SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
________________________________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
________________________________________________________________________________
FOR THE QUARTER ENDED MARCH 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
----------------------------------------- ----------------------------------------
(Address of principal executive offices) (ZIP Code)
(909) 627-1082
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(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Provena Foods Inc. Common Stock outstanding as of the
close of the period covered by this report was:
Common Stock 3,048,172 shares
PROVENA FOODS INC.
Form 10-Q Report for the First Quarter Ended March 31, 2001
Table of Contents
-----------------
Item Page
---- ----
PART I. FINANCIAL INFORMATION
------------------------------
1. Financial Statements................................................................. 1
Condensed Statements of Operations................................................... 1
Condensed Balance Sheets............................................................. 2
Condensed Statements of Cash Flows................................................... 3
Notes to Condensed Financial Statements.............................................. 4
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 5
Results of Operations................................................................ 5
Forward Looking Statements........................................................... 5
Swiss American Sausage Co. Meat Division............................................. 5
Royal-Angelus Macaroni Company Pasta Division........................................ 5
The Company.......................................................................... 6
Liquidity and Capital Resources...................................................... 6
New Accounting Standards............................................................. 8
3. Quantitative and Qualitative Disclosures About Market Risk............................. 8
PART II. OTHER INFORMATION
---------------------------
1. Legal Proceedings...................................................................... 8
2. Changes in Securities.................................................................. 8
3. Defaults Upon Senior Securities........................................................ 8
4. Submission of Matters to a Vote of Security Holders.................................... 8
5. Other Information...................................................................... 8
Common Stock Repurchase and Sale..................................................... 8
American Stock Exchange Listing...................................................... 9
Cash Dividends Paid.................................................................. 9
Management Stock Transactions........................................................ 9
6. Exhibits and Reports on Form 8-K....................................................... 9
Signature............................................................................ 9
PART I. FINANCIAL INFORMATION
------------------------------
ITEM I. FINANCIAL STATEMENTS
PROVENA FOODS INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended
March 31,
----------------------
2001 2000
---------- ---------
Net sales $7,738,681 5,927,400
Cost of sales 6,824,153 5,523,545
---------- ---------
Gross profit 914,528 403,855
Operating expenses:
Distribution 324,003 279,412
General and administrative 437,637 378,136
---------- ---------
Operating profit (loss) 152,888 (253,693)
Interest expense, net (194,364) (160,842)
Other income, net 58,942 27,119
---------- ---------
Earnings (loss) before income taxes 17,466 (387,416)
Income tax expense (benefit) 7,600 (154,486)
---------- ---------
Net earnings (loss) $ 9,866 (232,930)
========== =========
Earnings (loss) per share:
Basic $.00 (.08)
========== =========
Diluted $.00 (.08)
========== =========
Shares used in computing earnings (loss) per share:
Basic 3,043,882 2,981,552
---------- ---------
Diluted 3,043,882 2,981,552
---------- ---------
See accompanying Notes to Condensed Financial Statements.
-1-
PROVENA FOODS INC.
Condensed Balance Sheets
March 31, December 31,
Assets 2001 2000
------ ----------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 41,899 88,585
Accounts receivable, less allowance for doubtful
accounts of $21,843 at 2001 and $59,843 at 2000 2,571,308 2,532,019
Inventories 3,500,899 2,881,486
Prepaid expenses 223,285 53,608
Income taxes receivable 398,339 407,843
Deferred tax assets 102,828 102,828
----------- ----------
Total current assets 6,838,558 6,066,369
----------- ----------
Property and equipment, net 15,961,196 16,100,961
Other assets 193,832 189,925
----------- ----------
$22,993,586 22,357,255
=========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Line of credit $ 3,375,885 2,708,921
Current portion of long-term debt 492,135 492,135
Accounts payable 1,499,109 1,179,561
Accrued liabilities 1,181,847 1,378,596
Income taxes payable 7,600 -
----------- ----------
Total current liabilities 6,556,576 5,759,213
----------- ----------
Long-term debt, net of current portion 6,781,818 6,884,781
Deferred tax liability 474,818 474,818
Shareholders' equity:
Capital stock, no par value; authorized 10,000,000
shares; issued and outstanding 3,048,172 at 2001
and 3,035,009 at 2000 4,910,384 4,886,874
Retained earnings 4,269,990 4,351,569
----------- ----------
Total shareholders' equity 9,180,374 9,238,443
----------- ----------
$22,993,586 22,357,255
=========== ==========
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
--------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net earnings (loss) $ 9,866 (232,930)
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities:
Depreciation and amortization 184,088 188,704
Increase (decrease) in provision for bad debts (38,000) 12,000
Decrease (increase) in accounts receivable (1,289) 425,066
Increase in inventories (619,413) (58,376)
Increase in prepaid expenses (169,677) (215)
Increase in income taxes receivable 9,504 (154,488)
Decrease (increase) in other assets (3,907) 4,244
Increase (decrease) in accounts payable 319,548 (182,805)
Decrease in accrued liabilities (196,749) (72,278)
Increase in income taxes payable 7,600 -
--------- --------
Net cash used in operating activities (498,429) (71,078)
--------- --------
Cash flows from investing activities:
Additions to property and equipment (44,323) (356,766)
--------- --------
Net cash used in investing activities (44,323) (356,776)
--------- --------
Cash flows from financing activities:
Payments on long term debt (102,963) (108,634)
Proceeds from line of credit 666,964 -
Proceeds from sale of capital stock 23,510 36,264
Cash dividends paid (91,445) (89,580)
--------- --------
Net cash provided by (used in)
financing activities 496,066 (161,950)
--------- --------
Net decrease in cash and cash equivalents (46,686) (589,794)
Cash and cash equivalents at beginning of period 88,585 834,154
--------- --------
Cash and cash equivalents at end of period $ 41,899 244,360
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 197,715 159,982
Income taxes $ 800 -
========= ========
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Notes to Condensed Financial Statements
March 31, 2001 and 2000 (Unaudited)
(1) Basis of Presentation
--------------------------
The accompanying unaudited financial statements have been prepared in accordance
with the requirements of Form 10-Q and, therefore, do not include all
information and footnotes which would be presented were such financial
statements prepared in accordance with generally accepted accounting principles
for annual financial statement purposes. These statements should be read in
conjunction with the audited financial statements presented in the Company's
Form 10-K for the year ended December 31, 2000. In the opinion of management,
the accompanying financial statements reflect all adjustments which are
necessary for a fair presentation of the results for the interim periods
presented. Such adjustments consisted only of normal recurring items. The
results of operations for the three months ended March 31, 2001 are not
necessarily indicative of results to be expected for the full year.
(2) Inventories
----------------
Inventories at March 31, 2001 and December 31, 2000 consist of:
2001 2000
---------- ---------
Raw materials $1,259,153 1,082,829
Work-in-process 933,322 710,152
Finished goods 1,308,424 1,088,505
---------- ---------
$3,500,899 2,881,486
========== =========
(3) Segment Data
-----------------
Business segment sales and operating income (loss) for the three months ended
March 31, 2001 and 2000 and assets at March 31, 2001 and December 31, 2000 are
as follows:
2001 2000
----------- ----------
Net sales to unaffiliated customers:
Swiss American Sausage Division $ 6,413,644 4,276,024
Royal-Angelus Macaroni Division 1,325,037 1,651,376
----------- ----------
Total net sales $ 7,738,681 5,927,400
=========== ==========
Operating income (loss):
Swiss American Sausage Division $ 324,933 (268,628)
Royal-Angelus Macaroni Division (173,653) 18,621
Corporate 1,608 (3,686)
----------- ----------
Operating income (loss) $ 152,888 (253,693)
=========== ==========
Identifiable assets:
Swiss American Sausage Division $18,203,518 17,641,810
Royal-Angelus Macaroni Division 4,077,038 4,075,823
Corporate 722,534 639,622
----------- ----------
Total assets $23,003,090 22,357,255
=========== ==========
(4) Earnings (Loss) per Share
------------------------------
Basic earnings (loss) per share are net earnings (loss) divided by the weighted
average number of common shares outstanding during the period, and diluted
earnings (loss) per share are net earnings (loss) divided by the sum of the
weighted average plus an incremental number of shares attributable to
outstanding options. Options representing 107,111 shares were not included in
the diluted loss calculations for the three months ended March 31, 2001 and 2000
because their effect was antidilutive.
Three Months Ended March 31,
----------------------------
2001 2000
---------- ----------
Net earnings (loss) $ 9,866 (232,930)
========== ==========
Weighted average number of shares 3,043,882 2,981,552
Incremental shares for options - -
---------- ----------
Weighted average plus incremental shares 3,043,882 2,981,552
========== ==========
Basic earnings (loss) per share $ .00 (.08)
========== ==========
Diluted earnings (loss) per share $ .00 (.08)
========== ==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended
Results of Operations March 31,
--------------------- -----------------------
(Unaudited) 2001 2000
---------- ----------
(amounts in thousands)
Net sales by division:
Swiss American $ 6,414 $ 4,276
Royal-Angelus 1,325 1,651
---------- ----------
Total $ 7,739 $ 5,927
========== ==========
Sales in thousands of
pounds by division:
Swiss American 4,532 2,967
Royal-Angelus 2,659 3,322
Forward-Looking Statements
--------------------------
The following discussion may contain "forward-looking statements" that express
or imply expectations of future performance, developments or occurrences.
Actual events may differ materially from these expectations due to uncertainties
relating to the economy, competition, demand, commodities, credit markets,
energy supplies and other factors.
Swiss American Sausage Co. Meat Division
----------------------------------------
Sales by the processed meat division increased about 50% in dollars and 53% in
pounds in the 1st three months of 2001 over the same period in 2000. Sales in
dollars increased proportionately less than in pounds, in spite of increasing
meat prices, because much of the sales increase related to products which
normally sell for lower prices per pound. Swiss operated at a $324,933 profit
in the 1st quarter of 2001 compared to a $268,628 loss for the 1st quarter of
2000. The profit improvement resulted from increased sales and increased
margins.
Royal-Angelus Macaroni Company Pasta Division
---------------------------------------------
The pasta division's sales decreased about 20% in both dollars and pounds in the
1st quarter of 2001 compared to the 1st quarter of 2000. Royal operated at a
$173,653 loss for the 1st quarter of 2001 compared to an $18,621 profit for the
1st quarter of 2000. Sales and operating results were both adversely affected
by competition resulting from increased industry capacity, but most of the loss
occurred in January 2001, when production was shut down on five days due to
electric utility power interruptions. The pasta division has added a manager
and intensified its efforts in sales and marketing.
-5-
The Company
-----------
Company sales were up about 31% and the Company realized nominal net earnings in
the 1st quarter of 2001 compared to a net loss of $232,930 for the 1st quarter
of 2000. Swiss accounted for the increased sales and the improvement in
earnings. The Company's gross profit margin for the 1st quarter of 2001 was
11.8% compared to 6.8% a year ago. The Company's margin increased because
Swiss's margin increased, with Royal's margin down as a result of sales
decreasing proportionately more than production costs.
General and administrative expenses were up about $60,000 for the 1st quarter of
2001 compared to the same period in 2000, primarily from increased health
benefit costs offset by reduced printing expense and bad debt expense at Swiss.
Distribution expenses were up about $45,000 because of increased freight on
increased sales at Swiss with smaller increases for advertising, liability
insurance and Royal label design costs. Net interest expense increased about
$34,000 because of higher borrowings under the bank line of credit. Other
income increased because of the recovery and sale of waste products at Swiss.
Meat plant employees are represented by United Food and Commercial Workers
Union, Local 588, AFL-CIO, CLC under a collective bargaining agreement which
expires March 31, 2002. Pasta plant employees are represented by United Food and
Commercial Workers Union, Local 1428, AFL-CIO, CLC under a collective bargaining
agreement which expires September 29, 2002. There has been no significant labor
unrest at the Company's plants and the Company believes it has a satisfactory
relationship with its employees.
Liquidity and Capital Resources
-------------------------------
The Company has generally satisfied its normal working capital requirements with
funds derived from operations and borrowings under its bank line of credit,
which is part of a credit facility with Comerica Bank-California. The line of
credit is payable on demand, is subject to annual review, and bears interest at
a variable annual rate of 0.75% over the bank's "Base Rate." The maximum amount
of the line of credit is the lesser of $3,000,000, or 30% of inventories plus
80% of receivables, determined monthly. At March 31, 2001 the "Base Rate" was
8.0% per annum and 30% of inventories plus 80% of receivables was $3,107,316.
At March 31, 2001 the Company had $3,375,885 of borrowings under the bank line
of credit, representing an over-advance by the bank in anticipation of receipt
of an income tax refund.
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 new meat plant.
The bonds bear a variable rate of interest payable monthly and set weekly at a
market rate - 3.45% per annum at March 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 the bond principal per year. Monthly payments of bond
principal into a sinking fund began May 1, 2000, total $76,700 the first year
and increase about 5.6% each year until May 1, 2022, when $813,500 of remaining
principal is payable in 18 equal monthly payments.
-6-
Also as part of the credit facility, the bank made four loans to the Company for
the new meat plant, a $1,280,000 real estate loan and three equipment loans
totalling $2,614,788. The real estate loan was made in December 1999, bears a
fixed rate of interest of 9.1% per annum and is payable in equal monthly
payments of principal and interest over its 25 year term. Each equipment loan
bears a variable rate of interest and is payable in equal monthly payments of
principal plus interest over its term, with issue date, initial amount, term and
rate as follows: July 1999, $1,000,000, 7 year, bank's "Base Rate"; September
1999, $1,200,000, 7 year, bank's "Base Rate" plus 0.25%; and December 1999,
$414,788, 5 year, bank's "Base Rate" plus 0.75%.
All parts of the credit facility are secured by substantially all of the
Company's assets, including accounts receivable, inventory, equipment and
fixtures, the Company's two Chino buildings and the new meat plant, none of
which is otherwise encumbered. The credit facility prohibits mergers,
acquisitions, disposal of assets, borrowing, granting security interests, and
changes of management and requires a tangible net worth greater than $9,000,000,
a debt to tangible net worth ratio less than 2, a quick ratio greater than 0.45,
and cash flow coverage greater than 1.30. The Company was in default under the
quick-asset-ratio covenant at March 31, 2001 and the bank has waived the
default. The Company expects to be in compliance with all covenants at June 31,
2001.
Cash decreased $46,686 in the 1st quarter of 2001 compared to a $589,794
decrease in the 1st quarter of 2000. Operating activities used $498,429 of cash
primarily from an increase in inventories, augmented by an increase in prepaid
expenses and a decrease in accrued liabilities, and partially offset by
depreciation and amortization and an increase in accounts payable. Inventories
increased because of increased sales and increasing meat costs. Investing
activities used $44,323 of cash for modest additions to property and equipment,
and financing activities produced $496,066 of cash primarily from borrowings
under the bank line reduced by payments on long term debt and dividends.
The Company expects that its operations and bank line of credit will provide
adequate working capital to satisfy the normal needs of its operations for the
foreseeable future, including cash flow to service the debt incurred to finance
the new meat plant. The 1st quarter usually requires higher cash expenditures
than any other quarter because of annual retirement benefit contributions and
initial insurance premiums, and cash flow during the 1st quarter of 2001 was
tighter than most because of almost $300,000 of debt service and over $600,000
of inventory buildup. Not only has the Company, with the help of Comerica Bank-
California, met the cash flow demands of the 1st quarter, but Swiss has shown
that it can earn a profit after the depreciation and interest expense arising
from the new plant.
The Company believes that it has a good relationship with Comerica Bank-
California, as evidenced by the bank making an over-advance on the line of
credit to ease cash flow tensions and waiving a default under the financial
covenants. That relationship is crucial to the Company, because the line of
credit is payable on demand, the Company could not make an immediate repayment
of the line of credit, and a failure to repay the line after demand would render
the entire credit facility in default. As a result, neither a default under a
financial covenant nor the bank's waiver of it affects the bank's power to cause
the credit facility to be
-7-
in default and require that it be restructured or refinanced. The Company
regards the financial covenants as check-points triggering a review by the bank,
and the bank's waiver as an indication of its current intention to maintain the
credit facility.
New Accounting Standards
------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" in June 1998. SFAS No. 133, as amended by SFAS Nos. 137
and 138, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" in
December 1999. SAB No. 101, as amended by SAB Nos. 101A and 101B, is effective
no later than the 4th quarter of fiscal years beginning after December 15, 1999.
Application of these standards did not have a material effect on the information
presented or the Company's results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The industrial development bonds, the bank line of credit, and the equipment
loans bear variable rates of interest (see Liquidity and Capital Resources under
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations) which tend to follow market interest rates and change the
Company's interest expense in the same direction as changes in interest rates.
A 1% per annum change in the rate borne by the industrial development bonds
would change annual interest expense by almost $40,000. Assuming an average
bank line of credit balance of $3,000,000 plus $1,900,000 average principal
balance of equipment loans, a 1% per annum change in the rate borne by those
borrowings would change annual interest expense by $49,000.
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS No significant litigation.
ITEM 2. CHANGES IN SECURITIES None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
ITEM 5. OTHER INFORMATION
Common Stock Repurchase and Sale
--------------------------------
During the 1st three months of 2001, the Company did not purchase any shares of
its common stock under its stock repurchase program.
-8-
During the 1st three months of 2001, the Company sold 13,163 newly issued shares
of its common stock under its 1988 Employee Stock Purchase Plan, at an average
selling price of $1.79 per share. From inception of the Plan through March 31,
2001, employees have purchased a total of 569,718 shares.
American Stock Exchange Listing
-------------------------------
The Company's common stock trades on the American Stock Exchange under the
ticker symbol "PZA".
Cash Dividends Paid
-------------------
A cash dividend of $0.03 per share was paid March 31, 2001 to shareholders of
record March 10, 2001.
Management Stock Transactions
----------------------------
No purchases or sales of the Company's common stock by officers or directors
were reported during the 1st quarter of 2001, except 52 shares purchased by John
M. Boukather, director, under a broker's dividend reinvestment program.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are filed with this report.
(b) No reports on Form 8-K were filed during the three months ended March 31,
2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 28, 2001 PROVENA FOODS INC.
BY /s/ Thomas J. Mulroney
____________________________
Thomas J. Mulroney
Vice President and
Chief Financial Officer
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