<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 JUNE 30, 2000
Commission File Number 1-10741
PROVENA FOODS INC.
(Exact name of registrant as specified in its charter)
California 95-2782215
--------------------------------------------- -----------------------------
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) 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)
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 3,002,802
<PAGE>
PROVENA FOODS INC.
Form 10-Q Report for the Second Quarter Ended June 30, 2000
Table of Contents
-----------------
Item Page
---- ----
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....................................................9
Common Stock Repurchase and Sale..................................9
American Stock Exchange Listing...................................9
Cash Dividend Paid................................................9
Management Stock Transactions.....................................9
6. Exhibits and Reports on Form 8-K.....................................9
Signature............................................................9
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<PAGE>
PART I. FINANCIAL INFORMATION
--------------------------------
ITEM I. FINANCIAL STATEMENTS
PROVENA FOODS INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales $5,892,722 4,773,677 11,820,122 9,709,187
Cost of sales 5,790,469 5,003,808 11,314,014 9,963,487
--------- --------- ---------- ----------
Gross profit (loss) 102,253 (230,131) 506,108 (254,300)
Operating expenses:
Distribution 274,912 295,646 554,324 579,698
General and administrative 320,158 337,642 698,294 683,489
--------- --------- ---------- ----------
Operating loss (492,817) (863,419) (746,510) (1,517,487)
Interest expense, net (185,898) (38,295) (346,740) (40,617)
Other income, net 34,438 1,266,245 61,557 2,347,869
-------- --------- -------- ----------
Earnings (loss) before
income taxes (644,277) 364,531 (1,031,693) 789,765
Income tax expense (benefit) (256,514) 146,000 (411,000) 316,000
-------- --------- ---------- ---------
Net earnings (loss) $ (387,763) 218,531 (620,693) 473,765
========== ======== ======== =========
Earnings (loss) per share:
Basic $ (.13) .07 (.21) .16
============ ======== =========== ========
Diluted $ (.13) .07 (.21) .16
============ ======== =========== ========
Shares used in computing
earnings (loss) per share:
Basic 2,997,118 2,938,316 2,989,335 2,930,579
---------- --------- --------- ---------
Diluted 2,997,118 2,955,804 2,989,335 2,945,106
---------- --------- --------- ---------
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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<PAGE>
PROVENA FOODS INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
Assets 2000 1999
------ --------- ------------
<S> <C> <C>
(Unaudited)
Current assets:
Cash and cash equivalents $ 49,485 834,154
Accounts receivable, less allowance
for doubtful accounts of $52,166
at 2000 and $32,166 at 1999 2,151,942 2,316,771
Inventories 3,037,586 2,852,657
Prepaid expenses 33,139 61,409
Income taxes receivable 408,503 318,353
----------- -----------
Total current assets 5,680,655 6,383,344
----------- -----------
Deferred tax assets 43,481 43,481
Property and equipment, net 16,374,013 16,118,648
Other assets 198,065 199,052
----------- -----------
$22,296,214 22,744,525
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Line of credit $ 2,000,000 2,000,000
Current portion of long-term debt 462,418 462,418
Accounts payable 1,322,351 1,122,394
Accrued liabilities 1,217,220 920,075
----------- ------------
Total current liabilities 5,001,989 4,504,887
----------- ------------
Long-term debt, net of current portion 7,106,141 7,329,991
Deferred tax liability 571,916 571,916
Shareholders' equity:
Capital stock, no par value; authorized
10,000,000 shares; issued and out-
standing 3,002,802 at 2000 and
2,972,029 at 1999 4,825,510 4,746,716
Retained earnings 4,790,658 5,591,015
----------- ------------
Total shareholders' equity 9,616,168 10,337,731
----------- ------------
$22,296,214 22,744,525
=========== ============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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<PAGE>
PROVENA FOODS INC.
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited) Six Months Ended
June 30,
--------------------
2000 1999
<S> ---- ----
Cash flows from operating activities: <C> <C>
Net earnings (loss) $ (620,693) 473,765
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 394,433 221,549
Provision for doubtful accounts 20,000 24,000
Decrease (increase) in accounts receivable 144,829 (15,230)
Decrease in insurance recovery receivable -- 642,620
Increase in inventories (184,929) (496,862)
Decrease (increase) in prepaid expenses 28,270 (62,579)
Increase in income taxes receivable (90,150) (2,089)
Decrease in other assets 987 32,052
Increase in accounts payable 199,957 571,617
Increase (decrease) in accrued liabilities 297,145 (12,234)
Decrease in income taxes payable -- (107,960)
---------- ---------
Net cash provided by operating activities 189,849 1,268,649
---------- ---------
Cash flows from investing activities:
Addition to property and equipment (649,798) (5,933,707)
---------- ----------
Net cash used in investing activities (649,798) (5,933,707)
---------- ----------
Cash flows from financing activities:
Payments on long term debt (233,850) --
Proceeds from note payable to bank -- 783,275
Decrease in restricted cash -- 3,960,224
Proceeds from sale of capital stock 78,794 93,656
Cash dividends paid (179,664) (176,120)
---------- ---------
Net cash provided by (used in)
financing activities (324,720) 4,661,035
---------- ---------
Net decrease in cash and cash equivalents (784,669) (4,023)
Cash and cash equivalents at beginning of period 834,154 116,306
---------- ---------
Cash and cash equivalents at end of period $ 49,485 112,283
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 345,065 92,614
Income taxes $ -- 426,048
</TABLE>
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Notes to Condensed Financial Statenments
June 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 if such financial statements
were prepared in accordance with generally accepted accounting principles for
annual financial statement purposes. These statements should be read in
conjuction 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 six months ended June 30, 2000 are not necessarily
indicative of results to be expected for the full year.
(2) Inventories
----------------
Inventories at June 30, 2000 and December 31, 1999 consist of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Raw materials $ 763,471 1,108,731
Work-in-process 778,124 660,204
Finished goods 1,495,991 1,083,722
--------- ---------
$3,037,586 2,852,657
========= =========
</TABLE>
(3) Segment Data
-----------------
Business segment sales and operating income (loss) for the three months and six
months ended June 30, 2000 and 1999 and assets at June 30, 2000 and December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
Net Sales to unaffiliated customers: ---- ---- ---- ----
<S> <C> <C> <C> <C>
Swiss American Sausage division $ 4,538,450 2,949,984 8,814,474 5,807,836
Royal-Angelus Macaroni division 1,354,272 1,823,693 3,005,648 3,901,351
----------- ---------- ----------- ---------
Total Sales $ 5,892,722 4,773,677 11,820,122 9,709,187
=========== ========= ========== =========
Operating income (loss):
Swiss American Sausage division $ (543,450) (955,326) (812,078) (1,801,012)
Royal-Angelus Macaroni division 30,456 133,092 49,077 357,952
Corporate 20,177 (41,185) 16,491 (74,427)
----------- ---------- ----------- ---------
Operating loss $ (492,817) (863,419) (746,510) (1,517,487)
=========== ========= ========== =========
June 30, December 31,
2000 1999
Identifiable assets: ----------- ----------
Swiss American Sausage division $ 17,644,965 17,122,578
Royal-Angelus Macaroni division 4,077,013 4,286,900
Corporate 574,236 1,335,047
----------- -----------
Operating loss $ 22,296,214 22,744,525
=========== ===========
</TABLE>
(4) Earnings (Loss) per Share
-----------------------------
Pursuant to SFAS No. 128, basic earnings (loss) per share are net earnings
(loss) divided by the weighted average number of shares outstanding during the
period, and diluted earnings per share are net earnings divided by the sum of
the weighted average plus an incremental number of shares attributable to
outstanding options (the incremental shares are not used in calculating a
diluted loss per share because that would reduce the loss per share), as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $ (387,763) 218,531 (620,693) 473,765
========= ========= ========= =========
Weighted average number of shares 2,997,118 2,938,316 2,989,335 2,930,579
Incremental shares for options --- 17,488 --- 14,527
--------- --------- --------- ---------
Weighted average plus incremental shares 2,997,118 2,955,804 2,989,335 2,945,106
========= ========= ========= =========
Basic earnings (loss) per share $ (.13) .07 (.21) .16
========= ========= ========= =========
Diluted earnings (loss) per share $ (.13) .07 (.21) .16
========= ========= ========= =========
</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 Six Months Ended
June 30, June 30,
------------------- ------------------
(Unaudited) 2000 1999 2000 1999
----- ----- ----- -----
(amounts in thousands)
<S> <C> <C> <C> <C>
Net sales by division:
Swiss American $ 4,539 $ 2,950 $ 8,814 $ 5,808
Royal-Angelus 1,354 1,824 3,006 3,901
----- ----- ----- -----
Total $ 5,893 $ 4,774 $ 11,820 $ 9,709
===== ===== ====== =====
Sales in thousands of
pounds by division:
Swiss American 3,106 2,036 6,073 4,050
Royal-Angelus 3,051 3,658 6,373 7,789
</TABLE>
Swiss American Sausage Co. Meat Division
----------------------------------------
Sales by the processed meat division increased 52% in dollars and 50% in pounds
in the 1st six months of 2000 and increased 54% in dollars and 53% in pounds in
the 2nd quarter of 2000, compared to the same periods of 1999. Sales in dollars
increased proportionately more than in pounds because of higher selling prices
reflecting higher meat costs. During the 1st six months of last year, without
an operating plant, Swiss was purchasing processed products from other suppliers
to retain its customers, resulting in large operating losses offset by business
interruption insurance benefits. This year Swiss's new meat plant is in full
operation, its sales have increased, and its operating losses have been reduced,
but the losses continue with no insurance benefits to offset them. 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 diminishing or non-recurring expenses of
operating a new plant at a new location. Swiss is successfully increasing
efficiency, reducing expenses, and increasing sales. Swiss should reach the
efficiency of the old plant this year, and with the current sales volume and
stable meat costs, would operate profitably. Increased sales, decreased
expenses and further efficiency increases are expected ensure Swiss's
profitability.
Royal-Angelus Macaroni Company Pasta Division
---------------------------------------------
The pasta division's sales decreased about 23% in dollars and 18% pounds in the
1st half of 2000 and decreased 26% in dollars and 17% in pounds in the 2nd
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. Royal's operating profits were down for the 1st half and 2nd
quarter of 2000 over those periods of 1999, because of lower sales and lower
margins.
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<PAGE>
The Company
-----------
Company sales were up 33% in the 1st half of 2000 compared to the 1st half of
1999 and were up 23% in the 2nd quarter of 2000 compared to the 2nd quarter of
1999. The Company realized a net loss of $620,693 for the 1st half of 2000
compared to net earnings of $473,765 a year ago and a net loss of $387,763 for
the 2nd quarter of 2000 compared to net earnings of $218,531 a year ago. Swiss
accounted for the increased sales but both divisions contributed to the reduced
profits. The Company's gross margins for the 1st half and 2nd quarter of 2000
were 4.3% and 1.7%, respectively, compared to -2.6% and -4.8% a year ago. The
negative margins were caused by Swiss purchasing processed products for its
customers and selling them at a loss. In the 1st half and 2nd quarter of this
year, Swiss 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 half and slightly in the 2nd 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 up about $15,000 for the 1st half of 2000
but down about $17,000 in the 2nd quarter of 2000, compared to the same periods
in 1999. The increase was primarily from increased office expense, depreciation
and travel expense at Swiss, and the decrease from decreased health benefits,
promotional costs and outside services. Distribution expense was down about
$25,000 for the 1st half and $21,000 for the 2nd quarter because of decreased
salesman and advertising expense at Swiss. Net interest expense increased about
$306,000 and $148,000 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 half and 2nd
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 as the result of a September
1999 election, and negotiation of a collective bargaining agreement is in
progress. 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 $2,000,000 bank line of
credit as part of a credit facility with Comerica Bank-California. At June 30,
2000, the Company had $2,000,000 of borrowings under the bank line of credit.
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 the
bank's cost of funds or 0.25% under its "Base Rate." the "Base Rate" was 9.5%
per annum at June 30, 2000. Effective the 3rd quarter of 2000, the amount of the
line of credit will be 30% of inventories plus 80% of receivables, determined
monthly, and the interest rate will be increased 0.25% per annum. At June 30,
2000, 30% of inventories plus 80% of receivables was $2,674,562.
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<PAGE>
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 and set weekly at a market rate -4.55%
per annum at June 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 2nd
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 $9,500,000, 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
convenants at June 30, 2000.
Cash decreased $784,669 in the 1st half of 2000 compared to a decrease of $4,023
in the 1st half of 1999. Operating activities provided $189,849 of cash
primarily from depreciation, a decrease in accounts receivable and increases in
accounts payable and accrued liabilities, offset by the loss and increases in
inventories and income taxes receivable. Investing activities used $649,798 of
cash for additions to property and equipment, primarily Swiss's new plant.
Financing activities used $324,720 of cash from payments on long term debt and
dividends, offset by proceeds from the sale of stock.
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
forseeable 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 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 years beginning after June 15, 2000. The Securities and Exchange
-7-
<PAGE>
Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements" in December 1999. SAB No. 101, as amended
by SAB No. 101A, is effective for all fiscal years beginning after March 15,
2000. Application of these standards, in the opinion of management, will not
have a material effect on the information presented.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The industrial development bonds, the bank line of credit, and the $2,614,788 of
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 $2,000,000 plus the $2,614,000 of equipment
loans, a 1% per annum increase in the rate borne by those borrowings would
increase annual interest expense by almost $46,000.
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
The Company held its annual meeting of shareholders on Tuesday, April 25, 2000,
at 11:00 a.m. at the Company's principal office. Shareholders representing
2,703,303 or 90.5% of the 2,986,005 shares entitled to vote were present in
person or by proxy, with 30,151 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>
<S>
<C> <C> <C>
Without
Nominee For Withheld Authority
------- --- -------- ---------
John D. Determan 2,693,703 8,300 1,300
Theodore L. Arena 2,700,403 1,600 1,300
Ronald A. Provera 2,699,203 2,800 1,300
Santo Zito 2,699,950 2,053 1,300
Thomas J. Mulroney 2,702,003 -0- 1,300
Louis A. Arena 2,698,503 3,500 1,300
Joseph W. Wolbers 2,699,703 2,300 1,300
John M. Boukather 2,691,303 10,700 1,300
</TABLE>
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<PAGE>
ITEM 5. OTHER INFORMATION
Common Stock Repurchase and Sale
--------------------------------
The Company did not purchase any of its shares during the 1st half of 2000 under
its stock repurchase program.
During the 1st half of 2000, the Company sold 30,773 newly issued shares of its
common stock under its 1988 Employee Stock Purchase Plan, at an average selling
price of $2.56 per share. From inception of the Plan through June 30, 2000,
employees have purchased a total of 524,348 shares.
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 June 30, 2000 to shareholders of
record June 10, 2000.
Management Stock Transactions
-----------------------------
No purchases or sales of the Company's common stock by officers or directors
were reported during the 2nd quarter of 2000, except 35 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,
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: August 3, 2000 PROVENA FOODS INC.
By /s/ Thomas J. Mulroney
----------------------------
Thomas J. Mulroney
Vice President and
Chief Financial Officer
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