-----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, BXcED5M8qy+y9I7xS2Qc5gUTJKKoPXQEjvexWNsuZbHnLiwKMkGA5YBK3xXxCgVH W+uYew6GTrC6teMBi30QjA== 0000898430-98-000708.txt : 19980227 0000898430-98-000708.hdr.sgml : 19980227 ACCESSION NUMBER: 0000898430-98-000708 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980226 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: SEC FILE NUMBER: 001-10741 FILM NUMBER: 98550723 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 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, 1997 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 21, 1998 was $12,573,719. The number of shares of Provena Foods Inc. Common Stock outstanding on February 21, 1998 was 2,873,993. 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. 1997 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
-ii- 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 11 of Notes to Financial Statements. Swiss American - -------------- During the years ended December 31, 1997 and 1996, sales by Swiss American accounted for 69.3% and 68.1%, 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 Hormel Foods Corporation, 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 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. The Company intends to move Swiss American to a new meat plant in 1998. See ITEM 2. PROPERTIES. Royal-Angelus - ------------- During the years ended December 31, 1997 and 1996, sales by Royal-Angelus accounted for 30.7% and 31.9%, 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, Vegeroni and Capo di Monte are used on consumer products in limited distribution. No substantial portion of the Company's sales is dependent upon any trademark. 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 -2- ingredients from the time the Company contracts with its customers until the time the Company purchases the commodities used to fill the orders. Prices for meat and flour, the Company's major product ingredients, fluctuate widely based upon supply, market speculation, governmental trade and agricultural policies, and other unpredictable factors. The price of durum semolina flour, the pasta division's primary ingredient, increased about 50% in 1993 and has remained well above pre-1993 levels since then. 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 11 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, 1997:
Number of Division Company Division Customers Sales % Sales % -------- --------- -------- ------- Swiss American 3 61% 42% Royal-Angelus 2 36% 11% --- --- Totals 5 53%
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, 1997, the Company employed 157 full-time employees, 97 in production at Swiss American in San Francisco, California, 46 in production at Royal-Angelus in Chino, California, 6 in clerical and office functions, 3 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 - --------------- The Company provides health insurance benefits to its non-union employees on a self-funded basis. The Company is insured for the excess over $40,000 of claims of any covered person incurred and paid during the year, but is 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 to a newly constructed approximately 85,000 square foot building, to result in a more efficient and higher production capacity plant, with the capability of expansion to increase capacity or product variety. See LIQUIDITY AND CAPITAL RESOURCES under ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 22, 1997, at 11:00 a.m. at the Company's principal office. Shareholders representing 2,637,980 or 93.7% of the 2,816,364 shares entitled to vote were present in person or by proxy, with 15,801 broker non-votes. The following persons were nominated and elected directors, with votes for, withheld from specified nominees, or without authority to vote for directors, as indicated:
Without Nominee For Withheld Authority ------- --- -------- --------- John D. Determan 2,628,680 9,300 5,420 Theodore L. Arena 2,637,980 -0- 5,420 Ronald A. Provera 2,637,980 -0- 5,420 Santo Zito 2,637,980 -0- 5,420 Thomas J. Mulroney 2,637,980 -0- 5,420 Louis A. Arena 2,634,180 3,800 5,420 Joseph W. Wolbers 2,627,280 10,700 5,420 John M. Boukather 2,630,980 7,000 5,420
PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the American Stock Exchange under the symbol "PZA". The following table sets forth high and low prices as traded on the American Stock Exchange:
Quarter of Fiscal Year Ended December 31 First Second Third Fourth ------- ------- ------ ------ 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 1997 High 3-1/8 2-13/16 2-5/8 3 Low 2-1/2 2-1/4 2-1/8 2-3/8
The closing price on December 31, 1997 was $3.00. 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, 1997 the Company had issued and outstanding 2,865,981 shares held by approximately 240 shareholders of record. In addition, the Company estimates that there are approximately 800 shareholders holding shares in street or nominee names. -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:
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 DIVIDENDS $0.12 $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, Stock Transfer Department, Washington Bridge Station, P.O. Box 469, New York, NY 10033, (800) 522-6645, www.chasemellon.com. Common Stock Repurchase and Sales - --------------------------------- The Company has had an announced intention to repurchase shares of its common stock since January 11, 1988. Currently, purchases are authorized up to the number of shares issued under the Company's 1988 Employee Stock Purchase Plan. Purchases are made from time to time on the open market or in privately negotiated transactions. In addition, the Company must accept outstanding shares at fair market value in payment of the exercise price of options under the Company's 1987 Incentive Stock Option Plan. In 1997, the Company purchased no shares under its stock repurchase program, but received 7,795 shares in payment of the exercise price of options at an average fair market value of $2.89 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 1997 employees purchased 55,355 newly issued shares at an average price of $2.56 per share. Employees have purchased a total of 394,323 shares under the plan through December 31, 1997, at an average price of $2.98 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 1997 to purchase 20,400 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, 1997 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, 1997, 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, ----------------------- 1997 1996 1995 1994 1993 ------- ------ ------ ------ ------ (Amounts in thousands except per share data) STATEMENT OF OPERATIONS DATA: Net Sales $30,966 28,895 23,424 26,265 22,924 Cost of sales 27,103 26,037 21,348 23,812 21,155 ------- ------ ------ ------ ------ Gross profit 3,863 2,858 2,076 2,453 1,769 Distribution, general and administrative expenses 2,066 2,002 2,021 2,082 1,954 ------- ------ ------ ------ ------ Operating income (loss) 1,797 856 55 371 (185) Interest income (expense), net (58) (75) (66) (7) 3 Other income, net 279 113 184 156 161 ------- ------ ------ ------ ------ Earnings (loss) before income taxes 2,018 894 173 520 (21) Income taxes (benefit) 764 332 84 200 (5) ------- ------ ------ ------ ------ Net earnings (loss) $ 1,254 562 89 320 (16) ======= ====== ====== ====== ====== Earnings (loss) per share: Basic $ .44 .20 .03 .12 (.01) ======= ====== ====== ====== ====== Diluted $ .44 .20 .03 .12 (.01) ======= ====== ====== ====== ====== Cash dividends paid per share $ .12 .10 .18 .1725 .1625 Weighted average number of shares outstanding (1): Basic 2,836 2,767 2,705 2,669 2,653 Diluted 2,855 2,775 2,750 2,687 2,703 BALANCE SHEET DATA (end of period): Working capital $ 4,574 3,564 2,832 3,180 3,029 Property and equipment (net) 4,468 4,705 5,083 4,070 4,258 Total assets 11,539 10,414 10,050 9,036 9,126 Long-term debt 752 960 969 - - Shareholders' equity 8,435 7,357 6,915 7,245 7,274 - ---------------------------------------------------------------------------------------------------------
(1) The Company sold shares under its employee stock purchase plan, sold shares under its incentive stock option plan, received shares in exercise of incentive stock options and repurchased outstanding shares in the years as shown:
1997 1996 1995 1994 1993 ------- ------ ------ ------ ------ Purchase Plan Shares Sold 55,355 51,990 57,223 54,461 46,485 Incentive Option Shares Sold 20,400 16,000 53,555 52,000 - Received in Exercise of Options 7,795 8,600 18,500 31,457 - Outstanding Shares Repurchased - - 52,289 28,757 32,736
-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, 1997, 1996 and 1995:
Year Ended December 31, --------------------------------------------------------- 1997 1996 1995 ----------------- ----------------- ----------------- (Dollars in thousands) Net sales $30,966 100.0% $28,895 100.0% $23,424 100.0% Cost of sales 27,103 87.5 26,037 90.1 21,348 91.1 ------- ----- ------- ----- ------- ----- Gross profit 3,863 12.5 2,858 9.9 2,076 8.9 Distribution, general and administrative expenses 2,066 6.7 2,002 6.9 2,021 8.7 ------- ----- ------- ----- ------- ----- Operating income 1,797 5.8 856 3.0 55 .2 Interest expense, net (58) (.2) (75) (.3) (66) (.3) Other income, net 279 .9 113 .4 184 .8 ------- ----- ------- ----- ------- ----- Earnings before income taxes 2,018 6.5 894 3.1 173 .7 Income taxes 764 2.5 332 1.1 84 .3 ------- ----- ------- ----- ------- ----- Net earnings $ 1,254 4.0% $ 562 1.9% $ 89 .4% ======= ===== ======= ===== ======= ===== Sales in thousands of pounds by division SWISS AMERICAN 13,903 13,475 9,990 ROYAL-ANGELUS 21,284 18,213 18,825
Comparison of Years Ended December 31, 1997 and 1996 - ---------------------------------------------------- In 1997, sales of $30,966,000 were up 7% from 1996 sales of $28,895,000, as the result of increased sales at both divisions. The meat division's sales were up about 9% in dollars and 3% in pounds and its operating income was up 152% in 1997 over 1996. Swiss's sales for the 4th quarter of 1997 were up 25% in dollars and 23% in pounds over the 4th quarter of 1996. Sales increased proportionately more in dollars than in pounds because of higher selling prices reflecting higher meat prices. Swiss's operating income increased in 1997 because of favorable meat purchases and a higher margin product mix throughout the year and increased production labor efficiency and plant utilization resulting from the increased sales volume in the 4th quarter. The Royal-Angelus pasta division's sales increased about 3% in dollars and 17% in pounds and its operating income increased 56% in 1997 over 1996. The pasta division's sales for the 4th quarter of 1997 were up 44% in dollars and 62% in pounds over the same quarter of 1996. The sales increases in pounds did not result in proportionate increases in dollars because of lower average selling prices caused by price competition and a higher proportion of high- volume sales. The cost of semolina flour increased about 50% in 1993 and has remained well above pre-1993 levels since then. Royal has been experiencing a tension between high flour prices and increased price competition caused by increasing industry capacity. Flour prices increased slightly in 1997, but Royal succeeded in increasing its sales and operating income. Its operating income increased in 1997 because of higher production labor efficiency and plant utilization throughout the year, increasing in the 4th quarter, and because of lower officer payroll. The Company's gross profit for 1997 was $3,863,000 or 12.5% of net sales compared to $2,858,000 or 9.9% of net sales for 1996. Gross profit increased absolutely and as a percent of sales because production costs increased less than proportionately to sales, especially in the 4th quarter, and because of favorable meat purchases and a higher margin product mix at Swiss. Distribution, general and administrative expenses for 1997 were up about 3% from 1996. Distribution expense was up about $94,000 because Swiss's salesmen payroll increased and Royal bore the freight on a higher proportion of its sales. Administrative expense was down about $29,000 primarily due to a decrease in officer payroll at Royal, as well as lower health care costs and consulting services relating to Swiss and other outside services, partially offset by higher clerical payroll and bad debt expense. -8- Other income increased about $166,000 because of a $164,502 state reimbursement of the cost of the 1991 removal of a gasoline storage tank at the former distribution division warehouse. Net interest expense decreased principally because of lower borrowing under the bank line of credit. Comparison of Years Ended December 31, 1996 and 1995 - ---------------------------------------------------- In 1996, sales of $28,895,000 were up 23% from 1995 sales of $23,424,000, 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 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 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. 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, 1997 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 June 1997 to expire June 1, 1998, 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, 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 $7,150,000, a maximum debt to tangible net worth ratio of 0.75, a minimum debt coverage ratio of 1.75, a minimum current ratio of 2.00, profitable operations on a cumulative quarterly basis and a zero balance for 30 days during the term. The Company was in compliance with all of the bank's covenants at December 31, 1997. 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, and bearing interest at 2% over the bank's "LIBOR" rate. In 1997, the Company made a $200,000 voluntary pre-payment of the term loan, leaving a $751,735 balance at December 31, 1997, including the $8,460 current portion. The loan is payable in monthly payments of $705 principal plus accrued interest, which would leave a $732,700 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 21,284,000 pounds sold in 1997. The plant has the capacity to fulfil the foreseeable needs of the pasta division with adequate space for expansion. -9- 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 13,903,000 pounds sold in 1997. 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 meat plant to a newly constructed approximately 85,000 square foot building, to result in a more efficient and higher production capacity plant, with the capability of expansion to increase capacity or product variety. Accomplishing the move requires locating and acquiring a suitable site, constructing and equipping the building, moving from the present facilities to the new plant, obtaining financing for all of the foregoing, and obtaining the consent of Wells Fargo Bank, NA to proceed with the transaction or finding a lender to replace Wells Fargo Bank, NA as line of credit and term lender, all of which remain to be done. The estimated cost of the new plant is in excess of $8,000,000 and the Company has applied for the issuance of Industrial Development Bonds for all or part of the financing with conventional financing for all or any part not covered by Industrial Development Bonds. The annual cost to Swiss of the new plant will exceed the annual cost of its two current buildings. The move to the new plant will require charging to expense the net capitalized leasehold improvements at the present facilities and the future rent on the 2nd building through lease expiration in 2001, reduced by future rent under any agreed sublease, or reduced to termination costs if there is an agreed early termination of the lease. Additions to property and equipment of about $300,000 are anticipated for 1998, plus the cost of a new meat plant. In 1997 cash increased about $824,000. Operating activities produced about $1,508,000 primarily from earnings, depreciation, a decrease in inventories and an increase in accounts payable, partially offset by an increase in accounts receivable and a decrease in accrued liabilities. Investing activities used about $299,000 of cash for property and equipment at both divisions, including retail packaging and faster sausage linking machines at Swiss. Financing activities used about $385,000 for dividends and the term loan pre-payment, offset by net stock proceeds. Inventories were down and accounts receivable up because the surge of sales in the 4th quarter depleted inventories and generated accounts receivable. In 1996 cash decreased about $85,000. Operating activities produced about $238,000, principally from earnings and depreciation offset by increases in accounts receivable and inventories and a decrease in accounts payable. Investing activities used about $194,000 for net capital expenditures and financing activities used about $129,000 for dividends offset by net stock proceeds. The Company's inventories and accounts receivable normally reflect the level of its sales, and in 1996 sales were up 23%, resulting in about a $165,000 increase in accounts receivable and about a $631,000 increase in inventories, following about a $502,000 reduction in inventories in 1995 on reduced sales. 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 liabilities. Investing activities used about $578,000 for net capital expenditures and financing activities used about $425,000 for dividends offset by net stock proceeds. Company sales decreased during 1995 and inventories were reduced by over $502,000. The Company purchased the 2nd Royal building in 1995, incurring $975,000 of long term debt and using about $300,000 of cash. In 1998 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 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 $141,485 in 1997 and may be as much as $140,000 or more in 1998. 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, subject to the need to finance a new meat plant. The Company has no long term debt except the $751,735 secured by the 2nd Chino building. All of its other assets, including inventories, accounts receivable, equipment and its original Chino pasta plant are unencumbered. New Accounting Pronouncements - ----------------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related -10- Information." SFAS No. 130 establishes standards for the reporting of comprehensive income and its components. SFAS No. 131 changes some standards for the reporting by public companies of information about operating segments. Information in financial statements of the Company for periods beginning after December 31, 1997 will be presented as required by SFAS Nos. 130 and 131, which, in the opinion of management, will not have a material effect on the information presented. Year 2000 - --------- Many computer programs use only the last two digits of a year to store or process dates. This is the case with the accounting programs used by both divisions of the Company. As a result, the programs may treat dates after 1999 as earlier than dates before 2000. This could adversely affect routines such as calculating depreciation or aging accounts receivable. The Company has engaged a computer programmer to correct this defect in the Company's programs, and the Company expects the defect will be corrected without material cost before the year 2000. The Company's customers, suppliers and service providers may use computer programs with similar defects which, to the extent not corrected, could adversely affect the Company's operations, such as the receipt of supplies, services, purchase orders and payments of accounts receivable. 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 THE REGISTRANT The name, age, principal position for the past five years and other relevant information for each of the current directors and executive officers of the Company is as follows: JOHN D. DETERMAN, age 65, has been a vice president and director of the Company since its formation in 1972, General Counsel from 1986 to 1992, Chief Executive Officer from 1992 to February 21, 1998 and Chairman of the Board since 1992. He is a member of the audit and option committees. THEODORE L. ARENA, age 55, has been the General Manager of Swiss American since 1976, and the President and a director of the Company since 1985. He is the Chief Executive Officer effective February 21, 1998. He is the nephew of Louis A. Arena, a director of the Company. RONALD A. PROVERA, age 60, 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 61, 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 52, 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 75, 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 68, 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 61, 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, 1997, 1996 and 1995, all compensation of all executive officers of the Company serving at December 31, 1997.
Annual Restricted SEP/IRA Name and Position Year Salary Option Award Contributions ----------------- ---- ------ ------------ ------------- Shares John D. Determan, 1997 $ 65,658 $ 9,849 Chairman of the Board 1996 62,791 9,419 1995 63,098 9,465 Theodore L. Arena, 1997 110,790 91,458 16,618 President and 1996 107,135 16,070 Chief Executive Officer 1995 105,887 15,883 Ronald A. Provera, 1997 105,414 15,812 Secretary 1996 103,568 15,535 1995 103,338 15,501 Santo Zito, 1997 108,195 16,229 Vice President 1996 106,246 15,937 1995 111,586 16,738 Thomas J. Mulroney, 1997 105,552 18,291 15,833 Chief Financial Officer 1996 102,161 15,324 1995 101,693 15,254
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. Effective November 1, 1997, Mr. Determan's basic annual salary was raised from $60,000 to $75,000 and the basic annual salary of each of the other four officers was raised from $100,000 to $125,000. 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 1997, the Company contributed $391,762 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. In April 1997, outstanding options of Messrs. Arena and Mulroney to purchase 60,000 and 12,000 shares, respectively, were terminated and options were granted to Messrs. Arena and Mulroney to purchase 91,458 and 18,291 shares, respectively, at a price of $2- 9/16 per share. 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 and 1997, options were exercised to purchase 16,000 and 20,400 shares, respectively, none by executive officers. The following table shows the options granted to executive officers in 1997 and the potential value of the options at the expiration date of the options, assuming the Company's stock appreciated at the specified annual compounded rate from the $2-9/16 per share market price at the date of grant.
Option Grants in 1997 --------------------- Potential Realizable Value at Annual Rates of Stock Price Percent of Total Appreciation for Option Term Options Options Granted to Exercise Expiration ---------------------------- Name Granted Employees in 1997 Price Date 4/10 5% 10% ---- ------- ----------------- ----- --------- ------------ ----------- Theodore L. Arena 91,458 83.3% $2-9/16 2007 $147,388 $373,511 Thomas J. Mulroney 18,291 16.7% $2-9/16 2007 $ 29,477 $ 74,700
Option Committee Report - ----------------------- In April 1997, the option committee granted new options exercisable at the then current market price to two officers to provide a long term incentive and reward for increased earnings and stock price increases from current levels. The following table shows the least number of options held by an executive officer both before and after the June 1988, December 1992 and April 1997 option terminations and grants, as if the options were repriced.
Option Repricings ----------------- Price of Exercise Years of Number of Stock at Price at Original Option Options Time of Time of Exercise Term Remaining at Name Date Repriced Repricing Repricing Price Date of Repricing ---- ---- -------- --------- --------- ----- ----------------- Theodore L. Arena 6/88 125,000 $3-5/8 $7 $3-5/8 9.25 12/92 150,000 $2-1/4 $3-5/8 $2-1/4 5.5 4/97 60,000 $2-9/16 $2-1/4 $2-9/16 1.7 Thomas J. Mulroney 6/88 30,000 $3-5/8 $7 $3-5/8 9.25 12/92 30,000 $2-1/4 $3-5/8 $2-1/4 5.5 4/97 12,000 $2-9/16 $2-1/4 $2-9/16 1.7 James P. McClune 12/92 10,000 $2-1/4 $3-5/8 $2-1/4 5.5
Option Committee Members: John D. Determan, Ronald A. Provera and Santo Zito -13- Compensation of Directors Directors who are not officers or employees are paid a fee of $1,000 for each board meeting or board committee meeting attended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Management Stock Ownership - -------------------------- The following table sets forth, for each officer, director and 5% shareholder of the Company and for all officers and directors as a group (8 persons), the number and percent of outstanding shares of common stock of the Company owned on December 31, 1997.
Shares Beneficially Owned -------------------------------------- Without Options(3) Options Exercised(4) --------------- ----------------- Name or Category(1) Number Percent Number Percent ----------------- ------ ------- ------ ------- John D. Determan 335,327 11.7% 335,327 11.3% Penny S. Bolton (2) 378,463 13.2% 378,463 12.7% Theodore L. Arena 140,994 4.9% 232,452 7.8% Ronald A. Provera 322,330 11.2% 322,330 10.8% Santo Zito 352,330 12.3% 352,330 11.8% Thomas J. Mulroney 20,900 .7% 39,191 1.3% Louis A. Arena 288,030 10.0% 288,030 9.7% John M. Boukather 1,719 .1% 1,719 .1% Joseph W. Wolbers 7,750 .3% 7,750 .3% Officers and Directors 1,469,380 51.2% 1,579,129 53.1% Shares Outstanding 2,865,981 100% 2,975,730 100% - ---------------------------------------------------------------------------------------------------
(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 91,458 shares, to Thomas J. Mulroney to purchase 18,291 shares and to all officers and directors as a group to purchase 109,749 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 1997, officers and directors purchased the following numbers of shares of the Company's common stock: 1st quarter, John M. Boukather, director - 17 shares; 2nd quarter, Mr. Boukather - 17; 3rd quarter, Mr. Boukather -20; 4th quarter, Mr. Boukather - 16, Joseph W. Wolbers - 1,100. 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 1997 and (except as previously disclosed) prior years by Section 16(a) of the Securities Exchange Act, except that Theodore A. Arena and Thomas J. Mulroney each filed a Form 4 in February 1998 for incentive stock options terminated and granted in April 1997. 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 FORM 8-K Financial Statements and Schedules - ---------------------------------- The Financial Statements and Schedule filed with this report are in a separate section at the end of this report beginning with the Index to Financial Statements and Schedule on page F-1. 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 the first Swiss American San Francisco (1) 10.20 1988 Stock Purchase Plan of the Company (4) 10.22 Dean Witter Simplified Employee Pension Plan Employer Agreement dated August 8, 1988 (5) 10.23 Wells Fargo Bank Simplified Employee Pension Plan Adoption Agreement dated July 18, 1988 (5) 10.26 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 (10) 10.40 Fourth Amendment to Credit Agreement dated June 1, 1997 between the Company and Wells Fargo Bank, NA 23.1 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 July 29, 1987 (4) Exhibit to 1987 Form 10-K Annual Report (5) Exhibit to 1988 Form 10-K Annual Report (6) Exhibit to 1989 Form 10-K Annual Report (7) Exhibit to 1990 Form 10-K Annual Report (8) Exhibit to 1991 Form 10-K Annual Report (9) Exhibit to 1995 Form 10-K Annual Report (10) Exhibit to 1996 Form 10-K Annual Report Reports on Form 8-K - ------------------- During the year ended December 31, 1997 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 21, 1998 PROVENA FOODS INC. By /s/ John D. Determan -------------------- John D. Determan Chairman of the Board Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ John D. Determan Chairman of the Board and Director February 21, 1998 ____________________________________ John D. Determan President (Principal Executive /s/ Theodore L. Arena Officer) and Director February 21, 1998 ____________________________________ Theodore L. Arena Vice President, Sales, Secretary and /s/ Ronald A. Provera Director February 21, 1998 ____________________________________ Ronald A. Provera /s/ Santo Zito Vice President and Director February 21, 1998 ____________________________________ Santo Zito Chief Financial Officer (Principal /s/ Thomas J. Mulroney Financial and Accounting Officer) February 21, 1998 ____________________________________ Thomas J. Mulroney /s/ Louis A. Arena Director February 21, 1998 ____________________________________ Louis A. Arena /s/ Joseph W. Wolbers Director February 21, 1998 ____________________________________ Joseph W. Wolbers /s/ John M. Boukather Director February 21, 1998 ____________________________________ John M. Boukather
-16- PROVENA FOODS INC. Financial Statements and Schedule December 31, 1997 and 1996 (With Independent Auditors' Report Thereon) PROVENA FOODS INC. Index to Financial Statements and Schedule ------------------------------------------
Page ---- Independent Auditors' Report F-2 Balance Sheets - December 31, 1997 and 1996 F-3 Statements of Earnings - Years ended December 31, 1997, 1996 and 1995 F-4 Statements of Shareholders' Equity - Years ended December 31, 1997, 1996 and 1995 F-5 Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 F-6 Notes to Financial Statements F-8 Schedule -------- II - Valuation and Qualifying Accounts and Reserves F-18
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, 1997 and 1996 and the related statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the accompanying financial statement schedule, as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Provena Foods Inc. at December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997 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. /s/ KPMG Peat Marwick LLP Orange County, California January 23, 1998 PROVENA FOODS INC. Balance Sheets December 31, 1997 and 1996
1997 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 1,089,957 265,529 Accounts receivable, net of allowance for doubtful accounts of $10,934 and $0 at December 31, 1997 and 1996, respectively (note 11) 3,112,520 2,408,297 Inventories (note 2) 2,679,118 2,928,678 Prepaid expenses 45,460 50,310 ----------- ---------- Total current assets 6,927,055 5,652,814 Deferred tax asset (note 8) 101,279 6,849 Property and equipment, net (notes 3 and 5) 4,467,521 4,704,602 Other assets 43,203 49,581 ----------- ---------- $11,539,058 10,413,846 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (note 5) $ 8,460 8,460 Accounts payable 1,123,820 670,594 Accrued liabilities (note 6) 1,122,068 1,384,925 Income tax payable (note 8) 98,545 24,460 ----------- ---------- Total current liabilities 2,352,893 2,088,439 ----------- ---------- Deferred income 7,752 17,057 Long-term debt, net of current portion (note 5) 743,275 951,735 Shareholders' equity (notes 7 and 10): Common stock, no par value; authorized 10,000,000 shares; 2,865,981 and 2,798,021 shares issued and outstanding at December 31, 1997 and 1996, respectively 4,422,647 4,257,760 Retained earnings 4,012,491 3,098,855 ----------- ---------- Total shareholders' equity 8,435,138 7,356,615 Commitments and contingencies (notes 4, 9, 12 and 13) ----------- ---------- $11,539,058 10,413,846 =========== ==========
See accompanying notes to financial statements. F-3 PROVENA FOODS INC. Statements of Earnings Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---------- ---------- ---------- Net sales (note 11) $30,966,339 28,895,372 23,424,677 Cost of sales 27,103,198 26,037,541 21,348,187 ----------- ---------- ---------- Gross profit 3,863,141 2,857,831 2,076,490 ----------- ---------- ---------- Operating expenses: Distribution 987,948 893,834 880,316 General and administrative (note 9) 1,078,225 1,107,581 1,140,709 ---------- ---------- ---------- 2,066,173 2,001,415 2,021,025 ---------- ---------- ---------- Operating income 1,796,968 856,416 55,465 Interest expense, net (57,830) (75,437) (66,089) Other income, net (note 3) 279,257 113,339 183,640 ----------- ---------- ---------- Earnings from operations before income taxes 2,018,395 894,318 173,016 Income taxes (note 8) 763,776 332,416 84,224 ----------- ---------- ---------- Net earnings $ 1,254,619 561,902 88,792 =========== ========== ========== Earnings per common share: Basic $ .44 .20 .03 =========== ========== ========== Diluted $ .44 .20 .03 =========== ========== ========== Shares used in computing per common share amounts: Basic 2,836,434 2,767,156 2,705,398 =========== ========== ========== Diluted 2,854,939 2,775,133 2,749,843 =========== ========== ==========
See accompanying notes to financial statements. F-4 PROVENA FOODS INC. Statements of Shareholders' Equity Years ended December 31, 1997, 1996 and 1995
COMMON STOCK NOTE ------------------------- RECEIVABLE TOTAL SHARES RETAINED FROM SHAREHOLDERS' ISSUED AMOUNT EARNINGS SHAREHOLDER EQUITY --------- --------- -------- ---------------------------- Balance at December 31, 1994 2,698,642 $4,041,695 3,212,912 (9,738) 7,244,869 Repurchase of common stock (70,789) (212,651) -- -- (212,651) Sale of common stock 57,223 154,630 -- -- 154,630 Exercise of shares under stock option plan (note 10) 53,555 120,499 -- -- 120,499 Cash dividends paid, $.18 per share -- -- (487,535) -- (487,535) Payment on shareholder note receivable -- -- -- 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 common stock (8,600) (21,500) -- -- (21,500) Sale of common stock 51,990 139,087 -- -- 139,087 Exercise of shares under stock option plan (note 10) 16,000 36,000 -- -- 36,000 Cash dividends paid, $.10 per share -- -- (277,216) -- (277,216) Payment on shareholder note receivable -- -- -- 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 Repurchase of common stock (7,795) (22,498) -- -- (22,498) Sale of common stock 55,355 141,485 -- -- 141,485 Exercise of shares under stock option plan (note 10) 20,400 45,900 -- -- 45,900 Cash dividends paid, $.12 per share -- -- (340,983) -- (340,983) Net earnings -- -- 1,254,619 -- 1,254,619 --------- ---------- --------- ------ --------- Balance at December 31, 1997 2,865,981 $4,422,647 4,012,491 -- 8,435,138 ========= ========== ========= ====== =========
See accompanying notes to financial statements. F-5 PROVENA FOODS INC. Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $1,254,619 561,902 88,792 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 535,119 572,459 539,796 Loss on disposal of fixed assets 803 -- -- Provision for bad debts 36,241 (43,637) 91,212 Increase in accounts receivable (740,464) (164,989) (269,788) Decrease (increase) in inventories 249,560 (631,356) 502,497 Decrease (increase) in prepaid expenses 4,850 16,743 (8,706) (Increase) decrease in income taxes receivable -- 2,342 (2,342) Increase in deferred tax assets (94,430) (6,849) -- Decrease (increase) in other assets 6,378 (197) (18,972) Increase (decrease) in accounts payable 453,226 (123,161) 124,030 Increase (decrease) in accrued liabilities (262,857) 101,899 196,986 Increase in income tax payable 74,085 24,460 -- Increase (decrease) in deferred income (9,305) (71,947) 53,337 ---------- -------- --------- Net cash provided by operating activities 1,507,825 237,669 1,296,842 ---------- -------- --------- Cash flows from investing activities: Proceeds from sale of property and equipment 3,655 1,200 4,900 Additions to property and equipment (302,496) (195,362) (582,560) ---------- -------- --------- Net cash used in investing activities (298,841) (194,162) (577,660) ---------- -------- ---------
(Continued) F-6 PROVENA FOODS INC. Statements of Cash Flows, Continued
1997 1996 1995 ---------- ---------- ---------- Cash flows from financing activities: Payments on note payable to bank $ (208,460) (8,460) (6,345) Repurchase of common stock (22,498) (21,500) (212,651) Proceeds from sale of common stock 141,485 139,087 154,630 Exercise of stock options 45,900 36,000 120,499 Payments received on note from shareholder -- 3,268 6,470 Cash dividends paid (340,983) (277,216) (487,535) ---------- -------- -------- Net cash used in financing activities (384,556) (128,821) (424,932) ---------- -------- -------- Net increase (decrease) in cash and cash equivalents 824,428 (85,314) 294,250 Cash and cash equivalents at beginning of period 265,529 350,843 56,593 ---------- -------- -------- Cash and cash equivalents at end of period $1,089,957 265,529 350,843 ========== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 73,511 81,081 67,747 Income taxes 787,855 287,600 150,083 ========== ======== ======== 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, 1997 and 1996 (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 investments with maturities of three months or less at date of purchase to be cash equivalents. EARNINGS PER SHARE Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This statement replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been restated to conform to the SFAS No. 128 requirements. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred F-8 PROVENA FOODS INC. Notes to Financial Statements, Continued 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. 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, accrued liabilities and long-term debt are measured at cost which approximates their fair value. LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Long-lived assets and certain identifiable intangibles are 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 the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 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. 25, "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. 123, "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. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma 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 has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. RECLASSIFICATIONS Certain amounts in the prior year's financial statements have been reclassified to conform with the current presentation. F-9 PROVENA FOODS INC. Notes to Financial Statements, Continued (2) INVENTORIES A summary of inventories follows:
1997 1996 ---------- ---------- Raw materials $1,220,151 935,835 Work in process 674,400 689,650 Finished goods 784,567 1,303,193 ---------- --------- $2,679,118 2,928,678 ========== =========
(3) PROPERTY AND EQUIPMENT Property and equipment, at cost, consists of the following:
1997 1996 ---------- ---------- Land $ 551,985 551,985 Buildings and improvements 3,283,200 3,249,666 Machinery and equipment 5,550,646 5,338,432 Delivery equipment 28,599 28,599 Office equipment 114,912 114,301 Construction in progress 40,861 -- --------- --------- 9,570,203 9,282,983 Less accumulated depreciation 5,102,682 4,578,381 --------- --------- $4,467,521 4,704,602 ========= =========
The Company leases certain real property to outside parties under noncancelable operating leases. Rental income, included in other income, totaled approximately $106,000, $104,000 and $129,000 in 1997, 1996 and 1995, respectively. (4) LINE OF CREDIT The Company has a $2,000,000 unsecured bank line of credit, at an interest rate of bank prime (8.50% at December 31, 1997) plus .375%, which expires on June 1, 1998. Following is a summary of activity under the line of credit:
1997 1996 1995 ---------- ----------- ---------- Balance at December 31 $ -- -- -- Maximum amount outstanding at any month-end 373,000 390,000 550,000 Average amount of month-end borrowings 21,000 58,000 142,000 Weighted average interest rate during the year 8.735% 8.625% 9.359% ======== ======= =======
F-10 PROVENA FOODS INC. Notes to Financial Statements, Continued 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, 1997. (5) 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 (8.16% at December 31, 1997); payable in monthly principal installments of $705 plus interest ($5,767 at December 31, 1997) through April 10, 2000, when a balloon payment of all unpaid principal and interest is due and payable. Principal maturities of the mortgage note payable are as follows: 1998 $ 8,460 1999 8,460 2000 734,815 -------- $751,735 ======== (6) ACCRUED LIABILITIES A summary of accrued liabilities at December 31 follows:
1997 1996 ---------- ---------- Accrued profit sharing (note 9) $ 391,762 393,880 Accrued retirement 161,179 135,151 Accrued compensation 253,148 207,677 Other 315,979 648,217 ---------- --------- $1,122,068 1,384,925 ========== =========
(7) SHAREHOLDERS' EQUITY In 1995, the Company repurchased shares in negotiated transactions and retired the shares purchased. The Company sold shares to employees under its purchase plan (note 9) in 1997, 1996 and 1995. F-11 PROVENA FOODS INC. Notes to Financial Statements, Continued (8) INCOME TAXES Income taxes (benefit) consist of the following:
1997 1996 1995 ---------- ---------- ---------- Current: Federal $680,035 233,135 73,043 State 178,171 76,945 20,245 Deferred: Federal (56,366) 18,366 (6,444) State (38,064) 3,970 (2,620) -------- ------- ------ $763,776 332,416 84,224 ======== ======= ======
The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset and deferred income taxes (benefit) are presented below:
DEFERRED DEFERRED INCOME INCOME DECEMBER 31, TAXES DECEMBER 31, TAXES DECEMBER 31, 1997 (BENEFIT) 1996 (BENEFIT) 1995 ------------ --------- ------------ --------- ------------ Allowance for doubtful accounts $ -- -- -- 25,976 25,976 Deferred income 3,111 3,736 6,847 3,734 10,581 Depreciation 37,590 (35,204) 2,386 30,972 33,358 State taxes 60,578 (34,417) 26,161 (19,278) 6,883 -------- ------- ------- ------- ------- 101,279 (65,885) 35,394 41,404 76,798 Valuation allowance -- (28,545) (28,545) (19,068) (47,613) -------- ------- ------- ------- ------- Net deferred tax asset $101,279 (94,430) 6,849 22,336 29,185 ======== ======= ======= ======= =======
Based on the Company's historical pretax earnings, adjusted for significant items such as nonrecurring charges, management believes it is more likely than not that the Company will realize the benefit of deferred tax assets existing at December 31, 1997. Management believes the existing deductible temporary differences will reverse during periods in which the Company generates net taxable income. Nevertheless, certain tax planning or other strategies will be implemented, if necessary, to supplement income from operations to fully realize recorded tax benefits. F-12 PROVENA FOODS INC. Notes to Financial Statements, Continued Actual income taxes differs from the "expected" tax amount, computed by applying the U.S. Federal corporate tax rate of 34% to earnings from operations before income taxes, as follows:
1997 1996 1995 --------------------- --------------------- --------------------- AMOUNT % AMOUNT % AMOUNT % --------------------- --------------------- --------------------- Computed "expected" income taxes $686,254 34.0% $304,068 34.0% $ 58,825 34.0% State income taxes, net of Federal income tax benefit 117,593 5.8 50,784 5.7 13,362 7.7 Change in valuation allowance (28,545) (1.4) 19,068 2.1 24,037 13.9 Other (11,526) (.6) (41,504) (4.6) (12,000) (6.9) -------- ---- -------- ---- -------- ---- $763,776 37.8% $332,416 37.2% $ 84,224 48.7% ======== ==== ======== ==== ======== ====
(9) EMPLOYEE BENEFIT PLANS In 1988, the Company adopted a Simplified Employee Pension - Individual Retirement Account (SEP IRA) plan covering all full-time, nonunion employees. The Company makes contributions under the plan at the discretion of the Board of Directors. The Company's contributions to the SEP IRA for 1997, 1996 and 1995 were $391,762, $393,880 and $393,196, 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 13). (10) 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. All stock options have a maximum ten-year term and become fully exercisable in accordance with a predetermined vesting schedule that varies by employee. F-13 PROVENA FOODS INC. Notes to Financial Statements, Continued The per share weighted-average fair value of stock options granted during 1997 was $0.95 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield 1%, risk-free interest rate of 6.7%, and an expected life of 8 years. There were no options granted in 1996. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below:
1997 1996 ---------- ---------- Net earnings As reported $1,254,619 561,902 Pro forma 1,218,761 561,902 ========== ======= 1997 1996 ---------- ---------- Net earnings per share As reported: Basic $ .44 .20 Diluted .44 .20 ===== === Pro forma: Basic $ .43 .20 Diluted .43 .20 ===== ===
Pro forma net earnings reflects only options granted since December 31, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1996 is not considered. F-14 PROVENA FOODS INC. Notes to Financial Statements, Continued Stock option activity during the periods indicated is as follows:
WEIGHTED- NUMBER OF AVERAGE SHARES EXERCISE PRICE --------- -------------- Balance at December 31, 1994 208,000 $2.25 Exercised (53,555) 2.25 ------- ------- Balance at December 31, 1995 154,445 2.25 Exercised (16,000) 2.25 Expired (36,000) 2.25 ------- ------- Balance at December 31, 1996 102,445 2.25 Granted 109,749 2.5625 Exercised (20,400) 2.25 Expired (72,045) 2.25 ------- ------- Balance at December 31, 1997 119,749 $2.54 ======= =====
At December 31, 1997, the range of exercise prices and the range of remaining contractual life of outstanding options was $2.25 to $2.5625 and six to ten years, respectively. At December 31, 1997 and 1996, the number of options exercisable was 67,291 and 102,445, respectively, and the weighted-average exercise price of those options was $2.54 and $2.25, respectively. F-15 PROVENA FOODS INC. Notes to Financial Statements, Continued (11) SEGMENT DATA AND MAJOR CUSTOMERS The following table represents financial information about the Company's business segments as of and for the three years ended December 31, 1997:
1997 1996 1995 ---------- ---------- ---------- Net sales to unaffiliated customers: Swiss American Division $21,460,415 19,677,706 13,654,028 Royal-Angelus Division 9,505,924 9,217,666 9,770,649 ----------- ---------- ---------- Total sales $30,966,339 28,895,372 23,424,677 =========== ========== ========== Operating income (loss): Swiss American Division $ 1,072,749 425,280 (682,899) Royal-Angelus Division 794,617 507,914 775,855 Corporate (70,398) (76,778) (37,491) ----------- ---------- ---------- Operating income $ 1,796,968 856,416 55,465 =========== ========== ========== Identifiable assets: Swiss American Division $ 5,214,515 4,920,249 4,394,837 Royal-Angelus Division 5,098,629 5,185,553 5,249,632 Corporate 1,225,914 308,044 405,045 ----------- ---------- ---------- Total assets $11,539,058 10,413,846 10,049,514 =========== ========== ========== Capital expenditures: Swiss American Division $ 241,686 -- 42,558 Royal-Angelus Division 60,810 194,775 1,501,562 Corporate -- 587 13,440 ----------- ---------- ---------- Total capital expenditures $ 302,496 195,362 1,557,560 =========== ========== ========== Depreciation and amortization: Swiss American Division $ 201,537 213,892 210,766 Royal-Angelus Division 327,995 352,669 323,925 Corporate 5,587 5,898 5,105 ----------- ---------- ---------- Total depreciation and amortization $ 535,119 572,459 539,796 =========== ========== ==========
The Company had major customers during 1997, 1996 and 1995 that accounted for more than 10% of consolidated sales and purchased products, as follows:
ACCOUNTS RECEIVABLE 1997 1996 1995 BALANCE AT December 31 -------------------- -------------------- -------------------- ------------------------- Customer SALES % SALES % SALES % 1997 1996 - -------- --------- ----- --------- ----- --------- ----- ---------- ---------- A $7,356,414 24 $7,043,135 24 $3,093,216 13 $807,982 259,433 B 3,275,088 11 3,158,942 11 2,673,067 11 -- 318,671 ========== == ========== == ========== == ======== =======
F-16 PROVENA FOODS INC. Notes to Financial Statements, Continued (12) COMMITMENTS AND CONTINGENCIES The following table summarizes future minimum lease commitments required under various noncancelable operating leases:
AMOUNT ------ Year ending December 31: 1998 $ 379,384 1999 260,114 2000 270,519 2001 114,552 ---------- $1,024,569 ==========
Rent expense for all leases was approximately $396,000, $387,000 and $388,000 in the years ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997, 55% of the Company's employees are covered by a collective bargaining agreement which expires March 31, 1998. The Company is involved in a legal action arising in the ordinary course of business. In the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on the Company. (13) SELF-INSURED HEALTH BENEFITS The Company is self-funded for Company provided health insurance benefits for its nonunion employees. The profit or loss effects of self-insuring cannot be foreseen and may be adverse. The Company has a reinsurance policy which covers claims in excess of $40,000 for any covered individual. F-17 PROVENA FOODS INC. Schedule II: Valuation and Qualifying Accounts and Reserves Years ended December 31, 1997, 1996 and 1995
DEDUCTIONS: ------------- BALANCE AT PROVISION, BEGINNING OF NET OF UNCOLLECTIBLE BALANCE AT DESCRIPTION PERIOD RECOVERIES ACCOUNTS END OF PERIOD - ------------------------- ------------ ---------- ------------- ------------- Allowance for doubtful receivables: 1997 $ -- 36,241 (25,307) 10,934 ====== ====== ====== ====== 1996 $54,700 (43,637) (11,063) -- ====== ====== ====== ====== 1995 $17,000 91,212 (53,512) 54,700 ====== ====== ====== ======
See accompanying independent auditors' report. F-18 EX-10.40 2 FOURTH CREDIT AGREEMENT DATED JUNE 1, 1997 EXHIBIT 10.40 FOURTH AMENDMENT TO CREDIT AGREEMENT THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of June 1, 1997, 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, 1997" as the last day on which Bank will make advances under the Line of Credit, and by substituting for said date "June 1, 1998," 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(a) is hereby deleted in its entirety, and the following substituted therefor: "(a) Current Ratio not at any time less than 2.00 to 1.0, with "Current Ratio" defined as total current assets divided by total current liabilities." 3. 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 $7,150,000.00, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets." 4. Section 4.9(e) is hereby deleted in its entirety, and the following substituted therefor: "(e) EBITDA Coverage Ratio not less than 1.75 to 1.0 as of each fiscal year end, with "EBITDA" defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt." 5. The following is hereby added to the Credit Agreement as Section 7.10: "SECTION 7.10. ARBITRATION. (a) Arbitration. Upon the demand of any party, any Dispute shall be ----------- resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self- help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by --------------- the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a -2- location in California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. (S)91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No ---------------------------------------------------------- provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachement, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. -------------------------------------------- Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater -3- than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, in --------------- any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral; Judicial Reference. Notwithstanding anything -------------------------------------------- herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure -4- Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the ------------- arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties." 6. 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. 7. 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. -5- 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/ John D. Determan By: /s/ Sandra D. Martin ------------------------------ ---------------------------- Title: Chairman of the Board Sandra D. Martin --------------------------- Vice President and Chief Executive Officer -6- WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE - -------------------------------------------------------------------------------- $2,000,000.00 Irvine, California June 1, 1997 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 (computed on the basis of a 360-day year, actual days elapsed) at a rate per annum .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, 1997. (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, 1998. (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, notice or nonperformance, notice of protest, 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), expended or 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 REVOLVING LINE OF CREDIT NOTE (08/96), PAGE 1 way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. (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. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. PROVENA FOODS, INC. By: /s/ John D. Determan --------------------------------- Title: Chairman of the Board ------------------------------ and Chief Executive Officer EX-23.1 3 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 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 23, 1998, relating to the balance sheets of Provena Foods Inc. as of December 31, 1997 and 1996, 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, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Provena Foods Inc. KPMG PEAT MARWICK LLP Orange County, California February 25, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,070,485 19,471 3,112,520 0 2,679,118 6,927,055 9,570,203 5,102,682 11,539,058 2,252,893 743,275 0 0 4,422,647 4,012,491 11,539,058 30,966,339 21,245,596 27,103,198 2,066,173 13,070 0 75,986 2,018,395 763,776 1,254,619 0 0 0 1,254,619 .44 .44
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