SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
________________________________________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
________________________________________________________________________________
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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 (I.R.S. employer identification number)
incorporation or organization)
5010 Eucalyptus Avenue,
Chino, California 91710
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(Address of principal executive (ZIP Code)
offices)
(909) 627-1082
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the act:
Title of each class Name of each exchange on which registered
--------------------------- -----------------------------------------
COMMON STOCK AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the act: None
________________________________________________________________________________
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 aggregate market value of Provena Foods Inc. Common Stock held by non-
affiliates as of March 2, 2002 was $4,036,232.
The number of shares of Provena Foods Inc. Common Stock outstanding on
March 2, 2002 was 3,104,794.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
PROVENA FOODS INC.
2001 FORM 10-K ANNUAL REPORT
Table of Contents
Item Page
---- ----
PART I
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1. Business............................................................................... 1
2. Properties............................................................................. 4
3. Legal Proceedings...................................................................... 4
4. Submission of Matters to a Vote of Security Holders.................................... 5
PART II
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5. Market for the Registrant's Common Stock and Related Stockholder Matters............... 5
6. Selected Financial Data................................................................ 7
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 8
7A. Quantitative and Qualitative Disclosure About Market Risk.............................. 11
8. Financial Statements and Supplementary Data............................................ 12
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 12
PART III
--------
10. Directors and Executive Officers of the Registrant..................................... 12
11. Executive Compensation................................................................. 12
12. Security Ownership of Certain Beneficial Owners and Management......................... 13
13. Certain Relationships and Related Transactions......................................... 14
PART IV
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14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 14
________________
Signatures............................................................................. 16
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PART I
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ITEM 1. BUSINESS
General
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Provena Foods Inc. (the "Company") is a California-based specialty food
processor engaged in the supply of food products to other food processors,
distributors and canners. Its primary products are pepperoni and Italian-style
sausage sold to frozen pizza processors, pizza restaurant chains and food
distributors and dry pasta sold to food processors and canners, private label
producers and food distributors. The Company's products are sold throughout the
United States but primarily in the Western United States.
The Company's meat processing business is conducted through the Swiss
American Sausage Co. Division ("Swiss American" or "Swiss"), and its pasta
business is conducted through the Royal-Angelus Macaroni Company Division
("Royal-Angelus" or "Royal"). The Company acquired its present businesses
between 1972 and 1975. The predecessor of Swiss was founded in 1922 and the two
predecessors to Royal, Royal Macaroni Company and Angelus Macaroni Mfg. Co.,
were founded in 1878 and 1946, respectively. The Company was incorporated in
1972 in California with an initial capitalization of approximately $12,000.
The Company's competitive strategy is to emphasize providing products of
predictable quality and consistency at competitive prices as well as prompt and
reliable service. The Company attempts to establish, refine and maintain
procedures to assure that the Company's products comply with its customers'
specifications and are delivered in a manner that will satisfy their delivery
and production requirements.
For financial information about each of the Company's two divisions, see
the segment data contained in Note 12 of Notes to Financial Statements.
Swiss American Sausage Co. Meat Division
----------------------------------------
During the years ended December 31, 2001 and 2000, sales by Swiss accounted
for 84.18% and 78.47%, respectively, of the Company's net sales. Swiss's higher
proportion of Company sales in 2001 resulted from increased sales at Swiss in
the second full year of operation of its new meat plant and decreased sales at
Royal. The Company's processed meat products are sold primarily to pizza
restaurant chains, pizza processors and food service distributors. Pizza
processors produce prepared pizza which is sold primarily as frozen pizza in
food markets. Food service distributors supply food to delicatessens,
restaurants and other retail businesses offering prepared food. The Company's
meat products are sold nationally, but most of its sales are made to customers
located in the Western United States. The Company also sells processed meat
products to the U. S. Government. The Company does not have supply agreements
with its major customers, many of whom purchase some of their meat products from
other suppliers.
Swiss competes with numerous producers of processed meats, many of which
are larger and have greater financial resources than the Company. Swiss's
competitors include large national meat packers such as Hormel Foods
Corporation, as well as smaller regional meat processors. Pizza processors that
manufacture their own meat products diminish the market for Swiss's products.
The Company competes in the meat processing business by emphasizing predictable
quality and consistency.
The meat processing activities of the Company were conducted at its
facilities in San Francisco, California, until the main plant was destroyed by a
fire in 1998. The San Francisco plant had an estimated theoretical production
capacity of 27,000,000 pounds per year. Following the fire, the Company
completed the construction and equipping of a new meat plant in Lathrop,
California. The new meat plant has an estimated theoretical production capacity
of 46,000,000 pounds per year. The Company purchased an additional 2 acres of
land adjacent to the new plant in 1999 to ensure a capability of expansion which
the old meat plant did not have. See ITEM 2. PROPERTIES.
The meat processing activities of Swiss are typified by its processing of
pepperoni, its principal product, which consists of the following steps: (i) the
purchase of beef and pork trimmings with a guaranteed lean content; (ii) the
blending of the meat into the Company's meat product while carefully controlling
the consistency and content of the product; (iii) the addition of spices and
preservatives to the product; (iv) the extrusion of the product into sausage
casings; (v) the oven cooking of the product in the casings; and (vi) the drying
of the cooked product. Throughout the production process, the Company subjects
-1-
its meat products to quality control inspection for the purposes of satisfying
U.S. Department of Agriculture regulations, meeting customer specifications and
assuring a consistent quality of the products to the Company's customers.
In addition to pepperoni and sausage, the Company processes a relatively
small amount of other meat products, including meatballs and crumbles which are
quick-frozen nuggets of a pre-cooked meat product, such as the sausage on a
sausage pizza. The crumbles line extrudes the ground and blended ingredients
into nuggets which are cooked and quick-frozen in one continuous operation.
Royal-Angelus Macaroni Company Pasta Division
---------------------------------------------
During the years ended December 31, 2001 and 2000, sales by Royal-Angelus
accounted for 15.82% and 21.53%, respectively, of the Company's net sales.
Royal's lower proportion of Company sales in 2001 resulted from increased sales
at Swiss and decreased sales at Royal caused by competition from increased
industry capacity. The Company sells its pasta products primarily to food
processors and canners, private label customers, food service distributors, and
specialty food distributors.
Royal's food processor and canner customers use the Company's pasta to
produce retail products in which pasta is an ingredient, such as pasta salads,
soups and entrees. Royal's private label customers are regional and national
food suppliers that sell pasta under their own labels, purchased in bulk from
the Company or packaged by the Company. Royal's food service distributor
customers supply pasta to restaurants, institutional purchasers, and some retail
establishments. The Company also sells its pasta products to government
agencies, the military, schools and other pasta manufacturers.
Since 1987, the Company's pasta products have been produced at its
production plant in Chino, California. In 1995, the Company purchased a building
adjacent to the pasta plant and currently occupies 40% of the building as part
of its pasta plant and leases 60% to a tenant through February 2003. The pasta
plant has a theoretical production capacity estimated at 30,000,000 pounds per
year.
In the basic pasta production process, durum semolina flour is mixed with
water and the mixture is extruded into one of many shapes, cut to the proper
length, dried, packaged and shipped to the Company's customers. If required by
the particular variety of pasta, a different flour is used or flour is blended
with egg powder, vegetable powder or other ingredients before the water is
added. No preservatives are used in making pasta.
Royal-Angelus competes with several national and regional pasta
manufacturers, many of which have greater financial resources than the Company.
The Company competes in the pasta business by emphasizing predictable quality
and consistency and by its capability of producing a larger variety of pastas
with shorter lead times and production runs than most of its larger competitors.
Suppliers
---------
The primary ingredients used by the Company in processed meat products are
beef, pork, spices and casings and in pasta products are flour, egg powder and
vegetable powder. The ingredients are purchased from suppliers at prevailing
market prices. The Company has not recently experienced any shortages in the
supply of ingredients and generally expects the ingredients to continue to be
available for the foreseeable future.
During 1999, before the new meat plant was operational and with the old
meat plant having been destroyed by fire, the meat division attempted to
maintain volume by purchasing processed products from other suppliers for its
customers, but the meat division's sales were almost $1,000,000 per month lower
than before the fire. Purchasing from suppliers increased Swiss's costs but most
of the increased costs were covered by business interruption insurance. This
purchasing was phased out as the new plant came on line, ending in early 2000.
Patents, Trademarks and Licenses
--------------------------------
The Company owns no patents. It owns the United States registered
trademarks "Royal" with the crown design and "Vegeroni" for use on pasta
products and licenses from the Del Monte Company until 2009 the United States
registered trademark "Capo di Monte" for use on meat products. Registrations of
the trademarks owned by the Company must be and are renewed from time to time.
Royal, Vegeroni and Capo di Monte are used on consumer products in limited
distribution. No substantial portion of the Company's sales is dependent upon
any trademark.
-2-
Commodity Price Fluctuations and Availability
---------------------------------------------
The Company contracts to sell its products at a fixed price for production
and delivery in the future (generally four to six months or less). The Company
is, therefore, subject to the risk of price fluctuations with respect to its
product ingredients from the time the Company contracts with its customers until
the time the Company purchases the commodities used to fill the orders. Prices
for meat and flour, the Company's major product ingredients, fluctuate widely
based upon supply, market speculation, governmental trade and agricultural
policies, and other unpredictable factors.
The Company is able to contract at fixed prices for delivery of domestic
beef and pork up to 30 days in advance, imported beef and sometimes pork up to
90 days in advance, and flour up to 90 days or more in advance. The Company
generally covers its committed sales by purchasing commodities at fixed prices
for future delivery, but is subject to the risk of commodity price fluctuations
when it contracts for sales beyond the period it can cover or when it orders
commodities in anticipation of sales.
Effects of Inflation
--------------------
It is the Company's general policy, subject to current competitive
conditions, to pass on increases in costs of commodities used in production by
increasing prices of the products it sells to its customers. However, because
the Company agrees on the price of its products to its customers in advance of
purchasing the product ingredients, there may be a delay in passing on
increasing commodity costs to customers, temporarily decreasing profit margins.
Competitive conditions may limit the Company's ability to pass on commodity
price increases to its customers, prolonging or increasing the adverse effect on
profit margins.
Marketing and Distribution
--------------------------
The Company's processed meat and pasta products have been marketed
primarily by the Company's management personnel, food brokers, and three full-
time salaried sales people. Because the Company sells most of its processed meat
and pasta products to customers who either further process the products before
they reach the consumer or sell the products under private labels, the Company
does not advertise its products in a manner designed to reach the ultimate
consumer.
Dependency on a Limited Number of Large Customers
-------------------------------------------------
A substantial portion of the Company's net sales has in recent years
resulted from sales to a few customers. See Note 12 of Notes to Financial
Statements. The Company does not enter into continuing sales contracts with its
customers, and has different major customers from time to time. The following
table shows, by division and for the Company, the percentage of sales
represented by the Company's largest customers for the year ended December 31,
2001:
Number of Division Company
Division Customers Sales % Sales %
---------------- --------- -------- -------
Swiss American 3 43% 36%
Royal-Angelus 2 22% 3%
- --
Totals 5 39%
The Company fills orders as they are received from its customers, normally
within a few weeks or less, and does not have a meaningful backlog of orders for
its products. The Company carries significant inventories of its products for
only a few major customers, and does not provide extended payment terms to
customers.
Food Industry Risks
-------------------
The business of the Company is subject to the risks inherent in the food
industry, including the risk that a food product or ingredient may be banned or
its use limited or declared unhealthful, that product tampering or contamination
will require a recall or reduce sales of a product, or that a product's
acceptability will diminish because of generally perceived health concerns or
changes in consumer tastes.
-3-
Employees
---------
As of December 31, 2001, the Company employed 202 full-time employees, 146
in production at Swiss in Lathrop, California, 41 in production at Royal-Angelus
in Chino, California, 7 in clerical and office functions, 3 in sales activities,
and 5 in management activities.
Swiss's plant employees are represented by the United Food and Commercial
Workers Union,Local 588, AFL-CIO, CLC under a collective bargaining agreement
which expires March 31, 2002. Negotiations to renew the agreement are
progressing normally. Royal's 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 division's plants and the Company believes it
has a satisfactory relationship with its employees.
Health Benefits
---------------
The Company provides health insurance benefits to all of its employees. Its
union employees are covered by union sponsored health insurance plans. Its
non-union employees and their dependents were covered on a fully or partially
self-funded basis in prior years but are covered on a fully insured basis in
2002.
Regulation
----------
Food products purchased, processed and sold by the Company are subject to
various federal, state and local laws and regulations, including the federal
Meat Inspection Act and the Federal Food, Drug and Cosmetic Act. Since January
25, 1999, the Company has complied with the U. S. Department of Agriculture's
Hazardous and Analysis Critical Control Points Program which enables the Company
to self-inspect its meat products and production conditions and techniques. As
required by law, U.S. Department of Agriculture employees visit the Company's
plant to inspect meat products processed by the Company and to review the
Company's compliance with the program. The Company is also subject to various
federal, state and local regulations regarding workplace health and safety,
environmental protection, equal employment opportunity and other matters. The
Company maintains quality control departments at both its Lathrop and Chino
facilities for purposes of testing product ingredients and finished products to
ensure the production of products of predictable quality and consistency, as
well as compliance with applicable regulations and standards.
ITEM 2. PROPERTIES
The Company's meat processing plant is an approximately 85,000 square foot
facility located in Lathrop, California, constructed by the Company in 1999. The
estimated theoretical production capacity of the new meat plant is 46,000,000
pounds per year. The Company purchased an additional 2 acres of land adjacent to
the new plant in 1999 to ensure a capability of expansion.
The Company's pasta production plant is an approximately 41,000 square foot
facility located in Chino, California, occupied by the Company since 1987. In
1995, the Company purchased an approximately 44,000 square foot building
adjacent to the pasta plant and currently occupies 40% of the building for pasta
warehousing and leases 60% to a cold storage manufacturer through February 2003.
The Chino plant, after the addition of a third short-goods production line in
1996, has a theoretical production capacity estimated at 30,000,000 pounds
annually.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, is involved in routine claims and
litigation incidental to its business. Management believes that none will have a
material adverse effect on the Company's business, financial condition or
liquidity.
-4-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on Tuesday, April 24, 2001,
at 11:00 a.m. at the Company's principal office. Shareholders representing
2,525,889 or 82.9% of the 3,048,172 shares entitled to vote were present in
person or by proxy, with 15,452 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:
Without
Nominee For Withheld Authority
------------------- --------- -------- ---------
John D. Determan 2,486,394 4,970 34,525
Theodore L. Arena 2,489,464 1,900 34,525
Ronald A. Provera 2,489,064 2,300 34,525
Santo Zito 2,489,294 2,070 34,525
Thomas J. Mulroney 2,490,564 800 34,525
Louis A. Arena 2,489,294 2,070 34,525
Joseph W. Wolbers 2,488,564 2,800 34,525
John M. Boukather 2,488,264 3,100 34,525
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange under
the symbol "PZA". The following table sets forth high and low prices as traded
on the American Stock Exchange:
Quarter of Fiscal Year Ended December 31
First Second Third Fourth
----- ------ ----- ------
2000 High 2.875 2.75 2.125 1.9375
Low 2.375 1.8125 1.75 1.5625
2001 High 2.00 2.00 2.20 1.88
Low 1.625 1.74 1.75 1.42
The closing price on December 31, 2001 was $1.44.
Common Stock
------------
The Company's Articles of Incorporation as amended authorize the Company to
issue up to 10,000,000 shares of common stock, without par value. The Company is
not authorized to issue any class or series of shares except shares of common
stock. At December 31, 2001 the Company had issued and outstanding 3,089,516
shares held by approximately 240 shareholders of record. In addition, the
Company estimates that there are approximately 800 shareholders holding shares
in street or nominee names.
Holders of the Company's common stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. The Company commenced paying quarterly cash dividends in
March 1988 and paid a dividend every quarter through the second quarter of 2001.
A covenant under the Company's credit facility with Comerica Bank-California
limits quarterly dividends to quarterly earnings. The declaration and timing of
future dividends, if any, will depend on the Company's financial condition and
results of operations, compliance with the bank covenant and other factors
deemed relevant by the Board.
All outstanding shares of common stock are fully paid and nonassessable and
are not subject to redemption. Holders of common stock are entitled to one vote
for each share held of record and have cumulative voting rights in the election
of directors. Holders of common stock do not have preemptive rights and have no
right to convert their shares into any other security. Upon liquidation of the
Company, the holders of common stock would share ratably in all assets of the
Company after the payment of all liabilities.
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Shareholder communications regarding transfers, changes of address, missing
dividends, lost certificates or similar matters should be directed to the
Company's transfer agent and registrar, Registrar and Transfer Company, 10
Commerce Drive, Cranford, NJ 07016-3572, (800) 368-5948, www.rtco.com.
Common Stock Repurchase and Sales
---------------------------------
The Company has had an announced intention to repurchase shares of its
common stock since January 11, 1988. Currently, purchases are authorized up to
the number of shares issued under the Company's 1988 Employee Stock Purchase
Plan. Purchases are made from time to time on the open market or in privately
negotiated transactions. In addition, the Company must accept outstanding shares
at fair market value in payment of the exercise price of options under the
Company's 1987 Incentive Stock Option Plan.
In 2001, the Company purchased no shares under its stock repurchase
program, and received no shares in payment of the exercise price of options.
Since January 1988 the Company has repurchased 220,985 shares at an average cost
of $3.14 per share, excluding shares used to exercise options.
Under the Employee Stock Purchase Plan, in 2001 employees purchased 54,507
newly issued shares at an average price of $1.77 per share. Employees have
purchased a total of 611,062 shares under the plan through December 31, 2001, at
an average price of $2.84 per share. Employee contributions plus Company
matching funds are used monthly to purchase shares at the market price under the
plan and are accumulating at a rate of about $100,000 per year.
No shares were purchased by exercise of Incentive Stock Options in 2001.
-6-
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the headings Statement of
operations data and Balance sheet data as of and for each of the years in the
five-year period ended December 31, 2001 is derived from the financial
statements of the Company, which financial statements have been audited by KPMG
LLP, independent auditors. The selected financial data should be read in
conjunction with Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and the balance sheets as of December 31,
2001 and 2000 and the statements of operations, shareholder's equity and cash
flows for each of the years in the three-year period ended December 31, 2001,
included in a separate section at the end of this report beginning on Page F-1.
Financial reports are the responsibility of management, and are based on
corporate records maintained by management, which maintains an internal control
system, the sophistication of which is considered in relation to the benefits
received.
Year Ended December 31,
----------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Amounts in thousands except per share data)
Statement of operations data:
Net Sales $ 36,007 27,309 20,628 24,503 30,966
Cost of sales 33,295 25,535 20,371 21,794 27,103
-------- -------- -------- -------- --------
Gross profit 2,712 1,774 257 2,709 3,863
Distribution, general and administrative expenses 2,897 2,638 2,651 2,253 2,066
-------- -------- -------- -------- --------
Operating income (loss) (185) (864) (2,394) 456 1,797
Interest income (expense), net (690) (746) (175) 18 (58)
Other income, net 292 155 2,637 3,326 279
-------- -------- -------- -------- --------
Earnings (loss) before income taxes (583) (1,455) 68 3,800 2,018
Income tax expense (benefit) (313) (577) 30 1,558 764
-------- -------- -------- -------- --------
Net earnings (loss) $ (270) (878) 38 2,242 1,254
======== ======== ======== ======== ========
Earnings (loss) per share: Basic $ (.09) (.29) .01 .78 .44
======== ======== ======== ======== ========
Diluted $ (.09) (.29) .01 .77 .44
======== ======== ======== ======== ========
Cash dividends paid per share $ .06 .12 .12 .12 .12
Weighted average number
of shares outstanding (1): Basic 3,064 3,006 2,946 2,891 2,836
Diluted 3,064 3,006 2,961 2,924 2,855
Balance sheet data (end of period):
Working capital (deficit) $ (491) 307 1,878 3,261 4,574
Property and equipment (net) 16,129 16,101 16,119 7,602 4,468
Total assets 22,394 22,357 22,745 17,280 11,539
Long-term debt 6,396 6,885 7,330 4,000 752
Shareholders' equity 8,881 9,238 10,338 10,479 8,435
--------------------------------------------------------------------------------
(1) The Company sold shares under its employee stock purchase plan, sold shares
under its incentive stock option plan, and received shares in exercise of
incentive stock options in the years as shown:
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Purchase Plan Shares Sold 54,507 62,980 56,293 42,959 55,355
Incentive Option Shares Sold - - 2,638 10,000 20,400
Received in Exercise of Options - - - 5,842 7,795
-7-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
---------------------
The following table sets forth operating data for the years ended December
31, 2001, 2000 and 1999:
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Net sales $ 36,007 100.0% $ 27,309 100.0% $ 20,628 100.0%
Cost of sales 33,295 92.5 25,535 93.5 20,371 98.8
-------- ---------- -------- ---------- -------- ----------
Gross profit 2,712 7.5 1,774 6.5 257 1.2
Distribution, general and administrative expenses 2,897 8.0 2,638 9.7 2,651 12.9
-------- ---------- -------- ---------- -------- ----------
Operating loss (185) (.5) (864) (3.2) (2,394) (11.6)
Interest income (expense), net (690) (1.9) (746) (2.7) (175) (.8)
Other income, net 292 .8 155 .6 2,637 12.8
-------- ---------- -------- ---------- -------- ----------
Earnings (loss) before income taxes (583) (1.6) (1,455) (5.3) 68 .3
Income tax expense (benefit) (313) (.9) (577) (2.1) 30 .1
-------- ---------- -------- ---------- -------- ----------
Net earnings (loss) $ (270) (.7)% $ (878) (3.2)% $ 38 .2%
======== ========== ======== ========== ======== ==========
Sales in thousands of pounds by division
Swiss American 19,959 14,910 9,152
Royal-Angelus 11,921 12,226 14,913
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.
Comparison of Years Ended December 31, 2001 and 2000
----------------------------------------------------
In 2001, sales of $36,007,000 were up 32% from 2000 sales of $27,309,000.
The increase in sales was attributable to the meat division, with pasta division
sales down.
The meat division's sales were up about 41% in dollars and 34% in pounds
and it operated at a $436,000 profit for 2001 compared to a $854,000 loss for
2000. Swiss's sales for the 4th quarter of 2001 were up 40% in dollars and 29%
in pounds from the 4th quarter of 2000. The percentage increases in dollars were
greater than in pounds because of increases in selling prices to reflect higher
meat prices. The year 2001 was Swiss's second full year of operating its new
meat plant and Swiss has continued to increase its sales and improve its
operating results.
Swiss's operations in 2000 were adversely affected by inefficiencies and
transitional costs, exacerbated by increases in meat costs out-pacing increases
in selling prices. The inefficiencies were the result of the learning curve for
new operators and new equipment. The transitional costs were expenses of
operating a new plant at a new location which diminish with time or do not
recur. Swiss increased its efficiency from 2000 to 2001, with production
overhead up 32% on a 41% increase in sales, general and administrative expense
up only 2.1% and distribution expense up only 1.2%.
The pasta division's sales decreased about 3% in dollars and 2% in pounds
and it operated at a $616,000 loss in 2001 compared to a $42,000 loss in 2000.
The pasta division's sales for the 4th quarter of 2001 were up 22% in dollars
and 39% in pounds from the same quarter of 2000. The percentage increase for the
4th quarter was lower in dollars than in pounds because of lower selling prices
reflecting lower flour costs and an increased proportion of high-volume lower
price-per-pound sales. Sales decreased because of competition from increased
industry capacity. The loss resulted from low margins caused by competition.
Royal is continuing to seek additional personnel experienced in pasta sales and
production, but so far has been unsuccessful.
-8-
The Company's gross profit for 2001 was $2,712,000 or 7.5% of net sales
compared to $1,774,000 or 6.5% of net sales for 2000. Gross profit increased in
dollars and as a percent of net sales because of Swiss's increased sales and
efficiency. Distribution, general and administrative expenses for 2001 were up
about 9.8% from 2000 on a 32% increase in sales. Distribution expenses were up
about $33,000, or only 2.8%, despite the 32% increase in sales, because of
higher salesmen expense, with no significant change in shipping or other
distribution expenses. General and administrative expenses were up about
$226,000 primarily due to increased health care costs under the Company's
partially self-funded plan. All Company health coverage is fully insured for
2002.
Interest expense decreased in 2001 from 2000 because of lower interest
rates partially offset by higher borrowings under the bank line. Other income
increased in 2001 from 2000 because of the recovery and sale of waste products
at Swiss.
Comparison of Years Ended December 31, 2000 and 1999
----------------------------------------------------
In 2000, sales of $27,309,000 were up 32% from 1999 sales of $20,628,000.
The increase in sales was attributable to the meat division, with pasta division
sales down.
The meat division's sales were up about 62% in dollars and 63% in pounds
and it operated at a $854,000 loss for 2000 compared to a $2,837,000 loss for
1999. Swiss's sales for the 4th quarter of 2000 were up 53% in dollars and 57%
in pounds from the 4th quarter of 1999. The percentage increases in dollars were
slightly less than in pounds primarily because much of the increase was in
products that normally sell for lower prices per pound. The year 2000 was
Swiss's first full year of operating its new meat plant during which Swiss has
increased its sales and reduced its operating losses, operating at a modest
profit in the 4th quarter.
Swiss's 2000 operating loss resulted from inefficiencies and transitional
costs, exacerbated by increases in meat costs out-pacing increases in selling
prices during part of the year. The inefficiencies are the result of 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 increasing its efficiency and reducing its expenses, and
its operating profitability should improve if it continues its success in
increasing its sales.
The pasta division's sales decreased about 20% in dollars and 18% in
pounds and it operated at a $42,000 loss in 2000 compared to $534,000 of income
in 1999. The pasta division's sales for the 4th quarter of 2000 were down 15% in
dollars and 22% in pounds from the same quarter of 1999. The percentage
decreases for the year were larger in dollars than in pounds because of price
reductions to meet competition and to reflect lower flour costs, but reversed in
the 4th quarter because of a higher proportion of lower volume-higher priced
sales. Sales decreased because of competition from increased industry capacity.
The loss resulted from lower sales and lower margins.
The Company's gross profit for 2000 was $1,774,000 or 6.5% of net sales
compared to $257,000 or 1.2% of net sales for 1999. Gross profit increased
absolutely and as a percent of net sales because in 2000 Swiss was producing
products which it was purchasing from other suppliers in 1999. Distribution,
general and administrative expenses for 2000 were down about 0.5% from 1999.
Distribution expenses were down about $56,000, despite increased sales, because
of decreased salesman and advertising expense at Swiss. General and
administrative expenses were up about $43,000 primarily due to increased health
benefit costs in the 4th quarter.
Interest expense increased in 2000 from 1999 because of increased
borrowings under the bank line, an increase in the interest rate borne by the
bank line and because the real estate and equipment loans made to the Company in
the latter part of 1999 were outstanding for all of 2000. Other income decreased
in 2000 from 1999 because insurance proceeds relating to the meat plant fire
were included in other income in 1999. No insurance claims relating to the fire
have been outstanding and no proceeds received since 1999.
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 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 is the lesser of $4,000,000, or 30% of
inventories plus 80% of receivables, with a limit of $1,500,000 for inventories,
determined monthly. At December 31, 2001, the "Base Rate" was 4.75% per annum,
30% of inventories plus 80% of receivables was $3,548,346 and the Company had
$4,000,000 of borrowings under the bank line of credit, representing an
over-advance.
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 - 1.35% per annum at December 31, 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
-9-
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 in 1999 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, 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 working capital and debt service coverage
covenants at December 31, 2001, and the bank has waived the defaults. The
Company and the bank have reduced the minimum amounts required under the
tangible net worth and working capital covenants and the Company expects to be
in compliance with all covenants, as modified, at March 31, 2002.
In 1999, the Company completed the construction of a 85,000 square foot
meat plant on a 5.3 acre parcel of land in Lathrop, California, and purchased an
adjacent 2 acres for possible future expansion, for a total cost of about
$13,225,000. The new meat plant has adequate production capacity to meet the
foreseeable demand for its products.
The pasta plant has three short-good lines and one long-goods line.
Because of the recent decline in pasta sales, the Company has deferred the
purchase of a second long-goods line. The plant has adequate production capacity
to meet the foreseeable demand for its products, with more than adequate
short-goods capacity but limited long-goods capacity and flexibility. The two
pasta buildings provide ample capacity for possible future expansion.
Additions to property and equipment of about $500,000 are anticipated for
2002.
In 2001, cash increased about $118,000. Operating activities used about
$404,000 of cash, primarily from the net loss, increases in accounts receivable
and inventories and decreases in deferred income taxes and accrued liabilities,
offset by depreciation and amortization, a decrease in income taxes receivable
and an increase in accounts payable. Accounts receivable and inventories were up
28% and 11%, respectively, on a 32% increase in sales. Deferred income taxes
were reduced by tax benefits realized as a result of the loss. Income taxes
receivable decreased from receipt of an income tax refund. Investing activities
used about $196,000 for additions to property and equipment, primarily at Swiss.
Financing activities produced about $719,000 from borrowings under the bank
line, reduced by principal payments on notes payable and the excess of cash
dividends paid over net proceeds from the sale of common stock.
In 2000, cash decreased about $746,000. Operating activities used about
$86,000 of cash, primarily from the net loss, a decrease in deferred income
taxes and increases in accounts receivable and income taxes receivable, offset
by depreciation and amortization and an increase in accrued liabilities.
Deferred income taxes were reduced and income taxes receivable were increased by
tax benefits realized as a result of the loss. Investing activities used about
$732,000, primarily final payments and completion of the new plant. Financing
activities produced about $72,000 from borrowings under the bank line, reduced
by principal payments on notes payable and the excess of cash dividends paid
over net proceeds from the sale of common stock.
In 2001, quarterly dividends were paid in the first two quarters but not
the last two. The declaration and timing of future dividends, if any, will
depend on the Company's financial condition and results of operations,
compliance with the bank covenant limiting quarterly dividends to quarterly net
income, cash flow adequate to satisfy the Company's obligations and working
capital requirements and other factors deemed relevant by the Board.
The Company adopted an employee stock purchase plan in 1988 to provide
employees with the incentive of participation in the performance of the Company
and to retain their services. Under the plan, employees other than officers and
directors may authorize weekly payroll deductions which are matched by the
Company and used monthly to purchase shares from the Company at the market
price. The weekly payroll deduction is from $5 to $50 for each participant. The
matching funds are an expense incurred by the Company, but the plan results in
net cash flow to the Company because amounts equal to twice the matching funds
are used to purchase shares from the Company. Cash flow to the Company from the
plan was $96,465 in 2001.
-10-
Commitments and Contingencies
-----------------------------
The following table shows the long-term debt principal and capital lease
obligation payments due in the specified periods as of December 31, 2001. The
lease payments are estimates because they are proportional to pounds of a
product sold.
Year Ended December 31,
--------------------------------------------------
(amounts in thousands) Totals 2002 2003 2004 2005 2006 Thereafter
------ ---- ---- ---- ---- ---- ----------
Long-Term Debt $6,891 495 504 504 435 341 4,612
Capital Lease Obligation 567 113 113 113 113 115 -0-
------ ---- ---- ---- ---- ---- -----
Totals $7,458 608 617 617 548 456 4,612
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. In 2001,
the Company's operations and bank line provided adequate cash flow to pay the
principal and interest on its debt and satisfy the needs of its operations, but
the outstanding balance under the bank line increased almost $1,300,000. The
increase in borrowings under the bank line equaled the over $1,000,000 increase
in accounts receivable and inventories (on almost $9,000,000 of increased sales)
plus $183,000 in dividends paid and $118,000 of increased cash on hand. Thus, if
accounts receivable, inventories or interest rates increase significantly, the
Company must improve its profitability to avoid increasing its borrowings. The
Company anticipates increased sales in 2002, but believes its operations will
produce adequate cash flow to cover any resultant increase in accounts
receivable and inventories. The Company does not expect a significant increase
in interest rates in 2002.
The Company believes that it has a good relationship with Comerica Bank-
California, as evidenced by the bank's over-advances under the line of credit,
waiver of defaults under the financial covenants and modifications of 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.
Critical Accounting Policies
----------------------------
In December 2001, the Securities and Exchange Commission requested that
all registrants list their most "critical accounting policies" in Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
indicated that a "critical accounting policy" is one which is both important to
the portrayal of the registrant's financial condition and results of operations
and requires management's most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain. Critical for the Company is determining the allowance for
doubtful accounts because of the risk of failing to foresee a major credit loss,
and inventory valuation when inventory cost may exceed fair value less cost to
sell because of the difficulty of determining the latter.
New Accounting Standards
------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," SFAS No. 142,
"Goodwill and Other Intangible Assets" and SFAS No. 143, "Accounting for Asset
Retirement Obligations" in June 2001 and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" in August 2001. A brief description
of these standards follows. 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 January 1, 2002,
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. SFAS No. 143, effective January 1, 2003, requires that
an obligation for retirement of a long-lived asset be recorded as a liability at
fair value when the obligation is incurred and be reevaluated at the end of each
period. SFAS No. 144, effective January 1, 2002, requires that the carrying
amount of a long-lived asset be reduced to fair value if the carrying amount
exceeds the future net cash flows expected to be generated by the asset.
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 7A. 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 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and see Notes 4 and 5 of Notes to Financial
Statements) 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 $1,500,000 average of equipment loans, a 1%
per annum change in the rate borne by those borrowings would change annual
interest expense by $55,000.
-11-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are submitted in a
separate section at the end of this report beginning with the Index to Financial
Statements and Schedule on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, principal position for the past five years and other
relevant information for each of the current directors and executive officers of
the Company is as follows:
John D. Determan, age 69, has been a vice president and director of the
Company since 1972, General Counsel from 1986 to 1992, Chief Executive Officer
from 1992 to 1998 and Chairman of the Board since 1992. He is a member of the
option committee.
Theodore L. Arena, age 59, has been the General Manager of the Company's
Swiss American Sausage Co. meat division since 1976, the President and a
director of the Company since 1985 and the Chief Executive Officer since 1998.
He is the nephew of Louis A. Arena, a director of the Company.
Ronald A. Provera, age 64, has been the secretary and a director of the
Company since 1972 and was the General Manager of Sav-On Food Co., the Company's
distribution business, from its formation in 1960 until its liquidation in 1991.
He is currently providing sales support to the Company's Royal-Angelus Macaroni
Company pasta division. He is a member of the option committee.
Santo Zito, age 65, has been the Company's plant engineer since 1976, and
a vice president and director of the Company since 1972. He is currently the
General Manager of the pasta division. He is a member of the option committee.
Thomas J. Mulroney, age 57, has been the Company's chief accountant since
1976, the Chief Financial Officer since 1987, a vice president since 1991, and a
director since 1992.
Louis A. Arena, age 79, has been a director of the Company since 1972, a
vice president from 1972 to 1989, and General Manager of the pasta division from
1975 until his retirement in 1989. He is a member of the audit committee.
Joseph W. Wolbers, age 72, has been a director of the Company since 1990.
He retired in 1989 as a vice president of First Interstate Bank where he had
been employed since 1950. He is Chairman of the audit committee.
John M. Boukather, age 65, is a management consultant. He was the
Director of Operations of PW Supermarkets from 1993 to 1994, Vice President,
Retail Sales, of Certified Grocers of California, Ltd. from 1992 to 1993 and
president of Pantry Food Markets from 1983 to 1987. He has been a director of
the Company since 1987. He is a member of the audit committee.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 2001,
2000 and 1999, all compensation of all executive officers of the Company serving
at December 31, 2001.
Annual SEP-IRA
Name and Position Year Salary Contributions
----------------- ---- ------ -------------
John D. Determan, 2001 $ 83,810 $12,572
Chairman of the Board 2000 82,051 12,308
1999 80,637 12,096
Theodore L. Arena, 2001 127,307 19,096
President and 2000 127,323 19,098
Chief Executive Officer 1999 127,344 19,102
Ronald A. Provera, 2001 127,766 19,165
Secretary 2000 127,568 19,135
1999 127,536 19,130
Santo Zito, 2001 130,532 19,580
Vice President 2000 130,277 19,542
1999 129,640 19,446
Thomas J. Mulroney, 2001 125,431 18,815
Chief Financial Officer 2000 126,160 18,924
1999 127,757 19,164
-12-
See Incentive Stock Option Plan below for information on Incentive Stock
---------------------------
Options. See Simplified Employee Pension Plan below for more information on
--------------------------------
SEP-IRA Contributions.
The Company does not currently pay bonuses or deferred compensation to
executive officers or provide them with automobiles, employment contracts or
"golden parachute" arrangements.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
The Company has no compensation committee. All executive officers are
members of the Board and participate in the Board's deliberations concerning
executive compensation.
Simplified Employee Pension Plan
--------------------------------
In 1988, the Company adopted a Simplified Employee Pension-Individual
Retirement Accounts ("SEP-IRA") plan and executed SEP-IRA Agreements with Wells
Fargo Bank, N.A. and Dean Witter Reynolds Inc., covering all employees at least
18 years old who have worked at least six months and earned at least $300 during
the year, except certain union employees. Union plant employees at both
divisions do not participate in the SEP-IRA plan under the terms of their
current collective bargaining agreements.
The Company makes contributions under the plan in the discretion of the
Board, allocated in proportion to compensation, to an Individual Retirement
Account ("IRA") established by each eligible employee.
Contributions, up to 15% of eligible compensation, are deductible by the
Company and not taxable to the employee. An employee may withdraw SEP-IRA funds
from the employee's IRA. Withdrawals are taxable as ordinary income, and
withdrawals before age 59-1/2 may be subject to tax penalties.
For 2001, the Company contributed $332,183 to IRA's under the plan.
Incentive Stock Option Plan
---------------------------
In April 1987, the Company adopted an Incentive Stock Option Plan under
Section 422A of the Internal Revenue Code of 1986. Under the plan, as amended in
1988, for a period of 10 years from the date of adoption, an Option Committee
appointed by the Board of Directors was authorized in its discretion to grant to
key management employees options to purchase up to an aggregate of 261,704
shares of common stock of the Company. The purchase price of shares covered by
an option could not be less than the market value of the shares on the date of
grant and the term of an option could not exceed 10 years.
Options may no longer be granted under the plan. No options were
exercised in 2001. At January 1, 2002, outstanding options to purchase shares at
$2-9/16 per share were held 91,458 by Theodore L. Arena and 15,653 by Thomas J.
Mulroney. All outstanding options are exercisable at a price which exceeds the
2001 year end stock market closing price of $1.44 per share.
Compensation of Directors
-------------------------
Directors who are not officers or employees are paid a fee of $1,000 for
each board meeting or board committee meeting attended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management Stock Ownership
--------------------------
The following table sets forth, for each officer, director and 5%
shareholder of the Company and for all officers and directors as a group (8
persons), the number and percent of outstanding shares of common stock of the
Company owned on December 31, 2001.
-13-
Shares Beneficially Owned
-----------------------------------------
Without Options(5) Options Exercised(6)
--------------- -----------------
Name or Category(1) Number Percent Number Percent
---------------- ------ ------- ------ -------
John D. Determan 335,327 10.9% 335,327 10.5%
Penny S. Bolton Estate (2) 378,463 12.2% 378,463 11.8%
Theodore L. Arena 140,994 4.6% 232,452 7.3%
Ronald A. Provera (3) 322,330 10.4% 322,330 10.1%
Santo Zito 369,830 12.0% 369,830 11.6%
Thomas J. Mulroney (4) 18,338 .6% 33,991 1.1%
Louis A. Arena 288,030 9.3% 288,030 9.0%
John M. Boukather 3,173 .1% 3,173 .1%
Joseph W. Wolbers 12,250 .4% 12,250 .4%
Officers and Directors 1,490,272 48.2% 1,597,383 50.0%
Shares Outstanding 3,089,516 100% 3,196,627 100%
--------------------------------------------------------------------------------
(1) The address for each person is c/o Provena Foods Inc., 5010 Eucalyptus
Avenue, Chino, Ca. 91710.
(2) Penny S. Bolton was the widow of James H. Bolton, former chairman of the
Company. Her estate's shares are not included in the group's shares.
(3) Includes 320,930 shares held by the family trust of Ronald A. Provera and
his wife, Madelyn M. Provera.
(4) Includes 3,800 shares owned by Marsha Mulroney, wife of Thomas J. Mulroney.
(5) Excludes options under the Company's Incentive Stock Option Plan to
Theodore L. Arena to purchase 91,458 shares, to Thomas J. Mulroney to
purchase 15,653 shares and to all officers and directors as a group to
purchase 107,111 shares.
(6) The options of Messrs. Arena, Mulroney and the group are deemed exercised.
No other person is known to the Company to own beneficially more than 5%
of the outstanding shares of the Company.
Management Stock Transactions
-----------------------------
During the specified quarter of 2001, officers and directors purchased
the following numbers of outstanding shares of the Company's common stock: 1st
quarter, John M. Boukather - 52 shares; 2nd quarter, Mr. Boukather - 50; 3rd
quarter, Mr. Boukather - 47; 4th quarter, Santo Zito - 7,500. No sales and no
other purchases of the Company's common stock by officers or directors were
reported during the year.
Based on copies of filed forms and written representations, the Company
believes that all officers, directors and 10% shareholders have timely filed all
Forms 3, 4 and 5 required for 2001 and (except as previously disclosed) prior
years by Section 16(a) of the Securities Exchange Act, except that Santo Zito
made a late filing for a purchase of 7,500 shares in December 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no transactions with related parties required to be disclosed
under the above caption in this report.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements and Schedules
----------------------------------
The Financial Statements and Schedule filed with this report are in a
separate section at the end of this report beginning with the Index to Financial
Statements and Schedule on page F-1.
-14-
Exhibits
--------
3.7 Bylaws of the Company, as in effect on January 16, 1989 (1), (3)
3.8 Amended and restated Articles of Incorporation of the Company as filed
with the California Secretary of State on June 17, 1987 (2)
3.9 Amendment to Articles of Incorporation of the Company re Liability of
Directors and Indemnification as filed with the California Secretary of
State on January 17, 1989 (6) 3.10 Amendment to Bylaws of the Company re
Liability of Directors and Indemnification effective January 17, 1989 (6)
3.11 Amendment to Bylaws of the Company re Annual Meeting in April (7)
3.12 Amendment to Bylaws of the Company re relocating Principal Executive
Office to Chino, California (8)
3.13 Amendment to Bylaws of the Company re President as Chief Executive
Officer (10)
4.3 Form of Certificate evidencing common stock (8)
10.2 1987 Incentive Stock Option Plan, as amended to date (1)
10.20 1988 Stock Purchase Plan of the Company (4)
10.22 Dean Witter Simplified Employee Pension Plan Employer Agreement dated
August 8, 1988 (5)
10.23 Wells Fargo Bank Simplified Employee Pension Plan Adoption Agreement
dated July 18, 1988 (5)
10.36 Standard Industrial/Commercial Single-Tenant Lease - Gross dated December
18, 1995 between the Company, as Lessor, and R-Cold, Inc. and Therma-Lok,
Inc., as Lessee of a portion of 5060 Eucalyptus Avenue, Chino, CA (9)
10.37 First Amendment to Lease dated December 18, 1995 between Company and
R-Cold, Inc. and Therma-Lok, Inc. (10)
10.39 Master Revolving Note and Security Agreement, both dated July 14, 1998
between the Company and Comerica Bank- California, relating to the
Company's line of credit (10)
10.40 Collective Bargaining Agreement dated April 1, 1998 between Swiss and
United Food and Commercial Workers Union Local 101, AFL-CIO (10)
10.41 Loan Agreement dated October 1, 1998 between the California Economic
Development Financing Authority and the Company (10)
10.42 Remarketing Agreement dated October 1, 1998 between the Company and Dain
Rauscher Incorporated (10)
10.43 Purchase Contract among the California Economic Development Financing
Authority, the Treasurer of the State of California and Dain Rauscher
Incorporated (10)
10.44 Tax Regulatory Agreement dated October 1, 1998 among the California
Economic Development Financing Authority, U.S. Bank Trust National
Association, as trustee, and the Company (10)
10.45 Building Loan Agreement dated October 1, 1998 between the Company and
Comerica Bank-California (10)
10.46 Reimbursement Agreement dated October 1, 1998 between the Company and
Comerica Bank-California (10)
10.47 Loan Modification Agreement dated December 29, 1999 between the Company
and Comerica Bank-California (11)
10.48 Variable Rate-Installment "Base Rate" + 0.25%, 10/1/06; and 12/6/99, Note
for $1,000,000 dated $414,788, "Base Rate" + 0.75%, 12/6/04 (11) July 28,
1999 between the Company and Comerica Bank-California for equipment - two
other notes differ only as to date, amount, rate and maturity as follows:
9/29/99, $1,200,000,
10.49 Loan and Security Agreement (Accounts Receivable and Inventory) dated
July 31, 2000 between the Company and Comerica Bank-California (12)
10.50 Collective Bargaining Agreement dated October 2, 2000 between Royal and
United Food and Commercial Workers Union Local 1428, AFL-CIO-CLC (12)
10.51 Second Amendment to Lease dated December 18, 1995 between Company and
R-Cold, Inc. and Therma-Lok, Inc. (12)
10.52 Modification to Loan and Security Agreement dated August 2, 2001 between
the Company and Comerica Bank- California
10.53 Third Amendment to Lease dated December 18, 1995 between Company and
R-Cold, Inc. and Therma-Lok, Inc.
23.1 Consent of KPMG LLP
________________________________________________________________________________
(1) Exhibit to Form S-1 Registration Statement filed May 11, 1987
(2) Exhibit to Amendment No. 2 to Form S-1 Registration Statement filed June
17, 1987
(3) Exhibit to Amendment No. 3 to Form S-1 Registration Statement filed July
29, 1987
(4) Exhibit to 1987 Form 10-K Annual Report
(5) Exhibit to 1988 Form 10-K Annual Report
(6) Exhibit to 1989 Form 10-K Annual Report
(7) Exhibit to 1990 Form 10-K Annual Report
(8) Exhibit to 1991 Form 10-K Annual Report
(9) Exhibit to 1995 Form 10-K Annual Report
(10) Exhibit to 1998 Form 10-K Annual Report
(11) Exhibit to 1999 Form 10-K Annual Report
(12) Exhibit to 2000 Form 10-K Annual Report
-15-
Reports on Form 8-K
-------------------
During the year ended December 31, 2001 the Company filed no reports on
Form 8-K.
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities
and 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 9, 2002 PROVENA FOODS INC.
By /s/ John D. Determan
------------------------
John D. Determan
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934,
as amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John D. Determan Chairman of the Board and Director April 9, 2002
------------------------------------
John D. Determan
President (Principal Executive
/s/ Theodore L. Arena Officer) and Director April 9, 2002
------------------------------------
Theodore L. Arena
Vice President, Sales, Secretary and
/s/ Ronald A. Provera Director April 9, 2002
------------------------------------
Ronald A. Provera
/s/ Santo Zito Vice President and Director April 9, 2002
------------------------------------
Santo Zito
Chief Financial Officer (Principal
/s/ Thomas J. Mulroney Financial and Accounting Officer) April 9, 2002
------------------------------------
Thomas J. Mulroney
/s/ Louis A. Arena Director April 9, 2002
------------------------------------
Louis A. Arena
/s/ Joseph W. Wolbers Director April 9, 2002
-----------------------------------
Joseph W. Wolbers
/s/ John M. Boukather Director April 9, 2002
------------------------------------
John M. Boukather
-16-
[LOGO]
PROVENA FOODS INC.
Financial Statements and Schedule
December 31, 2001 and 2000
(With Independent Auditors' Report Thereon)
______________________
PROVENA FOODS INC.
Index to Financial Statements and Schedule
Page
Independent Auditors' Report F-2
Balance Sheets - December 31, 2001 and 2000 F-3
Statements of Operations - Years ended December 31, 2001, 2000, and 1999 F-4
Statements of Shareholders' Equity - Years ended December 31, 2001, 2000,
and 1999 F-5
Statements of Cash Flows - Years ended December 31, 2001, 2000, and 1999 F-6
Notes to Financial Statements F-7
Schedule
II - Valuation and Qualifying Accounts and Reserves F-20
F-1
[LOGO]
[Letterhead of KPMG]
Independent Auditors' Report
The Board of Directors
Provena Foods Inc.:
We have audited the accompanying balance sheets of Provena Foods Inc. as of
December 31, 2001 and 2000 and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2001. In connection with our audits of the financial
statements, we also have audited the accompanying financial statement schedule,
as listed in the accompanying index. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Provena Foods Inc. as of
December 31, 2001 and 2000 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Orange County, California
January 29, 2002
F-2
PROVENA FOODS INC.
Balance Sheets
December 31, 2001 and 2000
Assets (Notes 1, 4, and 5) 2001 2000
-------------- --------------
Current assets:
Cash and cash equivalents $ 206,777 88,585
Accounts receivable, net of allowance for doubtful accounts of
$0 and $59,843 at December 31, 2001 and 2000,
respectively (notes 4, 5, and 12) 3,238,935 2,532,019
Inventories (notes 2, 4, and 5) 3,190,660 2,881,486
Prepaid expenses 12,443 53,608
Income taxes receivable (note 8) -- 407,843
Deferred tax assets (note 8) 106,203 102,828
-------------- --------------
Total current assets 6,755,018 6,066,369
Property and equipment, net (notes 3, 4, 5, and 13) 16,128,662 16,100,961
Other assets 181,268 189,925
Deferred tax assets, net of current portion (note 8) 328,884 --
-------------- --------------
$ 23,393,832 22,357,255
============== ==============
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit (note 4) $ 4,000,000 2,708,921
Current portion of long-term debt (note 5) 495,285 492,135
Current portion of capital lease obligation (note 13) 113,200 --
Deferred tax liability (note 8) 46,394 --
Accounts payable 1,362,058 1,179,561
Accrued liabilities (note 6) 1,229,273 1,378,596
-------------- --------------
Total current liabilities 7,246,210 5,759,213
-------------- --------------
Long-term debt, net of current portion (note 5) 6,395,906 6,884,781
Capital lease obligation, net of current portion (note 13) 453,628 --
Deferred tax liability, net of current (note 8) 416,802 474,818
Shareholders' equity (notes 7, 9, and 10):
Common stock, no par value; authorized 10,000,000 shares;
3,089,516 and 3,035,009 shares issued and outstanding at
December 31, 2001 and 2000, respectively 4,983,339 4,886,874
Retained earnings 3,897,947 4,351,569
-------------- --------------
Total shareholders' equity 8,881,286 9,238,443
Commitments and contingencies (notes 4, 5, 9, 13, and 14)
-------------- --------------
$ 23,393,832 22,357,255
============== ==============
See accompanying notes to financial statements.
F-3
PROVENA FOODS INC.
Statements of Operations
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
-------------- ------------- -------------
Net sales (note 12) $ 36,007,139 27,309,361 20,627,542
Cost of sales 33,295,452 25,535,382 20,370,542
-------------- ------------- -------------
Gross profit 2,711,687 1,773,979 257,000
-------------- ------------- -------------
Operating expenses:
Distribution 1,214,011 1,180,992 1,237,224
General and administrative (note 9) 1,682,876 1,457,066 1,413,659
-------------- ------------- -------------
2,896,887 2,638,058 2,650,883
-------------- ------------- -------------
Operating loss (185,200) (864,079) (2,393,883)
Other income (expense):
Interest income 828 44 55,684
Interest expense (notes 4 and 5) (690,203) (746,403) (231,041)
Other, net (note 15) 291,623 155,039 2,637,233
-------------- ------------- -------------
Earnings (loss) before income taxes (582,952) (1,455,399) 67,993
Income tax expense (benefit) (note 8) (312,635) (577,278) 29,897
-------------- ------------- -------------
Net earnings (loss) $ (270,317) (878,121) 38,096
============== ============= =============
Earnings (loss) per common share (note 11):
Basic $ (0.09) (0.29) 0.01
Diluted (0.09) (0.29) 0.01
Shares used in computing per common share amounts (note 11):
Basic 3,064,033 3,005,834 2,946,138
Diluted 3,064,033 3,005,834 2,961,364
See accompanying notes to financial statements
F-4
PROVENA FOODS INC.
Statements of Shareholders' Equity
Years ended December 31, 2001, 2000, and 1999
Common stock Total
------------------------------- Retained shareholders'
Shares issued Amount earnings equity
------------- ----------- ----------- --------------
Balance at December 31, 1998 2,913,098 $ 4,572,482 5,906,965 10,479,447
Sale of common stock (note 9) 56,293 167,474 -- 167,474
Exercise of shares under
stock option plan (note 10) 2,638 6,760 -- 6,760
Cash dividends paid, $0.12 per
share -- -- (354,046) (354,046)
Net earnings -- -- 38,096 38,096
------------- ----------- ----------- --------------
Balance at December 31, 1999 2,972,029 4,746,716 5,591,015 10,337,731
Sale of common stock (note 9) 62,980 140,158 -- 140,158
Cash dividends paid, $0.12 per
share -- -- (361,325) (361,325)
Net loss -- -- (878,121) (878,121)
------------- ----------- ----------- --------------
Balance at December 31, 2000 3,035,009 4,886,874 4,351,569 9,238,443
Sale of common stock (note 9) 54,507 96,465 -- 96,465
Cash dividends paid, $0.06 per
share -- -- (183,305) (183,305)
Net loss -- -- (270,317) (270,317)
------------- ----------- ----------- --------------
Balance at December 31, 2001 3,089,516 $ 4,983,339 3,897,947 8,881,286
============= =========== =========== ==============
See accompanying notes to financial statements
F-5
PROVENA FOODS INC.
Statements of Cash Flows
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------ ------------ -----------
Cash flows from operating activities:
Net earnings (loss) $ (270,317) (878,121) 38,096
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 735,611 749,340 565,124
Loss on disposal of fixed assets -- -- 91,761
Provision for bad debts -- 39,316 32,166
Deferred income taxes (343,881) (156,445) 17,420
Changes in assets and liabilities:
Accounts receivable (706,916) (254,564) (710,915)
Insurance recovery receivable -- -- 2,204,738
Inventories (309,174) (28,829) (1,394,288)
Prepaid expenses 41,165 7,801 (2,291)
Income taxes receivable 407,843 (89,490) (318,353)
Other assets 8,657 9,127 (31,710)
Accounts payable 182,497 57,167 4,100
Accrued liabilities (149,323) 458,521 (69,368)
Income taxes payable -- -- (107,960)
----------- ----------- -----------
Net cash provided by (used in) operating activities (403,838) (86,177) 318,520
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment -- -- 16,408
Additions to property and equipment (196,484) (731,653) (9,189,901)
----------- ----------- -----------
Net cash used in investing activities (196,484) (731,653) (9,173,493)
----------- ----------- -----------
Cash flows from financing activities:
Payments on note payable to bank (485,725) (415,493) (102,379)
Proceeds from line of credit 1,291,079 708,921 2,000,000
Issuance of long-term debt -- -- 3,894,788
Decrease in restricted cash -- -- 3,960,224
Proceeds from sale of common stock 96,465 140,158 167,474
Exercise of stock options -- -- 6,760
Cash dividends paid (183,305) (361,325) (354,046)
----------- ----------- -----------
Net cash provided by financing activities 718,514 72,261 9,572,821
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 118,192 (745,569) 717,848
Cash and cash equivalents at beginning of period 88,585 834,154 116,306
----------- ----------- -----------
Cash and cash equivalents at end of period $ 206,777 88,585 834,154
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 690,203 738,928 305,453
Income taxes 800 (331,343) 426,048
Supplemental disclosures of noncash investing and financing activities:
Property and equipment acquired under capital leases $ 566,828 -- --
See accompanying notes to financial statements
F-6
PROVENA FOODS INC.
Notes to Financial Statementes
December 31, 2001 and 2002
(1) Summary of Significant Accounting Policies
(a) Description of Business
Provena Foods Inc. (the Company) is a California-based specialty food
processor. The Company grants credit to its customers in the normal
course of business. The Company's meat processing business is
conducted through its Swiss American Sausage Division (the Swiss
American Division), and the Company's pasta business is conducted
through its Royal-Angelus Macaroni Division (the Royal-Angelus
Division).
(b) Liquidity
The Company has experienced net losses of $270,317 and $878,121 during
fiscal 2001 and 2000, respectively, and its borrowings on the line of
credit and long-term debt have increased from $10,085,837 at December
31, 2000 to $10,891,191 at December 31, 2001. In addition, the Company
has a negative working capital of $491,192 at December 31, 2001. The
recent losses are primarily the result of the fire that occurred at
the Lathrop manufacturing facility in 1998 as well as a general
economic downturn during 2000 and the first three quarters of 2001.
The Company has built a new manufacturing facility in Lathrop to
replace the facility destroyed by fire. The new manufacturing facility
has a greater production capacity and as such the Company has begun to
increase sales to an even greater level than those achieved prior to
the fire. The Company has been successful in maintaining distribution,
general, and administrative costs at a relatively consistent level
over the past three years while sales have increased significantly
over the same period. Management believes that because of the
Company's ability to maintain consistent operating expenses, as the
economy continues to improve and with the increase in production
capability of the new manufacturing facility, the margin on the
increased sales will have a positive effect on the profitability of
the Company. The Company believes that, with respect to its current
operations, cash on hand and funds from operations, together with its
credit facilities, it will be sufficient to cover its reasonable
foreseeable working capital, capital expenditure, and debt service
requirements in fiscal 2002.
(c) Inventories
Inventories consist principally of food products and are stated at the
lower of cost (first-in, first-out) or market.
(d) Property and Equipment
Property and equipment are stated at cost. Equipment acquired under
capital lease is recorded at the present value of future minimum lease
payments and amortized on a straight-line basis over the shorter of
the lease term or the estimated useful life of the asset. Assets
acquired prior to 1981 and
(Continued)
F-7
PROVENA FOODS INC.
Notes to Financial Statementes
December 31, 2001 and 2002
subsequent to 1986 are depreciated on the straight-line method. For assets
acquired during the period from 1981 through 1986, accelerated methods of
depreciation are used. Estimated useful lives are as follows:
Buildings and improvements 31.5 to 39 years
Machinery and equipment 5 to 10 years
Delivery equipment 5 years
Office equipment 7 years
(e) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
investments with maturities of three months or less at date of purchase to
be cash equivalents.
(f) Earnings (Loss) per Common Share
Earnings (loss) per common share are calculated under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share, (SFAS No. 128). SFAS No. 128 requires the Company to report both
basic earnings (loss) per share, which is based on the weighted average
number of common shares outstanding, and diluted earnings (loss) per share,
which is based on the weighted average number of common shares plus all
potential dilutive common shares outstanding (see note 11).
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(h) Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(Continued)
F-8
PROVENA FOODS INC.
Notes to Financial Statementes
December 31, 2001 and 2002
(i) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are measured at cost which
approximates their fair value because of the short maturity of these
instruments. The carrying amount of the Company's borrowings under the line
of credit and long-term debt approximates their fair value because the
interest rate on the instruments fluctuate with market interest rates or
represents borrowing rates available with similar terms.
(j) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to Be Disposed Of. This statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(k) Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB Opinion No. 25 issued in March 2000,
to account for its fixed plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS No.
123, Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method
of accounting described above, and has adopted the disclosure requirements
of SFAS No. 123 (see note 10).
(l) Segment Information
The Company operates two reportable segments under criteria established in
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, (see note 12).
(m) Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes rules for the reporting and display of comprehensive income
(loss) and its components. The Company does not have any components of
other comprehensive income (loss), and accordingly, the Company's
comprehensive income (loss) is the same as its net earnings (loss).
(Continued)
F-9
PROVENA FOODS INC.
Notes to Financial Statementes
December 31, 2001 and 2002
(n) Revenue Recognition
Revenue is recognized upon shipment of goods to customers.
(o) Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform with the 2001 presentation.
(2) Inventories
A summary of inventories follows:
2001 2000
----------- ------------
Raw materials $ 1,393,975 1,082,829
Work in process 842,577 710,152
Finished goods 954,108 1,088,505
----------- ------------
$ 3,190,660 2,881,486
=========== ============
(3) Property and Equipment
Property and equipment, at cost, consists of the following:
2001 2000
------------ ----------
Land $ 1,296,803 1,296,803
Buildings and improvements 13,319,057 13,316,607
Machinery and equipment 6,422,184 5,664,320
Delivery equipment 6,700 6,700
Office equipment 180,597 177,912
------------ ----------
21,225,341 20,462,342
Less accumulated depreciation and
amortization (5,096,679) (4,361,381)
------------ ----------
$ 16,128,662 16,100,961
============ ==========
The Company leases certain real property to outside parties under
noncancelable operating leases. Rental income, included in other income,
totaled approximately $122,000, $112,000, and $101,000 in 2001, 2000, and
1999, respectively.
(4) Line of Credit
The Company has a $4,000,000 secured bank line of credit, due on demand
with no stated expiration date, at an interest rate of bank prime (4.75% at
December 31, 2001) plus 0.75%. The line of credit is secured by accounts
receivable, inventory and equipment. At December 31, 2001 and 2000 short-
term borrowings
(Continued)
F-10
PROVENA FOODS INC.
Notes to Financial Statementes
December 31, 2001 and 2002
under this line of credit were $4,000,000 and $2,708,921, respectively.
Amounts available under this line of credit are limited based on a formula
that considers receivables and inventory balances. The Company had no
amount available under this line of credit at December 31, 2001. The bank
line of credit agreement is subject to certain covenants for which the
Company was in compliance with or has obtained a waiver as of December 31,
2001.
(5) Long-Term Debt
Long-term debt at December 31, 2001 and 2000 consists of the following:
2001 2000
------------- --------------
Equipment loans at variable interest rates from prime (4.75% at
December 31, 2001) to prime plus 0.75%, secured by all Company
assets. Maturity dates range from 2004 through 2006 $ 1,711,026 2,108,261
Real estate loan at fixed rate of 9.1%, secured by all Company
assets, monthly principal and interest payments of $10,830, due
and payable in 2004 1,255,165 1,268,655
Industrial Development Revenue Bonds (IDRB) at variable interest
rate (1.35% at December 31, 2001), secured by an irrevocable
letter of credit, and requiring monthly principal and interest
payments ranging from $6,400 to $45,200 beginning in 2001 through
the year 2023 3,925,000 4,000,000
------------- --------------
6,891,191 7,376,916
Less current portion 495,285 492,135
------------- --------------
$ 6,395,906 6,884,781
============= ==============
The $4,060,000 irrevocable letter of credit securing the IDRB, is
collateralized by accounts receivable, inventories, equipment and certain
real property. The commitment fee is 1.5% per annum, due at the beginning
of each quarter.
The installments of long-term debt maturing in each of the next five years
and thereafter are: 2002 - $495,285, 2003 - $504,443, 2004 - $504,314,
2005 - $435,485, 2006 - $340,864 and thereafter - $4,610,800.
(Continued)
F-11
PROVENA FOODS INC.
Notes to Financial Statementes
December 31, 2001 and 2002
(6) Accrued Liabilities
A summary of accrued liabilities follows:
2001 2000
----------- ----------
Accrued profit sharing (note 9) $ 335,671 375,423
Accrued retirement 237,087 139,952
Accrued compensation 207,264 157,376
Other 449,251 705,845
----------- ----------
$ 1,229,273 1,378,596
=========== ==========
(7) Shareholders' Equity
The Company sold shares to employees under its stock purchase plan (see
note 9) in 2001, 2000, and 1999.
(8) Income Taxes
Income tax expense (benefit) for the years ended December 31, 2001, 2000,
and 1999 consist of the following:
2001 2000 1999
------------ ---------- ---------
Current:
Federal $ 30,446 (421,633) --
State 800 800 12,477
Deferred:
Federal (228,511) (99,729) 23,422
State (115,370) (56,716) (6,002)
------------ ---------- ---------
$ (312,635) (577,278) 29,897
============ ========== =========
(Continued)
F-12
The sources and tax effects of temporary differences between the financial
statement carrying amounts and tax basis of assets and liabilities are as
follows:
2001 2000
------------------- -------------------
Deferred tax assets:
Inventory $ 106,016 91,617
Accounts receivable -- 11,024
Net operating loss 235,986 --
State taxes 92,898 --
Other 187 187
------------------- -------------------
Total deferred tax assets 435,087 102,828
Less valuation allowance -- --
------------------- -------------------
Net deferred tax assets $ 435,087 102,828
=================== ===================
Deferred tax liability - gain on destroyed equipment $ 463,196 474,818
As of December 31, 2001 the Company had net operating loss (NOL)
carryforwards of approximately $549,000 and $843,000 for federal and state
purposes, respectively. The federal NOL is available to offset future
federal taxable income through the year 2021 and the state NOL is available
to offset future state taxable income through 2011. The utilization of
certain NOL carryforwards could be limited due to restrictions imposed
under federal and state laws upon a change in ownership.
In assessing the realizability of the net deferred tax assets, management
considers whether it is more likely than not that some or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon either the generation of future
taxable income during the periods in which those temporary differences
become deductible or the carryback of losses to recover income taxes
previously paid during the carryback period.
Actual income tax expense (benefit) differ from "expected" income tax,
computed by applying the U.S. federal corporate tax rate of 34% to earnings
(loss) from operations before income taxes, as follows:
2001 2000 1999
-------------------- ------------------- ----------------
Amount % Amount % Amount %
------------ ------ ----------- ------ -------- ------
Computed "expected" income taxes $ (198,204) 34.0% $ (494,836) 34.0% $ 23,117 34.0%
State income taxes, net of
federal income tax benefit (21,944) 3.8 (55,388) 3.8 4,208 6.2
State manufacturing investment
credit (92,487) 8.6 -- -- -- --
Other -- -- (27,054) 1.9 2,572 3.8
----------- ------ ------------ ----- --------- -----
$ (312,635) 46.4% $ (577,278) 39.7% $ 29,897 44.0%
=========== ====== ============ ===== ========= =====
F-13
(9) Employee Benefit Plans
In 1988, the Company adopted a Simplified Employee Pension - Individual
Retirement Account (SEP IRA) plan covering all full-time, nonunion
employees. The Company makes contributions under the plan at the discretion
of the board of directors. The Company's contributions to the SEP IRA for
2001, 2000, and 1999 were approximately $332,000, $375,000, and $419,000,
respectively.
In 1988, the Company adopted a stock purchase plan, enabling substantially
all nonunion employees except officers and directors to purchase shares of
the Company's common stock through periodic payroll deductions. Employees
may contribute up to $50 per week and all contributions are 100% matched by
the Company; the combined funds are used in the subsequent month to
purchase whole shares of common stock at current market prices. Stock
purchases under this Plan result in net cash flow to the Company as the
contributions and employer-matching contributions are used to purchase
stock from the Company. The Company matching contributions to the stock
purchase plan for 2001, 2000, and 1999 were $48,288, $70,079, and $83,737,
respectively.
The Company provides partial coverage for medical costs to its employees
under a self-insured plan. Additionally, the Company carries a catastrophic
policy that covers claims in excess of $50,000 for any covered individual.
The Company has accrued the estimated liability for its self-funded costs
(see note 14).
(10) Incentive Stock Option Plan
Under a stock option plan (the Plan) adopted in 1987, the Company has
awarded options to certain of its key employees to purchase common stock at
prices which approximate fair market value of the stock at the date of
grant. The Plan provides for a maximum grant of 261,704 shares. All stock
options have a maximum ten-year term and become fully exercisable in
accordance with a predetermined vesting schedule that varies by employee.
There were no options granted in 2001, 2000, or 1999.
F-14
The Company applies the intrinsic-value based method of APB Opinion No. 25
in accounting for its Plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net earnings
(loss) would have been reduced to the pro forma amounts indicated below:
2001 2000 1999
------------------- ------------------- -------------------
Net earnings (loss) As reported $ (270,317) (878,121) 38,096
Pro forma (270,317) (878,121) 29,673
Net earnings (loss) per share As reported:
Basic $ (0.09) (0.29) 0.01
Diluted (0.09) (0.29) 0.01
Pro forma:
Basic $ (0.09) (0.29) 0.01
Diluted (0.09) (0.29) 0.01
Pro forma net earnings (loss) reflect only options granted since December
31, 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
earnings (loss) amounts presented above because compensation cost is
reflected over the options' vesting period and compensation cost for
options granted prior to January 1, 1996 is not considered.
Stock option activity under the Plan during the periods indicated is as
follows:
Weighted average
Number of shares exercise price
------------------- -------------------
Balance at December 31, 1998 109,749 $ 2.56
Exercised (2,638) 2.56
-------------------
Balance at December 31, 1999 107,111 2.56
Exercised -- --
-------------------
Balance at December 31, 2000 107,111 2.56
Exercised -- --
-------------------
Balance at December 31, 2001 107,111 2.56
===================
At December 31, 2001 the exercise price and remaining contractual life of
outstanding options was $2.56 and 5 years, respectively.
F-15
At December 31, 2001 the number of options exercisable was 107,111, and the
weighted average exercise price of those options was $2.56.
(11) Earnings (Loss) Per Share
The following table illustrates the computation of basic and diluted
earnings (loss) per common share under the provisions of SFAS No. 128:
2001 2000 1999
------------------- ------------------- -------------------
Numerator:
Numerator for basic and diluted earnings (loss)
per share - net earnings (loss) $ (270,317) (878,121) 38,096
Denominator:
Denominator for basic earnings (loss) per share
- weighted average number of common shares
outstanding during the period 3,064,033 3,005,834 2,946,138
Incremental common shares attributable to
exercise of outstanding options -- -- 15,226
------------------- ------------------- -------------------
Denominator for diluted earnings
(loss) per share 3,064,033 3,005,834 2,961,364
=================== =================== ===================
Basic earnings (loss) per share $ (0.09) (0.29) 0.01
Diluted earnings (loss) per share $ (0.09) (0.29) 0.01
Substantially all options were included in the computation of diluted
earnings per common share for 1999. In 2001 and 2000, all 107,111 stock
options were excluded from the computation of diluted loss per share due to
their antidilutive effect.
(12) Segment Data and Major Customers
The Company's reportable business segments are strategic business units
that offer distinctive products that are marketed through different
channels. The Company has two reportable segments; the meat processing
division (Swiss American) and the pasta division (Royal-Angelus). The Swiss
American Division produces meat products that are sold primarily to pizza
restaurant chains, pizza processors, and food service distributors. The
Royal-Angelus Division produces pasta that is sold primarily to food
processors, private label customers, food service distributors, and
specialty food distributors.
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The following table represents financial information about the Company's
business segments as of and for the three years ended December 31, 2001:
2001 2000 1999
------------------- ------------------- -------------------
Net sales to unaffiliated customers:
Swiss American Division $ 30,310,182 21,428,485 13,254,827
Royal-Angelus Division 5,696,957 5,880,876 7,372,715
------------------- ------------------- -------------------
Total sales $ 36,007,139 27,309,361 20,627,542
=================== =================== ===================
Operating income (loss):
Swiss American Division $ 435,580 (854,291) (2,836,568)
Royal-Angelus Division (616,381) (41,958) 533,974
Corporate (4,399) 32,170 (91,289)
------------------- ------------------- -------------------
Operating loss $ (185,200) (864,079) (2,393,883)
=================== =================== ===================
Identifiable assets:
Swiss American Division $ 18,428,801 17,641,810 17,122,578
Royal-Angelus Division 4,328,435 4,075,823 4,286,900
Corporate 636,596 639,622 1,335,047
------------------- ------------------- -------------------
Total assets $ 23,393,832 22,357,255 22,744,525
=================== =================== ===================
Capital expenditures:
Swiss American Division $ 128,515 587,787 8,984,911
Royal-Angelus Division 65,809 143,866 204,990
Corporate 2,160 -- --
------------------- ------------------- -------------------
Total capital expenditures $ 196,484 731,653 9,189,901
=================== =================== ===================
Depreciation and amortization:
Swiss American Division $ 503,234 480,024 268,256
Royal-Angelus Division 227,901 263,755 291,196
Corporate 4,476 5,561 5,672
------------------- ------------------- -------------------
Total depreciation and amortization $ 735,611 749,340 565,124
=================== =================== ===================
The Company had major customers during 2001, 2000, and 1999 that accounted
for more than 10% of consolidated sales and purchased products, as follows:
Accounts receivable
2001 2000 1999 balance at December 31
----------------- ----------------- ------------------ -------------------------
Customer Sales % Sales % Sales % 2001 2000
------------ ----------- --- ----------- --- ------------ --- ------------- --------
A $ 4,695,600 13% $ 4,117,550 15% $ 1,397,090 7% $ -- --
B 4,443,520 12 3,854,702 14 3,316,544 16 636,618 630,760
C 3,955,478 11 2,943,984 11 2,555,701 12 88,000 365,809
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(13) Commitments and Contingencies
Rent expense for all leases was approximately $197,000 in the year ended
December 31, 1999. The Company did not have any operating leases in 2001 or
2000.
In December 2001, the Company entered into a capital lease for certain
production equipment totaling $566,828, which is included in property and
equipment on the accompanying 2001 balance sheet. The lease has a term of
five years and requires minimum payments based on certain production
volumes. Future minimum lease payments on the capital lease at December 31,
2001 is as follows:
2002 $ 128,361
2003 128,361
2004 128,361
2005 128,361
2006 128,361
-------------------
Total minimum lease payments 641,805
Less amount representing interest (74,977)
-------------------
Present value of net minimum
lease payments 566,828
Less current portion 113,200
-------------------
Long-term portion $ 453,628
===================
As of December 31, 2001 approximately 65% of the Company's employees are
covered by a collective bargaining agreement which expired March 31, 2002.
In addition, another 12% of the Company's employees are covered by a
collective bargaining agreement which expires September 29, 2002.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. Although occasional adverse decisions or
settlements may occur, the Company believes the final disposition of such
matters will not have a material adverse effect on its financial position,
results of operations or liquidity.
(14) Self-Insured Health Benefits
The Company is self-funded for Company provided health insurance benefits
for its nonunion employees. The profit or loss effects of self-insuring
cannot be foreseen and may be adverse. The Company has a reinsurance policy
which covers claims in excess of $50,000 for any covered individual.
(15) Casualty Loss
On August 1, 1998, a fire destroyed one of the Company's two meat
processing facilities located in San Francisco, CA. The destroyed facility
was being leased under an operating lease that expired on November 1, 1998.
The fire destroyed inventory with a net book value of $1,112,435 and
certain
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equipment and leasehold improvements with a net book value of $474,835. The
inventory was insured at market value and the equipment and leasehold
improvement were insured at replacement cost. The Company was also
reimbursed for incremental operating costs under its "Business Interruption
& Extra Expense" coverage. Total insurance proceeds recognized in 1999 and
1998 were $2,806,262 and $5,204,738, respectively, which resulted in gains
of $2,806,262 and $3,204,342 which are included in other income in the
accompanying 1999 and 1998 statements of operations, respectively. The
claim was completely settled and all amounts were fully collected as of
December 31, 1999.
(16) Selected Quarterly Financial Data (Unaudited)
The following summarizes certain unaudited quarterly financial information
for 2001, 2000, and 1999:
Quarter
-----------------------------------------------------------------------------
Fiscal 2001 1st 2nd 3rd 4th Total
-------------------------- ----------------- ----------------- ---------------- ---------------- ---------------
Net sales $ 7,738,681 7,905,495 9,757,489 10,605,474 36,007,139
Operating income (loss) 152,888 (15,453) (284,676) (37,959) (185,200)
Net loss 9,866 (98,634) (238,504) 56,955 (270,317)
Net loss per basic share 0.00 (0.03) (0.08) (0.02) (0.09)
Net loss per diluted share 0.00 (0.03) (0.08) (0.02) (0.09)
Fiscal 2000 1st 2nd 3rd 4th Total
-------------------------- ----------------- ----------------- ---------------- ---------------- ---------------
Net sales $ 5,927,400 5,892,722 7,735,279 7,753,960 27,309,361
Operating income (loss) (253,693) (492,817) (297,088) 179,519 (864,079)
Net loss (232,930) (387,763) (285,024) 27,596 (878,121)
Net loss per basic share (0.08) (0.13) (0.09) 0.01 (0.29)
Net loss per diluted share (0.08) (0.13) (0.09) 0.01 (0.29)
Fiscal 1999 1st 2nd 3rd 4th Total
-------------------------- ----------------- ----------------- ---------------- ---------------- ---------------
Net sales $ 4,935,510 4,773,677 5,069,039 5,849,316 20,627,542
Operating income (loss) (654,068) (863,419) (1,103,399) 227,003 (2,393,883)
Net earnings (loss) 255,234 218,531 (513,197) 77,528 38,096
Net earnings (loss) per 0.09 0.07 (0.17) 0.02 0.01
basic share
Net earnings (loss) per 0.09 0.07 (0.17) 0.02 0.01
diluted share
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PROVENA FOODS INC.
Schedule II - Valuation and Qualifying Accounts
and Reserves Years ended December 31,
2001, 2000, and 1999
Balance at Deductions -
beginning of Provision, net uncollectible Balance at end
Description period of recoveries accounts of period
------------------------ ------------------ ------------------ ----------------- ----------------
Allowance for doubtful
receivables:
2001 $ 59,843 -- 59,843 --
2000 32,166 39,316 11,639 59,843
1999 -- 32,166 -- 32,166
See accompanying independent auditors' report.
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