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
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FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Commission File Number 1-10741
PROVENA FOODS INC.
(Exact name of registrant as specified in its charter)
California 95-2782215
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification number)
5010 Eucalyptus Avenue, Chino, California 91710
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(Address of principal executive offices) (ZIP Code)
(909) 627-1082
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
----
The number of shares of Provena Foods Inc. Common Stock outstanding as of the
close of the period covered by this report was:
Common Stock 3,075,352
PROVENA FOODS INC.
Form 10-Q Report for the Third Quarter Ended September 30, 2001
Table of Contents
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Item Page
---- ----
PART I. FINANCIAL INFORMATION
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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 ......................................................................... 8
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 Dividends ................................................................................... 9
Management Stock Transactions .................................................................... 9
6. Exhibits and Reports on Form 8-K ..................................................................... 9
Signature ............................................................................................ 9
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM I. FINANCIAL STATEMENTS
PROVENA FOODS INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 9,757,489 7,735,279 25,401,665 19,555,401
Cost of sales 9,335,728 7,372,229 23,397,872 18,686,243
----------- ----------- ----------- -----------
Gross profit 421,761 363,050 2,003,793 869,158
Operating expenses:
Distribution 295,615 307,845 909,977 862,169
General and administrative 410,822 352,293 1,241,057 1,050,587
----------- ----------- ----------- -----------
Operating loss (284,676) (297,088) (147,241) (1,043,598)
Interest expense, net (174,755) (204,800) (543,520) (551,540)
Other income, net 69,127 28,864 172,489 90,421
----------- ----------- ----------- -----------
Loss before income
tax benefit (390,304) (473,024) (518,272) (1,504,717)
Income tax benefit (151,800) (188,000) (191,000) (599,000)
----------- ----------- ----------- -----------
Net loss $ (238,504) (285,024) (327,272) (905,717)
=========== =========== =========== ===========
Loss per share:
Basic $ (.08) (.09) (.11) (.30)
=========== =========== =========== ===========
Diluted $ (.08) (.09) (.11) (.30)
=========== =========== =========== ===========
Shares used in computing
loss per share:
Basic 3,070,451 3,014,159 3,057,167 2,997,670
----------- ----------- ----------- -----------
Diluted 3,070,451 3,014,159 3,057,167 2,997,670
----------- ----------- ----------- -----------
See accompanying Notes to Condensed Financial Statements.
-1-
PROVENA FOODS INC.
Condensed Balance Sheets
September 30, December 31,
Assets 2001 2000
------ ------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 50,918 88,585
Accounts receivable, less allowance for doubtful
accounts of $20,843 at 2001 and $59,843 at 2000 3,561,275 2,532,019
Inventories 3,640,621 2,881,486
Prepaid expenses 55,044 53,608
Income taxes receivable 222,246 407,843
Deferred tax assets 102,828 102,828
----------- ----------
Total current assets 7,632,932 6,066,369
----------- ----------
Property and equipment, net 15,897,648 16,100,961
Other assets 185,646 189,925
----------- ----------
$23,716,226 22,357,255
=========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit $ 3,970,147 2,708,921
Current portion of long-term debt 492,135 492,135
Accounts payable 1,681,533 1,179,561
Accrued liabilities 1,745,322 1,378,596
----------- ----------
Total current liabilities 7,889,137 5,759,213
----------- ----------
Long-term debt, net of current portion 6,550,694 6,884,781
Deferred tax liabilities 474,818 474,818
Shareholders' equity:
Capital stock, no par value; authorized 10,000,000
shares; issued and outstanding 3,075,352 at 2001
and 3,035,009 at 2000 4,960,584 4,886,874
Retained earnings 3,840,993 4,351,569
----------- ----------
Total shareholders' equity 8,801,577 9,238,443
----------- ----------
$23,716,226 22,357,255
=========== ==========
See accompanying Notes to Condensed Financial Statements.
-2-
PROVENA FOODS INC.
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net loss $ (327,272) (905,717)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 547,838 573,881
Change in allowance for doubtful accounts (39,000) 32,000
Increase in accounts receivable (990,256) (230,632)
Decrease (increase) in inventories (759,135) 7,623
Decrease (increase) in prepaid expenses (1,436) 27,980
Decrease (increase) in income taxes receivable 185,597 (256,600)
Decrease in other assets 4,279 5,032
Increase in accounts payable 501,972 38,797
Increase in accrued liabilities 366,726 640,396
----------- -----------
Net cash used in operating activities (510,687) (67,240)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (344,525) (689,708)
----------- -----------
Net cash used in investing activities (344,525) (689,708)
----------- -----------
Cash flows from financing activities:
Payments on long term debt (334,087) (345,203)
Proceeds from line of credit 1,261,226 766,247
Proceeds from sale of capital stock 73,710 113,491
Cash dividends paid (183,304) (270,274)
----------- -----------
Net cash provided by
financing activities 817,545 264,261
----------- -----------
Net decrease in cash and cash equivalents (37,667) (492,687)
Cash and cash equivalents at beginning of period 88,585 834,154
----------- -----------
Cash and cash equivalents at end of period $ 50,918 341,467
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 544,102 551,549
Income taxes (376,597) --
See accompanying Notes to Condensed Financial Statements.
-3-
PROVENA FOODS INC.
Notes to Condensed Financial Statements
September 30, 2001 and 2000
(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, 2000. 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,
2001 are not necessarily indicative of results to be expected for the full year.
(2) Inventories
----------------
Inventories at September 30, 2001 (unaudited) and December 31, 2000 consist of:
2001 2000
---- ----
Raw materials $1,361,021 1,082,829
Work-in-process 825,178 710,152
Finished goods 1,454,422 1,088,505
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$3,640,621 2,881,486
========== =========
(3) Segment Data
-----------------
Business segment sales and operating income (loss) for the three months and nine
months ended September 30, 2001 and 2000 and assets at September 30, 2001 and
December 31, 2000 are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales to unaffiliated customers:
Swiss American Sausage division $ 8,331,471 6,311,032 21,476,361 15,125,506
Royal-Angelus Macaroni division 1,426,018 1,424,247 3,925,304 4,429,895
------------- ------------- ---------- -----------
Total sales $ 9,757,489 7,735,279 25,401,665 19,555,401
============= ============= ========== ===========
Operating income (loss):
Swiss American Sausage division $ (176,155) (203,079) 309,544 (1,015,157)
Royal-Angelus Macaroni division (100,938) (101,530) (450,556) (52,453)
Corporate (7,583) 7,521 (6,229) 24,012
------------- ------------- ---------- -----------
Operating loss $ (284,676) (297,088) (147,241) (1,043,598)
============= ============= ========== ===========
September 30, December 31,
2001 2000
------------- ------------
Identifiable assets:
Swiss American Sausage division $ 19,079,020 17,641,810
Royal-Angelus Macaroni division 4,207,102 4,075,823
Corporate 430,104 639,622
------------- ------------
Total assets $ 23,716,226 22,357,255
============= ============
(4) Earnings (Loss) per Share
------------------------------
Basic earnings (loss) per share are net earnings (loss) divided by the weighted
average number of common shares outstanding during the period, and diluted
earnings (loss) per share are net earnings (loss) divided by the sum of the
weighted average plus an incremental number of shares attributable to
outstanding options. Options for 107,111 shares were not used in the diluted
loss calculations for the following periods because their effect was
antidilutive.
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net loss $ (238,504) (285,024) (327,272) (905,717)
=========== ========= ========= ==========
Weighted average number of shares 3,070,451 3,014,159 3,057,167 2,997,670
Incremental shares for options -- -- -- --
----------- --------- --------- ----------
Weighted average plus incremental shares 3,070,451 3,014,159 3,057,167 2,997,670
=========== ========= ========= ==========
Basic loss per share $ (.08) (.09) (.11) (.30)
=========== ========= ========= ==========
Diluted loss per share $ (.08) (.09) (.11) (.30)
=========== ========= ========= ==========
-4-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations Three Months Ended Nine Months Ended
--------------------- September 30, September 30,
------------------ -----------------
(Unaudited) 2001 2000 2001 2000
---- ---- ---- ----
(amounts in thousands)
Net sales by division:
Swiss American $8,331 $6,311 $21,476 $15,125
Royal-Angelus 1,426 1,424 3,926 4,430
------ ------ ------- -------
Total $9,757 $7,735 $25,402 $19,555
====== ====== ======= =======
Sales in thousands of
pounds by division:
Swiss American 5,279 4,387 14,220 10,460
Royal-Angelus 2,969 3,081 8,056 9,454
Forward-Looking Statements
--------------------------
The following discussion may contain "forward-looking statements" that express
or imply expectations of future performance, developments or occurrences. Actual
events may differ materially from these expectations due to uncertainties
relating to the economy, competition, demand, commodities, credit markets,
energy supplies and other factors.
Swiss American Sausage Co. Meat Division
----------------------------------------
Sales by the processed meat division increased 42% in dollars and 36% in pounds
in the 1st nine months of 2001 and increased 32% in dollars and 20% in pounds in
the 3rd quarter of 2001, compared to the same periods of 2000. Sales in dollars
increased proportionately more than in pounds because of higher selling prices
reflecting higher meat costs. Swiss operated at a $309,544 profit for the 1st
nine months of 2001 compared to a $1,015,157 loss for the 1st nine months of
2000, and at a $176,155 loss for the 3rd quarter of 2001 compared to a $203,079
loss for the 3rd quarter of 2000. The 3rd quarter 2001 loss was exacerbated by a
write-down of inventories to reflect lower meat costs at the end of the quarter.
The profit improvement resulted from increased sales.
Royal-Angelus Macaroni Company Pasta Division
---------------------------------------------
The pasta division's sales decreased about 11% in dollars and 15% in pounds in
the 1st nine months of 2001 and were level in dollars but decreased 4% in pounds
in the 3rd quarter of 2001, compared to the same periods of 2000. The percent
decreases were larger in pounds than in dollars because of a greater proportion
of higher price-per-pound sales. Royal operated at a $450,556 loss for the 1st
nine months of 2001 compared to a $52,453 loss for 1st nine months of 2000 and a
$100,938 loss for the 3rd quarter of 2001 compared to a $101,530 loss for the
3rd quarter of 2000. Operating results are improving at Royal, which operated at
a nominal profit in September of 2001. Sales and operating results were both
adversely affected by competition resulting from increased industry capacity.
Royal has hired three new employees experienced in pasta sales and production
and intends to provide them with incentives based on increased sales and
profitability.
-5-
The Company
-----------
Company sales were up 30% in the 1st nine months of 2001 compared to the 1st
nine months of 2000 and were up 26% in the 3rd quarter of 2001 compared to the
3rd quarter of 2000. The Company realized a net loss of $327,272 for the 1st
nine months of 2000 compared to a net loss of $905,717 a year ago and a net loss
of $238,504 for the 3rd quarter of 2000 compared to a net loss of $285,024 a
year ago. Swiss accounted for the increased sales and reduced losses. The
Company's gross margins for the 1st nine months and 3rd quarter of 2001 were
7.9% and 4.3%, respectively, compared to 4.4% and 4.7% a year ago. Swiss's gross
margins were higher for the nine months but lower for the 3rd quarter, whereas
Royal's were lower for the nine months but higher for the 3rd quarter, all
comparing periods in 2001 to the same periods in 2000.
General and administrative expense was up about $190,000 for the 1st nine months
of 2001 and up about $59,000 in the 3rd quarter of 2001, compared to the same
periods in 2000, due to increases in health benefit costs and smaller increases
in payroll, offset by reduced office supply and bad debt expenses. Distribution
expense was up about $48,000 for the 1st nine months because of increased
freight on increased sales plus smaller increases in advertising, insurance and
outside services, offset by lower salesman expense. Distribution expense was
down $12,000 for the 3rd quarter of 2001 because of decreased salesman and
outside service expenses, offset by higher advertising, insurance and commission
expenses. Net interest expense decreased about $8,000 for the 1st nine months of
2001 and decreased $30,000 for the 3rd quarter of 2001 because of lower interest
rates on the Company's debt offset by higher borrowings under the bank line of
credit. Other income increased because of the recovery and sale of waste
products at Swiss.
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 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. The line of
credit is payable on demand, is subject to annual review, and bears interest at
a variable annual rate of 0.75% over the bank's "Base Rate." The maximum amount
of the line of credit at September 30, 2001, was the lesser of $4,000,000, or
30% of inventories plus 80% of receivables, determined monthly. At September 30,
2001 the "Base Rate" was 6.00% per annum, 30% of inventories plus 80% of
receivables was $3,970,147, and borrowings under the bank line of credit were
$3,970,147.
-6-
As part of the credit facility, Comerica Bank-California 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 meat plant. The
bonds bear a variable rate of interest payable monthly and set weekly at a
market rate -- 2.3% per annum at September 30, 2001. 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 into a sinking fund began May 1, 2000, totaled $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 for
the 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 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 $8,750,000, working
capital not less than $50,000 effective December 31, 2001, debt service coverage
not less than 1.3 and quarterly dividends not exceeding the net income of the
prior quarter. The Company was in default under the debt service coverage
covenant at September 30, 2001, and the bank has waived the default. The Company
expects to be in compliance with all covenants under the credit facility at
December 31, 2001.
Cash decreased $37,667 in the 1st nine months of 2001 compared to a $492,687
decrease in the 1st nine months of 2000. Operating activities used $510,687 of
cash primarily from the net loss and increases in accounts receivable and
inventories, offset by depreciation and amortization, a decrease in income taxes
receivable and increases in accounts payable and accrued liabilities. Accounts
receivable and inventories increased because of increased sales. Investing
activities used $344,525 of cash for additions to property and equipment, and
financing activities produced $817,545 of cash primarily from borrowings under
the bank line reduced by payments on long term debt and dividends.
The Company expects 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 its debt. Swiss has shown
that it can earn a profit after the depreciation and interest expense arising
from the new plant and the Company has taken steps directed toward returning
Royal to profitable operations.
-7-
The Company believes that it has a good relationship with Comerica
Bank-California, as evidenced by the bank's prior over-advances under the line
of credit and waiver of defaults under the financial covenants. That
relationship is crucial to the Company, because the line of credit is payable on
demand, the Company could not make an immediate repayment of the line of credit,
and a failure to repay the line after demand would render the entire credit
facility in default. As a result, neither a default under a financial covenant
nor the bank's waiver of such a default affects the bank's power to cause the
credit facility to be in default and require that it be restructured or
refinanced. The Company regards the financial covenants as check-points
triggering a review by the bank, and the bank's waiver as an indication of its
current intention to maintain the credit facility.
New Accounting Standards
------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets" in July 2001. SFAS No. 141 requires that
business combinations initiated after June 30, 2001 be accounted for under the
purchase method and not the pooling-of-interests method. SFAS No. 142, effective
for fiscal years beginning after December 15, 2001, requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment.
Application of these standards, in the opinion of management, will not have a
material effect on the Company's financial position, results of operations or
liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 change the
Company's interest expense in the same direction as changes in interest rates. A
1% per annum change in the rate borne by the industrial development bonds would
change annual interest expense by almost $40,000. Assuming an average bank line
of credit balance of $4,000,000 plus $1,900,000 average principal balance of
equipment loans, a 1% per annum change in the rate borne by those borrowings
would change annual interest expense by $59,000.
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.
-8-
ITEM 5. OTHER INFORMATION
Common Stock Repurchase and Sale
--------------------------------
The Company did not purchase any of its shares during the 1st nine months of
2001 under its stock repurchase program.
During the 1st nine months of 2001 the Company sold 40,343 newly issued shares
of its common stock under its 1988 Employee Stock Purchase Plan, at an average
selling price of $1.83 per share. From inception of the Plan through September
30, 2001, employees have purchased a total of 596,898 shares.
American Stock Exchange Listing
-------------------------------
The Company's stock trades on the American Stock Exchange under the ticker
symbol "PZA".
Cash Dividends
--------------
No cash dividend was paid in the 3rd quarter of 2001 and none will be paid in
the 4th quarter of 2001 to comply with a covenant of the Company's bank credit
facility.
Management Stock Transactions
-----------------------------
No purchases or sales of the Company's common stock by officers or directors
were reported during the 3rd quarter of 2001, except 47 shares purchased by John
M. Boukather, director, under a broker's dividend reinvestment program.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are filed with this report.
(b) No reports on Form 8-K were filed during the three months ended September
30, 2001.
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 27, 2001 PROVENA FOODS INC.
By /s/ Thomas J. Mulroney
---------------------------------
Thomas J. Mulroney
Vice President and
Chief Financial Officer
-9-