-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tk6WAkDyk+gYMkOlYGr5pwbrumnI616sUB6nmELxjuMtEuEHdlPF3VD30xyYhrhm gxprlQd51qLPYUpu7u1W+A== 0000898430-97-000781.txt : 19970303 0000898430-97-000781.hdr.sgml : 19970303 ACCESSION NUMBER: 0000898430-97-000781 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970228 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVENA FOODS INC CENTRAL INDEX KEY: 0000814139 STANDARD INDUSTRIAL CLASSIFICATION: SAUSAGE, OTHER PREPARED MEAT PRODUCTS [2013] IRS NUMBER: 952782215 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10741 FILM NUMBER: 97546431 BUSINESS ADDRESS: STREET 1: 5010 EUCALYPTUS AVE CITY: CHINO STATE: CA ZIP: 91710 BUSINESS PHONE: 7146271082 MAIL ADDRESS: STREET 1: 5010 EUCALYPTUS AVENUE CITY: CHINO STATE: CA ZIP: 91710 10-K 1 FORM 10-K DATED 12-31-96 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, 1996 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 - -------------------------------------------------------------------------------- (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 February 22, 1997 was $7,383,348. The number of shares of Provena Foods Inc. Common Stock outstanding on February 22, 1997 was 2,812,704. 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. 1996 FORM 10-K ANNUAL REPORT Table of Contents
Item Page - ---- --- PART I ------ 1. Business................................................................................... 1 2. Properties ................................................................................ 4 3. Legal Proceedings.......................................................................... 5 4. Submission of Matters to a Vote of Security Holders........................................ 5 PART II ------- 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 8. Financial Statements and Supplementary Data................................................ 11 9. Disagreements on Accounting and Financial Disclosure....................................... 11 PART III -------- 10. Directors and Executive Officers of the Registrant......................................... 11 11. Executive Compensation..................................................................... 12 12. Security Ownership of Certain Beneficial Owners and Management............................. 14 13. Certain Relationships and Related Transactions............................................. 14 PART IV ------- 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 15 -------------- Signatures................................................................................. 16
PART I ------ ITEM 1. BUSINESS General - ------- Registrant (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"), and its pasta business is conducted through the Royal-Angelus Macaroni Company Division ("Royal-Angelus"). The Company acquired its present businesses between 1972 and 1975. The predecessor of Swiss-American was founded in 1922 and the two predecessors to Royal-Angelus, 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 about $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 - -------------- During the years ended December 31, 1996 and 1995, sales by Swiss American accounted for 68.1% and 58.3%, respectively, of the Company's net sales. 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 American competes with numerous producers of processed meats, many of which are larger and have greater financial resources than the Company. Swiss American's competitors include large national meat packers such as Geo. A. Hormel & Co., as well as smaller regional meat processors. Pizza processors that manufacture their own meat products diminish the market for Swiss American's products. The Company competes in the meat processing business by emphasizing predictable quality and consistency. The meat processing activities of the Company are conducted in its plant located in San Francisco, California. The meat processing activities of Swiss American are typified by its processing of pepperoni, its principal product, which consists of the following steps: (i) the purchase of frozen 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 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 crumbles which are quick-frozen nuggets of a pre-cooked meat product, such as the sausage on a sausage pizza. The Company's crumbles line, which became operational in 1993, extrudes the ground and blended ingredients into nuggets which are cooked and quick-frozen in one continuous operation. 1 The Company estimates the theoretical production capacity of its San Francisco plant to be 27,000,000 pounds per year. Although the Company does not have space within its San Francisco plant to further increase its capacity, the plant's capacity is adequate for the currently contemplated needs of Swiss American. Royal-Angelus - ------------- During the years ended December 31, 1996 and 1995, sales by Royal-Angelus accounted for 31.9% and 41.7%, respectively, of the Company's net sales. The Company sells its pasta products primarily to food processors and canners, private label customers, food service distributors, and specialty food distributors. Royal-Angelus' 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-Angelus' 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-Angelus' 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. Beginning in the latter part of 1987, the Company's pasta products have been produced at Royal-Angelus' production plant in Chino, California. In April 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 1999. The pasta plant has a theoretical production capacity estimated at 30,000,000 pounds per year, adequate for the foreseeable production needs of Royal-Angelus. 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. 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 and Vegeroni are used on consumer products in limited distribution. Capo di Monte is not used on consumer products. No substantial portion of the Company's sales is dependent upon any trademark. 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, 2 market speculation, governmental trade and agricultural policies, and other unpredictable factors. The price of durum semolina flour, the pasta division's primary ingredient, increased about 50% following the storms in the Midwest in 1993 and has remained up since then, decreasing slightly in 1996, but remaining well above pre-1993 levels. 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 two full-time salaried salesmen. 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 revenues 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, 1996:
Number of Division Company Division Customers Sales % Sales % -------- --------- -------- ------- Swiss American 3 57% 39% Royal-Angelus 3 31% 10% --- --- Totals 6 42%
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, 1996, the Company employed 150 full-time employees, 83 in production at Swiss American in San Francisco, California, 55 in production at Royal-Angelus in Chino, California, 5 in clerical and office functions, 2 in sales activities, and 5 in management activities. The Company's San Francisco plant employees are represented by the United Food and Commercial Workers Union Local 101, AFL-CIO, under a collective bargaining agreement renewed July 10, 1995 to expire March 31, 1998. 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 - --------------- From April 1, 1991 to December 31, 1993, the Company was totally self-funded for Company provided health insurance benefits for its non-union employees. On January 1, 1994, the Company became partially insured for the excess over $30,000 of claims of any covered person incurred and paid during the year, increased to $40,000 after 1995, but remains self-funded for claims up to $40,000. The Company is exposed to the risk of an extraordinary number of significant claims but not one or more very large claims. 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 1984, the Company has qualified for the U. S. Department of Agriculture's Total Quality Control System 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 plants in San Francisco to inspect meat products processed by the Company and to review the Company's self-inspection records. 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 San Francisco 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 original meat processing plant is an approximately 48,000 square foot facility located in San Francisco occupied under a lease which expires in 1998. In 1990 the Company occupied, under a lease expiring in 2001, an approximately 45,000 square foot facility nearby its main plant which it improved by building a dryer and relocating its slicing operations. The theoretical production capacity of the meat plant is estimated at 27,000,000 pounds per year, adequate for the currently contemplated needs of the division, but the plant does not have space to increase the production capacity or the variety of meat products which can be produced. In 1998, the Company intends to move the meat plant into a newly leased or purchased building with the same capacity as the present plant, but with the capability of expansion to increase capacity or product variety. 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 April 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 1999. 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, adequate to fulfill the foreseeable needs of the of the pasta division, and with the capability of expansion. The Company has not carried earthquake insurance on any of its properties, except its original pasta plant building beginning in 1993. 4 ITEM 3. LEGAL PROCEEDINGS The Company 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 or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of shareholders on Tuesday, April 23, 1996, at 11:00 a.m. at the Company's principal office. Shareholders representing 1,794,772 or 65.2% of the 2,749,289 shares entitled to vote were present in person or by proxy, with 97,785 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 1,780,490 -0- 14,272 Theodore L. Arena 1,776,790 3,700 14,272 Ronald A. Provera 1,779,890 600 14,272 Santo Zito 1,780,490 -0- 14,272 Thomas J. Mulroney 1,780,490 -0- 14,272 James P. McClune 1,492,260 288,230 14,272 Louis A. Arena 1,780,490 -0- 14,272 Joseph W. Wolbers 1,491,660 288,830 14,272 John M. Boukather 1,491,260 289,230 14,272
PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock was traded on the over-the-counter market and was reported on The National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") from January 19, 1988 through May 9, 1991, when the Company's common stock was admitted to trading 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 ----- ------ ----- ------ 1994 High 3-1/4 2-15/16 3 3 Low 2-13/16 2-11/16 2-3/8 2-1/4 1995 High 2-13/16 2-3/4 3-1/16 5-3/8 Low 2-3/8 2-1/4 2-5/16 2-7/16 1996 High 4 3-1/4 2-3/4 2-3/4 Low 2-5/16 2-5/16 2-1/4 2-3/8
The closing price on December 31, 1996 was $2-7/16. 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, 1996 the Company had issued and outstanding 2,798,021 shares held by 235 shareholders of record. In addition, the Company estimates that there are approximately 800 shareholders holding shares in street or nominee names. 5 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 has paid the following annual amounts per share: 1996 1995 1994 1993 1992 1991 1990 1989 1988 DIVIDENDS $0.10 $0.18 $0.1725 $0.1625 $0.16 $0.14 $0.125 $0.11 $0.10 The declaration and timing of future dividends, if any, will depend on the Company's financial condition and results of operations 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. 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, ChaseMellon Shareholder Services LLC, Stock Transfer Department, Washington Bridge Station, P.O. Box 469, New York, NY 10033, (800) 522-6645. 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 1996, the Company purchased no shares under its stock repurchase program, but received 8,600 shares in payment of the exercise price of options at an average fair market value of $2.50 per share. 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 1996 employees purchased 51,990 newly issued shares at an average price of $2.68 per share. Employees have purchased a total of 338,968 shares under the plan through December 31, 1996, at an average price of $3.05 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 $140,000 per year. Employees exercised Incentive Stock Options in 1996 to purchase 16,000 shares at an exercise price of $2.25 per share. 6 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below under the headings STATEMENT OF OPERATIONS DATA AND BALANCE SHEET DATA for, and as of the end of, each of the years in the five-year period ended December 31, 1996 is derived from the financial statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. 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 financial statements for, and as of the end of, each of the years in the three- year period ended December 31, 1996, and the report thereon, 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, 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (Amounts in thousands except per share data) STATEMENT OF OPERATIONS DATA: Net Sales $28,895 23,424 26,265 22,924 22,570 Cost of sales 26,037 21,348 23,812 21,155 20,743 ------- ------- ------- ------- ------- Gross profit 2,858 2,076 2,453 1,769 1,827 Distribution, general and administrative expenses 2,002 2,021 2,082 1,954 1,984 ------- ------- ------- ------- ------- Operating income (loss) 856 55 371 (185) (157) Interest income (expense), net (75) (66) (7) 3 (7) Other income, net 113 184 156 161 .80 ------- ------- ------- ------- ------- Earnings (loss) before income tax expense (benefit) 894 173 520 (21) (84) Income tax expense (benefit) 332 84 200 (5) (24) ------- ------- ------- ------- ------- Net earnings (loss) $ 562 89 320 (16) (60) ======= ======= ======= ======= ======= Earnings (loss) per share $ .20 .03 .12 (.01) (.02) ======= ======= ======= ======= ======= Cash dividends paid per common share $ .10 .18 .1725 .1625 .16 Weighted average number of common shares outstanding (1) 2,767 2,705 2,669 2,653 2,628 BALANCE SHEET DATA (end of period): Working capital $ 3,571 2,832 3,180 3,029 3,438 Property and equipment (net) 4,705 5,083 4,070 4,258 4,276 Total assets 10,414 10,050 9,036 9,126 9,238 Long-term debt 960 969 - - - Shareholders' equity 7,357 6,915 7,245 7,274 7,694 - -----------------------------------------------------------------------------------------------------------------------------------
(1) The Company sold shares under its employee stock purchase plan, sold received shares in exercise of incentive stock options and shares under its incentive stock option plan, repurchased outstanding shares in the years as shown: 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Purchase Plan Shares Sold 51,990 57,223 54,461 46,485 41,201 Incentive Option Shares Sold 16,000 53,555 52,000 - - Received in Exercise of Options 8,600 18,500 31,457 - - Outstanding Shares Repurchased - 52,289 28,757 32,736 16,692 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, 1996, 1995 and 1994:
Year Ended December 31, ----------------------- 1996 1995 1994 (Dollars in thousands) Net sales $28,895 100.0% $23,424 100.0% $26,265 100.0% Cost of sales 26,037 90.1 21,348 91.1 23,812 90.7 ------- ----- ------- ----- ------- ----- Gross profit 2,858 9.9 2,076 8.9 2,453 9.3 Distribution, general and administrative expenses 2,002 6.9 2.021 8.7 2,082 7.9 ------- ----- ------- ----- ------- ----- Operating income 856 3.0 55 .2 371 1.4 Interest income, net (75) (.3) (66) (.3) (7) - Other income, net 113 .4 184 .8 156 .5 ------- ----- ------- ----- ------- ----- Earnings before income tax expense 894 3.1 173 .7 520 2.0 Income tax expense 332 1.1 84 .3 200 .8 ------- ----- ------- ----- ------- ----- Net earnings $ 562 1.9% $ 89 .4% $ 320 1.2% ======= ===== ======= ===== ======= ===== Sales in thousands of pounds by division SWISS AMERICAN 13,475 9,990 11,753 ROYAL-ANGELUS 18,213 18,825 16,688
Comparison of Years Ended December 31, 1996 and 1995 - ---------------------------------------------------- In 1996, sales of $28,895,372 were up 23% from 1995 sales of $23,424,677, as the result of increased sales at the Swiss American meat division. The meat division's sales were up about 44% in dollars and 35% in pounds in 1996 over 1995 and Swiss had a substantial operating profit in 1996 versus a substantial loss in 1995. Swiss's sales for the 4th quarter of 1996 were up 41% in dollars and 26% in pounds over the 4th quarter of 1995. Sales increased proportionately more in dollars than in pounds because of higher selling prices reflecting higher meat costs. The increase in sales and profitability at Swiss resulted from special pizza- chain orders and a reversal of a long term erosion in sales and profitability which began in 1991. The Company continues to seek a meat processing business complementary to Swiss which could be combined with Swiss to enhance Swiss's profitability, but currently has no likely prospect. The Royal-Angelus pasta division's sales decreased about 6% in dollars and 3% in pounds in 1996 over 1995, after record annual sales in both dollars and pounds in 1995. The pasta division's sales for the 4th quarter of 1996 were down 5.6% in dollars and 1.1% in pounds over the same quarter of 1995. The percent decreases were higher in dollars than in pounds because of a higher proportion of sales of bulk products rather than retail-packaged products. The cost of semolina flour increased about 50% in 1993 and has remained up since then, decreasing slightly in 1996 but remaining well above pre-1993 levels. This cost increase puts pressure on margins and prices, because if passed on to consumers they might reduce consumption, and if passed on to customers, they might seek a cheaper supplier. At the same time, increasing industry capacity is causing increased price competition, adversely affecting sales and prices. The high flour prices and increased price competition caused Royal's operating income to be 35% lower in 1996 than 1995. The Company's gross profit for 1996 was $2,858,000 or 9.9% of net sales compared to $2,076,000 or 8.9% of net sales for 1995. Gross profit increased absolutely and as a percent of sales because Swiss's sales increased but its production 8 costs increased less than proportionate to its sales. Distribution, general and administrative expenses for 1996 were down about 1% from 1995. Distribution expense was up about $14,000 or 2% despite increased freight on a 23% increase in sales, because of decreases in Swiss's salesmen payroll and sales commissions. Administrative expense was down about $33,000 because of lower bad debt expense and collections on doubtful accounts, partially offset by higher clerical payroll, consulting fees relating to Swiss and other outside services. Other income decreased about $70,000 because a lease of a vacant lot being sublet and a space sharing arrangement at Swiss both ended. Net interest expense increased about $9,000 because of interest on the term loan used to purchase the 2nd Royal building. Comparison of Years Ended December 31, 1995 and 1994 - ---------------------------------------------------- In 1995, sales of $23,424,000 were down 11% from 1994 sales of $26,265,000, despite record sales by the Royal-Angelus pasta division. The Swiss American meat division's sales were down about 21% in dollars and 8.5% in pounds in 1995 versus 1994 and Swiss had an operating loss in 1995 substantially greater than in 1994. Swiss's sales for the 4th quarter of 1995 were down 1.4% in dollars but up 6.2% in pounds compared to the 4th quarter of 1994. Sales decreased proportionately more in dollars than in pounds because of a combination of lower meat costs and intense competition. The decrease in sales and profitability at Swiss was a continuation of a long term erosion in sales and profitability which began in 1991 and is attributed to over-capacity to produce pepperoni for pizza, reduced growth in pizza consumption and intense competition. The most likely way to improve Swiss's performance would be to increase its sales. Management concluded that there was no reasonable prospect of growing Swiss back to profitability and engaged a consultant to seek a specialty meat processing business complementary to Swiss which could be combined with Swiss to result in a profitable meat business by having a meat plant operating near capacity. The Royal-Angelus pasta division's sales increased about 10% in dollars and 13% in pounds in 1995 over 1994, record annual sales in both dollars and pounds for Royal. The pasta division's sales for the 4th quarter of 1995 were up 4.2% in dollars and 22% in pounds over the same quarter of 1994. The percent increases were lower in dollars than in pounds because of sales of a higher proportion of high volume rather than specialty products and the continuing effect of the high cost of flour. The cost of semolina flour began rising in 1993 and was up about 50% from pre-1993 levels through 1995. This cost increase put pressure on margins and prices, because if the full increase was passed on to the consumer, less consumption might result and if it was passed on to the Company's customers, they might seek a cheaper supplier. This pressure on margins and prices caused Royal's operating profit to be 6% lower in 1995 than 1994, despite increased sales. The Company's gross profit for 1995 was $2,076,000 or 8.9% of net sales compared to $2,453,000 or 9.3% of net sales for 1994. Gross profit decreased absolutely and as a percent of sales because of continuing pressure on margins at both divisions and the inefficiency of operating at low volumes at Swiss. Distribution, general and administrative expenses for 1995 were down about 3% from 1994. Distribution expense was down about $76,000 or 8% compared to an 11% decrease in sales, because salesmen payroll did not decrease and the Company bore the freight on a higher proportion of sales at both divisions. Administrative expense was up about $15,000 primarily because of an increase in bad debt expense. Other income increased about $27,000 and net interest expense increased about $60,000 primarily because of rent from the building adjacent to the pasta plant purchased in 1995 and interest on the term loan used to purchase it. 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. At December 31, 1996 the Company had no borrowings under its $2,000,000 unsecured bank line of credit with Wells Fargo Bank, NA. The line was renewed in May 1996 to expire June 1, 1997, and bears interest at a variable rate of 3/8% over prime. The line provides that if a financial covenant is violated, the Company agrees to grant the bank a security interest in receivables, inventories and equipment. The line prohibits mergers, acquisitions, 9 lending, borrowing, guaranteeing, annual capital expenditures over $500,000 and new annual lease obligations over $100,000 and requires a minimum tangible net worth of $6,790,000, a maximum debt to tangible net worth ratio of 0.75, a minimum debt coverage ratio of 1.75, a minimum current ratio of 2, profitable operations on a cumulative quarterly basis and a zero balance for 30 days during the term. The last requirement was fulfilled in early July 1996. The Company is not in violation of any financial covenants. In April 1995, Wells Fargo Bank, NA made a 5 year term loan of $975,000 to the Company to purchase the 2nd Royal building, secured by the building, bearing interest at 2% over the bank's "LIBOR" rate, with a $960,195 balance at December 31, 1996, including the $8,460 current portion. The loan is payable in monthly payments of $705 principal plus accrued interest and will have a $932,700 principal balance payable at the end of the term. The pasta division occupies 40% of the building and 60% is leased to a tenant. The Company's pasta plant in Chino, California, after the addition of a third short goods line in 1996, has a theoretical production capacity estimated at 30,000,000 pounds per year compared to about 18,213,000 pounds sold in 1996. The plant has the capacity to fulfil the foreseeable needs of the pasta division with adequate space for expansion. Swiss American Sausage division's San Francisco meat processing plant has a theoretical production capacity estimated at 27,000,000 pounds per year, compared to about 13,475,000 pounds sold in 1996. The meat plant's present capacity is adequate for the currently contemplated needs of the division, but the plant does not have space to increase its capacity or the variety of meat products which can be produced. The lease of the main production building expires in 1998 and in 1998 the Company intends to move the plant into a newly leased or purchased building with the same capacity as the present plant, but with the capability of increasing capacity or product variety. Accomplishing the move requires locating and acquiring a suitable building, improving the building for use as a meat processing plant, installing meat processing equipment, arranging for a lessor or lender or both to finance the acquisition and improvement of the building and installation of equipment, and obtaining the consent of Wells Fargo Bank, NA to the transaction, all of which remain to be done. The annual cost to Swiss of the new plant building will exceed the annual cost of its two current buildings and Swiss will bear the cost of rent on its 2nd building until the lease expires in 2001, less any amount received from subletting the 2nd building. Additions to property and equipment of about $300,000 are anticipated for 1997. In 1994 cash decreased about $51,000. Operating activities produced about $700,000 of cash from earnings, depreciation, reduced receivables and increased accrued expenses, offset by higher inventories and lower accounts payable. Investing activities used $302,000 for net capital expenditures and financing activities used $450,000 for dividends and reduction of bank debt, less net stock proceeds. For the first 3 quarters of 1994, both divisions had higher sales in dollars and pounds than in the same quarter of 1993, but in the 4th quarter of 1994 Swiss's sales declined compared with the 4th quarter of 1993, resulting in higher inventories at year end than desired. In 1995 cash increased about $294,000. Operating activities produced about $1,297,000 primarily from earnings, depreciation, a decrease in inventories and increases in accounts payable and accrued expenses. Investing activities used $578,000 for net capital expenditures and financing activities used $425,000 for dividends offset by net stock proceeds. Company sales decreased during 1995 and inventories were reduced by over $500,000. The Company purchased the 2nd Royal building in 1995, incurring $975,000 of long term debt and using about $300,000 of cash. In 1996 cash decreased about $85,000. Operating activities produced about $238,000, principally from earnings and depreciation offset by increases in receivables and inventories and a decrease in payables. Investing activities used $194,000 for net capital expenditures and financing activities used $129,000 for dividends offset by net stock proceeds. The Company's inventories and receivables normally reflect the level of its sales, and in 1996 sales were up 23%, resulting in a $209,000 increase in receivables and a $631,000 increase in inventories, following a $502,000 reduction in inventories in 1995 on reduced sales. In 1997 quarterly cash dividends will continue to be paid if the Board believes that earnings and cash flow are adequate. 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 10 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 $139,087 in 1996 and may be as much as $140,000 or more in 1997. The Company believes that its operations and bank line of credit will provide adequate working capital to satisfy the needs of its operations for the foreseeable future. The Company has no long term debt except the $960,195 secured by 2nd Chino building. All of its other assets, including inventories, receivables, equipment and its original Chino pasta plant are unencumbered. 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. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF 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 64, has been a vice president and director of the Company since its formation in 1972, General Counsel from 1986 to 1992, and Chairman and Chief Executive Officer since 1992. He is a member of the audit and option committees. THEODORE L. ARENA, age 54, has been the General Manager of Swiss American since 1976 and has been the President and a director of the Company since 1985. He is the nephew of Louis A. Arena, a director of the Company. RONALD A. PROVERA, age 59, has been the secretary and a director of the Company since its formation in 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 Royal-Angelus. He is a member of the option committee. SANTO ZITO, age 60, has been the Company's plant engineer since 1976, and a vice president and director of the Company since its formation in 1972. He is currently the General Manager of the pasta division. He is a member of the option committee. THOMAS J. MULRONEY, age 51, 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 74, has been a director of the Company since 1972, a vice president from 1972 to 1989, and General Manager of the Royal-Angelus Macaroni Co. division from 1975 until his retirement in 1989. JOSEPH W. WOLBERS, age 67, has been a director of the Company and Chairman of the audit committee since 1990. He retired in 1989 as a vice president of First Interstate Bank where he had been employed since 1950. JOHN M. BOUKATHER, age 60, 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 and member of the audit committee since 1987. 11 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth for the years ended December 31, 1996, 1995 and 1994, all compensation of all executive officers of the Company serving at December 31, 1996.
Annual SEP/IRA Name and Position Year Salary Contributions - ----------------- ---- ------ ------------- John D. Determan, 1996 $ 62,791 $ 9,419 Chief Executive Officer 1995 63,098 9,465 1994 100,686 15,103 Theodore L. Arena, 1996 107,135 16,070 President 1995 105,887 15,883 1994 104,973 15,745 Ronald A. Provera, 1996 103,568 15,535 Secretary 1995 103,338 15,501 1994 102,474 15,371 Santo Zito, 1996 106,246 15,937 Vice President 1995 111,586 16,738 1994 104,548 15,582 Thomas J. Mulroney, 1996 102,161 15,324 Chief Financial Officer 1995 101,693 15,254 1994 101,262 15,189
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 any executive officer and does not provide them with automobiles, other perquisites, employment contracts or "golden parachute" arrangements. Officers who are over 5% shareholders have not received an increase in their basic weekly wage since 1986, except that the compensation of John D. Determan, currently at the same basic wage as it had been since 1986, was increased only for the year 1994 to $100,000. The annual salary is as reported on Form W-2 and includes the cost of life insurance and other costs taxable to the officer. 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. The Company makes contributions under the plan at 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 1996, the Company contributed $393,880 to IRA's under the plan. 12 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 is 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 options may become exercisable in such installments as may be established by the Option Committee. The purchase price of shares covered by an option may not be less than the market value of the shares on the date of grant. The term of an option may not exceed 10 years and an option may not become exercisable in any year with respect to the purchase of more than $100,000 worth of shares based on the market value on the date of grant. In August 1987, options were granted under the plan to purchase 185,000 shares at a price of $7.00 per share, 125,000 to Theodore L. Arena, 30,000 to Thomas J. Mulroney and 30,000 to another employee. In June 1988, those options were terminated and options were granted to purchase 230,000 shares at a price of $3-5/8 per share, 155,000 to Mr. Arena, 30,000 to Mr. Mulroney and the balance to three other employees. In December 1992, the outstanding options were terminated and options were granted to purchase 260,000 shares at a price of $2- 1/4 per share, 150,000 to Mr. Arena, 30,000 to Mr. Mulroney, and the balance to four other employees. No options were exercised prior to 1994. In 1994, options were exercised to purchase 52,000 shares, including 30,000 by Mr. Arena and 6,000 by Mr. Mulroney. In 1995, options were exercised to purchase 53,555 shares, including 30,000 by Mr. Arena and 6,000 by Mr. Mulroney. In 1996, options were exercised to purchase 16,000 shares, none by executive officers. The following table shows, for the two executive officers, the number of unexercised options held on January 1, 1997, the number exercisable and unexercisable and their aggregate value based on the year end closing price of $2-7/16. Option Values at January 1, 1997
Number of Unexercised Value of Unexercised In-the- Options at 1/1/97 Money Options at 1/1/97 Name Exercisable/Unexercisable Exercisable/Unexercisable Theodore L. Arena 60,000/ -0- $11,250/ -0- Thomas J. Mulroney 12,000/ -0- $ 2,250/ -0-
Compensation of Directors - ------------------------- Directors who are not officers or employees are paid a fee of $500 for each board meeting or board committee meeting attended. 13 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, 1996.
Shares Beneficially Owned ----------------------------------------- Without Options(3) Options Exercised(4) ------------------ -------------------- Name or Category(1) Number Percent Number Percent - ------------------- ------ ------- ------ ------- John D. Determan 335,327 12.0% 335,327 11.5% Penny S. Bolton (2) 378,463 13.5% 378,463 13.0% Theodore L. Arena 140,994 5.0% 230,994 7.9% Ronald A. Provera 322,330 11.5% 322,330 11.1% Santo Zito 352,330 12.6% 352,330 12.1% Thomas J. Mulroney 20,900 .7% 38,900 1.3% Louis A. Arena 288,030 10.3% 288,030 9.9% John M. Boukather 1,644 .1% 1,644 .1% Joseph W. Wolbers 6,650 .2% 6,650 .2% Officers and Directors 1,468,205 52.5% 1,570,205 54.0% Shares Outstanding 2,798,021 100% 2,908,466 100% - -------------------------------------------------------------------------------
(1) The address for each person is c/o Provena Foods Inc., 5010 Eucalyptus Avenue, Chino, Ca. 91710. (2) Penny S. Bolton is the widow of James H. Bolton, former chairman of the Company. Her shares are not included in the group's shares. (3) Excludes options under the Company's Incentive Stock Option Plan to Theodore L. Arena to purchase 90,000 shares, to Thomas J. Mulroney to purchase 18,000 shares and to all officers and directors as a group to purchase 108,000 shares. (4) 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 1996, officers and directors purchased the following numbers of shares of the Company's common stock: 1st quarter, John M. Boukather, director - 16 shares; 2nd quarter, Mr. Boukather - 13; 3rd quarter, Mr. Boukather - 15, Santo Zito, vice president and director - 9,800; 4th quarter, Mr. Boukather - 16. No other purchases and no sales 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 1996 and (except as previously disclosed) prior years by Section 16(a) of the Securities Exchange Act, except that Mr. Boukather filed a Form 4 in March 1996 for 99 shares purchased during 1995 and January 1996 under a broker's dividend reinvestment program. 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. 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 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. 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) 4.3 Form of Certificate evidencing common stock (8) 10.2 1987 Incentive Stock Option Plan, as amended to date (1) 10.4 Lease Agreement dated October 27, 1978 between the Company, as the successor in interest to the Lessee, Swiss American Sausage Co., and Alfredo L. Caceres and Doris Caceres, as Lessor, of Plant (1) the first Swiss American San Francisco 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) 10.26 Lease Agreement dated May 28, 1990 between the Company and Alexander M. and June L. Maisin, as Lessor, of the second Swiss American San Francisco Plant (7) 10.35 Credit Agreement dated February 1, 1995 between the Company and Wells Fargo Bank, National Association and First Amendment thereto dated April 10, 1995 (9) 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) 10.38 Collective Bargaining Agreement dated December 6, 1995, between the Company and United Food and Commercial Workers Union Local 101, AFL-CIO (9) 10.39 Third Amendment to Credit Agreement dated June 1, 1996 between the Company and Wells Fargo Bank, NA 24.1 Report and Consent of KPMG Peat Marwick LLP 27 EDGAR Financial Data Schedule - -------------------------------------------------------------------------------- (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 June 29, 1987 (4) Exhibit to 1987 Form (5) Exhibit to 1988 Form (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 Reports on Form 8-K - ------------------- During the year ended December 31, 1996 the Company filed no reports on Form 8-K. 15 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: February 22, 1997 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 (Principal - ------------------------------------ Executive Officer) and Director February 22, 1997 John D. Determan /s/ THEODORE L. ARENA - ------------------------------------ President and Director February 22, 1997 Theodore L. Arena /s/ - ------------------------------------ Vice President, Sales, Secretary and Ronald A. Provera Director February , 1997 /s/ SANTO ZITO - ------------------------------------ Vice President and Director February 22, 1997 Santo Zito /s/ THOMAS J. MULRONEY Chief Financial Officer (Principal - ------------------------------------ Financial and Accounting Officer) February 22, 1997 Thomas J. Mulroney /s/ LOUIS A. ARENA - ------------------------------------ Director February 22, 1997 Louis A. Arena /s/ JOSEPH W. WOLBERS - ------------------------------------ Director February 22, 1997 Joseph W. Wolbers /s/ JOHN M. BOUKATHER - ------------------------------------ Director February 22, 1997 John M. Boukather
16 PROVENA FOODS INC. SEC Form 10-K Items 8 and 14 (a)(1) Financial Statements and Schedule December 31, 1996 and 1995 (With Independent Auditors' Report Thereon) 17 PROVENA FOODS INC. Index to Financial Statements and Schedule ------------------------------------------
Page ---- Independent Auditors' Report F-2 Balance Sheets--December 31, 1996 and 1995 F-3 Statements of Earnings--Years ended December 31, 1996, 1995 and 1994 F-4 Statements of Shareholders' Equity--Years ended December 31, 1996, 1995 and 1994 F-5 Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994 F-6 Notes to Financial Statements F-8 Schedule - -------- II--Valuation and Qualifying Accounts and Reserves F-17
F-1 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, 1996 and 1995 and the related statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. In connection with our audits of the financial statements, we also have audited the 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial statement schedule 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. at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. 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 PEAT MARWICK LLP Orange County, California January 24, 1997 F-2 PROVENA FOODS INC. Balance Sheets December 31, 1996 and 1995
1996 1995 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 265,529 350,843 Accounts receivable, less allowance for doubtful accounts of $0 in 1996 and $54,700 in 1995 (note 12) 2,408,297 2,199,671 Inventories (note 2) 2,928,678 2,297,322 Prepaid expenses (note 9) 57,159 67,053 Income taxes receivable (note 9) - 2,342 ----------- ---------- Total current assets 5,659,663 4,917,231 Property and equipment, net (notes 3 and 6) 4,704,602 5,082,899 Other assets (note 9) 49,581 49,384 ----------- ---------- $10,413,846 10,049,514 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (note 6) $ 8,460 8,460 Accounts payable 670,594 793,755 Accrued liabilities (note 7) 1,384,925 1,283,026 Income tax payable (note 9) 24,460 - ----------- ---------- Total current liabilities 2,088,439 2,085,241 ----------- ---------- Deferred income (note 4) 17,057 89,004 Long-term debt, net of current portion (note 6) 951,735 960,195 Shareholders' equity (notes 8 and 11): Capital stock, no par value; authorized 10,000,000 shares; 2,798,021 and 2,738,631 shares issued and outstanding at December 31, 1996 and 1995, respectively 4,257,760 4,104,173 Retained earnings 3,098,855 2,814,169 Note receivable from shareholder - (3,268) ----------- ---------- Total shareholders' equity 7,356,615 6,915,074 Commitments and contingencies (notes 5, 10, 13 and 14) ----------- ---------- $10,413,846 10,049,514 =========== ==========
See accompanying notes to financial statements. F-3 PROVENA FOODS INC. Statements of Earnings Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ----------- ---------- ---------- Net sales (note 12) $28,895,372 23,424,677 26,265,478 Cost of sales 26,037,541 21,348,187 23,812,347 ----------- ---------- ---------- Gross profit 2,857,831 2,076,490 2,453,131 ----------- ---------- ---------- Operating expenses: Distribution 893,834 880,316 956,399 General and administrative (note 10) 1,107,581 1,140,709 1,125,395 ----------- ---------- ---------- 2,001,415 2,021,025 2,081,794 ----------- ---------- ---------- Operating income 856,416 55,465 371,337 Interest expense, net (75,437) (66,089) (7,408) Other income, net (note 3) 113,339 183,640 156,499 ----------- ---------- ---------- Earnings from operations before income tax expense 894,318 173,016 520,428 Income tax expense (note 9) 332,416 84,224 200,200 ----------- ---------- ---------- Net earnings $ 561,902 88,792 320,228 =========== ========== ========== Net earnings per share $ .20 .03 .12 =========== ========== ========== Weighted average number of shares outstanding 2,767,156 2,705,398 2,669,336 =========== ========== ==========
See accompanying notes to financial statements. F-4 PROVENA FOODS INC. Statements of Shareholders' Equity Years ended December 31, 1996, 1995 and 1994
Capital stock Note ------------------------------- receivable Total Shares Retained from shareholders' issued Amount earnings shareholder equity ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1993 2,652,395 $3,935,638 3,354,385 (15,788) 7,274,235 Repurchase of capital stock (60,214) (167,577) - - (167,577) Sale of capital stock 54,461 156,634 - - 156,634 Exercise of shares under stock option plan (note 11) 52,000 117,000 - - 117,000 Cash dividends paid, $.1725 per share - - (461,701) - (461,701) Payment on shareholder note receivable (note 8) - - - 6,050 6,050 Net earnings - - 320,228 - 320,228 --------- ---------- --------- ------- --------- Balance at December 31, 1994 2,698,642 4,041,695 3,212,912 (9,738) 7,244,869 Repurchase of capital stock (70,789) (212,651) - - (212,651) Sale of capital stock 57,223 154,630 - - 154,630 Exercise of shares under stock option plan (note 11) 53,555 120,499 - - 120,499 Cash dividends paid, $.18 per share - - (487,535) - (487,535) Payment on shareholder note receivable (note 8) - - - 6,470 6,470 Net earnings - - 88,792 - 88,792 --------- ---------- --------- ------- --------- Balance at December 31, 1995 2,738,631 4,104,173 2,814,169 (3,268) 6,915,074 Repurchase of capital stock (8,600) (21,500) - - (21,500) Sale of capital stock 51,990 139,087 - - 139,087 Exercise of shares under stock option plan (note 11) 16,000 36,000 - - 36,000 Cash dividends paid, $.10 per share - - (277,216) - (277,216) Payment on shareholder note receivable (note 8) - - - 3,268 3,268 Net earnings - - 561,902 - 561,902 --------- ---------- --------- ------- --------- Balance at December 31, 1996 2,798,021 $4,257,760 3,098,855 - 7,356,615 ========= ========== ========= ======= =========
See accompanying notes to financial statements. F-5 PROVENA FOODS INC. Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 -------- --------- -------- Cash flows from operating activities: Net earnings $561,902 88,792 320,228 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 572,459 539,796 490,469 Provision for bad debts - 91,212 - Decrease (increase) in accounts receivable (208,626) (269,788) 133,579 Decrease (increase) in inventories (631,356) 502,497 (308,766) Decrease (increase) in prepaid expenses 9,894 (8,706) 10,703 (Increase) decrease in income taxes receivable 2,342 (2,342) 9,164 Decrease (increase) in other assets (197) (18,972) 1,732 Increase (decrease) in accounts payable (123,161) 124,030 (202,907) Increase in accrued liabilities 101,899 196,986 252,264 Increase in income tax payable 24,460 - - Increase (decrease) in deferred income (71,947) 53,337 (5,569) -------- --------- -------- Net cash provided by operating activities 237,669 1,296,842 700,897 -------- --------- -------- Cash flows from investing activities: Proceeds from sale of property and equipment 1,200 4,900 19,041 Additions to property and equipment (195,362) (582,560) (321,084) -------- --------- -------- Net cash used in investing activities (194,162) (577,660) (302,043) -------- --------- --------
(Continued) F-6 PROVENA FOODS INC. Statements of Cash Flows, Continued
1996 1995 1994 -------- --------- -------- Cash flows from financing activities: Net borrowings on bank credit line $ - - (100,000) Payments on note payable to bank (8,460) (6,345) - Repurchase of capital stock (21,500) (212,651) (167,577) Proceeds from sale of capital stock 139,087 154,630 156,634 Exercise of stock options 36,000 120,499 117,000 Payments received on note from shareholder 3,268 6,470 6,050 Cash dividends paid (277,216) (487,535) (461,701) -------- --------- -------- Net cash used in financing activities (128,821) (424,932) (449,594) -------- --------- -------- Net increase (decrease) in cash and cash equivalents (85,314) 294,250 (50,740) Cash and cash equivalents at beginning of period 350,843 56,593 107,333 -------- --------- -------- Cash and cash equivalents at end of period $265,529 350,843 56,593 ======== ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 81,081 67,747 11,147 Income taxes 287,600 150,083 136,800 ======== ========= ======== Supplemental disclosure of noncash investing and financing activities - building acquired for debt $ - 975,000 - ======== ========= ========
See accompanying notes to financial statements. F-7 PROVENA FOODS INC. Notes to Financial Statements December 31, 1996 and 1995 (1) Summary of Significant Accounting Policies 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). Inventories Inventories consist principally of food products and are stated at the lower of cost (first-in, first-out) or market. Property and Equipment Property and equipment are stated at cost. Assets acquired prior to 1981 and 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 10 years Delivery equipment 5 years Office equipment 7 years
Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers excess cash invested in highly liquid money market funds to be cash equivalents. Earnings per Share Earnings per share are based on the weighted average number of common shares outstanding during the year. Common equivalent shares (stock options) are not included in the computation of earnings per share as their effect would be immaterial. Fully diluted earnings per share approximate primary earnings per share. Income Taxes The Company accounts for income taxes 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. F-8 PROVENA FOODS INC. Notes to Financial Statements, Continued Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles 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. Fair Value of Financial Instruments The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are measured at cost which approximates their fair value. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," on January 1, 1996. 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 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 exceed their fair values. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position or results of operations. Stock Option Plan Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No.E25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No.E123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock- based awards on the date of grant. Alternatively, SFAS No.E123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide proEforma net income and proEforma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company adopted the latter alternative method. There was no difference between reported earnings and proEforma earnings in 1996 or 1995. F-9 PROVENA FOODS INC. Notes to Financial Statements, Continued (2) Inventories A summary of inventories follows:
1996 1995 ---------- --------- Raw materials $ 935,835 797,990 Work in process 689,650 575,957 Finished goods 1,303,193 923,375 ---------- --------- $2,928,678 2,297,322 ========== =========
(3) Property and Equipment Property and equipment, at cost, consists of the following:
1996 1995 ---------- --------- Land $ 551,985 551,985 Buildings and improvements 3,249,666 3,265,644 Machinery and equipment 5,338,432 5,042,767 Delivery equipment 28,599 28,599 Office equipment 114,301 113,712 Construction in progress - 86,132 ---------- --------- 9,282,983 9,088,839 Less accumulated depreciation 4,578,381 4,005,940 ---------- --------- $4,704,602 5,082,899 ========== =========
The Company leases certain real property to outside parties under noncancelable operating leases. Rental income, included in other income, totaled approximately $103,774, $129,112 and $75,000 in 1996, 1995 and 1994, respectively. (4) Deferred Income In 1978, the Company sold real property and certain machinery to an unrelated third party and simultaneously entered into a 20-year noncancelable operating lease (note 13). The sale resulted in a gain of $186,098 which has been deferred and is being amortized on the straight-line method over the term of the lease as an adjustment to rental expense. F-10 PROVENA FOODS INC. Notes to Financial Statements, Continued (5) Line of Credit The Company has a $2,000,000 unsecured bank line of credit, at an interest rate of bank prime (8.25% at December 31, 1996) plus .375%, which expires on June 1, 1997. Following is a summary of activity under the line of credit:
1996 1995 1994 -------- ------- ------- Balance at December 31 $ - - - Maximum amount outstanding at any month-end 390,000 550,000 700,000 Average amount of month-end borrowings 58,000 142,000 170,050 Weighted average interest rate during the year 8.625% 9.359% 7.513% ======== ======= =======
The bank line of credit agreement includes covenants limiting certain activities of the Company. Among these covenants are restrictions as to mergers and expenditures for capital assets in excess of $500,000 per year. In addition, the loan agreement requires that the Company maintain minimum tangible net worth and certain total debt to tangible net worth ratios. The Company was in compliance with all such covenants at December 31, 1996. (6) Long-Term Debt Long-term debt consists of a mortgage note payable secured by a deed of trust on land and building, bearing interest at 2% over the Bank's LIBOR rate (7.53% at December 31, 1996); payable in monthly installments of principal and interest ($7,250 at December 31, 1996) through February 1, 2000, when a balloon payment of all unpaid principal and interest is due and payable. (7) Accrued Liabilities A summary of accrued liabilities at December 31 follows:
1996 1995 ---------- ---------- Accrued profit sharing (note 10) $ 393,880 393,196 Accrued retirement 135,151 137,342 Accrued compensation 207,677 164,472 Other 648,217 588,016 ---------- ---------- $1,384,925 1,283,026 ========== ==========
F-11 PROVINA FOODS INC. Notes to Financial Statements, Continued (8) Shareholders' Equity In 1976, the Company sold 105 shares of stock of a predecessor company to two employees in exchange for cash and notes receivable. These shares were exchanged for 214,200 shares of Provena Foods Inc. when the predecessor merged into the Company in 1985. At December 31, 1995, one note remained and was shown as a reduction to shareholders' equity. This note was paid in full at December 31, 1996. In 1995 and 1994, the Company repurchased shares in negotiated transactions and retired the shares purchased. The Company sold shares to employees under its 1988 employee stock purchase plan in 1996, 1995 and 1994. (9) Income Taxes Income tax expense (benefit) consists of the following:
1996 1995 1994 -------- -------- ------- Current: Federal $277,807 73,043 158,940 State 76,945 20,245 27,324 Deferred (22,336) (9,064) 13,936 -------- ------ ------- $332,416 84,224 200,200 ======== ====== =======
The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset and deferred income tax expense are presented below:
Deferred Deferred income tax income tax December 31, expense December 31, expense December 31, 1996 (benefit) 1995 (benefit) 1994 ------------ ---------- ------------ ---------- ----------- Allowance for doubtful accounts $ - (25,976) 25,976 18,615 7,361 Deferred income (note 4) 6,847 (3,734) 10,581 (4,863) 15,444 Depreciation 2,386 (30,972) 33,358 12,466 20,892 State taxes 26,161 19,278 6,883 6,883 - -------- ------- ------- ------- ------- 35,394 (41,404) 76,798 33,101 43,697 Valuation allowance (28,545) 19,068 (47,613) (24,037) (23,576) -------- ------- ------- ------- ------- Net deferred tax asset $ 6,849 (22,336) 29,185 9,064 20,121 ======== ======= ======= ======= =======
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Based on the Company's historical results of operations, a valuation allowance has been established. F-12 PROVENA FOODS INC. Notes to Financial Statements, Continued Included in other assets are net deferred tax assets of $6,849 and $10,535 at December 31, 1996 and 1995, respectively. The balance of net deferred tax assets, if any, is included in prepaid expenses. Actual income tax expense differs from the "expected" tax amount, computed by applying the U.S. Federal corporate tax rate of 34% to earnings from operations before income tax expense, as follows:
1996 1995 1994 -------------------- -------------------- ------------------- Amount % Amount % Amount % -------- -------- -------- -------- -------- -------- Computed "expected" tax expense $304,068 34.0 $ 58,825 34.0 $176,945 34.0 State income taxes, net of Federal income tax benefit 50,784 5.7 13,362 7.7 31,746 6.1 State N.O.L. carryforward - - - - (4,422) (.8) Change in valuation allowance (19,068) (2.1) 24,037 13.9 (3,779) (.7) Other (3,368) (.4) (12,000) (6.9) (290) (.1) -------- ---- -------- ---- -------- ---- $332,416 37.2 $ 84,224 48.7 $200,200 38.5 ======== ==== ======== ==== ======== ====
The Company utilized a California state net operating loss carryforward of $72,491 in 1994. (10) 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 1996, 1995 and 1994 were $393,880, $393,196 and $365,934, 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 capital 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 capital 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 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 $40,000 for any covered individual. The Company has accrued the estimated liability for its self-funded costs (see note 14). F-13 PROVENA FOODS INC. Notes to Financial Statements, Continued (11) Incentive Stock Option Plan Under a stock option plan adopted in 1987, the Company has awarded options to certain of its key employees to purchase common stock at prices which approximate the fair market value of the stock at the date of grant. The plan provides for a maximum grant of 261,704 shares. In December 1993, options were granted to purchase 260,000 shares at $2.25 per share, of which 102,445 were exercisable at December 31, 1996. A total of 16,000, 53,555 and 52,000 options were exercised in 1996, 1995 and 1994, respectively, at $2.25 per share. At December 31, 1996, options to purchase 138,445 shares remained outstanding. (12) Segment Data and Major Customers The following table represents financial information about the Company's business segments for the three years ended December 31, 1996:
1996 1995 1994 ----------- ----------- ---------- Net sales to unaffiliated customers: Swiss American Division $19,677,706 13,654,028 17,392,931 Royal-Angelus Division 9,217,666 9,770,649 8,872,547 ----------- ---------- ---------- Total sales $28,895,372 23,424,677 26,265,478 =========== ========== ========== Operating income (loss): Swiss American Division $ 425,280 (682,899) (381,820) Royal-Angelus Division 507,914 775,855 825,953 Corporate (76,778) (37,491) (72,796) ----------- ---------- ---------- Operating income $ 856,416 55,465 371,337 =========== ========== ========== Identifiable assets: Swiss American Division $ 4,920,249 4,394,837 4,891,700 Royal-Angelus Division 5,185,553 5,249,632 4,039,621 Corporate 308,044 405,045 104,980 ----------- ---------- ---------- Total assets $10,413,846 10,049,514 9,036,301 =========== ========== ========== Capital expenditures: Swiss American Division $ - 42,558 155,411 Royal-Angelus Division 194,775 1,501,562 149,232 Corporate 587 13,440 16,441 ----------- ---------- ---------- Total capital expenditures $ 195,362 1,557,560 321,084 =========== ========== ==========
F-14 PROVENA FOODS INC. Notes to Financial Statements, Continued
1996 1995 1994 -------- -------- -------- Depreciation and amoritzation: Swiss American Division $213,892 210,766 200,994 Royal-Angelus Division 352,669 323,925 286,374 Corporate 5,898 5,105 3,101 -------- ------- ------- Total depreciation and amortization $572,459 539,796 490,469 ======== ======= =======
The Company had major customers during 1996 and 1995 that accounted for a significant portion of net sales. Each accounted for more than 10% of sales and purchased products from Swiss American.
Accounts receivable balance at 1996 1995 1994 December 31 ----------------- ----------------- ----------------- -------------------- Customer Sales % Sales % Sales % 1996 1995 - ----------- ----------------- ----------------- ----------------- -------------------- A $7,043,135 24 $3,093,216 13 $3,350,109 13 $259,433 419,625 B 3,158,942 11 2,673,067 11 2,938,731 11 318,671 205,104 C - - 1,341,681 6 2,815,861 11 - 140,284 ========== == ========== == ========== == ======== =======
(13) Commitments The following table summarizes future minimum lease commitments required under the lease described in note 4 and other noncancelable operating leases:
Amount ---------- Year ending December 31: 1997 $ 395,619 1998 379,384 1999 260,114 2000 270,519 2001 114,552 ---------- $1,420,188 ==========
Rent expense for all leases was approximately $387,000, $388,000 and $380,000 in the years ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, 50% of the Company's employees are covered by a collective bargaining agreement which expires March 31, 1998. F-15 PROVENA FOODS INC. Notes to Financial Statements, Continued (14) Self-Insured Health Benefits The Company is totally 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 $40,000 for any covered individual. F-16 Schedule II PROVENA FOODS INC. Valuation and Qualifying Accounts and Reserves Years ended December 31, 1996, 1995 and 1994
Charged (credited) to ----------------------- Balance Other Deductions: Balance at beginning costs and Accounts: uncollectible at end Description of period expenses recoveries accounts of period - -------------------------------------- ------------ --------- ---------- ------------- --------- Allowance for doubtful receivables: Year ended December 31: 1996 $ 54,700 (20,831) 22,806 11,063 - ========= ======= ====== ====== ====== 1995 $ 17,000 91,454 242 53,512 54,700 ========= ======= ====== ====== ====== 1994 $ 47,000 62 426 29,636 17,000 ========= ======= ====== ====== ======
F-17 EX-10.39 2 3RD AMENDMENT TO CREDIT AGREEMENT DATED MAY 1996 EXHIBIT 10.39 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of June 1, 1996, by and between PROVENA FOODS INC., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS -------- WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of February 1, 1995, as amended from time to time ("Credit Agreement"). WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: 1. Section 1.1.(a) is hereby amended by deleting "June 1, 1996" as the last day on which Bank will make advances under the Line of Credit, and by substituting for said date "June 1, 1997," with such change to be effective upon the execution and delivery to Bank of a promissory note substantially in the form of Exhibit A attached hereto (which promissory note shall replace and be deemed the Line of Credit Note defined in and made pursuant to the Credit Agreement) and all other contracts, instruments and documents required by Bank to evidence such change. 2. Section 4.9.(b) is hereby deleted in its entirety, and the following substituted therefor: "(b) Tangible Net Worth not at any time less than Six Million Seven Hundred Ninety Thousand Dollars ($6,790,000.00), with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets." 3. The following is hereby added to the Credit Agreement as Section 4.11.: "Section 4.11. VIOLATION OF ANY FINANCIAL COVENANT. Provide to Bank a security interest of first priority in all Borrower's accounts receivable, other rights to payment and general intangibles, inventory and equipment upon the violation of any financial covenant." 4. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 5. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. WELLS FARGO BANK, PROVENA FOODS INC. NATIONAL ASSOCIATION By: /s/ Thomas J. Mulroney By: /s/ Sandra D. Martin ------------------------ ---------------------------- Sandra D. Martin Title: CFO Vice President -------------------- -3- EXHIBIT A WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE - -------------------------------------------------------------------------------- $2,000,000.00 Irvine, California June 1, 1996 FOR VALUE RECEIVED, the undersigned PROVENA FOODS INC. ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Orange Coast RCBO, 2030 Main Street Suite 900, Irvine, CA 92714, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $2,000.000.00, or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. INTEREST: (a) Interest. The outstanding principal balance of this Note shall bear -------- interest at a rate per annum (computed on the basis of a 360-day year, actual days elapsed) .37500% above the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. (b) Payment of Interest. Interest accrued on this Note shall be payable on the ------------------- 1st day of each month, commencing July 1, 1996. (c) Default Interest. From and after the maturity date of this Note, or such ---------------- earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note. BORROWING AND REPAYMENT: (a) Borrowing and Repayment. Borrower may from time to time during the term of ----------------------- this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of the Credit Agreement between Borrower and Bank defined below; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on June 1, 1997. (b) Advances. Advances hereunder, to the total amount of the principal sum -------- available hereunder, may be made by the holder at the oral or written request of (i) THOMAS J. MULRONEY or JOHN D. DETERMAN, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. (c) Application of Payments. Each payment made on this Note shall be credited ----------------------- first, to any interest then due and second, to the outstanding principal balance hereof. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of February 1, 1995, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default as defined in the -------- Credit Agreement, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy Revolving Line of Credit Note, Page 1 proceeding relating to any Borrower. (b) Obligations Joint and Several. Should more than one person or entity sign ----------------------------- this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) Governing Law. This Note shall be governed by and construed in accordance ------------- with the laws of the State of California, except to the extent Bank has greater rights or remedies under Federal law, whether as a national bank or otherwise, in which case such choice of California law shall not be deemed to deprive Bank of any such rights and remedies as may be available under Federal law. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. PROVENA FOODS INC. By: --------------------------- Title: ------------------------ Revolving Line of Credit Note, Page 2 EX-24.1 3 REPORT & CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 24.1 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors Provena Foods Inc.: We consent to the incorporation by reference in the registration statement (No.33-23852) on Form S-8 of Provena Foods Inc. of our report dated January 24, 1997, relating to the balance sheets of Provena Foods Inc. as of December 31, 1996 and 1995, and the related statements of earnings, shareholders' equity, and cash flows and related schedule for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Provena Foods Inc. KPMG PEAT MARWICK LLP Orange County, California February 24, 1997 EX-27 4 EDGAR FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 245,205 20,324 2,408,297 0 2,928,678 5,659,663 9,282,982 4,578,380 10,413,846 2,088,439 951,735 0 0 4,257,760 3,098,855 10,413,846 28,895,372 29,008,711 26,037,541 2,001,415 8,448 0 84,863 894,318 332,416 561,902 0 0 0 561,902 .20 .20
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