SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTER ENDED MARCH 31, 2002
Commission File Number 1-10741
PROVENA FOODS INC.
(Exact name of registrant as specified in its charter)
California 95-2782215
----------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
5010 Eucalyptus Avenue, Chino, California 91710
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(Address of principal executive offices) (ZIP Code)
(909) 627-1082
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(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
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The number of shares of Provena Foods Inc. Common Stock outstanding as April 27,
2002 was:
Common Stock 3,109,302 shares
PROVENA FOODS INC.
Form 10-Q Report for the First Quarter Ended March 31, 2002
Table of Contents
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Item Page
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PART I. FINANCIAL INFORMATION
-----------------------------
1. Financial Statements................................................................................... 1
Condensed Statements of Operations................................................................. 1
Condensed Balance Sheets........................................................................... 2
Condensed Statements of Cash Flows................................................................. 3
Notes to Condensed Financial Statements............................................................ 4
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 5
Results of Operations.............................................................................. 5
Swiss American Sausage Co. Meat Division........................................................... 5
Royal-Angelus Macaroni Company Pasta Division...................................................... 5
The Company........................................................................................ 6
Liquidity and Capital Resources.................................................................... 6
Commitments and Contingencies...................................................................... 7
Critical Accounting Policies....................................................................... 8
New Accounting Standards........................................................................... 8
3. Quantitative and Qualitative Disclosures About Market Risk............................................. 8
PART II. OTHER INFORMATION
--------------------------
1. Legal Proceedings....................................................................................... 9
2. Changes in Securities................................................................................... 9
3. Defaults Upon Senior Securities......................................................................... 9
4. Submission of Matters to a Vote of Security Holders..................................................... 9
5. Other Information....................................................................................... 9
Common Stock Repurchase and Sale.................................................................... 9
American Stock Exchange Listing..................................................................... 9
Cash Dividends Paid................................................................................. 9
Management Stock Transactions....................................................................... 9
6. Exhibits and Reports on Form 8-K........................................................................ 9
Signature.............................................................................................. 10
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PART I. FINANCIAL INFORMATION
-----------------------------
ITEM I. FINANCIAL STATEMENTS
PROVENA FOODS INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended
March 31,
-------------------
2002 2001
---- ----
Net sales $ 9,772,060 7,738,681
Cost of sales 8,810,846 6,824,153
----------- -----------
Gross profit 961,214 914,528
Operating expenses:
Distribution 305,016 324,003
General and administrative 497,035 437,637
----------- -----------
Operating income 159,163 152,888
Interest expense, net (123,766) (194,364)
Other income, net 57,309 58,942
----------- -----------
Earnings before income taxes 92,706 17,466
Income tax expense 37,000 7,600
----------- -----------
Net earnings $ 55,706 9,866
=========== ===========
Earnings per share:
Basic $ .02 .00
=========== ===========
Diluted $ .02 .00
=========== ===========
Shares used in computing earnings per share:
Basic 3,099,362 3,043,882
----------- -----------
Diluted 3,099,362 3,043,882
----------- -----------
See accompanying Notes to Condensed Financial Statements.
-1-
PROVENA FOODS INC.
Condensed Balance Sheets
March 31, December 31,
Assets 2002 2001
------ ----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 54,543 206,777
Accounts receivable, less allowance for doubtful
accounts of $40,225 at 2002 and $0 at 2001 3,423,103 3,238,935
Inventories 3,343,413 3,190,660
Prepaid expenses 165,994 12,443
Deferred tax assets 106,203 106,203
----------- -----------
Total current assets 7,093,256 6,755,018
----------- -----------
Property and equipment, net 15,980,611 16,128,662
Other assets 175,650 181,268
Deferred tax assets, net of current 328,884 328,884
----------- -----------
$23,578,401 23,393,832
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Line of credit $ 3,592,225 4,000,000
Current portion of long-term debt 495,285 495,285
Current portion of capital lease obligation 113,200 113,200
Accounts payable 1,582,097 1,362,058
Accrued liabilities 1,619,420 1,229,273
Deferred tax liability 46,394 46,394
Income taxes payable 37,000 -
----------- -----------
Total current liabilities 7,485,621 7,246,210
----------- -----------
Long-term debt, net of current portion 6,292,634 6,395,906
Capital lease obligation, net of current portion 424,684 453,628
Deferred tax liability, net of current 416,802 416,802
Shareholders' equity:
Capital stock, no par value; authorized 10,000,000
shares; issued and outstanding 3,104,794 at 2002
and 3,089,516 at 2001 5,005,007 4,983,339
Retained earnings 3,953,653 3,897,947
----------- -----------
Total shareholders' equity 8,958,660 8,881,286
----------- -----------
$23,578,401 23,393,832
=========== ===========
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 55,706 9,866
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 204,483 184,088
Increase (decrease) in provision for bad debts 40,225 38,000)
Increase in accounts receivable (224,393) 1,289)
Increase in inventories (152,753) (619,413)
Increase in prepaid expenses (153,551) (169,677)
Increase in income taxes receivable - 9,504
Decrease (increase) in other assets 5,618 (3,907)
Increase in accounts payable 220,039 319,548
Increase (decrease) in accrued liabilities 390,147 (196,749)
Increase in income taxes payable 37,000 7,600
--------- ---------
Net cash provided by (used in) operating activities 422,521 (498,429)
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Cash flows from investing activities:
Additions to property and equipment 56,432 (44,323)
--------- ---------
Net cash used in investing activities 56,432 (44,323)
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Cash flows from financing activities:
Payments on long term debt (103,272) 102,963)
Payments on capital lease obligation (28,944) -
Proceeds from (repayments of) line of credit (407,775) 666,964
Proceeds from sale of capital stock 21,668 23,510
Cash dividends paid - (91,445)
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Net cash provided by (used in) financing activities (518,323) 496,066
--------- ---------
Net decrease in cash and cash equivalents (152,234) (46,686)
Cash and cash equivalents at beginning of period 206,777 88,585
--------- ---------
Cash and cash equivalents at end of period $ 54,543 41,899
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 124,004 197,715
Income taxes $ - 800
========= =========
See accompanying Notes to Condensed Financial Statements.
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PROVENA FOODS INC.
Notes to Condensed Financial Statements
March 31, 2002 and 2001 (Unaudited)
(1) Basis of Presentation
--------------------------
The accompanying unaudited financial statements have been prepared in accordance
with the requirements of Form 10-Q and, therefore, do not include all
information and footnotes which would be presented were such financial
statements prepared in accordance with accounting principles generally accepted
in the United States for annual financial statement purposes. These statements
should be read in conjunction with the audited financial statements presented in
the Company's Form 10-K for the year ended December 31, 2001. In the opinion of
management, the accompanying financial statements reflect all adjustments which
are necessary for a fair presentation of the results for the interim periods
presented. Such adjustments consisted only of normal recurring items. The
results of operations for the three months ended March 31, 2002 are not
necessarily indicative of results to be expected for the full year.
(2) Inventories
----------------
Inventories at March 31, 2002 and December 31, 2001 consist of:
2002 2001
---- ----
Raw materials $1,317,644 1,393,975
Work-in-process 873,840 842,577
Finished goods 1,151,929 954,108
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$3,343,413 3,190,660
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(3) Segment Data
-----------------
Business segment sales and operating income (loss) for the three months ended
March 31, 2002 and 2001 and assets at March 31, 2002 and December 31, 2001 are
as follows:
2002 2001
---- ----
Net sales to unaffiliated customers:
Swiss American Sausage Division $ 8,177,597 6,413,644
Royal-Angelus Macaroni Division 1,594,463 1,325,037
----------- ----------
Total net sales $ 9,772,060 7,738,681
=========== ==========
Operating income (loss):
Swiss American Sausage Division $ 208,098 324,933
Royal-Angelus Macaroni Division (91,826) (173,653)
Corporate 42,891 1,608
----------- ----------
Operating income $ 159,163 152,888
=========== ==========
Identifiable assets:
Swiss American Sausage Division $18,934,751 18,428,801
Royal-Angelus Macaroni Division 4,061,943 4,328,435
Corporate 581,707 636,596
----------- ----------
Total assets $23,578,401 23,393,832
=========== ==========
(4) Earnings per Share
-----------------------
Basic earnings per share are net earnings divided by the weighted average number
of common shares outstanding during the period, and diluted earnings per share
are net earnings divided by the sum of the weighted average plus an incremental
number of shares attributable to outstanding options. Options for 107,111 shares
were not used in the diluted loss calculations for the following periods because
their effect was antidilutive.
Three Months Ended March 31,
---------------------------
2002 2001
---- ----
Net earnings $ 55,706 9,866
============= ==========
Weighted average number of shares 3,099,362 3,043,882
Incremental shares for options - -
------------- ----------
Weighted average plus incremental shares 3,099,362 3,043,882
============= ==========
Basic earnings (loss) per share $ .02 .00
============= ==========
Diluted earnings (loss) per share $ .02 .00
============= ==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations Three Months Ended
---------------------
March 31,
---------------------
(Unaudited) 2002 2001
---- ----
(amounts in thousands)
Net sales by division:
Swiss American $8,178 $6,414
Royal-Angelus 1,594 1,325
------ ------
Total $9,772 $7,739
====== ======
Sales in thousands of
pounds by division:
Swiss American 5,427 4,532
Royal-Angelus 2,814 2,659
Forward-Looking Statements
--------------------------
The following discussion may contain "forward-looking statements" that express
or imply expectations of future performance, developments or occurrences. Actual
events may differ materially from these expectations due to uncertainties
relating to the economy, competition, demand, commodities, credit markets,
energy supplies and other factors.
Swiss American Sausage Co. Meat Division
----------------------------------------
Sales by the processed meat division increased about 28% in dollars and 20% in
pounds in the 1st three months of 2002 over the same period in 2001. Sales in
dollars increased proportionately more than in pounds because of higher selling
prices to reflect meat price increases. Swiss operated at a $208,098 profit in
the 1st quarter of 2002 compared to a $324,933 profit for the 1st quarter of
2001. Reduced profits were caused by lower margins resulting primarily from
higher insurance and maintenance costs.
Royal-Angelus Macaroni Company Pasta Division
---------------------------------------------
The pasta division's sales increased about 20% in dollars and 6% in pounds in
the 1st quarter of 2002 compared to the 1st quarter of 2001. The percentage
increases were higher in dollars than in pounds because of a reduced proportion
of lower price-per-pound bulk sales and higher selling prices to reflect higher
flour costs. Royal operated at a $91,826 loss for the 1st quarter of 2002
compared to a $173,653 loss for the 1st quarter of 2001. Sales and operating
results were both adversely affected by competition resulting from increased
industry capacity, but increased sales resulted in a reduced loss because of the
increase in plant utilization. Royal is continuing to seek personnel experienced
in pasta sales and production and to aggressively pursue sales opportunities.
-5-
The Company
-----------
Company net sales were up about 26% and the Company realized net earnings of
$55,706 in the 1st quarter of 2002 compared to $9,866 for the 1st quarter of
2001. Both divisions contributed to the increased sales and the decreased loss
at Royal produced the improvement in net earnings. The Company's gross profit
margin for the 1st quarter of 2002 was 9.8% compared to 11.8% a year ago. The
Company's margin decreased because Swiss's margin decreased primarily as the
result of increased insurance and maintenance costs, with Royal's margin up as a
result of sales increasing proportionately more than production costs.
General and administrative expenses were up about $60,000 for the 1st quarter of
2002 compared to the same period in 2001 because of recovery of a doubtful
account in the 1st quarter of 2001 versus an increased reserve for doubtful
accounts in 2002, reduced by lower health benefit costs. Distribution expenses
were down about $20,000 in spite of increased sales because of reduced
advertising and salesman expenses partially offset by higher freight and
insurance. Net interest expense decreased about $70,000 primarily because of
lower interest rates, augmented by slightly lower total debt, despite slightly
higher borrowings under the bank line of credit in the 1st quarter of 2002
versus the 1st quarter of 2001.
Meat plant employees are represented by United Food and Commercial Workers
Union, Local 588, AFL-CIO, CLC under a collective bargaining agreement which
expired March 31, 2002. Negotiations to renew the agreement are progressing
normally. Pasta plant employees are represented by United Food and Commercial
Workers Union, Local 1428, AFL-CIO, CLC under a collective bargaining agreement
which expires September 29, 2002. There has been no significant labor unrest at
the Company's plants and the Company believes it has a satisfactory relationship
with its employees.
Liquidity and Capital Resources
-------------------------------
The Company has generally satisfied its normal working capital requirements with
funds derived from operations and borrowings under its bank line of credit,
which is part of a credit facility with Comerica Bank-California. The line of
credit is payable on demand, is subject to annual review, and bears interest at
a variable annual rate of 0.75% over the bank's "Base Rate." The maximum amount
of the line of credit is the lesser of $4,000,000, or 30% of inventories plus
80% of receivables, with a limit of $1,500,000 for inventories, determined
monthly. At March 31, 2002 the "Base Rate" was 4.75% per annum, 30% of
inventories plus 80% of receivables was $3,592,225 and the Company had
$3,592,225 of borrowings under the bank line of credit.
As part of the credit facility, Comerica Bank-California issued a $4,060,000
letter of credit to support $4,000,000 of industrial development bonds issued in
1998 for costs relating to the construction of the Company's meat plant. The
bonds bear a variable rate of interest payable monthly and set weekly at a
market rate - 1.5% per annum at March 31, 2002. The Company pays a 1.5% per
annum fee on the amount of the letter of credit and fees of the bond trustee
estimated at 0.5% of the bond principal per year. Monthly payments of bond
principal into a sinking fund began May 1, 2000, total $76,700 the first year
and increase about 5.6% each year until May 1, 2022, when $813,500 of remaining
principal is payable in 18 equal monthly payments.
-6-
Also as part of the credit facility, the bank made four loans to the Company for
the new meat plant, a $1,280,000 real estate loan and three equipment loans
totalling $2,614,788. The real estate loan was made in December 1999, bears a
fixed rate of interest of 9.1% per annum and is payable in equal monthly
payments of principal and interest over its 25 year term. Each equipment loan
bears a variable rate of interest and is payable in equal monthly payments of
principal plus interest over its term, with issue date, initial amount, term and
rate as follows: July 1999, $1,000,000, 7 year, bank's "Base Rate"; September
1999, $1,200,000, 7 year, bank's "Base Rate" plus 0.25%; and December 1999,
$414,788, 5 year, bank's "Base Rate" plus 0.75%.
All parts of the credit facility are secured by substantially all of the
Company's assets, including accounts receivable, inventory, equipment and
fixtures, the Company's two Chino buildings and the new meat plant, none of
which is otherwise encumbered. The credit facility prohibits mergers,
acquisitions, disposal of assets, borrowing, granting security interests, and
changes of management and, as modified for 2002, requires a tangible net worth
greater than $8,500,000, increasing to $8,900,000 at June 30, 2002 and by
$200,000 each quarter thereafter; working capital not less than negative
$625,000 increasing to negative $400,000 at June 30, 2002, negative $200,000 at
September 30, 2002 and $0 at December 31, 2002; debt service coverage not less
than 1.3; and quarterly dividends not exceeding the net income of the prior
quarter. The Company was not in default under any of the covenants at March 31,
2002 and expects to be in compliance with all covenants at June 30, September
30, and December 31, 2002.
Cash decreased $152,234 in the 1st quarter of 2002 compared to a $46,686
decrease in the 1st quarter of 2001. Operating activities provided $422,521 of
cash primarily from net earnings, depreciation and amortization and increases in
accounts payable and accrued liabilities, partially offset by increases in
accounts receivable, inventories and prepaid expenses. Accounts receivable and
inventories increased because of increased sales. Investing activities used
$56,432 of cash for modest additions to property and equipment, and financing
activities used $518,323 of cash for payments on long term debt and the capital
lease obligation and repayments of the bank line of credit.
Commitments and Contingencies
-----------------------------
The following table shows the long-term debt principal and capital lease
obligation payments due in the specified periods as of December 31, 2001. The
lease payments are estimates because they are proportional to pounds of a
product sold.
Year Ended December 31,
------------------------------------------------------------
(amounts in thousands) Totals 2002 2003 2004 2005 2006 Thereafter
------ ---- ---- ---- ---- ---- ----------
Long-Term Debt $6,891 495 504 504 435 341 4,612
Capital Lease Obligation 567 113 113 113 113 115 -0-
------ --- --- --- --- --- -----
Totals $7,458 608 617 617 548 456 4,612
The Company expects that its operations and bank line of credit will provide
adequate working capital to satisfy the normal needs of its operations for the
foreseeable future, including cash
-7-
flow to service its debt. The 1st quarter usually requires higher cash
expenditures than any other quarter because of annual retirement benefit
contributions and initial insurance premiums.
The Company believes that it has a good relationship with Comerica
Bank-California, as evidenced by the bank's previous over-advances under the
line of credit, waiver of defaults under the financial covenants and
modifications of the financial covenants. That relationship is crucial to the
Company, because the line of credit is payable on demand, the Company could not
make an immediate repayment of the line of credit, and a failure to repay the
line after demand would render the entire credit facility in default. As a
result, neither a default under a financial covenant nor the bank's waiver of
such a default affects the bank's power to cause the credit facility to be in
default and require that it be restructured or refinanced.
Critical Accounting Policies
----------------------------
In December 2001, the Securities and Exchange Commission requested that all
registrants list their most "critical accounting policies" in Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
indicated that a "critical accounting policy" is one which is both important to
the portrayal of the registrant's financial condition and results of operations
and requires management's most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain. Critical for the Company is determining the allowance for
doubtful accounts because of the risk of failing to foresee a major credit loss,
and inventory valuation when inventory cost may exceed fair value less cost to
sell because of the difficulty of determining the latter.
New Accounting Standards
------------------------
The Financial Accounting Standards Board in June 2001 issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
applicable to business combinations initiated after June 30, 2001, SFAS No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002 and SFAS No.
143, "Accounting for Asset Retirement Obligations" effective January 1, 2003 and
in August 2001 issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" effective January 1, 2002. These standards are adopted by
the Company as they become effective and, in the opinion of management, have not
had and will not have a material effect on the Company's financial position,
results of operations or liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The industrial development bonds, the bank line of credit, and the equipment
loans bear variable rates of interest (see Liquidity and Capital Resources under
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations) which tend to follow market interest rates and change the
Company's interest expense in the same direction as changes in interest rates. A
1% per annum change in the rate borne by the industrial development bonds would
change annual interest expense by almost $40,000. Assuming an average bank line
of credit balance of $4,000,000 plus $1,500,000 average principal balance of
equipment loans, a 1% per annum change in the rate borne by those borrowings
would change annual interest expense by $55,000.
-8-
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS No significant litigation.
ITEM 2. CHANGES IN SECURITIES None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
ITEM 5. OTHER INFORMATION
Common Stock Repurchase and Sale
--------------------------------
During the 1st three months of 2002, the Company did not purchase any shares of
its common stock under its stock repurchase program.
During the 1st three months of 2002, the Company sold 15,278 newly issued shares
of its common stock under its 1988 Employee Stock Purchase Plan, at an average
selling price of $1.42 per share. From inception of the Plan through March 31,
2002, employees have purchased a total of 626,340 shares.
American Stock Exchange Listing
-------------------------------
The Company's common stock trades on the American Stock Exchange under the
ticker symbol "PZA".
Cash Dividends Paid
-------------------
No cash dividend was paid in the 1st quarter of 2002.
Management Stock Transactions
-----------------------------
No purchases or sales of the Company's common stock by officers or directors
were reported during the 1st quarter of 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are filed with this report.
(b) No reports on Form 8-K were filed during the three months ended March 31,
2002.
-9-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 27, 2002 PROVENA FOODS INC.
By /s/ Thomas J. Mulroney
-----------------------------
Thomas J. Mulroney
Vice President and
Chief Financial Officer
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