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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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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
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(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)
Securities registered pursuant to Section 12(b) of the act:
Title of each class Name of each exchange on which registered
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COMMON STOCK AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the act: None
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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
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PART I
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1. Business................................................................................... 1
2. Properties................................................................................. 4
3. Legal Proceedings.......................................................................... 5
4. Submission of Matters to a Vote of Security Holders........................................ 5
PART II
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5. Market for the Registrant's Common Stock and Related Stockholder Matters................... 5
6. Selected Financial Data.................................................................... 7
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 8
8. Financial Statements and Supplementary Data................................................ 11
9. Disagreements on Accounting and Financial Disclosure....................................... 11
PART III
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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
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14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 15
________________
Signatures................................................................................. 16
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PART I
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ITEM 1. BUSINESS
General
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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
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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
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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
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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
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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
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange
under the symbol "PZA". The following table sets forth high and low prices as
traded on the American Stock Exchange:
Quarter of Fiscal Year Ended December 31
First Second Third Fourth
------- ------- ------ ------
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
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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
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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
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(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