,125 $ 9,108
Royal-Angelus 1,424 1,769 4,430 5,670
------ ------ ------- -------
Total $7,735 $5,069 $19,555 $14,778
====== ====== ======= =======
Sales in thousands of
pounds by division:
Swiss American 4,387 2,270 10,460 6,320
Royal-Angelus 3,081 3,548 9,454 11,337
</TABLE>
Swiss American Sausage Co. Meat Division
----------------------------------------
Sales by the processed meat division increased 66% in dollars and 66% in pounds
in the 1st nine months of 2000 and increased 91% in dollars and 93% in pounds in
the 3rd quarter of 2000, compared to the same periods of 1999. The percentage
increase in dollars was slightly less than in pounds in the 3rd quarter because
much of the increase was in products which normally sell for lower prices per
pound. Last year Swiss commenced operations in a new meat plant which is now in
full operation, Swiss's sales have increased, and its operating losses have been
reduced. The operating losses resulted from inefficiencies and transitional
costs exacerbated by increases in meat costs out-pacing increases in selling
prices.
The inefficiencies result from the learning curve for new operators and new
equipment. The transitional costs are expenses of operating a new plant at a
new location which diminish with time or do not recur. Swiss is successfully
increasing efficiency, reducing expenses, and increasing sales. Meat costs
moderated in the 3rd quarter of 2000, but are higher than a year ago and much
higher than in July of 1998, just before fire destroyed Swiss's old meat plant.
Swiss's selling prices have not increased commensurate with the increased meat
costs because of competition and selling price inelasticity. It is always
easier to increase margins when raw material costs are falling or have fallen
than to maintain margins when raw material costs are increasing or have
increased. Pressure on margins from high meat costs and resistance to selling
price increases is normally a temporary phenomenon which does not affect long
term profitability. More important to Swiss's long term prospects is its
continued success in increasing its sales.
Royal-Angelus Macaroni Company Pasta Division
---------------------------------------------
The pasta division's sales decreased about 22% in dollars and 17% in pounds in
the 1st nine months of 2000 and decreased 20% in dollars and 13% in pounds in
the 3rd quarter of 2000, compared to the same periods of 1999. Sales decreased
because of competition from increased industry capacity. The percent decreases
were higher in dollars than in pounds because of price reductions to meet
competition and to reflect lower flour costs. Royal operated at a loss for the
1st nine months and 3rd quarter of 2000 because of lower sales and lower
margins.
-5-
<PAGE>
The Company
-----------
Company sales were up 32% in the 1st nine months of 2000 compared to the 1st
nine months of 1999 and were up 53% in the 3rd quarter of 2000 compared to the
3rd quarter of 1999. The Company realized a net loss of $905,717 for the 1st
nine months of 2000 compared to a net loss of $39,432 a year ago and a net loss
of $285,024 for the 3rd quarter of 2000 compared to a net loss of $513,197 a
year ago. Swiss accounted for the increased sales and though both divisions
contributed to the losses, the profit and loss trend at Swiss is up and at Royal
is down. The Company's gross margins for the 1st nine months and 3rd quarter of
2000 were 4.4% and 4.7%, respectively, compared to -4% and -6.8% a year ago.
The negative margins were caused by Swiss purchasing processed products for its
customers and selling them at a loss before they could be produced at the new
plant. In the 1st nine months and 3rd quarter of this year, Swiss's margins
were down substantially from its margins before the fire because of increased
meat costs and operating inefficiencies. Royal's margins decreased
significantly in the 1st nine months and 3rd quarter from the same periods of
last year due to lower selling prices and sales decreasing proportionately more
than production costs.
General and administrative expense was down about $21,000 for the 1st nine
months of 2000 and down about $36,000 in the 3rd quarter of 2000, compared to
the same periods in 1999. The decreases were primarily from decreased outside
services, decreased health benefit costs and decreased clerical payroll in the
3rd quarter. Distribution expense was down about $89,000 for the 1st nine
months and $64,000 for the 3rd quarter because of decreased salesman and
advertising expense at Swiss. Net interest expense increased about $512,000 and
$205,000 in the respective periods because of interest on the loans to finance
the new meat plant. Other income decreased because of the absence of business
interruption insurance proceeds recognized in the 1st nine months and 3rd
quarter of 1999.
Meat plant employees are represented by United Food and Commercial Workers
Union, Local 588, AFL-CIO, CLC under a collective bargaining agreement which
expires March 31, 2002. Pasta plant employees are represented by United Food
and Commercial Workers Union, Local 1428, AFL-CIO, CLC under a collective
bargaining agreement dated October 2, 2000 which expires September 29, 2002.
There has been no significant labor unrest at the Company's plants and the
Company believes it has a satisfactory relationship with its employees.
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,
which is part of a credit facility with Comerica Bank-California. At September
30, 2000, the Company had $2,766,247 of borrowings under the bank line of
credit. The line is payable on demand, is subject to annual review, and, as
modified in the 3rd quarter of 2000, bears interest at a variable annual rate of
0.75% over the bank's "Base Rate," and the maximum amount of the line of credit
is 30% of inventories plus 80% of receivables, determined monthly. At September
30, 2000, the "Base Rate" was 9.5% per annum and 30% of inventories plus 80% of
receivables was $2,766,247.
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
relating to the construction of the Company's new meat plant. The bonds bear a
variable rate of interest payable monthly
-6-
<PAGE>
and set weekly at a market rate - 4.65% per annum at September 30, 2000. 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 began 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.
Also as part of the credit facility, the bank made four loans to the Company in
1999 for the new meat plant, a $1,280,000 real estate loan and three equipment
loans totalling $2,614,788. The real estate loan was made in December 1999,
bears a fixed rate of interest of 9.1% per annum and is payable in equal monthly
payments of principal and interest over its 25 year term. Each equipment loan
bears a variable rate of interest and is payable in equal monthly payments of
principal plus interest over its term, with issue date, initial amount, term and
rate as follows: July 1999, $1,000,000, 7 year, bank's "Base Rate"; September
1999, $1,200,000, 7 year, bank's "Base Rate" plus 0.25%; and December 1999,
$414,788, 5 year, bank's "Base Rate" plus 0.75%.
All parts of the credit facility are 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, as amended in the 3rd
quarter of 2000, prohibits mergers, acquisitions, disposal of assets, borrowing,
granting security interests, and changes of management and requires a tangible
net worth greater than $9,000,000, a debt to tangible net worth ratio less than
2, a quick ratio greater than 0.40, and, beginning January 1, 2001, cash flow
coverage greater than 1.30. The Company was not in default under any of the
covenants at September 30, 2000.
Cash decreased $492,687 in the 1st nine months of 2000 compared to an increase
of $626,693 in the 1st nine months of 1999. Operating activities used $67,239
of cash primarily from the loss and increases in accounts receivable and income
taxes receivable, offset primarily by depreciation and an increase in accrued
liabilities. Investing activities used $689,708 of cash for additions to
property and equipment, primarily Swiss's new plant. Financing activities
provided $264,260 of cash from borrowings under the bank line and proceeds from
the sale of stock offset by payments on long term debt and dividends.
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 cash flow to service the debt incurred to finance
the new meat plant.
New Accounting Standards
------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" in June 1998. SFAS No. 133, as amended by SFAS Nos. 137
and 138, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" in
December 1999. SAB No. 101, as amended by SAB Nos. 101A and 101B, is effective
no later than the 4th quarter of fiscal years beginning after December 15, 1999.
Application of these standards, in the opinion of management, will not have a
material effect on the information presented.
-7-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The industrial development bonds, the bank line of credit, and the equipment
loans bear variable rates of interest (see Liquidity and Capital Resources under
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations) which tend to follow market interest rates and increase the
interest expense to the Company if interest rates increase. A 1% per annum
increase in the rate borne by the industrial development bonds would increase
annual interest expense by almost $40,000. Assuming an average bank line of
credit balance of $2,700,000 plus $2,100,000 average of equipment loans, a 1%
per annum increase in the rate borne by those borrowings would increase annual
interest expense by $48,000.
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.
ITEM 5. OTHER INFORMATION
Common Stock Repurchase and Sale
--------------------------------
The Company did not purchase any of its shares during the 1st nine months of
2000 under its stock repurchase program.
During the 1st nine months of 2000 the Company sold 48,333 newly issued shares
of its common stock under its 1988 Employee Stock Purchase Plan, at an average
selling price of $2.35 per share. From inception of the Plan through September
30, 2000, employees have purchased a total of 541,908 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 September 30, 2000 to shareholders
of record September 10, 2000.
Management Stock Transactions
-----------------------------
No purchases or sales of the Company's common stock by officers or directors
were reported
-8-
<PAGE>
during the 3rd quarter of 2000, except 41 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 September
30, 2000.
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: October 30, 2000 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
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